Sabrina Simmons, Senior Vice President, Treasury and Investor Relations Byron Pollitt, Chief Financial Officer Paul Pressler, Chief Executive Officer Jenny Ming, President, Old Navy Cynthia Harriss, President, Gap Brand Marka Hansen, President, Banana Republic

Margaret Mager, Goldman Sachs Brian Tunick, J.P. Morgan Stacy Pak, Prudential Dana Cohen, Banc of America Securities Jeff Black, Lehman Brothers Janet Kloppenburg, JJK Research Paul Lejuez, Credit Suisse First Boston Barbara Wyckoff, Buckingham Research Gabrielle Kivitz, Deutsche Bank Kimberly Greenberger, Citigroup Jennifer Black, Jennifer Black and Associates Dana Telsey, Telsey Advisory Group Todd Slater with Lazard Capital Markets

Good afternoon ladies and gentlemen, and welcome to Gap Inc.’s First Quarter 2006 Conference Call. At this time, all participants are in a listen-only mode. If anyone should require assistance during the call, please press “*” key followed by the “0″ key on your touchtone phone. The conference call and webcast are being simultaneously recorded on behalf of Gap Inc. and consist of copyrighted material. They may not be rerecorded, reproduced, re-transmitted, rebroadcast or downloaded without Gap Inc.’s expressed written permission. Your participation represents your consent to these terms and conditions, which are governed under California law. Your participation on the call also constitutes your consent to having any comments or statements you make, appear on any transcript or broadcast of this call. If you have any questions regarding this policy, please contact Gap Inc. Investor Relations at 415-427-2175. I would now like to introduce your host Sabrina Simons, Senior Vice President, Treasury and Investor Relations. Sabrina Simmons, Senior Vice President, Treasury & Investor Relations: Good morning everyone. I’d like to welcome you to Gap Inc.’s First Quarter 2006 Earnings Conference Call. For those of you participating in the webcast, please turn to slide 2. I’d like to remind you that the information made available on this webcast and conference call contains forward-looking statements including but not limited to forecast relating to improve business performance, comparable store sales, earnings per share, free tax expenses under 123R, free cash flow, dividend amounts, operating margin, inventory per square foot, gross interest expense, depreciation and amortization, capital expenditures, effective tax rates, store openings and closings, real estate square footage as well as other statements that express our expectations, anticipations, beliefs, estimates, intentions, plans, and forecast. Because, these forward-looking statements involve risks and uncertainties, there are important factors that could cause their actual results to differ materially from those in the forward-looking statements. Information regarding factors that could cause results to differ can be found in our annual report on Form 10-K for the fiscal year ended January 28th, 2006. Investors should also consult today’s press release. 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 May 18, 2006 and we assume no obligation to publicly update or revise our forward-looking statements even if experience or future change make it clear that any projected results expressed or implied therein will not be realized. This presentation includes a non-Generally Accepted Accounting Principle measure of free cash flow, which under SEC Reg-G we are required to reconcile with GAAP. The reconciliation of this measure to GAAP financial measures is included in our earnings press release, which is available on gapinc.com. Joining us on the call today, our CEO, Paul Pressler; CFO, Byron Pollitt; Gap Brand President, Cynthia Harriss; Old Navy President, Jenny Ming; and Banana Republic’s President, Marka Hansen. Now, I’d like to turn the call over to Paul. Paul Pressler, Chief Executive Officer: Thank you, Sabrina, and good afternoon. On our Fourth Quarter Earnings Call we said that the first half of the year would be challenging. Consistent with that view, we delivered first quarter earnings generally in line with our expectations, and we still expect that the second quarter will be tough. In second quarter, we will continue to invest in important areas like store payroll and marketing to build traffic going into fall. But we don’t expect a financial return on this SG&A spending until the second half. With that said, I am pleased that we’re making progress in each of our brands and we look forward to seeing the improvements in our product and store experience reflected in our results. Banana Republic, as we predicted, is beginning to regain his momentum first and we still expect that Old Navy and Gap will begin seeing improved customer response this fall. We remain confident in our turnaround strategies underway in each of our businesses. Today, Cynthia Harris, Jenny Ming, and Marka Hansen will provide updates on their progress. First, I’ll turn the call over to Byron for an overview of the financials. Byron Pollitt, Chief Financial Officer: Thank you, Paul. Good afternoon. As Paul mentioned, our original full year EPS guidance reflected a challenging first half. Our view, especially given the first quarter results, has not changed. We expect comparable store sales to remain negative in the second quarter while our investments in SG&A continue and we begin to increase stand in important areas like store experience and marketing. As we said on our last earnings call, we expect comps to turn modestly positive in the second half of the year. Here are some highlights from the first quarter. Earnings per share were $0.28 and operating margin was 10.8%. We generated $225 million in free cash flow and ended the quarter with $2.9 billion in cash and short-term investments. We nearly doubled our dividend in the quarter from $0.045 to $0.08 cents per share and we repurchased 21.7 million shares at a cost of $389 million. Since we began our share repurchase program in 2004, we have spent nearly $3.4 billion repurchasing 168 million shares. Now, please turn to slide 3 for a review of earnings performance. First quarter earnings were down 17% to $242 million or $0.28 per share including $2 million of expense related to the adoption of 123R not incurred last year. First quarter weighted average diluted shares were 861 million. The first quarter effective tax rate was 38.6%, 90 basis points above the prior year rate. Recall that the prior year first quarter tax rate reflected favorable tax settlements primarily from the resolution of state audits. Please turn to slide 4, sales performance. First quarter total sales were $3.4 billion, down 5% versus last year. Online sales continue to grow during the quarter increasing 15% versus prior year. Total company comp sales were down 9% in the quarter. The 4 percentage point spread between total sales and comp sales was driven almost entirely by new stores with online sales contributing as well. Please refer to our earnings press release for total sales in comps by division. Turning to slide 5, gross profit. First quarter gross profit decreased by 7% to $1.4 billion. Gross margin was 40.2%, down 60 basis points compared to last year; 20 basis points of this decline are from lower merchandise margins. The remainder is from the de-leveraging of rent, occupancy, and depreciation. Please turn to slide 6 for operating expenses. Despite a lack of television advertising of Gap Brand during the quarter, overall operating expenses were about equal to last year at $1 billion as investments in growth strategies and store experience continued. Marketing expenses in the first quarter were down 22% to $97 million. Turning to inventory, on slide 7. We ended the first quarter with $1.9 billion in inventory, down about 1%. Inventory per square foot was $48, down 5%. Please turn to slide 8 or capital expenditures and store count. First quarter capital expenditures were $91 million. We opened 38 new stores and closed 21, ending the quarter with 3070 stores. Square footage increased 3%. Please refer to our press release for end of quarter store count and square footage by division. Regarding cash flow on slide 9, free cash flow defined as cash from operations less capital expenditures was an inflow of $225 million, up $112 million versus last year, driven primarily by a decrease in working capital. Please refer to our press release for a Reg-G reconciliation of free cash flow. We repurchased a total of 21.7 million shares in the first quarter at an average price of $17.91 including commissions, and we increased our dividend to $0.08 per share in the first quarter. Finally, we ended first quarter with $2.9 billion in cash and short-term investments. Turning to slide 10, I would like to comment on our outlook