GAP INC (Form: 10-K, Received: 03/27/2009 16:12:22)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x	Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended January 31, 2009

¨	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to

Commission File Number 1-7562

THE GAP, INC.

(Exact name of registrant as specified in its charter)


		Delaware		94-1697231
		(State of Incorporation)		(I.R.S. Employer Identification No.)


		Two Folsom Street, San Francisco, California		94105
		(Address of principal executive offices)		(Zip code)

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

Securities registered pursuant to Section 12(b) of the Act:


		Common Stock, $0.05 par value		New York Stock Exchange, Inc.
		(Title of class)		(Name of each exchange where registered)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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


Large accelerated filer x		Accelerated filer ¨		Non-accelerated filer ¨		Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of August 1, 2008 was approximately $8 billion based upon the last price reported for such date in the NYSE-Composite transactions.

The number of shares of the registrant’s common stock outstanding as of March 23, 2009 was 695,718,239.

Documents Incorporated by Reference

Portions of the registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on May 19, 2009 (hereinafter referred to as the “2009 Proxy Statement”) are incorporated into Part III.

Special Note on Forward-looking Statements

This Annual Report on Form 10-K contains forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements other than those that are purely historical are forward-looking statements. Words such as “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan,” “project,” and similar expressions also identify forward-looking statements. Forward-looking statements include, but are not limited to, statements regarding: (i) our plans to expand internationally through franchising and similar arrangements; (ii) the outcome of proceedings, lawsuits, disputes and claims; (iii) cash balances and cash flows being sufficient for the foreseeable future; (iv) improvement in return on invested capital; (v) managing inventory to support a healthy merchandise margin; (vi) maintaining a focus on cost management; (vii) generating strong free cash flow; (viii) current cash balances and cash flows being adequate to support our business operations, capital expenditures, and the payment of dividends and share repurchases; (ix) being able to supplement near-term liquidity with our existing credit facility; (x) capital expenditures in fiscal 2009; (xi) the number of new store openings and store closings in fiscal 2009; (xii) net square footage change in fiscal 2009; (xiii) our plan to maintain our dividend in fiscal 2009; (xiv) future share repurchases, including repurchases from members of the Fisher family; (xv) the expected payments and the expected benefits, including cost savings, resulting from our services agreement with IBM; (xvi) the maximum potential amount of future lease payments; (xvii) the impact of losses due to indemnification obligations; (xviii) the maximum exposure and cash collateralized balance for the reinsurance pool in future periods; (xix) the estimates and assumptions we use in our accounting policies, including those used to calculate our lower of cost or market and inventory shortage reserves, our impairment of long-lived assets, goodwill, and intangible assets, our insurance liabilities, our future sales returns, and our settlement of foreign and domestic tax audits; (xx) future lease payments related to the closure of Forth & Towne; (xxi) the assumptions used to value share-based compensation expense; (xxii) future lease payments and sublease income; (xxiii) our intent to use earnings in foreign operations for an indefinite period or repatriate them only when tax-effective to do so; (xxiv) total gross unrecognized tax benefits; (xxv) driving traffic, improving product, and creating new store prototypes; (xxvi) growing our international, online, and outlet businesses; (xxvii) maximizing earnings potential; and (xxviii) performing better than the competition and gaining back market share.

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. These factors include, without limitation, the following: the risk that the adoption of new accounting pronouncements will impact future results; the risk that we will be unsuccessful in gauging fashion trends and changing consumer preferences; the risk that changes in general economic conditions, consumer confidence, or consumer spending patterns will have a negative impact on our financial performance or strategies; the highly competitive nature of our business in the United States and internationally and our dependence on consumer spending patterns, which are influenced by numerous other factors; the risk that we will be unsuccessful in identifying and negotiating new store locations and renewing leases for existing store locations effectively; the risk that comparable store sales and margins will experience fluctuations; the risk that we will be unsuccessful in implementing our strategic, operating and people initiatives; the risk that adverse changes in our credit ratings may have a negative impact on our financing costs, structure and access to capital in future periods; the risk that changes to our information technology (“IT”) systems may disrupt our operations; the risk that trade matters, events causing disruptions in product shipments from China and other foreign countries, or an inability to secure sufficient manufacturing capacity may disrupt our supply chain or operations; the risk that our efforts to expand internationally through franchising and similar arrangements may not be successful and could impair the value of our brands; the risk that acts or omissions by our third party vendors, including a failure to comply with our code of vendor conduct, could have a negative impact on our reputation or operations; the risk that changes in the regulatory or administrative landscape could adversely affect our financial condition and results of operations; the risk that we do not repurchase some or all of the shares we anticipate purchasing pursuant to our repurchase program; and the risk that we will not be successful in defending various proceedings, lawsuits, disputes, claims, and audits; any of which could impact net sales, expenses, and/or planned strategies. Additional information regarding factors that could cause results to differ can be found in this Annual Report on Form 10-K and our other filings with the U.S. Securities and Exchange Commission.

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 March 27, 2009 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.

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THE GAP, INC.

2008 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS


		Page
PART I

Item 1.	Business	4

Item 1A.	Risk Factors	7

Item 1B.	Unresolved Staff Comments	12

Item 2.	Properties	12

Item 3.	Legal Proceedings	12

Item 4.	Submission of Matters to a Vote of Security Holders	13

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	14

Item 6.	Selected Financial Data	16

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	34

Item 8.	Financial Statements and Supplementary Data	35

Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	67

Item 9A.	Controls and Procedures	67

Item 9B.	Other Information	67

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	68

Item 11.	Executive Compensation	68

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	68

Item 13.	Certain Relationships and Related Transactions, and Director Independence	68

Item 14.	Principal Accountant Fees and Services	68

PART IV

Item 15.	Exhibits, Financial Statement Schedules	69

Part I

Item 1. Business.

General

The Gap, Inc. (the “Company,” “we,” and “our”) was incorporated in the State of California in July 1969 and was reincorporated under the laws of the State of Delaware in May 1988.

We design most of our products, which are manufactured by independent sources, and sell them under our brands:

Gap. Founded in 1969, Gap stores offer an extensive selection of classically styled, high quality, casual apparel at moderate price points. Products range from wardrobe basics such as denim, khakis, and T-shirts to fashion apparel, accessories, and personal care products for men and women. We entered the children’s apparel market with the introduction of GapKids in 1986 and babyGap in 1989. These stores offer casual apparel and accessories in the tradition of Gap style and quality for children, ages newborn through pre-teen. We also offer maternity apparel. We launched GapBody in 1998 offering women’s underwear, sleepwear, loungewear, and sports and active apparel. We also operate Gap Outlet stores, which carry similar categories of products.

Old Navy. We launched Old Navy in 1994 to address the market for value-priced family apparel. Old Navy offers broad selections of apparel, shoes, and accessories for adults, children, and infants as well as other items, including personal care products. Old Navy also offers a line of maternity wear.

Banana Republic. Acquired in 1983 with two stores, Banana Republic offers sophisticated, fashionable collections of casual and tailored apparel, shoes, accessories, and personal care products for men and women at higher price points than Gap. We also operate Banana Republic Factory Stores, which carry similar categories of products.

As of January 31, 2009, we operated a total of 3,149 store locations. For more information on the number of stores by brand and region, see the table in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included as Part II, Item 7 of this Form 10-K.

In 1997, we introduced Gap Online, a web-based store located at www.gap.com. Gap Online offers products comparable to those carried in Gap, GapKids, babyGap, and GapBody stores, as well as extended sizes not found in stores. We introduced Banana Republic Online, a web-based store located at www.bananarepublic.com, in 1999 which offers products comparable to those carried in the store collections, as well as extended sizes not found in stores. In 2000, we established Old Navy Online, a web-based store located at www.oldnavy.com. Old Navy Online offers apparel and accessories comparable to those carried in the store collections, as well as a plus size line not found in stores.

We also have two online only brands, Piperlime, located at www.piperlime.com, and our online and catalog store, Athleta, located at www.athleta.com:

Piperlime. We launched Piperlime in October 2006. Piperlime offers customers an assortment of the leading brands in footwear and handbags for women, men, and kids, as well as tips, trends, and advice from leading style authorities.

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Athleta. Acquired in September 2008, Athleta offers customers high quality and performance-driven women’s sports and active apparel and footwear that is stylish and functional for a variety of activities, including golf, running, skiing/snowboarding, tennis, and yoga. Customers can purchase Athleta product, as well as an assortment of products from leading brands in women’s active wear, online or through the catalog.

Certain financial information about international operations is set forth under the heading “Segment Information” in Note 16 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.

Our stores offer a shopper-friendly environment with an assortment of casual apparel and accessories that emphasize style, quality, and good value. The range of merchandise displayed in each store varies depending on the selling season and the size and location of the store.

Our stores generally are open seven days per week (where permitted by law) and most holidays. All sales are tendered for cash, personal checks, debit cards, or credit cards. We also issue and redeem gift cards through our brands. Gap, Banana Republic, and Old Navy each has a private label credit card program and a co-branded credit card program through which frequent customers receive benefits. Private label and co-branded credit cards are underwritten by a third-party financing company.

Merchandise Vendors

We purchase private label merchandise from approximately 600 vendors and non-private label merchandise from approximately 300 vendors. Our vendors have facilities in approximately 60 countries. No vendor accounted for more than 3 percent of the dollar amount of our total fiscal 2008 purchases. Of our merchandise sold during fiscal 2008, approximately 3 percent of all units (representing approximately 3 percent of total cost) were produced domestically while the remaining 97 percent of all units (representing approximately 97 percent of total cost) were produced outside the United States. Approximately 23 percent of our total merchandise units (representing approximately 27 percent of total cost) were produced in China. Events causing disruption of imports from China or other foreign countries, including the imposition of additional import restrictions, or vendors potentially failing due to the current economic downturn or an inability to maintain an acceptable level of operating capital, could have an adverse effect on our operations. Substantially all of our foreign purchases of merchandise are negotiated and paid for in U.S. dollars. Also see the section entitled “Risk Factors—Trade matters may disrupt our supply chain” in Item 1A of this Form 10-K.

Seasonal Business

Our business follows a seasonal pattern, with sales peaking over a total of about eight weeks during the holiday (November through December) period. During fiscal 2008, the period accounted for approximately 21 percent of our net sales.

Brand Building

Our ability to develop and evolve our existing brands is a key to our success. We believe our distinct brands are among our most important assets. With the exception of Piperlime, virtually all aspects of brand development from product design and distribution, to marketing, merchandising and shopping environments are controlled by us. With respect to Piperlime, we control all aspects of brand development except for product design. We continue to invest in our brands and enhance the customer experience through the remodeling of existing stores, the opening of new stores, the closure of under-performing stores, and a focus on customer service.

