Paul Pressler - CEO Byron Pollitt - CFO Marka Hansen - President of Banana Republic Cynthia Harriss - President of Gap Brand Sabrina Simmons - Senior VP of Corporate Finance

Brian Tunick - J.P. Morgan Randal Konik - Bear Stearns Jeff Klinefelter - Piper Jaffray Dana Cohen - Banc of America Stacy Pak - Prudential Equity Group Kimberly Greenberger - Citigroup Jennifer Black - Jennifer Black and Associates Barbara Wyckoff - Buckingham Research Ilene Dee - Credit Suisse Lorraine Maikis - Merrill Lynch

Good afternoon, ladies and gentlemen, and welcome to Gap Inc.'s Third Quarter Conference Call. At this time, all participants are on a listen-only mode. (Operator Instructions). The conference call and webcast are being simultaneously recorded on behalf of Gap Inc. and consist of copyrighted material. They may not be re-recorded, reproduced, retransmitted, rebroadcast or downloaded without Gap Inc.'s express 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 Simmons, Senior Vice President, Corporate Finance. Please go ahead, ma'am.

Good afternoon, everyone. I would like to welcome you to Gap Inc.'s third quarter 2006 earnings conference call. For those of you participating in the webcast, please turn to slide 2. I would like to remind you that the information made available on this webcast and conference call contain certain forward-looking statements including. but not limited to. forecasts relating to earnings per share, free cash flow, operating margin, inventory per square foot, interest expense, depreciation and amortization, capital expenditures, effective tax rate, store openings and closings, real estate square footage, market and product category growth, and excess cash usage, as well as other statements that express our expectations, anticipations, beliefs, estimates, intentions, plans and forecasts. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause our 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 28, 2006. Investors should also consult our quarterly report on Form 10-Q for the quarter ended July 29, 2006, and 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 November 16, 2006, 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. This presentation includes the non-generally accepted accounting principal measure, free cash flow, which under SEC Reg G, we are required to reconcile with GAAP. The reconciliation of these measures to GAAP financial measures is included in our earnings press release, which is available on gapinc.com. Joining us on the call today are CEO, Paul Pressler; CFO, Byron Pollitt; Banana Republic President, Marka Hansen; and Gap Brand President, Cynthia Harriss. Now, I would like to turn the call over to Paul.

Good afternoon. Our third quarter results reflect that each brand is at a different stage in its turnaround. We were pleased with the solid performance at Banana Republic and continued progress at Gap, but Old Navy's third quarter results were disappointing. Although we believe we've made improvements in Old Navy's product and store experience over the past several months, traffic trends unexpectedly deteriorated in October, making it difficult to clear fall product. I'll share further details on Old Navy later in the call. At Gap, we continue to make progress during the third quarter, although we would like to see its top line results improve faster. Each month this quarter our comp trend has moved in the right direction. We are creating great buzz in the market with our Audrey and RED campaigns, but we know it will takes several seasons of compelling messaging and product to rebuild our traffic. Most importantly, Cynthia has laid the ground work for Gap's long term success, setting solid strategies and hiring strong talent to lead the execution. At Banana Republic, I am pleased that we reported three months of positive comps, are continuing to achieve healthy improvements in margins. Customers have responded positively to our assortments, which the team has balanced with both elevated fashion and versatile essentials. Building on Banana Republic's unique accessible luxury positioning, we will continue to expand the brand into new product categories. As we look at our third quarter performance and November results so far, Old Navy's business continues to be challenging month-to-date, and momentum at Gap brand is slower than we expected. Accordingly, we are lowering our earnings guidance for the year. I'll turn the call over to Byron to provide more details on this and to review our financials.