for 2006. Regarding earnings, we are confident that our product milestones are being met. It is our belief that with consistently improved product together with the effect of our improving store experience and cumulative marketing efforts, we will realize a positive momentum shift in topline results in the second half of the year. For this reason, we’re maintaining our annual EPS guidance of $1.23 to a $1.27. Regarding share-based compensation expense from the adoption of 123R, our current estimate for full year expense is about $25 million. Given the immaterial size of this amount related to our overall SG&A spend, going forward we will report actuals only. Regarding operating margin, we still expect operating margin of 10% to 10.5%. Regarding inventory, we now expect inventory per square foot at the end of the second quarter to be flat compared to a 3% decrease last year. Inventory per square foot at the end of the third quarter is also expected to be flat versus a 7% decrease last year. The 2006 guidance for the following items remains unchanged. Depreciation and amortization about $535 million, gross interest expense about $40 million, tax rate about 39%, capital spending about $675 million, store activity and square footage, opened about 175 store locations, closed about 135, full year square footage to increase 1% to 2%, free cash flow at least $900 million. Those are the financial highlights for the first quarter. Now, I’ll turn it over to Cynthia. Cynthia Harriss, President, Gap Brand: Thanks Byron, good afternoon. On today’s call, I’d like to share with you our progress and key strategies for 2006. Then, I’ll take you through how we’re building momentum for fall with our upcoming product, marketing or initiatives. As I’ve discussed previously, with the objective of becoming more nimble and focussed, we made the decision to align our organization and talent around three key business units -- Adult, Kids Baby Maternity, and Body. Our new alignment coupled with strong leaders, clear accountability, and jobs that are more manageable in scope will allow us to address the unique needs of each business unit and deliver the right product and storage clearings for our customers. We’ve made great progress by hiring strong decisive leaders with deep merchandising and apparel industry experience to lead each of these teams. Pam Wallace joined late last year to head up Kids Baby Maternity and Tom Weiss joined in March to lead Gap Body. We just announced that Denise Johnson will join us in June to run our Adult business. Denise brings more than 25 years of apparel experience and most recently as President and Chief Merchandising Officer from Liz Clairbone. We also continued to make progress in our merchandising strategy, which has anchored and elevated high quality casual clothing and focusses on key categories. While some of the product is still work in progress, visual merchandising for the season is improved and features clear compelling visuals to help customers find what they want. Our stores are set up as the go-to-place for summer casuals like Polo, Graphic Ts, hank tops, and soft colorful fitties to wear home from the beach. By July 20th, our fall product will be in stores and you will see that we have taken a step forward in terms of product details and fabrication. You’ll also see category shops for fall that represent what we believe in and make it easy for customers to shop denim, T-shirts, free active wear, and our clean look. We’re beginning to ramp up our marketing in advance of fall. What you’re seeing for summer is an integrated campaign, Rock Color, which features print ads, outdoor, direct mail, online, and radio spots. In our top four markets, New York, Chicago, San Francisco, and Los Angeles, you’ll see us out there with Fun Bus generating promotions, including our summer concert series and bus tour. For those of you in New York, we invite you to visit our Rock Color Bus as it stops in Union Square on June 5th. These events are designed to continue building momentum as we roll into the next season. Reflecting our confidence in fall products and our merchandising strategies, we’ve built a comprehensive marketing plan to inspire customers. TV Spot begins July 20th to coincide with our fall products. They will run for a total of eight weeks versus six weeks last year. The first TV campaign focusses on denim, one of the key categories of our merchandising strategy with a print campaign running concurrently. We’re making progress with the in-store experience and we’re pleased that our customer survey results are improving. I’m sure you’ve seen our windows and in-store images with Rock Color inspired graphics. They are representative of how we’re refreshing windows each month to signal newness and how we’re paying greater attention to visuals and service. It’s been one year since we launched our store re-design in Denver. We’ve learned that elements like the Denim Bar, larger fitting rooms, shop layouts, and dark wood floors create a warmer environment that resonate well with customers. We firmly believe that the remodeled strategy is an important part of rebuilding our brand and although remodeling the entire fleet will take time, we’re not standing still. This summer, we will refresh our top 200 adult stores in key markets. Customers will experience store environments with updated paint, selling fixtures, mannequins, and signage by August. In closing, we remain confident in our long-term strategies to turn around the business and look forward to delivering more tangible proof of our progress in coming seasons. Thank you, and now I will turn it over to Jenny. Jenny Ming, President, Old Navy: Thank you, Cynthia. As I shared with you last quarter, we are focussed on repositioning Old Navy in the market, anchor back in specialty products at great value. During the first quarter, we made incremental progress in improving our products, marketing, and store experience. We are offering more products that respect our specialty repositioning and our Pure Naturals performed well during the quarter. However, versus our expectations, our customers’ purchases were rated toward more of our lower priced value products versus core and better. This negatively impacted our AUR. We know it will take time for our customers to recognize how we’re positioning and drive even greater demand towards our specialty products. So, we’re addressing our traffic and AUR challenges by evolving our marketing to focus more on our specialty products and less on our commodity promotive items, and we made some progress in March and April. We elevated the look of our circular with more lifestyle photography and cleaner layouts, and we had a strong presence on TV with two new spots that highlighted our trend right product. Though we had negative traffic during the quarter, we attribute improvement in April in part to these efforts. Another important step to winning back our specialty customers is to improve our store experience. Since holiday of 2005, we have been investing in more store payables and we’re pleased to report that the investment is beginning to pay off. Our customer experience of course improves each month during the quarter in key areas like the fitting room experience with time for checkout, a neat clean and organized store. We are now achieving the highest customer service rating that we’ve had over the last year. We still have more work to do, but we’re pleased with the progress we’ve made and we are continuing to build momentum in the second quarter. Looking ahead, we continue to offer a product that reflects our specialty repositioning as we are highly confident that the strategy we’re pursuing is the right one. I’m sure many of you have seen our Madras products that are in stores now. We are pleased with its quality and how it looks, and we’re looking forward to our dog flow at the end of July. We’re also continuing with our marketing. We’ll be on TV with Madras’ campaign for the next three weeks, and of course we’ll run a memorial-based circular that features both fashion and value with traffic driving $5, $10, and $15 deals for the family, which we reinforced with radio. We also added a PR campaign that’s incremental to last year. This campaign is intended to generate awareness and buzz for the brand. When we first started Old Navy, our TV ads frequently featured our mascot, “Magic, the Dog.” Now we’re running a special contest in search of a new mascot. But throughout the month of May, customers entered their dogs online and we already received tens of thousands of entries. When the campaign came back to the new line, our dog products were launched in our store in July. Our new mascot will be announced in early August and will feature in our holiday TV