Trademarks and Service Marks

Gap, GapKids, babyGap, GapBody, Banana Republic, Old Navy, Piperlime, and Athleta trademarks and service marks, and certain other trademarks, have been registered, or are the subject of pending trademark applications with the United States Patent and Trademark Office and with the registries of many foreign countries and/or are protected by common law.

Franchising

We have franchise agreements with unaffiliated franchisees to operate Gap and Banana Republic stores in Bahrain, Bulgaria, Croatia, Cyprus, Egypt, Greece, Indonesia, Israel, Jordan, Kuwait, Malaysia, Mexico, Oman, Philippines, Qatar, Romania, Russia, Saudi Arabia, Singapore, South Korea, Turkey, and United Arab Emirates. Under these agreements, third parties operate or will operate stores that sell apparel, purchased from us, under our brand names. While we expect that this will be a small part of our business in the near future, we plan to continue to increase the number of countries in which we enter into these types of arrangements over time as part of our efforts to expand internationally. For additional information on risks related to our franchise business, see the section entitled “Risk Factors—Our efforts to expand internationally through franchising and similar arrangements may not be successful and could impair the value of our brands” in Item 1A of this Form 10-K.

Inventory

The cyclical nature of the retail business requires us to carry a significant amount of inventory, especially prior to peak selling seasons when we and other retailers generally build up our inventory levels. We review our inventory levels in order to identify slow-moving merchandise and broken assortments (items no longer in stock in a sufficient range of sizes) and use markdowns to clear merchandise. Because we do not carry much replenishment inventory in our stores, much of our inventory is maintained in distribution centers. Also see the section entitled “Risk Factors—We must successfully gauge fashion trends and changing consumer preferences to succeed” in Item 1A of this Form 10-K.

Competitors

The global specialty apparel industry is highly competitive. We compete with national and local department stores, specialty and discount store chains, independent retail stores and online businesses that market similar lines of merchandise. We are also faced with competition in European, Japanese, and Canadian markets from established regional and national chains, and our franchisees face significant competition in the markets in which they operate. Also see the section entitled “Risk Factors—Our business is highly competitive and depends on consumer spending patterns” in Item 1A of this Form 10-K.

Employees

As of January 31, 2009, we had a work force of approximately 134,000 employees, which includes a combination of part- and full-time employees. We hire temporary employees primarily during the peak holiday period. The reduction in the number of employees by 7,000 compared to fiscal 2007 reflects our ongoing commitment to cost management.

To remain competitive in the apparel retail industry we must attract, develop and retain skilled employees, including executives. Competition for such personnel is intense. Our success is dependent to a significant degree on the continued contributions of key employees. Also see the section entitled “Risk Factors—We must successfully gauge fashion trends and changing consumer preferences to succeed” in Item 1A of this Form 10-K.

Available Information

We make available on our website, www.gapinc.com, under “Investors, Financials, SEC Filings,” free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after we electronically file or furnish them to the U.S. Securities and Exchange Commission (“SEC”).

Our Code of Business Conduct, Board of Directors Committee Charters (Audit and Finance, Compensation and Management Development, Governance, Nominating and Social Responsibility Committees), and Corporate Governance Guidelines are also available on our website. The Code of Business Conduct can be found at www.gapinc.com, under “Investors, Corporate Compliance, Code of Business Conduct.” Any amendments and waivers to the code will also be available on the website. The Committee Charters and Governance Guidelines can be found on our website under “Investors, Governance.” All of these documents are also available in print to any stockholder who requests them.

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Executive Officers of the Registrant

The following are our executive officers:

Name, Age, Position and Principal Occupation During Past Five Years:

Michelle Banks, 45, Senior Vice President, General Counsel, Corporate Secretary, and Chief Compliance Officer since March 2008; Senior Vice President and General Counsel from November 2006 to March 2008; Vice President from March 2005 to November 2006; Associate General Counsel from February 2003 to March 2005; Senior Corporate Counsel from January 1999 to February 2003.

Donald Fisher, 80, Founder; Chairman Emeritus since 2004; Chairman of the Company from 1969 to 2004; Chief Executive Officer of the Company from 1969 to 1995.

Marka Hansen, 54, President, Gap North America since February 2007; President of Banana Republic from June 2003 to February 2007; Executive Vice President of Gap Adult Merchandising from February 2002 until June 2003; Senior Vice President of Human Resources from March 2000 until February 2002; Senior Vice President of Merchandising, International Division, from April 1995 to March 2000; Vice President of Merchandising from April 1990 to April 1995.

Glenn Murphy, 47, Chairman and Chief Executive Officer since August 2007; Chief Executive Officer of Shoppers Drug Mart Corporation, a drug store chain, from 2001 to 2007.

Art Peck, 53, Executive Vice President of Strategy and Operations since May 2005; President, Gap Inc. Outlet since October 2008; Acting President, Gap Inc. Outlet from February 2008 to October 2008; Senior Vice President of The Boston Consulting Group, a business consulting firm, from 1982 to May 2005; Director of The Boston Consulting Group from 1988 to 2005.

Eva Sage-Gavin, 50, Executive Vice President, Human Resources, Communications and Global Responsibility since April 2008; Executive Vice President, Human Resources and Communications from February 2007 to April 2008; Executive Vice President, Human Resources from March 2003 to February 2007; Senior Vice President, Human Resources of Sun Microsystems, Inc., a software and system technology company, from 2000 to 2003.

Sabrina Simmons, 45, Executive Vice President and Chief Financial Officer since January 2008; Executive Vice President, Corporate Finance from September 2007 to January 2008; Senior Vice President, Corporate Finance and Treasurer from March 2003 to September 2007; Vice President and Treasurer from September 2001 to March 2003.

J. Tom Wyatt, 53, President, Old Navy since August 2008; Acting President, Old Navy from February 2008 to August 2008; President, Gap Inc. Outlet from February 2007 to February 2008; President, GapBody from March 2006 to February 2007; President and Chief Executive Officer of Cutter & Buck Inc., an apparel company, from December 2004 to March 2006; Corporate Officer and President, Intimate Apparel and Sportswear of Warnaco Group, Inc., an apparel company, from 2002 to 2004.

Item 1A. Risk Factors.

Our past performance may not be a reliable indicator of future performance because actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, the risks and uncertainties discussed below. In addition, historical trends should not be used to anticipate results or trends in future periods.

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

The Company’s performance is subject to general economic conditions and their impact on levels of consumer confidence and consumer spending. Recently, consumer confidence and consumer spending have deteriorated

significantly, and could remain depressed for an extended period. Some of the factors influencing this deterioration include fluctuating interest rates and credit availability, fluctuating fuel and other energy costs, fluctuating commodity prices, higher levels of unemployment, higher consumer debt levels, reductions in net worth based on market declines, home foreclosures and reductions in home values, and general uncertainty regarding the overall future economic environment. Consumer purchases of discretionary items, including our merchandise, generally decline during periods when disposable income is adversely affected or there is economic uncertainty, and this has recently adversely impacted, and could in the future adversely impact, our results of operations.

Our business is highly competitive and depends on consumer spending patterns.

The global specialty apparel retail industry is highly competitive. We compete with national and local department stores, specialty and discount store chains, independent retail stores and online businesses that market similar lines of merchandise. We face a variety of competitive challenges including:

•

attracting consumer traffic;

•

sourcing merchandise efficiently;

•

competitively pricing our products and achieving customer perception of value;

•

anticipating and quickly responding to changing consumer demands;

•

maintaining favorable brand recognition and effectively marketing our products to consumers in several diverse market segments;

•

developing innovative, high-quality products in sizes, colors and styles that appeal to consumers of varying age groups and tastes; and

•

providing strong and effective marketing support.

Our business is sensitive to a number of factors that influence the levels of consumer spending, including political and economic conditions such as recessionary environments, levels of employment, levels of disposable consumer income, consumer debt, interest rates, and consumer confidence. Declines in consumer confidence and spending on apparel and accessories could have a material adverse effect on our operating results.

We are also faced with competition in European, Japanese, and Canadian markets from established regional and national chains, and our franchisees face significant competition in the markets in which they operate. If our international business is not successful or if we cannot effectively take advantage of international growth opportunities, our results of operations could be adversely affected.

The market for prime real estate is competitive.

Our ability to effectively obtain real estate to open new stores depends upon the availability of real estate that meets our criteria for traffic, square footage, co-tenancies, lease economics, demographics, and other factors, including our ability to negotiate terms that meet our financial targets. In addition, we must be able to effectively renew our existing store leases. Failure to secure real estate locations adequate to meet annual targets, as well as effectively managing the profitability of our existing fleet of stores, could have a material adverse effect on our results of operations.

Additionally, the current economic environment may make it difficult to determine the fair market rent of retail real estate properties within the United States and internationally. This could impact the quality of our decisions to exercise lease options at previously negotiated rents, and the quality of our decisions to renew expiring leases at negotiated rents. Any adverse effect on the quality of these decisions could impact our ability to retain real estate locations adequate to meet annual targets or efficiently manage the profitability of our existing fleet of stores, and could have a material adverse effect on our results of operations.

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We must successfully gauge fashion trends and changing consumer preferences to succeed.

Our success is largely dependent upon our ability to gauge the fashion tastes of our customers and to provide merchandise that satisfies customer demand in a timely manner. The global specialty retail business fluctuates according to changes in consumer preferences dictated, in part, by fashion and season. To the extent we misjudge the market for our merchandise or the products suitable for local markets, our sales will be adversely affected and the markdowns required to move the resulting excess inventory will adversely affect our operating results. Some of our past product offerings have not been well received by our broad and diverse customer base. Merchandise misjudgments could have a material adverse effect on our operating results.

Our ability to anticipate and effectively respond to changing fashion trends depends in part on our ability to attract and retain key personnel in our design, merchandising, marketing, and other functions. Competition for this personnel is intense, and we cannot be sure that we will be able to attract and retain a sufficient number of qualified personnel in future periods.