Thank you, Paul, and good afternoon. As Paul said, though we were pleased with performance at Banana Republic and progress at Gap brand during the third quarter, business at Old Navy remained challenging. Today, I will review third quarter results, and then walk you through guidance for fiscal 2006. First Q3 results. Net earnings were $189 million, or $0.23 per share. Gross margin increased 210 basis points, to 37.4%. We ended the quarter with $2.4 billion in total cash and investments. We increased our quarterly dividend to $0.08 per share, and finally as of November 15, we have utilized a total of $344 million of our $750 million share repurchase authorization, and have repurchased 20 million shares. Of which, 16 million shares were repurchased during the third quarter. For webcast participants, please turn to slide 3. Third quarter earnings were $189 million, or $0.23 per share, compared to $212 million, or $0.24 per share last year. As stated in our October sales release, the tax rate benefited from an adjustment related to a tax treaty resolution that was originally booked in January of fiscal 2005. Therefore, our third quarter effective tax rate was 35.4%, 410 basis points below the prior year. Third quarter weighted average diluted shares were 832 million. Please turn to slide 4, sales performance. Total Gap Inc. sales in the third quarter were 3.9 billion, flat to last year. Gap Inc. comp store sales decreased 5% in the third quarter, compared to a negative 7 in the third quarter last year. The 5 percentage point positive spread between total sales and comp sales was driven primarily by new stores and online. For the third quarter net sales in comps by division, please refer to our earnings press release. Turning now to gross profit on slide 5. Gross margin was 37.4%, up 210 basis points from last year, with 20 basis points from leverage on rent, occupancy and depreciation, and 190 basis points from higher merchandise margins. Of which, 60 basis points were related to the impact of a reclassification of sourcing costs from operating expenses to cost of goods sold last year. A word, a further explanation. Last year during the third quarter, we made $30 million entry to reclassify certain sourcing costs from operating expenses to cost of goods sold. 20 million of that year-to-date catch-up entry was related to costs incurred in the first and second quarter. As a result of this catch-up, last year's cost of goods sold were higher and operating expenses were lower by about $20 million. Turning now to operating expenses on slide 6. Third quarter operating expenses were 1.2 billion, up 15% over prior year. When considering this year-over-year increase, keep in mind that expenses last year were lowered by 20 million, as I just discussed. In addition, third quarter operating expenses increased over prior year due to the following investment. Incremental payroll associated with a net increase of 40 new stores, and additional $50 million of marketing in the quarter related to incremental campaigns across all the divisions, particularly Old Navy and Gap. Total marketing expenses in the third quarter were 202 million, up 33% from last year. These investments are critical to driving our turnaround. We expect them on a cumulative basis over time to help communicate the relevancy of our brands and drive quality traffic to our stores. And we continue to invest in our growth initiatives, Forth & Towne, international, franchise and Piperlime. Turning to inventory on slide 7. Inventory per square foot at the end of the third quarter was $64, flat to prior year. We ended third quarter with 2.6 billion in inventory. Turning to slide 8 for detail on capital expenditures and store count. Year-to-date, capital expenditures were $406 million, compared to $448 million last year. Year-to-date, we have opened 160 stores and closed 56. Square footage is up 2% over third quarter last year. Please refer to the press release for end of quarter store count and square footage by division. Turning to slide 9 for detail on free cash flow. Year-to-date free cash flow, defined as cash from operations less capital expenditures, was an in-flow of $214 million, compared to an outflow of $120 million last year, driven by reductions in working capital. A Reg G reconciliation of free cash flow can be found in our press release. At the end of the third quarter, we had total cash and investments of $2.4 billion. Please turn to slide 10 for guidance covering the remainder of the year. Given the deceleration of momentum at or maybe in October, which has continued into November, coupled with a slower turnaround pace at Gap Brand than was assumed in previous guidance. We are revising our outlook for the remainder of the year. Earnings per share, we now expect annual EPS for fiscal 2006 to be $1.01 to $1.06. Operating margins, we now expect operating margins to be about 8%. Capital expenditures, we now expect capital expenditures for the year of $625 million, $50 million less than prior guidance. Regarding inventory, we still expect inventory per square foot at the end of the fourth quarter to be up in the low-single digits versus an 11% decrease last year. We expect inventory per square foot at the end of the first quarter 2007 to be flat versus a 5% decrease in the first quarter of 2006. Guidance for the following areas has not changed. Depreciation and amortization, about $535 million. Interest expense about $40 million. Tax rate about 39%. Free cash flow at least $800 million. Store count in square footage, we expect to open about 190 store locations and close about 125 stores. Square footage is expected to increase 2% to 3%. And finally a word on cash balances. To support the normal operating requirements of our business and adequately withstand a prolonged downturn, like that experienced in 2001 and 2002, we originally established a minimum cash target of $2 billion with an expectation that this amount would come down, as we demonstrated greater discipline in managing our cash flows. Despite several quarters of challenging top line results, we have delivered healthy free cash flow. Because of this, we are now comfortable reducing our minimum cash target to $1.5 billion, and we will continue to revisit this target periodically. We plan to deploy excess cash according to the same three priorities we have previously outlined. First, investments in the business; second, increasing our dividend and third share repurchases. Thank you. Now I will turn it over to Marka.