spots. Lastly, we’ll definitely be on TV with our new campaign at the end of July. So, we’re heading in the right direction as we continue to improve our products, marketing, and store experience. Importantly, our customers are telling us that their experience in our store has improved. This is an important foundation to winning their frequency back. We remain confident that we’ll make progress each season. And now, I’d like to turn things over to Marka. Marka Hansen, President, Banana Republic: Thank you, Jenny, and good afternoon everyone. It’s been a while since I’ve had a chance to speak to most of you, so I’m going to go into a little more detail. First, I’d like to set some context for my comments today. Two years ago, we experienced great success with fashion in our assortments. However, in 2005, we pushed our product too far into fashion that was complicated and difficult for customers to shop. As a result, our traffic in sales suffered throughout 2005. We realized this in the back half of 2004 and we were able to crack our assortments starting with spring 2006 and are now beginning to see improvements in our results. While traffic continues to be challenging in the first quarter, our other sale levels combined to offset some of traffic mix, particularly in March and April. We believed our assortments were better beginning last holiday supported by feedback from customers and store associates and we’re pleased that these improvements are now resulting in tangible comp improvements. We’re not all the way back yet, we still have work to do, but I can share learnings with you and how this is shaping our future. Our most important learning was that while our customers love us for fashion, they ultimately want balance assortments and they expect a Banana Republic filter on everything we do, our aesthetics with accessible luxury. We offer elevated products that are versatile, have noticeable qualities that are both approachable and sophisticated. This aesthetic is consistent and evident in our spring line. One of our biggest changes was to balance the fashion in our lines with a more versatile range of wearable items. Today’s collection emphasizes style essentials and has been better resonating with our customers; for example, our assortment of versatile white shirts for women. This collection includes everything from the classic three-quarter sleeve pop-in shirt, a quintessential work item, to a great tunic that has just turned ripe. This demonstrates a responsive feedback heard last year that customers were having trouble putting outfits together in our store and that they wanted us to make it easier for them to build wardrobes. So, let’s turn to men. Suiting has been great this spring, especially our increased offering of blazers. Men’s sweaters and pants have also been strong. In particular, our go-to-work message has worked well. In contrast, last year, we offered a narrow range of choices. For example, last year’s woven shirts were saturated with color and focussed on a going out occasion. Today, men coming into our stores are finding products they can wear for work, casual weekends, and going out. An example of range can be found in our chino offerings. We have the perfect dress chino, a boot-cut chino, and relax fit chino, presenting an assortment wide enough to appeal to both the conservative and fashion forward customers. We are pleased that customers responded to these better balanced assortments during the quarter and they began to show tangible results. Also, as part of our efforts over the last two years, we have looked to grow and extend our brand. A few years ago, we began offering Petite, which helped us to capture a new customer base for Banana Republic. We now offer Petite in 52 stores including five standalone stores and are looking forward to growth opportunities with both free standing stores and including Petite in the new stores we build. We expanded into Japan last year with four stores and it has been very successful for us. We are very excited about this opportunity and we will continue to add stores throughout Japan with about 10 more planned for 2006. We see other brand extension opportunities as well. We have a very successful accessories business with belts, shoes, and jewelry, all performing well. A great expansion to this business has been handbags. This spring we introduced a new elevated range of handbags that extends our Lifestyle brands and the response has been amazing. We now offer beautiful day-to-night bags that are consistent with the market place and complement our apparel. Our average price points have increased from about $65 to $175 for our new bags, and we’ve seen great customer acceptance. We are very excited about our newest extension, personal care, which launches this fall. Many of you may have seen last Friday’s cover story in Women’s Wear Daily, introducing our five new fragrances to the editorial community. We support the launch with new selling fixtures and a print marketing campaign. Along with our efforts to improve our products, we’ve also worked on our in-store experience. We tested a comprehensive store experience in New York this spring including re-merchandising our stores visually into cut through ideas supported by clear destination signage, fixtures to increase capacity, and elevating our window messages. We believe the elevated experience in these stores supports the aesthetic of our product, and this fall we’ll roll many of the most impactful ideas to all of our stores. As we make progress on our product, we are continuing to focus on those things that will drive traffic -- compelling advertising, PR events to generate buzz and excitement, editorial coverage, and elevated store experience and new product extension like personal care. But in a brand like BR, word of mouth is our most powerful traffic driver and we intend to address that by consistently delivering amazing products. Thank you, and I’ll turn it back over to Paul. Paul Pressler, Chief Executive Officer: Thank you, Marka. As you heard from our Brand Presidents today; the teams are making progress on their turnaround plans across the business. In addition to focussing on product, we are working to drive our traffic. We are implementing marketing plans for summer to excite our customers and we are making additional investments for fall including Gap Brand Television back on television that reflects our growing confidence in our product offering and visual merchandising. Most important, we are confident in the strategic direction of each of our brands. The gap were focusing is on reestablishing the brand’s iconic positioning through key categories with improved quality and style. Cynthia has both a strong and seasoned leadership team that is driving this strategy through design and merchandising, store experience, and marketing. Old Navy’s hybrid positioning as a value and specialty player differentiates the brand in the market place. We believe we have the right strategy to win back our trade down customer through more specialty product and an improved store experience of still providing the value they expect from Old Navy. Banana Republic has maintained its compelling accessible luxury positioning as the team has rebalanced the assortment with approachable fashion and versatile key items. We will continue to extend the brand from new product lines as we have with the successful launch of Petite and handbags. While improving the core business, it is clearly our top priority that we will also continue to pursue our growth initiatives. We are opening stores and extending our existing brands through new lines like the Banana Republic’s personal care. We are expanding internationally, which includes opening new stores in Europe and Japan and executing our franchise agreements. And finally, we are growing our newest brand. We are encouraged by customer response to Forth & Towne reflective in strong product acceptance, high fitting room usage, and feedback that customers appreciate the exceptional service. Confident in our positioning, we are excited about our growth prospects. The team is focussed on building brand awareness as we prepare to open about 10 new stores this fall in Atlanta, Houston, Los Angeles, San Francisco, and the Seattle markets. In closing, I want to recognize our teams who have been working with a relentless commitment to making the necessary changes to turn around our business results. Confident in our direction, we will continue driving execution to make progress each season and create value for our shareholders. Thank you. Sabrina Simmons, Senior Vice President, Treasury and Investor Relations: That concludes our prepared remarks. We will now open up the call to questions. Please limit your questions to one each.