Fluctuations in the global specialty retail business especially affect the inventory owned by apparel retailers, since merchandise usually must be ordered well in advance of the season and frequently before fashion trends are evidenced by customer purchases. In addition, the cyclical nature of the global specialty retail business requires us to carry a significant amount of inventory, especially prior to the peak holiday selling season when we build up our inventory levels. We must enter into contracts for the purchase and manufacture of merchandise well in advance of the applicable selling season. As a result, we are vulnerable to demand and pricing shifts and to suboptimal selection and timing of merchandise purchases. In the past, we have not always predicted our customers’ preferences and acceptance levels of our fashion items with accuracy. In addition, lead times for many of our purchases are long, which may make it more difficult for us to respond rapidly to new or changing fashion trends or consumer acceptance for our products. If sales do not meet expectations, too much inventory may cause excessive markdowns and, therefore, lower than planned margins.

We experience fluctuations in our comparable store sales and margins.

Our success depends, in part, upon our ability to improve sales. A variety of factors affect comparable store sales, including fashion trends, competition, current economic conditions, the timing of release of new merchandise and promotional events, changes in our merchandise mix, the success of marketing programs, and weather conditions. These factors may cause our comparable store sales results to differ materially from prior periods and from expectations. Our comparable store sales have fluctuated significantly in the past on an annual, quarterly and monthly basis. More recently, over the past three years, our comparable store sales figures have been negative year over year as demonstrated by a decrease of seven percent in fiscal 2006, a decrease of four percent in fiscal 2007, and a decrease of twelve percent in fiscal 2008. Over the past five years, our reported gross margins have ranged from a high of 39 percent in fiscal 2004 to a low of 36 percent in fiscal 2006. In addition, over the past five years, our reported operating margins have ranged from a high of twelve percent in fiscal 2004 to a low of eight percent in fiscal 2006.

Our ability to deliver strong comparable store sales results and margins depends, in large part, on accurately forecasting demand and fashion trends, selecting effective marketing techniques, providing an appropriate mix of merchandise for our broad and diverse customer base, managing inventory effectively, using effective pricing strategies, and optimizing store performance. Failure to meet the expectations of investors, security analysts, or credit rating agencies in one or more future periods could reduce the market price of our common stock and cause our credit ratings to decline.

Changes in our credit profile or further deterioration in market conditions may limit our access to the capital markets.

Although we believe that our existing cash and cash equivalents combined with future cash flow from our operations will be adequate to satisfy our capital needs for the foreseeable future, we may require additional cash for unexpected contingencies.

The current unfavorable financial market conditions have resulted in diminished availability of external funding and increased the related costs. There can be no assurance that our current levels of liquidity will continue or that our ability to access the credit or capital markets will not be adversely affected by changes in the financial markets and the global economy.

Due to our long-term credit ratings, we do not have meaningful access to the commercial paper market. Any future reduction in our long-term senior unsecured credit rating could result in reduced access to the credit and capital markets and higher interest costs on future financings.

We repaid our $50 million, 6.25 percent notes payable in March 2009. The Company now has no debt. As a result, Moody’s has withdrawn its credit ratings. As of January 31, 2009, the Company had $1.8 billion in cash, cash equivalents, and restricted cash.

For further information on our debt and credit facilities see the sections entitled “Debt” and “Credit Facilities” in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included as Part II, Item 7 of this Form 10-K.

Trade matters may disrupt our supply chain.

Trade restrictions, including increased tariffs or quotas, embargoes, safeguards, and customs restrictions against apparel items, as well as U.S. or foreign labor strikes, work stoppages or boycotts, could increase the cost or reduce the supply of apparel available to us and adversely affect our business, financial condition, and results of operations. We cannot predict whether any of the countries in which our merchandise currently is manufactured or may be manufactured in the future will be subject to additional trade restrictions imposed by the U.S. and other foreign governments, including the likelihood, type or effect of any such restrictions. For example, the quota system established by the Agreement on Textiles and Clothing was phased out for World Trade Organization countries and the U.S.-China textile and apparel agreement expired on December 31, 2008, but there are no assurances that additional restrictions will not be reestablished for certain categories in specific countries. Moreover, with the disappearance of quotas, the possibility of anti-dumping or countervailing duties lawsuits from U.S. domestic producers against importers increases. We are unable to determine the impact of the changes to the quota system or the impact that potential tariff lawsuits could have on our global sourcing operations. Our sourcing operations may be adversely affected by trade limits or political and financial instability resulting in the disruption of trade from exporting countries, significant fluctuation in the value of the U.S. dollar against foreign currencies, restrictions on the transfer of funds, and/or other trade disruptions.

Updates or changes to our IT systems may disrupt operations.

We continue to evaluate and implement upgrades to our IT systems. Upgrades involve replacing existing systems with successor systems, making changes to existing systems or cost-effectively acquiring new systems with new functionality. We are aware of inherent risks associated with replacing these systems, including accurately capturing data and system disruptions, and believe we are taking appropriate action to mitigate the risks through testing, training, and staging implementation as well as ensuring appropriate commercial contracts with third-party vendors supplying such replacement technologies are in place. Although we are on track with the replacement or upgrade of our systems, there can be no assurances that we will successfully launch these systems as planned or that they will occur without disruptions to our operations. IT system disruptions, if not anticipated and appropriately mitigated, could have a material adverse effect on our results of operations.

Our IT services agreement with IBM could cause disruptions in our operations and have an adverse effect on our financial results.

We have entered into the fourth year of a ten-year non-exclusive services agreement with IBM under which IBM operates certain significant aspects of our information technology infrastructure. Under the original agreement, this included supporting our mainframe, server, network and data center, and store operations, as well as help desk, end user support, and some disaster recovery. The agreement was amended effective March 2, 2009 to return to us certain services originally performed by IBM under the agreement. These returned services include services related to management of our server and data center environment, along with disaster recovery. All other

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services remain with IBM per the original agreement. Our ability to realize the expected benefits of this arrangement is subject to various risks, some of which are not within our complete control. These risks include, but are not limited to, disruption in services, and the failure to protect the security and integrity of the Company’s data under the terms of the agreement. We are unable to provide assurances that some or all of these risks will not occur. Failure to effectively mitigate these risks if they occur could have a material adverse effect on our operations and financial results.

Our efforts to expand internationally through franchising and similar arrangements may not be successful and could impair the value of our brands.

We have entered into franchise agreements with unaffiliated franchisees to operate stores in many countries around the world. Under these agreements, third parties operate, or will operate, stores that sell apparel, purchased from us, under our brand names. Prior to fiscal 2006, we had no experience operating through these types of third-party arrangements, and we can provide no assurance that these arrangements will be successful. While we expect that this will be a small part of our business in the near future, we plan to continue to increase these types of arrangements over time as part of our efforts to expand internationally. The effect of these arrangements on our business and results of operations is uncertain and will depend upon various factors, including the demand for our products in new markets internationally and our ability to successfully identify appropriate third parties to act as franchisees, distributors, or in a similar capacity. In addition, certain aspects of these arrangements are not directly within our control, such as the ability of these third parties to meet their projections regarding store openings and sales. Other risks that may affect these third parties include general economic conditions in specific countries or markets, changes in diplomatic and trade relationships, and political instability. Moreover, while the agreements we have entered into and plan to enter into in the future provide us with certain termination rights, to the extent that these third parties do not operate their stores in a manner consistent with our requirements regarding our brand identities and customer experience standards, the value of our brands could be impaired. A failure to protect the value of our brands or any other harmful acts or omissions by a franchisee, could have an adverse effect on our results of operations and our reputation.

Our products are subject to risks associated with overseas sourcing and manufacturing.

The current unfavorable economic conditions, including the reduced ability to access credit, is having an adverse impact on businesses around the world, and its impact on our vendors cannot be predicted. Vendors’ reduced ability to access sources of capital could lead to their failure to deliver merchandise and could reduce the supply of apparel available to us, which could adversely affect our business, financial condition, and results of operations.

Independent third parties manufacture nearly all of our products for us. If we experience significant increases in demand, or need to replace an existing vendor, there can be no assurance that additional manufacturing capacity will be available when required on terms that are acceptable to us, or at all, or that any vendor would allocate sufficient capacity to us in order to meet our requirements. In addition, even if we are able to expand existing or find new manufacturing sources, we may encounter delays in production and added costs as a result of the time it takes to train our vendors in our methods, products, quality control standards, and environmental, labor, health, and safety standards. Moreover, in the event of a significant disruption in the supply of the fabrics or raw materials used by our vendors in the manufacture of our products, our vendors might not be able to locate alternative suppliers of materials of comparable quality at an acceptable price, or at all. Any delays, interruption, or increased costs in the manufacture of our products could have an adverse effect on our ability to meet consumer demand for our products and result in lower sales and net earnings.

Because independent vendors manufacture nearly all of our products outside of our principal sales markets, our products must be transported by third parties over large geographic distances. Delays in the shipment or delivery of our products due to the availability of transportation, work stoppages, port strikes, infrastructure congestion, or other factors, and costs and delays associated with transitioning between vendors, could adversely impact our financial performance. Manufacturing delays or unexpected demand for our products may require us to use faster, but more expensive, transportation methods such as aircraft, which could adversely affect our profit margins. In addition, the cost of fuel is a significant component in transportation costs, so increases in the price of petroleum products can adversely affect our profit margins.

Failure of our vendors to adhere to our code of vendor conduct could harm our business.

We purchase nearly all merchandise from third-party vendors outside of the United States and require those vendors to adhere to a code of vendor conduct and other environmental, labor, health, and safety standards for the benefit of workers. From time to time, contractors may not be in compliance with these standards or applicable local laws. Significant or continuing noncompliance with such standards and laws by one or more contractors could have a negative impact on our reputation and an adverse effect on our results of operations.

Changes in the regulatory or administrative landscape could adversely affect our financial condition and results of operations.

Laws and regulations at both the state and federal levels frequently change and the ultimate cost of compliance cannot be precisely estimated. In addition, we cannot predict the impact that may result from the changes in the federal regulatory or administrative landscape under the Obama administration. Any changes in regulations, the imposition of additional regulations, or the enactment of any new legislation under the Obama administration that impacts employment/labor, trade, product safety, transportation/logistics, health care, tax, privacy, or environmental issues could have an adverse impact on our financial condition and results of operations.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

We operate stores in the United States, Canada, the United Kingdom, France, Ireland, and Japan. The stores operated as of January 31, 2009 aggregated approximately 39.5 million square feet. Almost all of our stores are leased with one or more renewal options after our initial term, or slightly longer terms with negotiated sales termination clauses at predetermined sales thresholds. Economic terms vary by type of location.