Thank you, Byron, and good afternoon everyone. When I last spoke to you on the first quarter earnings call, I shared an important lesson our team had learned the past year, that customer's love us for our fashion point of view, but they expect to find versatile wardrobe builders in addition to the latest fashion trends. We have made sure to reflect this balance in everything we do, from our product assortments and in-store shopping experience to our windows, direct mail and print marketing campaign. Of course, it all begins with product. In 2005, we worked hard on rebalancing our assortments to include great elevated fashion along with high quality style essentials that could be worn to work, out at night or on weekends. By holiday of 2005, we all believe that the assortments had achieved the balance that was right for the brand. And at the time of Q1 call, we were beginning to see signs that customers were responding. This progress has not only continued, but has resulted in positive sales comp and healthy margins for the past three months in a row. This fall, women responded very well in the dressing, classic and feminine women shirts and suiting. She also completed here wardrobe with our accessories, such has elevated handbags, the perfect sales and trends like jewelry. For holiday, we position Banana Republic as the destination to meet all of her holiday occasion. We are all about affordable luxury, great items that you can wear to work, to an office party or out at night. We are also offering a wide range of covetable gifts, both for yourself and for others, from leather accessories to cozy sweaters, featuring cashmere, alpaca and [ferraro], as well as our essential sweaters like merino. Our men's business continues to gain momentum, both the traditional and fashion forward customers have returned to Banana Republic to update their wardrobes with product ranging from our new chinos to sweaters to suiting and tailored blazers. Similar to our women's holiday assortment, we have versatile product to help our guy transition smoothly from what to wear on the weekend, whether denim or chino, to casual go to work in our already established suiting business. This holiday in addition to these style essentials, we are really excited about sweaters from our foundational merino and silk cashmere blend, all the way to ultra lux cashmere. In addition to rebalancing our assortments, we also focused on improving the in-store experience and marketing. After testing a wide range of visual elements in New York this spring, we rolled out the best of these ideas to the rest of our stores, including clear destination signage, such as denim or chino, updated fixtures that allowed for more capacity, technical displays and new propping and window enhancements to elevate the shopping experience. We also updated our marketing imagery to clearly communicate the brand position with Banana appropriate fashion items, like the pencil skirt, which you should have seen featured in our fall campaign. For holiday, we will be featuring our sweaters, accessories and holiday dressing. Importantly, while our focus has been on the base business, we continue to develop and execute on a growth initiative. For example, we continue to expand Petites, and now carry Petites in 85 stores, including five standalone. In fall of 2005, we opened our first Banana Republic store in Japan, and by year-end 2006 we will have 14 stores. We launched our elevated handbag line in the fall of 2005, and continue to expand our accessories offering with small leather goods, pair accessories and out of case jewelry. As I am sure many of you have seen, we launched personal care in September with five fragrances, elevated packaging, full in-store fixtures and a dedicated ad campaign. All of these initiatives are performing very well for us. We continue to expand our brands through our latest venture, eyewear, which we just announced yesterday. We have established a licensing partnership with Safilo, a leader in the eyewear industry to sell Banana Republic's sunglasses in our stores. as well on Safilo's wholly-owned Solstice Sunglass Stores, beginning at the back half of 2007. Additionally, Banana Republic eyewear will be sold through independent opticians. This partnership is very exciting for us, because it enables us to extend our brands through a new channel and engage in the $7 billion eyewear frames and sunglass market. I am very pleased with the progress our team has made by staying committed to our strategies. We are now seeing tangible results in our efforts. We know that in order to win, we must remain relentlessly focused on creating amazing products offered in the compelling store environment. Thank you, and now I will turn it over to Cynthia.