At this time, ladies and gentlemen, if you haven’t done so already, you may press “*” followed by the number “1” on your telephone keypad in order to ask a question. Your first question comes from Margaret Mager with Goldman Sachs. Margaret your line is open. Margaret Mager, Goldman Sachs: Okay, thank you. I wanted to ask about your view on inventory per square foot and that you’re looking at it to be flat in the next two quarters, is that a sign that at this point the inventory is really where it needs to be and it would apparel to take it much lower because of the negative impact of not having enough inventory in the store? What is the message here with the inventory per square foot outlook? Thanks. Byron Pollitt, Chief Financial Officer: This is Byron and let me respond. So, the guidance for end of second quarter and end of third quarter are both flat. Recall that for the same period last year, second quarter is up against a minus 3 and third quarter is up against a minus 7. Clearly, we have been very prudent about managing our inventory levels during the past year. But, as we become more confident in our products, the merchants are at liberty to buy deep where they have our confidence, and as we move into the second half you should interpret that, from our vantage point, a very appropriate level of inventory given how we were postured last year and with our growing confidence in the product outlook for the second half. Margaret Mager, Goldman Sachs: Thanks.

Our next question comes from Brian Tunick with JP Morgan. Brian Tunick, JP Morgan: Hi, thanks. We were hoping maybe the three Brand Presidents could update us on lead times, speed to market, and maybe thoughts on some sourcing in the U.S., and then maybe Paul could comment between Old Navy and Gap, which one do you think is closer to showing evidence of the turn? Jenny Ming, President, Old Navy: Why don’t I start, this is Jenny. We feel in some of our key categories like graphics and myths and denim, we are able to go from 8 to a 12-week cycle. As we experience contraction, we are able to even do more and more quantity. Those are our key categories that would really trade back in, and we are keeping them open and a little bit more liquid as we go into every season. Cynthia Harriss, President, Gap Brand: This is Cynthia. I would say for that brand we’ve been spending this past year really, as I’ve said before getting our team in place, getting the talent in place, getting the aesthetic of the product right, at the same token of knowing that speed is essential for us. We have examples where we have fast tracked products predominantly and myths, where, just as Jenny said, we can cut down the time considerably. But, this workup speed to market will be a big part of our endeavor now that we’ve got our team in place. B>Marka Hansen, President, Banana Republic This is Marka from Banana. We’ve done a couple of things. One is we’ve been leaving some dollars open to either chasten the trends. For us, it looks like a reorder in white shirts this season and they were successful, as well as doing some things like consolidating our denim base into steel fabrics and using some local production in Los Angeles to chasten to our premium denim, and then just being more smart about cutting off things that aren’t working and refocussing those into things that are working. Paul Pressler, Chief Executive Officer: And Brian, as for your last question, first I think it’s really important to know that all of our teams, our production teams, our design teams, our merchant teams, they’re out working with our vendors. So, they’re not only gaining speed and access but visibility to innovation and what’s happening, and that’s been a fundamental shift for the businesses across the board. As to the pace of the turn between Gap and Old Navy, I think I just want to remind you that both are in a little bit of a different track. Clearly, we had said for Gap that the new teams the new vision was going to be really first expressed as part of the fall presentation, both from an in-store standpoint, the merchandise categories, and the product. Keep in mind that Cynthia’s new team and the design team, fall is really their first expression. So, they have a little bit different trajectory in terms of expectation. Jenny has been working the specialty redirection now as part of the first half in each quarter and we’re seeing incremental improvement, so we expect it to continue to improve. Needless to say, most of that is going to hit as we bring all of these elements together for the second half. So, they are a little bit on different tabs, but we certainly expect the second half to be better for both. Brian Tunick, JP Morgan: Thanks and good luck.