We own approximately 1.2 million square feet of corporate office space located in San Francisco, San Bruno, and Rocklin, California, of which approximately 184,000 square feet is leased to another company. We lease approximately 1.2 million square feet of corporate office space located in San Francisco, San Bruno, Rocklin, and Petaluma, California; New York, New York; Albuquerque, New Mexico; and Toronto, Ontario, Canada. Of the 1.2 million square feet of leased office space, approximately 160,000 square feet is under sublease to others and approximately 33,000 square feet is being marketed for sublease to others. We also lease 19 regional offices in North America and 36 international offices. We own approximately 8.6 million square feet of distribution space located in Fresno, California; Fishkill, New York; Groveport, Ohio; Gallatin, Tennessee; Brampton, Ontario, Canada; and Rugby, England. We lease approximately 1.7 million square feet of distribution space located in Grove City, Ohio, and in Northern Kentucky. A third-party logistics company provides logistics services to us through a 444,000 square foot distribution warehouse in Chiba, Japan.

Item 3. Legal Proceedings.

As a multinational company, we are subject to various proceedings, lawsuits, disputes, and claims (“Actions”) arising in the ordinary course of our business. Many of these Actions raise complex factual and legal issues and are subject to uncertainties. Actions filed against us from time to time include commercial, intellectual property, customer, employment, data privacy, and securities related claims, including class action lawsuits in which plaintiffs allege that we violated federal and state wage and hour and other laws. The plaintiffs in some Actions seek unspecified damages or injunctive relief, or both. Actions are in various procedural stages, and some are covered in part by insurance.

12 G AP I NC . F ORM 10-K

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

Item 4. Submission of Matters to a Vote of Security Holders.

Not applicable.

Part II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The principal market on which our stock is traded is the New York Stock Exchange. The number of holders of record of our stock as of March 23, 2009 was 9,236. The table below sets forth the market prices and dividends declared and paid for each of the fiscal quarters in fiscal 2008 and 2007.


	Market Prices								Dividends Declared and Paid
	Fiscal Year 2008				Fiscal Year 2007				Fiscal Year
	High		Low		High		Low		2008		2007
1st Quarter	$	21.89	$	17.77	$	20.26	$	17.11	$	0.085	$	0.08
2nd Quarter	$	19.26	$	14.77	$	19.66	$	16.44		0.085		0.08
3rd Quarter	$	20.80	$	11.01	$	19.73	$	15.20		0.085		0.08
4th Quarter	$	14.57	$	9.41	$	22.02	$	16.36		0.085		0.08

									$	0.34	$	0.32

Stock Performance Graph

The graph below compares the percentage changes in our cumulative total stockholder return on our common stock for the five-year period ended January 31, 2009, with (i) the cumulative total return of the Dow Jones (“DJ”) U.S. Retail, Apparel Index and (ii) the S&P 500 Index. The total stockholder return for our common stock assumes quarterly reinvestment of dividends.

14 G AP I NC . F ORM 10-K

Total Return Analysis


	1/31/2004		1/29/2005		1/28/2006		2/3/2007		2/2/2008		1/31/2009
The Gap, Inc.	$	100.00	$	117.87	$	94.93	$	108.18	$	109.29	$	65.15
S&P 500	$	100.00	$	106.23	$	117.26	$	134.28	$	131.17	$	80.50
Dow Jones U.S. Apparel Retailers	$	100.00	$	123.41	$	139.81	$	164.21	$	129.64	$	69.42

Source: Research Data Group, Inc. (415) 643-6000 (www.researchdatagroup.com/S&P.htm)

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table presents information with respect to purchases of common stock of the Company made during the thirteen weeks ended January 31, 2009, by The Gap, Inc. or any affiliated purchaser, as defined in Exchange Act Rule 10b-18(a)(3).


	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or approximate dollar amount) of Shares that M ay Y et be Purchased Under the Plans or Programs (1)
Month #1 (Nov. 2 - Nov. 29)	—		—	—	$	400 million
Month #2 (Nov. 30 - Jan. 3)	715,359	$	12.89	715,359	$	391 million
Month #3 (Jan. 4 - Jan. 31)	11,482,715	$	11.88	11,482,715	$	255 million

Total	12,198,074			12,198,074

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

Item 6. Selected Financial Data.

The following selected financial data are derived from the Consolidated Financial Statements of the Company. We have also included certain non-financial data to enhance your understanding of our business. In fiscal 2007, we closed our Forth & Towne stores and, accordingly, the results of Forth & Towne have been presented as a discontinued operation in the table below. The data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and the Company’s Consolidated Financial Statements and related notes herein.


	Fiscal Year (number of weeks)
	2008 (52)			2007 (52)			2006 (53)			2005 (52)			2004 (52)
Operating Results ($ in millions)
Net sales	$	14,526		$	15,763		$	15,923		$	16,019		$	16,267
Gross margin		37.5	%		36.1	%		35.5	%		36.7	%		39.2	%
Operating margin (a)		10.7	%		8.3	%		7.7	%		11.1	%		12.2	%
Earnings from continuing operations, net of income taxes	$	967		$	867		$	809		$	1,131		$	1,150
Net earnings	$	967		$	833		$	778		$	1,113		$	1,150
Cash dividends paid	$	243		$	252		$	265		$	179		$	79

Per Share Data (number of shares in millions)
Basic earnings per share:
Earnings from continuing operations	$	1.35		$	1.10		$	0.97		$	1.28		$	1.29
Loss from discontinued operation	$	—		$	(0.05	)	$	(0.03	)	$	(0.02	)	$	—
Net earnings	$	1.35		$	1.05		$	0.94		$	1.26		$	1.29
Diluted earnings per share:
Earnings from continuing operations	$	1.34		$	1.09		$	0.97		$	1.26		$	1.21
Loss from discontinued operation	$	—		$	(0.04	)	$	(0.04	)	$	(0.02	)	$	—
Net earnings	$	1.34		$	1.05		$	0.93		$	1.24		$	1.21
Weighted-average number of shares — basic		716			791			831			881			893
Weighted-average number of shares — diluted		719			794			836			902			991
Cash dividend declared and paid (b)	$	0.34		$	0.32		$	0.32		$	0.18		$	0.09

Balance Sheet Information ($ in millions except inventory per square foot)
Merchandise inventory	$	1,506		$	1,575		$	1,796		$	1,696		$	1,814
Total assets	$	7,564		$	7,838		$	8,544		$	8,821		$	10,048
Inventory per square foot (c)	$	34.7		$	37.0		$	43.7		$	42.6		$	47.8
Percentage increase (decrease) in inventory per square foot		(6	)%		(15	)%		3	%		(11	)%		6	%
Working capital	$	1,847		$	1,653		$	2,757		$	3,297		$	4,062
Total long-term debt and senior convertible notes, less current maturities (d)	$	—		$	50		$	188		$	513		$	1,886
Stockholders’ equity	$	4,387		$	4,274		$	5,174		$	5,425		$	4,936

Other Data ($ and square footage in millions)
Purchases of property and equipment	$	431		$	682		$	572		$	600		$	419
Acquisition of business, net of cash acquired (e)	$	142		$	—		$	—		$	—		$	—
Number of store locations opened		101			214			194			198			130
Number of store locations closed		119			178			116			139			158
Number of store locations open at year-end		3,149			3,167			3,131			3,053			2,994
Percentage decrease in comparable store sales (52-week basis)		(12	)%		(4	)%		(7	)%		(5	)%		—
Square footage of store space at year-end (f)		39.5			39.6			38.7			37.7			36.6
Percentage increase (decrease) in square feet (f)		(0.3	)%		2.3	%		2.7	%		3.0	%		0.3	%
Number of employees at year-end		134,000			141,000			154,000			153,000			152,000

16 G AP I NC . F ORM 10-K

(a)	Operating margin includes the loss on early retirement of debt of $105 million for fiscal 2004.

(b)	A dividend of $0.0222 per share declared in the fourth quarter of fiscal 2004 was paid in the first quarter of fiscal 2005.

(c)	Based on year-end inventory balance and store square footage. Excludes inventory related to our Direct segment and wholesale and franchise businesses. Also excludes inventory and square footage related to the discontinued operation of Forth & Towne.

(d)	For fiscal 2008, 2007, and 2006, reduction due to repayment of long-term debt and reclassification into current maturities of long-term debt. Fiscal 2005 reduction due primarily to the March 2005 redemption of our Senior Convertible Notes of $1.4 billion.

(e)	In September 2008, we acquired all of the outstanding capital stock of Athleta, Inc., a women’s sports and active apparel company, for an aggregate purchase price of $148 million.

(f)	Excludes square footage related to the discontinued operation of Forth & Towne.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

We are a global specialty retailer offering clothing, accessories, and personal care products for men, women, children, and babies under the Gap, Old Navy, Banana Republic, Piperlime, and Athleta brands. We operate stores in the United States, Canada, the United Kingdom, France, Ireland, and Japan. We also have franchise agreements with unaffiliated franchisees to operate Gap and Banana Republic stores in many other countries around the world. Under these agreements, third parties operate or will operate stores that sell apparel, purchased from us, under our brand names. In addition, our U.S. customers can shop online at www.gap.com, www.oldnavy.com, www.bananarepublic.com, www.piperlime.com, and www.athleta.com. Most of the products sold under our brand names are designed by us and manufactured by independent sources. We also sell products that are designed and manufactured by branded third parties.

In September 2008, we acquired all of the outstanding capital stock of Athleta, Inc. (“Athleta”), a women’s sports and active apparel company based in Petaluma, California, for an aggregate purchase price of $148 million. The acquisition will allow us to enhance our presence in the growing women’s active apparel sector in the United States. We believe this acquisition complements our brands and allows us to leverage our online platform to expand into this significant retail sector. See Note 3 of Notes to the Consolidated Financial Statements.

We identify our operating segments according to how our business activities are managed and evaluated. Beginning in the fourth quarter of fiscal 2008, we have two reportable segments: Stores and Direct.

Fiscal 2008 and 2007 had 52 weeks versus 53 weeks in fiscal 2006. Net sales numbers for the fourth quarter and year for fiscal 2006 include this additional week; however, comparable store sales calculations exclude the 53rd week.

Financial highlights include:

•

Net sales for fiscal 2008 were $14.5 billion compared with $15.8 billion for fiscal 2007, and comparable store sales decreased 12 percent compared with a decrease of 4 percent last year.

•

Net earnings for fiscal 2008 increased 16 percent to $967 million, or $1.34 per share on a diluted basis, compared with $833 million, or $1.05 per share on a diluted basis for fiscal 2007.

•

Net earnings from continuing operations for fiscal 2008 increased 12 percent to $967 million, or $1.34 per share on a diluted basis, compared with $867 million, or $1.09 per share on a diluted basis for fiscal 2007.