Thank you, Martha, and good afternoon. On today's call, I will review the progress Gap Brand has made turning around the business and highlight specific accomplishments across each of the business unit. I will close with a key focus for holiday. As you know, this year we’ve been working hard to turn around the business, adopting a long-term plan with clear strategies to improve product, store environment and marketing. Today we are executing against the plan with the right talent leading each of the business units. And as a result, we are seeing good traction, especially at body and baby. While progress remained slow in adult, we have strategies in place to strengthen the business. We remained confident in our ability to win back customers over time. In the third quarter we saw positive indicators across the brand that validate our long-term strategy and encourage us to stay the course while making appropriate corrections along the way. First, comp sales improved each month this quarter. Second, customer experience scores are up significantly from last year, with customers reporting they feel more welcome in our stores, attended to by helpful employees and they appreciate the neat and organized store environment. And third, we have generated strong buzz and exposure with our marketing campaign. I would like to share some specific accomplishments in each of the business unit. Under the leadership of Tom Wyatt, we are seeing solid performance in creating strong momentum in our body business. As a reminder, Tom joined us nine months ago to head up GapBody. A veteran leader with more than 30 years experience, including 25 in the intimate apparel industry, Tom's expertise has been instrumental in creating a long-term strategy that positions the business for growth. The combined foundation, lounge and swimwear business is $20 billion market, which we believe represents a tremendous growth opportunity for GapBody. While we plan to share more details in coming months, here are some highlights of Tom's strategy to capture the growth potential. First, we are positioning the brand to embody a playful, emotionally sensual aesthetic that will empower our customer to celebrate her unique and individual style. Second, in addition to continued focus on key items of bras, panties, sleep lounge wear, swim and sport, we will refocus our efforts around the category of personal care next year. Equally important, we will distinguish GapBody in the marketplace by creating a compelling new store experience. Two weeks ago, we unveiled the new store design in Mission Viejo, California, and the old Orchard Center near Chicago. Because shopping for intimates is inherently different and more personal than shopping for apparel, these stores are transformed to create an intimate boutique like experience with distinct rooms, soft colors, unique fixtures and decor. We are very pleased with the early positive feedback and we'll share more about our strategy in the coming year. Pam Wallace joined the team 11 months ago to lead our Kids, Baby and Maternity business. Pam is a proven merchant and seasoned leader with more than 25 years experience in these categories. Our positive momentum, especially in baby, is a reflection of Pam's dedicated leadership and strategic influence to position the business as mom's favorite place to shop at the mall. We continue to offer exquisite products in babyGap and GapKids in a compelling range of comfortable everyday clothes, as well as enhanced options in the premium assortment. New categories that are resonating well with customers include our everyday playwear for toddler girls and [layer] collection in newborn. In addition, we are enhancing our in-store experience with innovative fixtures that provide more efficient access to our broader assortment. Denise Johnston joined the team in June of this year as the President of Gap Adult. She is a seasoned merchant with -- and leader with more than 25 years experience with major retail and wholesale companies. In her five months with the company, Denise has been working closely with the teams to bring our new product categories to life, while developing tactical strategies for upcoming seasons. Our shop-in-shop concept focused on key categories, was first presented in-store in late July, and while we’re anxious for stronger traction, we are encouraged by indicators of positive progress. In women's, we're especially pleased with the momentum in the clean shop, which was fueled by the skinny black pant, Audrey three quarters sleeve knit turtleneck, and the V-neck boyfriend cotton cashmere sweater. We've also had success in shoes, particularly the assortment in ballet flat. And we’re encouraged by recent Gallup Poll result indicating our efforts to reconnect with core target customer segment, women aged 18 to 34 are showing positive results. Our men's business continues to be challenging. We’re working to add more newness across the board, and to make deeper investment in the clean shop, which is performing well. Denim also continues to be a difficult category. We’re in the midst of a two-month test to help us explore the right fit, fabric and wash of our five-pocket denim moving forward. As we continue to position our business units for success and execute our individual strategies, we also remained steadfast in our commitment to provide exceptional in-store environment and inspiring marketing. Our dedication to an up-to-date and compelling in-store environment continues with fleet remodel. We will have approximately 100 stores in the new design by the end of the year, and we will ramp up that effort in 2007, remodeling 75 to 100 additional stores. In addition, our stores will be continually refreshed with dynamic in-store marketing and windows, seasonal enhancements and dedicated visual specialist. In marketing, we are focused on inspiring campaigns, which invite customers back into our stores with fresh messages each month. We know it takes time and consistent cumulative messaging to shift consumer behavior. Our objective is to steadily build brand awareness by focusing on key iconic products in a culturally relevant and entertaining manner. In September, we celebrated Gap's iconic skinny black pants with the Keep It Simple marketing campaign, the innovative TV spot featuring timeless style icon Audrey Hepburn, generated great PR buzz. As a result, our skinny black pant performed well. While we also saw an encouraging halo effect in other areas of our women's business. In mid-October, we launched Gap (PRODUCT) RED in North America as an inaugural partner in the global initiative founded by Bono and Bobby Shriver help eliminate AIDS in Africa. We are excited about how (PRODUCT) RED is connecting with our customers on a deeply personal level. We have heard from customers and employees across the country, how proud they are to support this meaningful cause by purchasing Gap (PRODUCT) RED. Throughout our five-year commitment, we will carry a collection in our stores each season and evaluate the opportunities to feature (PRODUCT) RED in our marketing and PR campaign. Overall, we are encouraged with the progress in the third quarter, and are confident in our strategies moving forward. Gap brand will continue to focus on delivering exclusive product, creating a compelling store environment and inviting customers back into our stores in innovative and unique way. Our Q4 holiday campaign launches today, with the tagline 'peace love gap,' and celebrates the unspoken emotion of the season with compelling images of warmth in family presented in a very culturally relevant manner with the TV spot bringing our holiday message to life with iconic music and dance, which is the spirit of Gap. A variety of products for gifts and self purchase make up the holiday collection, including goodies for the whole family, sweaters and a wide range of accessories. In closing, we remain confident in our long-term strategy. We are seeing signs of traction across the business and we have confidence in our ability to stay consistently top of mind with our customers, while delivering exquisite product and creating warm and inviting store experiences. Thank you.