Your next question comes from Stacy Pak with Prudential Equity. Stacy Pak, Prudential: Thanks. My question is for Jenny “surprise, surprise.” Jenny, I guess a couple of things. One is what you said about the April improvement in traffic part of it being due to what you’re doing in store and some of the marketing, does that suggest that you’re seeing a continuation of good traffic in May? And then the real question I have is on the Neutral of your Naturals collection, what’s left of it in the store? I’m still not seeing marked down and I was wondering whether there’s been a change in your markdown approach, whether you’re seeing the same kind of success on the Madras collection with regard to reception on sole priced purchases, and if you could kind of just grade Old Navy’s execution of summer overall in your opinion on everything -- product, advertising, stores, and talk about some of the other comp levers; I mean we’ve all seen the traffic, but what about conversion and UPT and AUR and where Old Navy is or isn’t achieving the progress you would like? That would be helpful. Jenny Ming, President, Old Navy: First of all, you and I could have a 15-minute conversation. Stacy Pak, Prudential: You can talk for 15, I’ve got time. Jenny Ming, President, Old Navy: But the traffic, actually I think we can’t forget that April is also Easter shift, although I was encouraged to see some improvement. But I think for us, for summer, as I said earlier, we have our Madras TV that’s on now for the next three weeks and we have a strong circular that was dropped this weekend for Memorial period, and then of course we have Magic. So, we have some strong marketing efforts and I’m hoping that will drive better traffic. But regarding Pure Naturals and Madras, actually Pure Naturals was always meant to stay on, as a backdrop to Madras; they actually look great together. So what you should see on the floor is Pure Naturals is more in the backdrop and Madras sitting in the forefront, and they look great together, and it’s meant to be that way. So, it’s a flow from summer one into summer two, and they should live together. As I said, for us, the leverage has really been challenging, it’s really traffic and AUR, and it’s really about that. Stacy Pak, Prudential: Two followups, so have you seen any improvement in conversion and shouldn’t we have seen the Pure Naturals collection marked down by now, and that’s the part that sort of surprised me. Jenny Ming, President, Old Navy: Actually our conversion has been pretty steady and there we’ve seen some improvement at the UPT. It’s the best driver from selling a little bit more value and we anticipate it. So, our UPT has been strong. Sabrina Simmons, Senior Vice President, Treasury & Investor Relations: And Stacy that was one long question. Operator, next question.