•

Our Direct sales for fiscal 2008 increased 14 percent to $1.0 billion, compared with $903 million for fiscal 2007. Our Direct segment includes our online business and, beginning in September 2008 with the acquisition of Athleta, our catalog business.

•

We generated cash flows from operating activities of $1.4 billion during fiscal 2008. Our capital expenditures in fiscal 2008 were $431 million.

•

In fiscal 2008, we generated free cash flow of $981 million compared with free cash flow of $1.4 billion in fiscal 2007. Free cash flow is defined as net cash provided by operating activities less purchases of property and equipment. For a reconciliation of free cash flow, a non-GAAP financial measure, from a GAAP financial measure, see the Liquidity and Capital Resources section.

•

We repurchased approximately 46 million shares of our common stock for a total of $745 million under our share repurchase program in fiscal 2008. We also declared and paid a cash dividend of $0.34 per share in fiscal 2008.

•

We opened 101 new stores and closed 119 stores in fiscal 2008.

18 G AP I NC . F ORM 10-K

Macroeconomic conditions deteriorated in the third quarter of fiscal 2008 and continued in the fourth quarter. Net sales for the fourth quarter of fiscal 2008 were down 13 percent from the prior year comparable period. Despite this, our cash flow generation remains healthy and we have a strong balance sheet. As of January 31, 2009, cash, cash equivalents, and restricted cash were $1.8 billion and long-term debt of $50 million, classified as current, was repaid in March 2009. We believe our cash balances and cash flows from operations will be sufficient for the foreseeable future. During this challenging economic environment we are focused on the following priorities:

•

consistently delivering product that aligns with our target customers;

•

improving customer experience and continuing to invest in the store fleet in a manner that supports improvement in return on invested capital;

•

managing inventory to support a healthy merchandise margin;

•

maintaining a focus on cost management; and

•

generating strong free cash flow.

Results of Operations

Net Sales

Net Sales by Brand, Region, and Reportable Segment

Net sales primarily consist of retail sales, online sales, and shipping fees received from customers for delivery of merchandise. Outlet retail sales are reflected within the respective results of each brand. Fiscal years ended January 31, 2009 (fiscal 2008) and February 2, 2008 (fiscal 2007) had 52 weeks. Fiscal year ended February 3, 2007 (fiscal 2006) had 53 weeks. Net sales numbers for the fourth quarter and year for fiscal 2006 include this additional week; however, comparable store sales calculations exclude the 53rd week. Net sales for the additional week in fiscal 2006 were approximately $200 million.

Net sales by brand, region, and reportable segment are as follows:


($ in millions) Fiscal Year 2008	Gap			Old Navy			Banana Republic			Other (3)			Total
U.S. (1)	$	3,840		$	4,840		$	2,221		$	—		$	10,901
Canada		329			392			146			—			867
Europe		724			—			23			33			780
Asia		732			—			101			47			880
Other Regions		—			—			—			68			68

Total Stores reportable segment		5,625			5,232			2,491			148			13,496
Direct reportable segment (2)		333			475			145			77			1,030

Total	$	5,958		$	5,707		$	2,636		$	225		$	14,526

Sales Growth (Decline)		(5	)%		(14	)%		(3	)%		84	%		(8	)%

Fiscal Year 2007	Gap			Old Navy			Banana Republic			Other (3)			Total
U.S. (1)	$	4,146		$	5,776		$	2,351		$	—		$	12,273
Canada		364			461			147			—			972
Europe		822			—			—			5			827
Asia		613			—			89			36			738
Other Regions		—			—			—			50			50

Total Stores reportable segment		5,945			6,237			2,587			91			14,860
Direct reportable segment (2)		308			428			136			31			903

Total	$	6,253		$	6,665		$	2,723		$	122		$	15,763

Sales Growth (Decline)		(4	)%		(2	)%		7	%		213	%		(1	)%

Fiscal Year 2006	Gap			Old Navy			Banana Republic			Other (3)			Total
U.S. (1)	$	4,494		$	6,042		$	2,251		$	—		$	12,787
Canada		379			442			119			—			940
Europe		792			—			—			1			793
Asia		581			—			61			7			649
Other Regions		—			—			—			24			24

Total Stores reportable segment		6,246			6,484			2,431			32			15,193
Direct reportable segment (2)		261			345			117			7			730

Total	$	6,507		$	6,829		$	2,548		$	39		$	15,923

Sales Growth (Decline)		(5	)%		—			11	%		56	%		(1	)%

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

(2)	U.S. only. Direct includes Athleta beginning September 2008.

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

Comparable Store Sales

The percentage change in comparable store sales by brand and region and for total Company for fiscal 2008 and 2007 are as follows:


	Fiscal Year
	2008		2007
Gap North America	(8	)%	(5	)%
Old Navy North America	(17	)%	(7	)%
Banana Republic North America	(10	)%	1	%
International	(4	)%	(1	)%
The Gap, Inc.	(12	)%	(4	)%

20 G AP I NC . F ORM 10-K

The comparable store sales calculation excludes sales from our Direct reportable segment and our wholesale and franchise businesses. Outlet comparable store sales are reflected within the respective results of each brand.

A store is included in comparable store sales (“Comp”) when it has been open for at least 12 months and the square footage has not changed by 15 percent or more within the past year. A store is included in Comp on the first day it has comparable prior year sales. Stores in which square footage has changed by 15 percent or more as a result of a remodel, expansion, or reduction are excluded from Comp until the first day they have comparable prior year sales. Current year foreign exchange rates are applied to both current year and prior year Comp store sales to achieve a consistent basis for comparison.

A store is considered non-comparable (“Non-comp”) when it has been open for less than 12 months or it has changed its square footage by 15 percent or more within the past year. Non-store sales such as online and catalog revenues are also considered Non-comp.

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

Store Count and Square Footage Information

Net sales per average square foot is as follows:


	Fiscal Year
	2008		2007		2006
Net sales per average square foot (1)	$	336	$	376	$	395

(1)	Excludes net sales associated with the Direct segment and our wholesale and franchise businesses. Computation also excludes net sales and average square footage associated with the discontinued operation of Forth & Towne.

Store count, openings, closings, and square footage for our wholly owned stores are as follows:


	February 2, 2008	Fiscal 2008		January 31, 2009
	Number of Store Locations	Number of Stores Opened	Number of Stores Closed	Number of Store Locations		Square Footage (in millions)
Gap North America	1,249	13	69	1,193		11.8
Gap Europe	173	9	9	173		1.5
Gap Asia	110	8	5	113		1.0
Old Navy North America	1,059	34	26	1,067		20.1
Banana Republic North America	555	28	10	573		4.9
Banana Republic Asia	21	6	—	27		0.2
Banana Republic Europe	—	3	—	3		—

Total	3,167	101	119	3,149		39.5

Decrease over prior year				(0.6	%)	(0.3	%)

	February 3, 2007	Fiscal 2007		February 2, 2008
	Number of Store Locations (2)	Number of Stores Opened (1)	Number of Stores Closed (1) (2)	Number of Store Locations		Square Footage (in millions)
Gap North America	1,293	29	73	1,249		12.2
Gap Europe	168	12	7	173		1.5
Gap Asia	105	9	4	110		1.1
Old Navy North America	1,012	113	66	1,059		20.0
Banana Republic North America	521	43	9	555		4.7
Banana Republic Asia	13	8	—	21		0.1
Banana Republic Europe	—	—	—	—		—

Total	3,112	214	159	3,167		39.6

Increase over prior year (2)				1.8	%	2.3	%

(1)	Includes conversion of 45 Old Navy Outlet stores to Old Navy.

(2)	Excludes store locations, number of stores closed, and square footage associated with the discontinued operation of Forth & Towne.

Outlet stores are reflected in each of the respective brands. We also have franchise agreements with unaffiliated franchisees to operate Gap and Banana Republic stores in Asia, Europe, Latin America, and the Middle East. There were 121 and 68 franchise stores that were open as of January 31, 2009 and February 2, 2008, respectively.

Net Sales Discussion

Our fiscal 2008 net sales decreased $1.2 billion, or 8 percent, compared with fiscal 2007 primarily due to a decrease in net sales of $1.4 billion related to our Stores reportable segment offset by an increase in net sales of $127 million related to our Direct reportable segment.

•

For the Stores reportable segment, our fiscal 2008 net sales decreased $1.4 billion, or 9 percent, compared with fiscal 2007. The decrease was primarily due to a decline in net sales at all of our brands due to the weakening retail environment and declines in traffic, offset by an increase in net sales from our franchise business, and the favorable impact of foreign exchange of $19 million. The foreign exchange impact is the translation impact if fiscal 2007 sales were translated at fiscal 2008 exchange rates.

•

For the Direct reportable segment, our fiscal 2008 net sales increased $127 million, or 14 percent, compared with fiscal 2007 due to the growth in our online business across all brands and the acquisition of Athleta in September 2008.

Our fiscal 2007 net sales decreased $160 million, or 1 percent, compared with fiscal 2006 primarily due to a decrease in net sales of $333 million related to our Stores reportable segment offset by an increase in net sales of $173 million related to our Direct reportable segment.

•

For the Stores reportable segment, our fiscal 2007 net sales decreased $333 million, or 2 percent, compared with fiscal 2006. The decrease was primarily due to a decline in net sales at Old Navy and Gap, offset by an increase in net sales at Banana Republic, our franchise business, and the favorable impact of foreign exchange of $146 million. The foreign exchange impact is the translation impact if fiscal 2006 sales were translated at fiscal 2007 exchange rates. Note that fiscal 2006 consisted of 53 weeks and the additional week contributed approximately $200 million of net sales.

•

For the Direct reportable segment, our fiscal 2007 net sales increased $173 million, or 24 percent, compared with fiscal 2006 primarily due to the growth in our online business across all brands.

Cost of Goods Sold and Occupancy Expenses

Cost of goods sold and occupancy expenses include:

•

the cost of merchandise;

•

inventory shortage and valuation adjustments;

•

freight charges;

•

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

•

production costs;

•

insurance costs related to merchandise; and

•

rent, occupancy, depreciation, amortization, common area maintenance, real estate taxes, and utilities related to store operations, distribution centers, and certain corporate functions.

22 G AP I NC . F ORM 10-K

The classification of these expenses varies across the retail industry.