Thank you, Cynthia. As I said, Old Navy's third quarter results were disappointing. Although we believe, we've improved our offering of trend right product and began seeing traction in women's fashion early in the quarter, results declined as traffic deteriorated in October. Because challenging business trends have continued month-to-date, we are cautious about our fourth quarter outlook. I strongly believe that we have hired the right leader for Old Navy. Dawn Robertson is onboard working with her team to regain momentum in the short term, and to look at the brand's competitive positioning for the long term. I hired Dawn based on her deep merchandising and marketing expertise and her nearly 30 years of retail experience. She has held leadership roles with Federated, the May company and Saks. And most recently Dawn led Myer, the largest department store chain in Australia, which she successfully repositioned the brand and significantly improved their financial results. Needless to say, Dawn has been immediately focused on quickly diagnosing the needs of the business. The Old Navy team is continuing to execute their plans to get trend right product into stores faster, to maximize store productivity, and to develop compelling marketing. Holiday television advertising is primarily focused on the family. Our first spot, featuring winter fashion, began last Thursday and runs through November 21. This would be followed by a spot supporting our Black Friday promotional event, then two additional spots focused on gifts for the family run through December 22. Aligned with Old Navy's emphasis on trend right specialty product, we have doubled the number of fashion magazines we are advertising in this holiday. Finally, on Black Friday we will be holding a 'steel deal unreal' promotional event, including $10, $20 and $30 gifts, and in every store we will be giving away a $250 shopping spree as well as other discounts. We will be holding similar promotional events every weekend until Christmas. Across all businesses, we are continuing to hold ourselves accountable for delivering great product supported by compelling store experiences and effective marketing. And I am confident in Don, Cynthia and Marka's ability to lead this work. While improving each brand's performance is our top priority, we continue to believe in leveraging the strength of our brands to achieve our growth objectives. Our strategy is to build and expand our brands through new product categories and through international, online and real estate growth. I am pleased with the progress the teams are making delivering on these plans. First, we believe there are many opportunities to extend our lifestyle brands into categories beyond what we offer today. For example, as you heard from Marka, the team is building on the success of Banana Republic Petites, high quality handbags and personal care by licensing Banana Republic eyewear. Second, in terms of international expansion, we believe that brings our brands to new markets, represents a significant growth opportunity and we can do this faster and with less risk through franchising. In the third quarter, our first franchised Gap stores opened in Singapore and Malaysia and are exceeding expectations. One of the top selling products has been our Gap logo T, reinforcing the connection that people have with our brand across the globe. Next, Banana Republic franchised stores will open in these markets and we also plan to enter Indonesia and the Middle East and are evaluating new markets as well. In addition to using our franchise business model, we will continue to expand vertically where we can generate the appropriate returns. For example, last year Banana Republic entered the Japanese market where customers are responding very positively to the brand's elevated positioning. We will have 14 Banana Republic stores in Japan at the end of the year and will continue to open new locations in 2007. Third, we built a world-class online business. Our Gap Inc. Direct division continues to report strong sales growth. The new systems that Toby Lenk and the team put in place one year ago, not only improved our efficiencies and online customer experience, they also created a platform for launching new businesses. An example of this is Piperlime. The team successfully launched this online shoe business last month and the initial response is encouraging. The site currently offers more than 100 brands, which we're continuing to expand. Online footwear represents $2.8 billion market that’s expected to double by 2010. So, we're excited to go after this opportunity. Finally, Gary Muto and his team opened 10 new Forth & Towne store in the third quarter. By the end of the year we will have 19 stores in nine markets. Customers continue to respond positively to the product, exceptional service, and the unique fitting room experience. We have an opportunity to improve store productivity, so this fall the team has been testing smaller boxes and we've learned that we can retain the core store experience in less square footage than originally planned. We are also focused on building brand awareness. The team launched a marketing campaign for fall and holiday, targeting older women who have a strong fashion sensibility. Overall, we continue to be encouraged by customer response and believe in the concept's potential for expansion. In closing, each of our brands is in a different place today. At Banana Republic, we are gaining solid momentum. At Gap, we remain committed to executing the strategies that we believe are gaining traction. And at Old Navy, while we've made improvements, we have more work to do to win back our customers. I want to recognize our teams who have been working incredibly hard to achieve our plans. Heading into the holiday season, we will continue to focus on driving strong execution. By focusing our turnaround on our business, improved continued cash distributions, we remain committed to delivering shareholder value. Thank you.

That concludes our prepared remarks. We will now open up the call to questions. We’d appreciate limiting your questions to one per caller.

Your first question comes from the line of Brian Tunick with J.P. Morgan. Brian Tunick - J.P. Morgan: Hi, thanks guys. I guess, my question is, I was just trying to keep track of all the different projects, initiatives you've talked about in the call between Piperlime and the Banana Republic sunglasses. Just maybe talk about the philosophy of trying, maybe not to just to focus on just maybe three things and doing them well. Why are there so many projects that you guys continue to pursue, when obviously the opportunity in the core businesses are still ahead of us?

Hi, it's Paul. Let me answer that one. I think it's a good question. First, we are all unbelievably focused and committed to our turnaround, and we are not going to let anything get in our way or distract us for making sure that the teams are focused on executing that. As we've said, there's a couple of things. First of all, we want to continue to invest in our future growth, and we setup a while ago and said that that growth was going to come through a couple of different avenues. First and foremost was the natural extension of these brands, because we think they're covetable lifestyle brands. And when we look at what Marka is doing in Banana Republic, it's clear that that brand not only is covetable, but she and her team have the bandwidth to be able to expand and offer those products to our consumers that we think is relevant to the business. We also think that these brands are relevant internationally, and growth is going to be an important part of growth, which is why we setup the franchise business. Our franchise business and our vertically integrated businesses are being led by separate and distinct teams that are not part of the US team. So, it's not a distraction and they’re able to take the assets, and now particularly since we have our teams in place in markets in Europe. And in Japan, they are truly operating independently. On online, not only we have built the systems, but Toby and his team have the capacity to be able to grow that business, hence the reason for Piperlime and for the new systems that we've put in place. And again, it doesn’t distract from the major brands, and those teams in what they need to do. So, the principle that we continue to follow is that the turnaround is our most important focus. We will not do anything that we believe in any way distracts the talent in place to accomplish that turnaround. At the same time, we want to continue to invest in our opportunities for growth, which will be the product extensions, our international growth and our online business. Brian Tunick - J.P. Morgan: Okay. Thanks that’s very helpful.

Your next question comes from the line of Randal Konik with Bear Stearns Randal Konik - Bear Stearns: Hey, I have quick question. Just on the -- if you look at the product quality of Banana, it seems to be getting a lot of better and a lot elevated. You talked a lot about cashmere and the assortment. And then the Gap RED product seems to be higher quality. But in the Gap stores, the rest of the assortment seems to be just a bit of the lower quality. Can you discuss some of the learnings from the RED assortment, in terms of how you may elevate the rest of the product assortment going forward in the coming quarters and what categories you may be focused on?