Your next question comes from Dana Cohen with Banc of America Securities. Dana Cohen, Banc of America Securities: Hey, good afternoon guys. I guess this question is for Byron. What is the change in the inventory, Byron, I think to begin of the second quarter it went negative to flat sort of confirm that, several reasons for that? And then second, I know you don’t project SG&A, but can you help us think about it as we move into the back half of the year, what is going to change sequentially? I mean, you have marketing coming, can you give us a sense of what will change year-over-year sequentially, just to help us think about that line? Byron Pollitt, Chief Financial Officer: Sure, let’s reset first the second quarter inventory. The original guidance we have was low negative single digits, and we’ve moved it to flat for end of second quarter. This was our first guidance for the third quarter. SG&A: So let me elevate and give you all a perspective on how to think about SG&A for the second quarter and through the balance of the year. First, we are in the midst of a turn around and we do feel it is appropriate to spend in some of the critical SG&A categories in order to accelerate our recovery. Therefore, as we enter the second quarter, you can expect to see a building investment in store labor in our existing stores in order to enhance store experience, which is a fundamental lever in our turn around approach. We are adding new stores, which boosts payroll and store expense through the balance of the year. In the second quarter, we will begin to ramp up marketing, which will also continue through the balance of the year, and we will at the same time continue with our growth strategies, Forth and Towne, the expansion of Banana Republic in Japan, the launch of our franchise business, localization of our international management teams, and the upgrading of our internet platforms. We don’t expect that all of these costs will be offset with cuts in the other places, though this is a deliberate approach.

Thank you, our next question comes from Jeff Black with Lehman Brothers. Jeff Black, Lehman Brothers: Thank you very much. I guess I have a question for Byron as well. On the inventory side, I continue with that, where is the bulk of the increases going by division? In other words, is Gap getting a little more inventory than Old Navy, etc., as you look at moving to flat? And secondly, how do you feel about the clearance inventory as you start making your transition into the next season? Thanks a lot. Byron Pollitt, Chief Financial Officer: First of all, recall that our guidance was from low for the second quarter is moving from low single digits negative to flat. In the big seam of things that’s a pretty small change in inventory. Consider it across the brands, growing confidence in our position, lapping a negative in the prior year. So, I would just put this in perspective. It’s a small increase. With regards to clearing, we are committed to continue to manage inventory levels season by season and to clear viable inventory. We are entering the second quarter with an overall inventory level in line with what we hope to achieve, but with a bit more spring still to clear. So, when we said on an earlier sales call, we expected to have some margin pressure in the second quarter. This was related to entering into the quarter with a bit more spring than we had planned, and we do expect to move decisively to clear it in this quarter. Jeff Black, Lehman Brothers: Okay, thanks very much. Good luck.

You next question comes from Janet Kloppenburg with JJK Research. Janet Kloppenburg, JJK Research: Good afternoon. I had a question for Jenny and Cynthia. Jenny, I wondered if you could talk a little about…it seems like this change in purchasing pattern began in April with the customer focusing more on the value. I thought before a customer really liked the products and I just thought you didn’t have enough investment in the fashion categories, and maybe you could talk about your analysis of that change. And Cynthia, I was hoping you could tell us what matrix you’re using to gain confidence in the Gap fall line and perhaps categories that are performing well now that you’re feeding back into or some tests projects that you’ve run that gives us confidence that the business will turn at that time. Thank you. Jenny Ming, President, Old Navy: Actually our fashion product, especially the Pure Natural performed well and, of course as I said, our value product is doing better than our expectations. I think within our business is really our core product such as big categories like denim, and that’s the key set in that setting up plan. So, it’s not the fashion. The Pure Natural, all of that has been doing well. Janet Kloppenburg, JJK Research: So, what will you do about that, Jenny, what actions have you taken? Jenny Ming, President, Old Navy: Denim obviously is a very important category for us. So going into the fall, it will continue to be an important category, so we have actually revamped our entire mix for the fall, especially in the women’s denim going into summer. It’s a little bit trickier, has been embroidery, embellishments. How we look at going forward is a lit bit better fabric, a little cleaner wash, just a little bit more elevated, a little bit more sophisticated. That’s what you’ll see for fall. Janet Kloppenburg, JJK Research: And other core categories that you saw a change in clothes using patterns? Jenny Ming, President, Old Navy: What do you mean by that? Janet Kloppenburg, JJK Research: Besides denim, you emphasized this change in pattern in April… Jenny Ming, President, Old Navy: It’s not really a change in pattern. Actually our value piece has been selling continuously. What I want to assure is that our specialty product actually is doing very well. So, I feel it’s about marketing more of our specialties so that we can win back our trade bound customer than before. So, we’re really looking at also revamping our core product, making sure they get elevated to a little bit more specialty. Janet Kloppenburg, JJK Research: I understand. Thank you. Cynthia Harriss, President, Gap Brand: Well, this is Cynthia…your question about why we’re at the level confidence in fall; it really goes back to the overall strategy. We have been consistently saying that we’re focusing on our four key categories, specific categories that Gap has historically been know for, and that’s where we’ve had the greatest momentum. In fact it caught our attention to really ensuring that we have the aesthetics that is a good match to what is Gap, that clean, confident, a very causal aesthetic. But equally important has been adding back a great attention to the quality and details that really we think are essential to having the full assortment. And lastly, we have done surveys and focused groups with customers that give us early indicators of some positive uptake. Janet Kloppenburg, JJK Research: Thank you.