	Fiscal Year
($ in millions)	2008			2007			2006
Cost of Goods Sold and Occupancy Expenses	$	9,079		$	10,071		$	10,266
Gross Profit	$	5,447		$	5,692		$	5,657
Cost of Goods Sold and Occupancy Expenses as a Percentage of Net Sales		62.5	%		63.9	%		64.5	%
Gross Margin		37.5	%		36.1	%		35.5	%

Cost of goods sold and occupancy expenses as a percentage of net sales decreased 1.4 percentage points in fiscal 2008 compared with fiscal 2007. Cost of goods sold decreased $1.1 billion, or 3.1 percentage points as a percentage of net sales, in fiscal 2008 compared with fiscal 2007. Occupancy expenses increased $60 million, or 1.7 percentage points as a percentage of net sales, in fiscal 2008 compared with fiscal 2007.

•

For the Stores reportable segment, cost of goods sold and occupancy expenses as a percentage of net sales decreased 1.4 percentage points in fiscal 2008 compared with fiscal 2007. Cost of goods sold decreased 3.3 percentage points as a percentage of net sales in fiscal 2008 compared with fiscal 2007. The decrease was driven by higher margins achieved for both regular price and marked down merchandise primarily as a result of reduced cost of merchandise from our cost management efforts. Occupancy expenses increased 1.9 percentage points as a percentage of sales in fiscal 2008 compared with fiscal 2007 primarily driven by lower net sales in fiscal 2008 and, to a lesser extent, an increase in certain occupancy expenses.

•

For the Direct reportable segment, cost of goods sold and occupancy expenses as a percentage of net sales increased 0.9 percentage points in fiscal 2008 compared with fiscal 2007. Cost of goods sold as a percentage of net sales was relatively flat in fiscal 2008 compared with fiscal 2007. Occupancy expenses, consisting primarily of depreciation and amortization expense, increased 0.7 percentage points as a percentage of sales in fiscal 2008 compared with fiscal 2007 primarily driven by higher depreciation expense for new information technology systems and applications.

Cost of goods sold and occupancy expenses as a percentage of net sales decreased 0.6 percentage points in fiscal 2007 compared with fiscal 2006. Cost of goods sold decreased $307 million, or 1.4 percentage points as a percentage of net sales, in fiscal 2007 compared with fiscal 2006. Occupancy expenses increased $112 million, or 0.8 percentage points as a percentage of net sales, in fiscal 2007 compared with fiscal 2006.

•

For the Stores reportable segment, cost of goods sold and occupancy expenses as a percentage of net sales decreased 0.4 percentage points in fiscal 2007 compared with fiscal 2006. Cost of goods sold decreased 1.5 percentage points as a percentage of net sales in fiscal 2007 compared with fiscal 2006. The decrease was primarily driven by an increase in selling at regular price and a higher margin achieved for marked down merchandise. Occupancy expenses increased 1.1 percentage points as a percentage of net sales in fiscal 2007 compared with fiscal 2006.

•

For the Direct reportable segment, cost of goods sold and occupancy expenses as a percentage of net sales decreased 1.3 percentage points in fiscal 2007 compared with fiscal 2006. Cost of goods sold decreased 0.7 percentage points as a percentage of net sales in fiscal 2007 compared with fiscal 2006 primarily driven by the write-off of discontinued merchandise in fiscal 2006 that did not occur in fiscal 2007. Occupancy expenses, consisting primarily of depreciation and amortization expense, decreased 0.6 percentage points as a percentage of sales in fiscal 2007 compared with fiscal 2006 primarily driven by higher net sales.

As a general business practice, we review our inventory levels in order to identify slow-moving merchandise and broken assortments (items no longer in stock in a sufficient range of sizes) and use markdowns to clear the majority of this merchandise.

Operating Expenses

Operating expenses include:

•

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

•

advertising;

•

general and administrative expenses;

•

costs to design and develop our products;

•

merchandise handling and receiving in distribution centers and stores;

•

distribution center general and administrative expenses;

•

rent, occupancy, depreciation, and amortization for corporate facilities; and

•

other expense (income).

The classification of these expenses varies across the retail industry.


	Fiscal Year
($ in millions)	2008			2007			2006
Operating Expenses	$	3,899		$	4,377		$	4,432
Operating Expenses as a Percentage of Net Sales		26.8	%		27.8	%		27.8	%
Operating Margin		10.7	%		8.3	%		7.7	%

Operating expenses decreased $478 million, or 1.0 percent as a percentage of net sales, in fiscal 2008 compared with fiscal 2007 primarily due to the following:

•

$195 million in decreased corporate and divisional overhead expenses, primarily related to bonus, payroll, and employee benefits;

•

$141 million in decreased store payroll and benefits;

•

$88 million in decreased store-related expenses associated with fewer remodels, fewer fixture rollouts, and less packaging and supplies; and

•

$41 million in decreased marketing expenses, primarily for Gap and Old Navy.

Operating expenses as a percentage of net sales were flat, but decreased $55 million in fiscal 2007 compared with fiscal 2006 primarily due to the following:

•

$97 million in decreased marketing expenses, primarily for Gap and Old Navy; offset by

•

$32 million of expenses, the majority of which were severance payments, recognized in fiscal 2007 as a result of our cost reduction initiatives not included in fiscal 2006;

•

$31 million of income recognized in fiscal 2006 related to the change in our estimate of the elapsed time for recording income associated with unredeemed gift cards not included in fiscal 2007; and

•

$14 million of income recognized in fiscal 2006 related to the Visa/Mastercard litigation settlement.

24 G AP I NC . F ORM 10-K

The remaining decrease is due to lower payroll and other expenses across the organization.

Interest Expense


	Fiscal Year
($ in millions)	2008		2007		2006
Interest Expense	$	1	$	26	$	41

The decrease in interest expense for fiscal 2008 compared with fiscal 2007 was primarily due to the maturity of our $326 million, 6.90 percent notes repaid in September 2007 and the reduction of interest accruals resulting primarily from foreign tax audits occurring in fiscal 2008.

The decrease of $15 million in interest expense for fiscal 2007, compared with fiscal 2006, was primarily due to the maturity of our $326 million, 6.90 percent notes repaid in September 2007 and the reduction of interest accruals resulting from the resolutions of tax audits and outstanding tax contingencies completed in fiscal 2007.

Interest Income


	Fiscal Year
($ in millions)	2008		2007		2006
Interest Income	$	37	$	117	$	131

Interest income is earned on our cash, cash equivalents, and short-term investments. The decreases in interest income for fiscal 2008 compared with fiscal 2007 and fiscal 2007 compared with fiscal 2006 were primarily due to lower interest rates and lower average balances of cash, cash equivalents, and short-term investments.

Income Taxes


	Fiscal Year
($ in millions)	2008			2007			2006
Income Taxes	$	617		$	539		$	506
Effective Tax Rate		39.0	%		38.3	%		38.5	%

The increase in the effective tax rate in fiscal 2008 from fiscal 2007 was primarily driven by the impact of changes in 2007 in state tax laws and a change in the mix of earnings, with a higher relative percentage of fiscal 2008 earnings occurring in jurisdictions that impose the highest relative tax rates.

The decrease in the effective tax rate in fiscal 2007 from fiscal 2006 was primarily driven by the impact of changes in state tax laws.

We currently expect the fiscal 2009 effective tax rate to be about 39 percent. The actual rate will ultimately depend on several variables, including the mix of earnings between domestic and international operations, the overall level of earnings, and the potential resolution of outstanding tax contingencies.

Loss from Discontinued Operation, Net of Income Tax Benefit

Loss from discontinued operation relates to the Forth & Towne brand, whose stores were closed by the end of June 2007. Loss from the discontinued operation of Forth & Towne, net of income tax benefit, was $34 million and $31 million for fiscal 2007 and fiscal 2006, respectively.

Liquidity and Capital Resources

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

We consider the following to be measures of our liquidity and capital resources:


($ in millions)	January 31, 2009		February 2, 2008		February 3, 2007
Cash, cash equivalents, short-term investments, and restricted cash	$	1,756	$	1,939	$	2,644
Debt	$	50	$	188	$	513
Working capital (a)	$	1,847	$	1,653	$	2,757
Current ratio (a)		1.86:1		1.68:1		2.21:1

(a)	Our working capital and current ratio calculations include restricted cash.

Our working capital and current ratio as of January 31, 2009 increased compared with February 2, 2008 primarily due to decreases in accrued expenses and other current liabilities. See Cash Flows from Operating Activities below.

As of January 31, 2009, cash, cash equivalents, and restricted cash were $1.8 billion and long-term debt of $50 million, classified as current, was repaid in March 2009. Our cash flow generation remains healthy and our cash position remains strong. We believe that current cash balances and cash flows from our operations will be adequate to support our business operations, capital expenditures, and the payment of dividends. We are also able to supplement the near-term liquidity, if necessary, with the existing $500 million revolving credit facility.

Cash Flows from Operating Activities

In fiscal 2008, net cash provided by operating activities decreased $669 million compared with fiscal 2007 primarily due to the following:

•

an increased balance in accounts payable in fiscal 2007 due to the change in vendor payment terms;

•

a higher payout during the first quarter of fiscal 2008 related to the fiscal 2007 bonus compared with the prior year comparable period;

•

a decrease in the gift card, gift certificate, and voucher liability due to more redemptions than issuances in fiscal 2008, compared with more issuances than redemptions in fiscal 2007;

•

decreases in accrued liabilities and other current liabilities related to information technology projects and advertising expenses; offset by

•

higher net earnings in fiscal 2008 compared with fiscal 2007.

For fiscal 2007, net cash provided by operating activities increased $831 million compared with fiscal 2006, primarily due to the following:

•

higher net earnings in fiscal 2007 compared with fiscal 2006;

•

a decrease in inventory purchases as a result of our continued focus on inventory management;

•

an increase in accounts payable due to a change in vendor payment terms; and

•

lower income taxes paid in fiscal 2007 compared with fiscal 2006.

Inventory management remains an area of focus. We continue to execute against our strategy of managing inventory levels in a manner that supports healthy merchandise margins. As a result, inventory per square foot at January 31, 2009 was $34.7 compared with inventory per square foot of $37.0 at February 2, 2008 and $43.7 at February 3, 2007.

We fund inventory expenditures during normal and peak periods through cash flows from operating activities and available cash. Our business follows a seasonal pattern, with sales peaking over a total of about eight weeks during the holiday period. During fiscal 2008, 2007, and 2006, the holiday period accounted for 21 percent, 22 percent, and 21 percent, respectively, of our annual net sales. The seasonality of our operations may lead to significant fluctuations in certain asset and liability accounts between fiscal year-end and subsequent interim periods.