Hi, this Cynthia. We are very proud of (PRODUCT) RED and its provided not only great buzz for the brand, but great learnings for all of us. We were able as a team to go from concept to delivery in pretty short order with that. Along with that, part of our intention was that RED was intended to be the premium of expression of the brand, and from that we have actually learned a lot about the customer's response and I think that you will see many of the fabrications and attitudes of that showing up in future seasons in the rest of the assortment. Randal Konik - Bear Stearns: Hello?

Yes? Randal Konik - Bear Stearns: Yes, and then quick one for Byron. Just, Byron, if I may, if you look at the cash flow statement, the accounts payable on accrued expenses has been very significant drivers of cash flow. Just explain those drivers and are they sustainable source of the cash in '07?

The primary driver on the working capital increased, which did have a pretty significant impact on our cash flow this quarter, can be traced back to a strategy we implemented some time ago in connection with shifting most of our product purchases from letter of credit to open account, and this was made possible by the significant improvement in our credit rating. And although the original intent was to reduce financing fees associated with letter of credit, a consequence -- an additional consequence with this strategy was to increase the amount of payables outstanding. And therefore we received a pretty significant working capital impact. And to the extent that, that differential continues then it would be sustainable. With regards to the increase in accrued expenses, without getting into the details of what caused it in the third quarter, the heart of your question was whether it's sustainable. And I would say, there are natural fluctuations on this account and I wouldn't view that component as being sustainable. Randal Konik - Bear Stearns: Thank you.

Your next question comes from the line of Jeff Klinefelter with Piper Jaffray. Jeff Klinefelter - Piper Jaffray: Yes. My question is regarding the store remodel program. When you think about how you are allocating between marketing dollars, advertising dollars, and then towards store remodels, is there any consideration given what you've learned so far with the productivity improvements to direct even more of the marketing dollars, the national marketing dollars towards store remodel, given that it seems with your particularly Gap, the mall base locations, mall traffic having sort of stabilized nationally from what we understand that that would be even more effective way of driving the conversion? And then just as a follow to that is, what is the current age of the leases across your three divisions?

This is Byron. Let me start with that one. With regards to remodels, we don't view the remodel campaign at Gap -- effort at Gap to be in conflict with the allocation of dollars to marketing. In order to maintain a brand standard, what it means to the brand as it relates to the stores shopping experience, and the experience of the customer inside the store, the moment you say you have a brand standard, you sign up for a certain amount of remodel over time. That’s been seriously neglected at Gap brand. We are in catch-up mode and, frankly, we would remodel our stores as quickly as the length -- as we can negotiate leases that would allow an adequate time to amortize those improvements. So, to be clear, there is no cash constraint associated with our remodels. The decisions to do specific marketing campaigns and the productivity of those campaigns are a completely separate decision, and they have to stand on their own merits and in no way detract from our ability to remodel as fast as we can the Gap fleet. Jeff Klinefelter - Piper Jaffray: And what is the current age of each fleet?

We haven't guided -- we haven't really talked about that. Your question began with Gap, and because Gap is the oldest brand and has the highest percentage of older leases, what happens when a lease runs out of options, you no longer have a guaranteed option to extend the lease. And therefore, what's slowing the program down a bit Extend the lease and therefore what's slowing the program down a bit is that -- what's governing its pacing is, we have to go in and negotiate renewals and extensions to those older leases. And that’s why we've been calling this out as a pacing factor for our remodel program. Jeff Klinefelter - Piper Jaffray: Okay. Thank you.

Your next question comes from the line of Dana Cohen with Banc of America. Dana Cohen - Banc of America: Hi guys. I just wanted to come back on the issues for the business momentum at Gap division. I mean, I can understand you pointing just things like customer satisfaction scores. But, at what point do you feel you would need comps and other objective measures for the business or just start to put up those types of numbers in order to have incremental confirmation that you are moving in the right direction?

Hi, Dana, this is Cynthia. Certainly, I understand your question, and during the Q3 we would have liked to even have stronger performance. But what we know is that it’s a long-term strategy the fact that we have disappointed customers over many seasons and it will take a period of time. But what I would say, in Q2 there were positive indicators, some of which I mentioned in my remarks. But with the specific product in women's, we are getting strong indicators in those areas, specifically in the clean shop, body, baby as well as each month during the quarter we did make improvement even though not to the level that we wanted against content, against traffic. So, we're just viewing this as indicators. That being said, we know we've got to work it hard every single day, because there is more ahead. Dana Cohen - Banc of America: Fine. Thank you.

Your next question comes from the line of Stacy Pak with Prudential. Stacy Pak - Prudential Equity Group: Hi. A couple of things. Byron, I was wondering if you could address how you are thinking about SG&A expense dollars for '07, given the lack of momentum in the business. I guess, what I think I’m hearing is you're going to continue to spend on marketing, and so we should probably look at those dollars being up that same amount. Also for you, why should inventories be up low single digit? Why is that the right number, if comps are down mid to high? And then Cynthia and Paul, I guess, I’m just trying to understand the strategy to reinvigorate Gap and Old Navy, not GapBody, not baby, not international and extensions. But what are you going to do to get the brands reinvigorated, or is there anything about adding third party brands? And what do you do --I mean it's -- you had Oprah and Bono and it didn’t seem to do much. So I am just -- I'm not understanding. Thanks.