Your next question comes from Paul Lejuez with Credit Suisse First Boston Paul Lejuez, Credit Suisse First Boston: Hey, thanks guys. Can you give a little bit more color on merchandised margins by the Vision, perhaps if not specifically on basis points, maybe directionally? And you did say that the first quarter was essentially in line, I’m just wondering about the different pieces of the puzzle and how they performed relative to your expectations in offline gross margin and expenses. Thanks. Byron Pollitt, Chief Financial Officer: This is Byron. Let me just respond at a high level since we don’t typically talk of margins quite at the level you’re asking for. But, as we hindsight the first quarter, Banana is clearly out of the gates first and with them performing well, the shortfall in margin is more in the two bigger brands, Gap and Old Navy. And with the underperforming of the AUR in Old Navy, we have a bit more of the gap to close with regards to that division. In connection with the other expenses and with the topline results, we said that we expected the first half to be challenging. The first quarter was and there are not real callouts here. It roughly has performed in line with our expectations. Paul Lejuez, Credit Suisse First Boston: Thanks guys, good luck.

Your next question comes from Barbara Wyckoff with Buckingham Research. Barbara Wyckoff, Buckingham Research: Hi, Jenny and everybody. I have a question for Cynthia. You’ve made some changes which you talked about a little bit in the merchandising priorities. Excluding apparels and finished jobs, when will we start to see the first phase of the levers in Kids and Body, and when will you start to share with us here sort of the learning? And have you made any strategic changes in processes in these two businesses outside of looking at the lead time kinds of things, are you doing anything differently? Cynthia Harriss, President, Gap Brand: Well first of all, I’d say right now we’re experiencing a pretty solid business in our Kids, Baby, and Maternity as well as in our Body business, which is a nice foundation for us to build upon. Our two leaders now being in place, I think what we’re seeing is just the effect of their seasoned leadership giving the teams good direction for strong in-season management. Obviously when the products cycle, it will take a period of time before you see the influence on the overall product assortment. But, as I’ve said in previous conversations is this was more than just adding leadership. It’s really aligning our team against working categories, turn out to be more nimble, more quick, and more decisive in that. So, I’d say bottomline with that is we’ve got the leadership and the team in place. We’ve got a solid business to really start to build upon, and in the coming months this will really start to take hold. Barbara Wyckoff, Buckingham Research: Okay, thank you.

Your next question comes from Gabrielle Kivitz with Deutsche Bank. Gabrielle Kivitz, Deutsche Bank: Good afternoon. Question for Cynthia. Are you changing anything within the organization to make sure that the product offering is trend relevant and that you’re capitalizing on the right trends in the right seasons? So, how is the organization adapting to ensure this happens; for instance, how do you make sure that you’re not khaki focused in a year when denims are dominant bottoms or that you have enough dresses in the offering in a season when dresses are on fire in the industry? And then second question also for Cynthia, could you talk about the markdown strategy of the Gap division and how that changed in the first quarter? I think you may have had improved profitability in the first quarter, but are you pleased with how the strategy is working and will you continue it going forward? Thank you. Cynthia Harriss, President, Gap Brand: So, a couple of things. This overall shift in our organizational structure is one of the elements to really accommodate us having the right assortments and by having focused leadership against the competitive set, and against each one of these businesses for not only the consumer but in the competitive set allowing us to really be more focused and on target with that. So, I’d say one is about being focussed, the second is with the fact that we’ll use the adult business as a place holder for what we’re doing in all the businesses by having the key categories, then setting it up in shops versus having a collection base really is requiring us to be very tuned into what is the emerging trends within those categories as well as you’ll see in fall when the store setup in the shop really does allow us to keep feeding in new current products as it emerges as opposed to in previous times when we had a more dramatic seasonal shift or slip with that. So, I figure there are multiple aspects of it that are set up to accommodate that, and then most importantly is just really the attention and shift on the way we work in terms of our processes in working closely between design merchants, production, and being speedy and fast to market. On the markdown strategy, we really haven’t changed anything and we continue to use the tools that allow us to make us and be clear with this, and overall we’re clearing our inventory in an appropriate fashion. Gabrielle Kivitz, Deutsche Bank: Great, thank you.