26 G AP I NC . F ORM 10-K

Cash Flows from Investing Activities

Our cash outflows from investing activities are primarily for capital expenditures and purchases of short-term investments, while cash inflows are primarily the result of proceeds from maturities of short-term investments. Net cash used for investing activities for fiscal 2008 increased $124 million compared with fiscal 2007 primarily due to the following:

•

$217 million less net maturities of short-term investments in fiscal 2008 compared with fiscal 2007;

•

$142 million, which is net of cash acquired, used for the acquisition of Athleta in fiscal 2008; offset by

•

$251 million less purchases of property and equipment in fiscal 2008 compared with fiscal 2007.

Net cash used for investing activities for fiscal 2007 increased $124 million compared with fiscal 2006 primarily due to $110 million more purchases of property and equipment in fiscal 2007 compared with fiscal 2006.

For fiscal 2009, we expect capital expenditures to be about $350 million. We expect to open about 50 new store locations and to close about 100 store locations. As a result, we expect net square footage to decrease about 2 percent for fiscal 2009.

Cash Flows from Financing Activities

Our cash outflows from financing activities consist primarily of the repurchases of our common stock, dividend payments, and the repayment of debt, while cash inflows typically consist of proceeds from share-based compensation. Net cash used for financing activities for fiscal 2008 decreased $1.1 billion compared with fiscal 2007 primarily due to the following:

•

$995 million less repurchases of common stock in fiscal 2008 compared with fiscal 2007;

•

$188 million less repayments of long-term debt in fiscal 2008 compared with fiscal 2007; offset by

•

$50 million less cash inflows from share-based compensation in fiscal 2008 compared with fiscal 2007.

Net cash used for financing activities for fiscal 2007 increased $1.0 billion compared with fiscal 2006 primarily due to the following:

•

$650 million more repurchases of common stock in fiscal 2007 compared with fiscal 2006; and

•

$326 million more repayments of long-term debt in fiscal 2007 compared with fiscal 2006.

Free Cash Flow

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

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


	Fiscal Year
($ in millions)	2008			2007			2006
Net cash provided by operating activities	$	1,412		$	2,081		$	1,250
Less: Purchases of property and equipment		(431	)		(682	)		(572	)

Free cash flow	$	981		$	1,399		$	678

Debt

The following discussion should be read in conjunction with Note 5 of Notes to the Consolidated Financial Statements.

Our $50 million notes payable with a fixed interest rate of 6.25 percent per annum was classified as current maturities of long-term debt in the Consolidated Balance Sheet as of January 31, 2009 and was repaid in March 2009. In connection with this debt, we had a cross-currency interest rate swap to swap the interest and principal payable of $50 million debt of our Japanese subsidiary, Gap (Japan) KK, from a fixed interest rate of 6.25 percent, payable in U.S. dollars, to 6.1 billion Japanese yen with a fixed interest rate of 2.43 percent. We also settled the cross-currency interest rate swap in March 2009 and in connection with this settlement, we received, subsequent to January 31, 2009, $19 million as a return of collateral, which was classified as restricted cash in the Consolidated Balance Sheet as of January 31, 2009.

In December 2008, we paid the remaining $138 million related to the maturity of our 8.80 percent notes payable and in September 2007, we paid $326 million related to the maturity of our 6.90 percent notes payable.

Credit Facilities

Trade letters of credit represent a payment undertaking guaranteed by a bank on our behalf to pay the vendor a given amount of money upon presentation of specific documents demonstrating that merchandise has shipped. Vendor payables are recorded in the Consolidated Balance Sheets at the time of merchandise title transfer, although the letters of credit are generally issued prior to this. Over the past three years, we have migrated most of our merchandise vendors to open account payment terms. As of January 31, 2009, our letter of credit agreements consist of two separate $100 million, three-year, unsecured committed letter of credit agreements, with two separate banks, for a total aggregate availability of $200 million with an expiration date of May 2011. In addition, we have an $8 million revolving credit facility available for Athleta which is exclusively being used for the issuance of trade letters of credit to support its merchandise purchases. As of January 31, 2009, we had $83 million in trade letters of credit issued under these letter of credit agreements.

We also have a $500 million, five-year, unsecured revolving credit facility scheduled to expire in August 2012 (the “Facility”). The Facility is available for general corporate purposes, including commercial paper backstop, working capital, trade letters of credit, and standby letters of credit. The facility usage fees and fees related to the Facility fluctuate based on our long-term senior unsecured credit ratings and our leverage ratio. If we were to draw on the Facility, interest would be a base rate (typically the London Interbank Offered Rate) plus a margin based on our long-term senior unsecured credit ratings and our leverage ratio on the unpaid principal amount. To maintain availability of funds under the Facility, we pay a facility fee on the full facility amount, regardless of usage. As of January 31, 2009, there were no borrowings under the Facility. The net availability of the Facility, reflecting $56 million of outstanding standby letters of credit, was $444 million as of January 31, 2009.

The Facility and letter of credit agreements contain financial and other covenants, including, but not limited to, limitations on liens and subsidiary debt as well as the maintenance of two financial ratios—a fixed charge coverage ratio and a leverage ratio. A violation of these covenants could result in a default under the Facility and letter of credit agreements, which would permit the participating banks to terminate our ability to access the Facility for letters of credit and advances, terminate our ability to request letters of credit under the letter of credit agreements, require the immediate repayment of any outstanding advances under the Facility, and require the immediate posting of cash collateral in support of any outstanding letters of credit under the letter of credit agreements.

Dividend Policy

In determining whether and at what level to declare a dividend, we consider a number of factors including sustainability, operating performance, liquidity, and market conditions.

We increased our annual dividend, which had been $0.32 per share for fiscal 2007 and 2006, to $0.34 per share for fiscal 2008. We intend to maintain our annual dividend at $0.34 per share for fiscal 2009.

28 G AP I NC . F ORM 10-K

Share Repurchase Program

Since the beginning of fiscal 2004, the Company has repurchased approximately 340 million shares for $6.5 billion. In fiscal 2006, the Board of Directors authorized share repurchases of $1.3 billion, which were fully utilized in fiscal 2006 and 2007. In August 2007, the Board of Directors authorized $1.5 billion for share repurchases which was fully utilized in fiscal 2007. In February 2008, our Board of Directors authorized $1 billion for share repurchases, of which $745 million was utilized through January 31, 2009. In connection with the fiscal 2007 and 2008 authorizations, we entered into purchase agreements with individual members of the Fisher family. We expect that approximately $158 million (approximately 16 percent) of the $1 billion share repurchase program will be purchased from Fisher family members (related party transactions) under these purchase agreements. The shares are purchased at the same weighted-average market price that we are paying for share repurchases in the open market. During fiscal 2008, we repurchased approximately 46 million shares for $745 million, including commissions, at an average price per share of $16.36. Approximately 7 million shares were repurchased for $117 million from the Fisher family. All except $40 million of total share repurchases were paid for as of January 31, 2009. Of the $40 million accrual, $21 million was payable to Fisher family members as of January 31, 2009.

During fiscal 2007, we repurchased approximately 89 million shares for $1.7 billion, including commissions, at an average price per share of $19.05. Approximately 13 million shares were repurchased for $249 million from the Fisher family. All of the share repurchases were paid for as of February 2, 2008. In fiscal 2006, we repurchased approximately 58 million shares for $1.1 billion, including commissions, at an average price per share of $17.97.

Contractual Cash Obligations

We are party to many contractual obligations involving commitments to make payments to third parties. The following table provides summary information concerning our future contractual obligations as of January 31, 2009. These obligations impact our short-term and long-term liquidity and capital resource needs. Certain of these contractual obligations are reflected in the Consolidated Balance Sheet, while others are disclosed as future obligations.


	Payments Due by Period
($ in millions)	Less than 1 Year		1-3 Years		3-5 Years		More Than 5 Years		Total
Amounts reflected in Consolidated Balance Sheet:
Debt (a)	$	50	$	—	$	—	$	—	$	50
Liabilities for unrecognized tax benefits (b)		3		—		—		—		3
Other cash obligations not reflected in Consolidated Balance Sheet:
Operating leases (c)		1,069		1,639		906		1,080		4,694
Purchase obligations and commitments (d)		1,901		284		208		194		2,587

Total contractual cash obligations	$	3,023	$	1,923	$	1,114	$	1,274	$	7,334

(a)	Represents principal maturities, net of unamortized discount, excluding interest. See Note 5 of Notes to the Consolidated Financial Statements.

(b)

The table above excludes $128 million of long-term liabilities under the Financial Accounting Standards Board (“FASB”) Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109,” as we are not able to reasonably estimate when cash payments of the long-term liabilities for unrecognized tax benefits will occur. The amount is included in lease incentives and other long-term liabilities in the Consolidated Balance Sheet as of January 31, 2009.

(c)	Maintenance, insurance, taxes, and contingent rent obligations are excluded. See Note 11 of Notes to the Consolidated Financial Statements for discussion of our operating leases.

(d)	Represents estimated open purchase orders to purchase inventory as well as commitments for products and services used in the normal course of business.

Commercial Commitments

We have commercial commitments, not reflected in the table above, that were incurred in the normal course of business to support our operations, including standby letters of credit of $58 million (of which $56 million was

issued under the revolving credit facility lines), surety bonds of $38 million, and bank guarantees of $4 million outstanding at January 31, 2009.

Amounts Reflected in the Consolidated Balance Sheet

We have other long-term liabilities reflected in the Consolidated Balance Sheet, including deferred income taxes. The payment obligations associated with these liabilities are not reflected in the table above due to the absence of scheduled maturities. Therefore, the timing of these payments cannot be determined, except for amounts estimated to be paid in fiscal 2009 that are included in current liabilities.

Other Cash Obligations Not Reflected in the Consolidated Balance Sheet (Off-Balance Sheet Arrangements)

The majority of our contractual obligations are made up of operating leases for our stores. Commitments for operating leases represent future minimum lease payments under non-cancelable leases. In accordance with accounting principles generally accepted in the United States of America, our operating leases are not recorded in the Consolidated Balance Sheet; however, the minimum lease payments related to these leases are disclosed in Note 11 of Notes to the Consolidated Financial Statements.

Purchase obligations include our non-exclusive services agreement with International Business Machines Corporation (“IBM”) to operate certain aspects of our information technology structure. The agreement was amended March 2, 2009. The services agreement expires in March 2016, and we have the right to renew it for up to three additional years. We have various options to terminate the agreement, and we pay IBM under a combination of fixed and variable charges, with the variable charges fluctuating based on our actual consumption of services. IBM also has certain termination rights in the event of our material breach of the agreement and failure to cure. Based on the current projection of service needs, we expect to pay approximately $741 million to IBM over the remaining term of the contract.