Okay Stacy, Byron. I'll begin with the SG&A. So the same approach we have used to support our turnaround strategies in marketing and store labor investments and in supporting our growth initiatives Forth & Towne, international, franchise, Piperlime, we will follow that same expense investment approach in Q4. And clearly, we expect all our expenses to have a return. So as we approach '07, the budgets for which we are currently in the midst of, we will evaluate each of the seasons accordingly, beginning with the first one in '07, and make whatever adjustments we feel appropriate. But to be clear, the guidance that we have given you reflects in Q4 of '06, the same approach that we adopted in Q3. With regards to your inventory question, we guided to low single digits at the end of this fiscal year. Just keep in mind that we’re comping against a prior year's fourth quarter of minus 11. And so, when you put that -- when you just look at the two year comp, you're in negative territory.

Yes, I'll just -- it's Paul. I'll just mention quickly on Old Navy. As I had mentioned, clearly we were pleased with how the teams had refocused our product positioning against our specialty flair. And although we think we did a good job on that, of course, there's always opportunity for us to get better. After seeing some momentum, particularly in September, we were disappointed and unexpected the deterioration of the business in October. Having said that, we do feel like we've got the holiday advertising campaign to be able to drive our business, and get our customers excited, not just about our product, but also about the excitement and fun that Old Navy has always been and reflected on. So, we feel good that we've got the marketing plans in place. But needless to say now that Don's here, it's going to give her an opportunity and for all of us to have a new fresh pair of eyes on the business to see how we can look for other opportunities for us to drive excitement with our customers, whether it would be advertising campaigns, product campaigns, repositioning of the merchandise within the store. So, we’re clearly looking and open to ideas, but we feel pretty good about our holiday plans in place and are hopeful that it can drive the traffic we need.

Hi, this is Cynthia. The strategy overall is really focusing on the product, the in-store experience, service and marketing. The Q3 performance were as not to the level we wanted, was some indicators of progress. It’s the first season where we delivered the new product assortment and we are learning a lot with it. Several of the things that you mentioned certainly are things that we are exploring, and whereas it's not the big part of our business, things like we did introduce Converse into our stores, in 25 stores, and its been a success. It will be in 75 by this next week. But that’s just one indicator. An indicator is that we are open to exploring a variety of things. You have heard the buzz about the Roland Mouret dresses in Europe, and those will be in seven of our Manhattan stores next week. But the big focus is really on the product, of the core product. Stacy Pak - Prudential Equity Group: Thank you.

Your next question comes from the line of Kimberly Greenberger with Citigroup Kimberly Greenberger - Citigroup: Hey, thank you. I wanted to ask a question on marketing, specifically for Gap brand. And I think you mentioned that the Audrey campaign haloed to the rest of the store. But if you could just go through your third quarter campaigns, the Denim, the Audrey and the RED. What campaigns did successfully not only sell the items featured, but halo the rest of the store? And then just if Byron, can you give us an update on CapEx for '07, given the 75 to 100 '07 remodels, that would be helpful thanks.

We were back on air in July for the first time with a television commercial. I would say the Audrey commercial with the skinny black pants, keep it simple, really was a break out for us. That’s where we had strong performance in the categories, not only in the ad, but had a nice halo effect within what we would call the whole clean shop. RED, on the other hand product assortment was really, or was intended to be premier and is a small proportion of the inventory, rate buzz on that and we’ve had great response to the product, and in fact pleased of the fact that the team was able to scurry and chase into additional products so that we will be as its delivery into the stores now for the rest of the holiday season.

Kimberly, it's our custom to give all '07 guidance on the fourth quarter earnings call, so look forward to answering that question there. Kimberly Greenberger - Citigroup: Thanks, Byron. Is there anyway you might be willing to comment on what an average store remodel might cost or a ball park range.

We haven’t talked about that yet, and will talk about capital expenditure by category on the fourth quarter earnings call, to give you a better flavor of how much money we are investing in remodels and existing stores. Kimberly Greenberger - Citigroup: Great, thanks.

Your next question comes from the line of Jennifer Black with Jennifer Black and Associates. Jennifer Black - Jennifer Black and Associates: Good afternoon. Have you seen a response to your ads in the front of magazines, oldnavy.com? And then I also wondered if you could comment on how you feel about the depth of the assortment at both Gap and Old Navy? Thank you.

Hi, Jennifer, it's Paul. Jennifer Black - Jennifer Black and Associates: Hi, Paul.

Not quite sure I got that first question, but we continue to look at lots of different mediums for Old Navy. As I mentioned in the call, we think that prints particularly, as it relates to our fashion sensibility is new for us and we are going to continue to do that. The teams are always looking at new mediums, whether they would be online for our own sites or even through other sites as a way for us to get attention about what's important overall to our products. Jennifer Black - Jennifer Black and Associates: What I asked was, if you are measuring the response, because you can't miss the ads in the front of all the magazines?