Your next question comes from Kimberly Greenberger with Citigroup. Kimberly Greenberger, Citigroup: Great, thank you. I was looking at each of the Brand Presidents to talk about the risk that they see, the opportunity to become positive in the second half of the year, obviously we’re all hoping that that happens. If had to take a look at it and say the risk that it doesn’t turn positive is “x”, what would that be by brand? Thanks. Paul Pressler, Chief Executive Officer: Kim, this is Paul. I’ll talk to it because it’s needless to say the teams are very confident in our strategies for fall, and every single day we are focusing on what do we need to improve our business today and tomorrow. So, we have the confidence, we really believe in our strategies, we’re beginning to see from our internal milestones some success associated with that, and we just got to believe and be committed and be confident in what we’re doing. We can’t control the consumer in terms of the speed in which they come back. All we can do is to make sure that we’ve got our right product, we’ve got our vision, we got compelling marketing, we’ve got compelling store streams, and as we’ve said, we are going to invest in the second quarter to help ensure that we are telling the consumer why we believe in what we’re doing, and we’re just going to fight it every day and make sure that we’re winning back share. I’m not sure if my colleagues have much to add to that, but I just think we’re confident. We believe in our product, we believe in our strategies, and we are going to fight every single day in whatever level it takes to make sure that we win back those customers’ confidence.

Your next question comes from Jennifer Black with Jennifer Black and Associates. Jennifer Black, Jennifer Black and Associates: Hi, good afternoon. I just wondered if you could refresh us about who the target Gap customer is, if you could describe the demographics that would be very helpful? Cynthia Harriss, President, Gap Brand: Hi, this is Cynthia. So, the target customer in this and a reiteration of what we’ve been saying all along is really that 18 to 35-year-old customer with really the sweet spot being in the mid-to-later 20’s, the young adults. We are a broad brand that is focused and, especially I think you’ll see more stores in fall, the really core categories gives us the liberty to be able to halo a little younger and a little older along with that. Sabrina Simmons, Senior Vice President, Treasury & Investor Relations: Operator, we have time for two more questions.

Very well mam, you next question comes from Dana Telsey with Telsey Advisory Group Dana Telsey, Telsey Advisory Group: Good afternoon every one. Can you please talk a little bit about…if you think about each brand, Old Navy, Gap, and Banana, store remodelings and store presentation, how is that changing for the fall given the product changes that’s coming about, what do you expect to see in the in-store environment for a company that changes? Thank you. Paul Pressler, Chief Executive Officer: Maybe I’ll do it broadly and then maybe Cynthia wants to pick up. Our strategy for in-store experience is unique for each one of the brands. First and foremost for Gap, we are very focused on continuing to roll out our remodels. The remodels generally speaking, as you saw from the Denver experience, we believe strongly that that’s a critical element to the overall repositioning of the brand and its success. And then within Gap as well, as Cynthia had mentioned, since that’s going to take sometime, we are making sure that we are communicating our merchandised strategies to our customers by reorienting our merchandising visuals around these key classifications. So, you’re going to see a shift in that and then you’re going to see some marketing elements that we think will make it a clear sign to the customer that something has changed. Jenny has already been putting into work stronger visual presentations, both on the standard side but also making sure that there’s a compelling specialty sensibility to it, so new signage that’s going up in our stores, the way she’s reworking the front center and the way she’s working the main streets in terms of accessories. And then of course with Banana Republic, you’re seeing it already reflected in the stores, but you’re also seeing it as the market continues to make sure that each one of those classifications that we really believe in, whether it’s the chinos or the white shirting, are very clear and very compelling to our consumer and that we continue to push on Banana Republic’s elevation, whether we do that through product merchandising like our handbags and then later this fall the introduction of our personal care. Dana Telsey, Telsey Advisory Group: Thank you.

And your next question comes from Todd Slater with Lazard Capital Markets. Todd Slater, Lazard Capital Markets: Thanks very much, just a quick question on the SG&A side given the investments made there, if you could just tell us what the leverage point now is, does that change at all? Byron Pollitt, Chief Financial Officer: This is Byron. There’s no formulaic relationship yet on leveraging SG&A and comp. As you can appreciate, we’re in a turn around and it’s a little painful but we do feel it is absolutely appropriately for us to spend in certain key categories like store labor, like marketing, both of which did hit SG&A, not only as a critical component of our turn around but to help accelerate the rate of turn around and that of course causes de-leverage in a way that’s not normalized, and at the same time we are now beginning to add stores net of our closures, so that adds to SG&A, particularly store payroll. And then we have the launch of a number of growth strategies for our future, which are in a non-normalized state of incubation including Forth & Towne, BR in Japan, franchising the movement of management teams to local in-country business teams, and the investments we’re making in the internet. So, in short, we’ve got a lot of activity occurring in SG&A in a way that’s not normalized, and so it would be very premature at this point to describe any sort of relationship between comp and SG&A leveraging…according to the day though that we can do that. Todd Slater, Lazard Capital Markets: So do we, thank you. Sabrina Simmons, Senior Vice President, Treasury & Investor Relations: So I’d like to thank everyone for joining us on the call today, and as always the investor relations team will be available after the call for further questions. Thanks everyone.

Ladies and gentlemen, we do appreciate you joining us for our Gap, Inc. Conference Call. This call is now concluded and you may now disconnect.