Yes. The teams have a pretty robust measurement tools that we use for all of our mediums where we can get it. Clearly when it comes to direct mail and there is a response, it’s a lot easier to get an exact science on measuring the effectiveness of that. Our print campaign in the magazine book is a lot more difficult if there isn't a response. But we have pretty good programs in place to be able to understand the value creation from some of these vehicles. Jennifer Black - Jennifer Black and Associates: Okay. And then I also asked the question about how you feel about the depth of the assortment at both Gap and Old Navy.

Jennifer, this is Cynthia. Jennifer Black - Jennifer Black and Associates: Hi Cynthia

Hi. As you know, we have made significant shift in the presentation of our stores compared to last year, and I would say overall the inventory levels are appropriate for where we are with the business. But just to the facts that there has been such a shift in the look, the feel, the quality of it, we are learning a lot and finding areas where frankly we are chasing some business. As I mentioned earlier, probably the greatest strength that we are having in the adult business is coming in the clean shops, in both men and women. And there is certainly some categories where we wished we had a little more depth in that. But I think that’s part of the learning journey that we are on.

And then, Jennifer, as it relates to Old Navy, I will answer it in depth in two ways, both inventory and classifications. We feel really good going into holiday, the classifications, particularly in sweaters, and some of the great products that I think Old Navy has done with sherpa and faux fur. So, we feel very good about the general depth of the classifications that we are covering, hoddies and men's and so on. As it relates to inventory, clearly in hindsight for October for fall, we were deeper than we would have liked to have been, given the deterioration in our traffic. However, we did buy holiday lighter. So, even given our software business today we think we are in pretty good shape. Jennifer Black - Jennifer Black and Associates: Okay. Thank you very much and good luck.

Thank you.

Thank you.

Your next question comes from the line of Barbara Wyckoff with Buckingham Research. Barbara Wyckoff - Buckingham Research: Hi everyone. I guess a couple of questions, one for Marka and one for Cynthia, and Cynthia, I guess and Paul, given the success of the plans of the body business, we really haven't heard any plans to accelerate body openings, it would seem that that might be a good idea. And then Banana, Marka on Banana, just if you could talk generally about Banana domestic versus international, meaning Japan, and I realize Japan doesn't have much scale, but, how many stores do you think you could open there and where do you think the margins could get to relative to domestic Banana? Are they at the same kind of levels, do they have that potential or could you talk a little more about that?

Hi, this is Cynthia. We're really encouraged about the big opportunity we think that there is in GapBody, and as I mentioned, just two weeks ago we introduced a new look and feel of our store and are really enthused about it, and I hope you have an opportunity to go visit at one of the locations. There is more to come on this and frankly this is the work that Tom and the team have been working toward on putting together a strategy. But we really view this as a big opportunity.

So with regard to Banana Republic, I think we are learning a lot from our Japan counterparts. As we know, we opened five stores last year, eight more this year, and we are just going to continue to grow the market as it is appropriate. But we've learned a lot with smaller stores, some new fixturing that we've actually brought back to the States. So it has been a really great learning experience on both sides. And we are looking at Banana as a global brand where the product assortment is actually pretty much the same globally, which is working really very well -- the proposition of Affordable Luxury has worked there as well as our women's business has been very strong in Japan. Barbara Wyckoff - Buckingham Research: Okay. Thank you.

Your next question comes from the line of [Ilene Dee] with Credit Suisse. Ilene Dee - Credit Suisse: Hi. What is your sense on selling or spinning off any of your brands and on acquisitions, and would that sense change based on the pace of the turnaround or the stock price? Thank you.

Thanks Ilene. Well I think it's obviously responsible of our management team to continue to evaluate the strategic options that really determine the best way for our shareholders to increase their value in the company. We believe that we can create significant value to our shareholders by staying just maniacally focused on our turnaround in the short run and that's really the focus of the team today.

Operator, we have time for about one more question.

Your final question comes from the line of Lorraine Maikis with Merrill Lynch. Lorraine Maikis - Merrill Lynch: Thank you. Good afternoon. Just back to Old Navy, can you just talk briefly about what you think the biggest problem was with the product, what changes you've made and will this be in time to impact holiday?

Yeah. I think as I've said, we do feel like we did a nice job getting our product filter to be more special in our stores and to be more trend right. So, having said that we feel good, but obviously the results aren't there. We recognize that it is a fiercely competitive market set that Old Navy plays in, and that it becomes really important for us to continue to make sure that our differentiation which is not just product and price, but a fun and compelling experience is critically important. We did see some good traction in our women's business that made us feel like we were on the right track. That has contrasted against our men's business, which has been really tough. So I think all in all, the product has gotten better. We need to continue to make sure that our marketing is compelling on all three dimensions. And needless to say, we know it's a competitive marketplace. We need to do -- we need to do it to get -- to be effective against our competition and win share.

So, I'd like to thank everyone for joining us on the call today. As always, the Investor Relations team will be available after the call for further questions. Thank you.

This concludes the Gap Inc.'s third quarter conference call. You may now disconnect.