We have assigned certain store and corporate facility leases to third parties as of January 31, 2009. Under these arrangements, we are secondarily liable and have guaranteed the lease payments of the new lessees for the remaining portion of our original lease obligation. We account for these guarantees in accordance with FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of the Indebtedness of Others.” The maximum potential amount of future lease payments we could be required to make is approximately $33 million as of January 31, 2009. The carrying amount of the liability related to the guarantees was not material as of January 31, 2009.

We are a party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters. These contracts primarily relate to our commercial contracts, operating leases, trademarks, intellectual property, financial agreements, and various other agreements. Under these contracts we may provide certain routine indemnifications relating to representations and warranties (e.g., ownership of assets, environmental or tax indemnifications) or personal injury matters. The terms of these indemnifications range in duration and may not be explicitly defined. Generally, the maximum obligation under such indemnifications is not explicitly stated and, as a result, the overall amount of these obligations cannot be reasonably estimated. Historically, we have not made significant payments for these indemnifications. We believe that if we were to incur a loss in any of these matters, the loss would not have a material effect on our financial condition or results of operations.

As party to a reinsurance pool for workers’ compensation, general liability, and automobile liability, we have guarantees with a maximum exposure of $14 million, of which $0.2 million has been cash collateralized. We are currently in the process of winding down our participation in the reinsurance pool. Our maximum exposure and cash collateralized balance are expected to decrease in the future as our participation in the reinsurance pool diminishes.

30 G AP I NC . F ORM 10-K

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to adopt accounting policies and make significant judgments and estimates to develop amounts reflected and disclosed in the financial statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a thorough process to review the application of our accounting policies and to evaluate the appropriateness of the many estimates that are required to prepare the financial statements of a large, global corporation. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances and the receipt of new or better information.

Our significant accounting policies can be found in Note 1 of Notes to the Consolidated Financial Statements. The policies and estimates discussed below include the financial statement elements that are either judgmental or involve the selection or application of alternative accounting policies and are material to our financial statements. Management has discussed the development and selection of these critical accounting policies and estimates with the Audit and Finance Committee of our Board of Directors, and the Audit and Finance Committee of our Board of Directors has reviewed our disclosure relating to critical accounting policies and estimates in this annual report on Form 10-K.

Merchandise Inventory

We review our inventory levels in order to identify slow-moving merchandise and broken assortments (items no longer in stock in a sufficient range of sizes) and use markdowns to clear merchandise. We value inventory at the lower of cost or market (“LCM”) and record a reserve when future estimated selling price is less than cost. Our LCM reserve calculation requires management to make assumptions to estimate the amount of slow-moving merchandise and broken assortments subject to markdowns, which is dependent upon factors such as historical trends with similar merchandise, inventory aging, forecasted consumer demand, and the promotional environment. In addition, we estimate and accrue shortage for the period between the last physical count and the balance sheet date. Our shortage estimate can be affected by changes in merchandise mix and changes in actual shortage trends. Historically, actual shortage has not differed materially from our estimates.

We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our LCM or inventory shortage reserves. However, if estimates regarding consumer demand are inaccurate or actual physical inventory shortage differs significantly from our estimate, our operating results could be affected. We have not made any material changes in the accounting methodology used to calculate our LCM or inventory shortage reserves in the past three fiscal years.

Impairment of Long-Lived Assets, Goodwill, and Intangible Assets

In accordance with FASB Statement of Financial Accounting Standards No. (“SFAS”) 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we review the carrying value of long-lived assets, including lease rights, key money, and intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Events that result in an impairment review include the decision to close a store, corporate facility, or distribution center, or a significant decrease in the operating performance of the long-lived asset. For assets that are identified as potentially being impaired, if the undiscounted future cash flows of the long-lived assets are less than the carrying value, we recognize a loss equal to the difference between the carrying value and the asset’s fair value. The fair value of the asset is estimated based on discounted future cash flows of the assets using a discount rate commensurate with the risk. Our estimate of future cash flows requires management to make assumptions and to apply judgment, including forecasting future sales and expenses and estimating useful lives of the assets. These estimates can be affected by factors such as future store results, real estate demand, and economic conditions that can be difficult to predict. We have not made any material changes in the methodology to assess and calculate impairment of long-lived assets in the past three fiscal years. We recorded charges for the impairment of long-lived assets of $5 million, $42 million, and $32 million for fiscal 2008, 2007, and 2006, respectively. The impairment charge in fiscal 2007 and 2006 included $29 million and $3 million, respectively, related to the discontinued operation of Forth & Towne.

In connection with the acquisition of Athleta in September 2008, we allocated $99 million of the purchase price to goodwill and $54 million to trade name. In accordance with SFAS 142, “Goodwill and Other Intangible Assets,” we review the carrying value of goodwill and the trade name for impairment annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Events that result in an impairment review include significant changes in the business climate, declines in our operating results, or an expectation that the carrying amount may not be recoverable. We assess potential impairment considering present economic conditions as well as future expectations. The fair value of the reporting unit used to test goodwill for impairment and the fair value of the trade name are estimated using the income approach. This approach requires management to make assumptions and to apply judgment, including forecasting future sales and expenses which can be affected by economic conditions and other factors that can be difficult to predict. We did not recognize any impairment charges for our goodwill or other intangible assets in fiscal 2008, 2007, or 2006.

We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate impairment losses of long-lived assets, goodwill, and intangible assets. However, if actual results are not consistent with our estimates and assumptions used in the calculations, we may be exposed to losses that could be material.

Insurance and Self-Insurance

We use a combination of insurance and self-insurance for a number of risk management activities including workers’ compensation, general liability, and employee related health care benefits, a portion of which is paid by our employees. Liabilities associated with these risks are estimated based primarily on actuarially determined amounts, and accrued in part by considering historical claims experience, demographic factors, severity factors, and other actuarial assumptions. Any actuarial projection of losses is subject to a high degree of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, litigation trends, legal interpretations, benefit level changes, health care costs, and claim settlement patterns. Historically, actual results for estimated losses have not differed materially from our estimates.

We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our insurance liabilities. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.

Revenue Recognition

While revenue recognition does not involve significant judgment, it represents an important accounting policy for the Company. We recognize revenue and the related cost of goods sold at the time the products are received by the customers. For store sales, revenue is recognized when the customer receives and pays for the merchandise at the register, primarily with either cash or credit card. For sales from our online and catalog business, revenue is recognized at the time we estimate the customer receives the merchandise. We record an allowance for estimated returns based on estimated gross profit using our historical return patterns and various other assumptions that management believes to be reasonable. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our sales return reserve. However, if the actual rate of sales returns increases significantly, our operating results could be adversely affected. We have not made any material changes in the accounting methodology used to estimate future sales returns in the past three fiscal years.

Unredeemed Gift Cards, Gift Certificates, and Vouchers

Upon the purchase of a gift card or issuance of a gift certificate or voucher, a liability is established for its cash value. The liability is relieved and net sales are recorded upon redemption by the customer. Over time, some portion of these instruments is not redeemed (“breakage”). We determine breakage income for gift cards, gift certificates, and vouchers based on historical redemption patterns. Breakage income is recorded as other income,

32 G AP I NC . F ORM 10-K

which is a component of operating expenses in the Consolidated Statements of Earnings when it can be determined that the likelihood of redemption is remote and there is no legal obligation to remit the unredeemed portion to relevant jurisdictions. During fiscal 2006, we changed our estimate of the elapsed time for recording breakage income associated with unredeemed gift cards to three years from our prior estimate of five years and, as a result, recorded $31 million of other income in fiscal 2006. For gift certificates and vouchers, we recognize breakage income after five years.

Income Taxes

We record a valuation allowance against our deferred tax assets arising from certain net operating losses when it is more likely than not that some portion or all of such net operating losses will not be realized. In determining the need for a valuation allowance, management is required to make assumptions and to apply judgment, including forecasting future earnings, taxable income, and the mix of earnings in the jurisdictions in which we operate. Our effective tax rate in a given financial statement period may also be materially impacted by changes in the mix and level of earnings, changes in the expected outcome of audits or changes in the deferred tax valuation allowance.

At any point in time, many tax years are subject to or in the process of audit by various taxing authorities. To the extent that our estimates of settlements change or the final tax outcome of these matters is different from the amounts recorded, such differences will impact the income tax provision in the period in which such determinations are made. Our income tax expense includes changes in our estimated liability for exposures associated with our various tax filing positions, in accordance with FIN 48. Determining the income tax expense for these potential assessments requires management to make assumptions that are subject to factors such as proposed assessments by tax authorities, changes in facts and circumstances, issuance of new regulations, and resolution of tax audits.

Recent Accounting Pronouncements

See Note 1 of Notes to the Consolidated Financial Statements for recent accounting pronouncements, including the expected dates of adoption and estimated effects on our financial position, statement of cash flows and results of operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

We operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate fluctuations. Our risk management policy is to hedge a significant portion of forecasted merchandise purchases for foreign operations and forecasted royalty payments using foreign exchange forward contracts. We also use forward contracts to hedge our market risk exposure associated with foreign currency exchange rate fluctuations for certain intercompany loans and balances denominated in currencies other than the functional currency of the entity holding or issuing the intercompany loan or balance. These contracts are entered into with large, reputable financial institutions, which are monitored for counterparty risk. The principal currencies hedged during fiscal 2008 were U.S. dollars, Euro, British pounds, Japanese yen, and Canadian dollars. Our use of derivative financial instruments represents risk management; we do not use derivative financial instruments for trading purposes. Additional information is presented in Note 8 of Notes to the Consolidated Financial Statements. The derivative financial instruments are recorded in the Consolidated Balance Sheets at their fair value as of the balance sheet dates.

We have performed a sensitivity analysis as of January 31, 2009 and February 2, 2008, based on a model that measures the impact of a hypothetical 10 percent adverse change in the level of foreign currency exchange rates to U.S. dollars (with all other variables held constant) on our underlying exposure, net of derivative financial instruments. The foreign currency exchange rates used in the model were based on the spot rates in effect at January 31, 2009 and February 2, 2008. The sensitivity analysis indicated that a hypothetical 10 percent adverse movement in foreign currency exchange rates would have had an unfavorable impact on the underlying cash flow exposure, net of our foreign exchange derivative financial instruments, of $34 million at January 31, 2009 and $37 million at February 2, 2008.

We do not have significant exposure to interest rate fluctuations on our borrowings. We use a cross-currency interest rate swap to swap the interest and principal payable of the $50 million debt of our Japanese subsidiary, Gap (Japan) KK, from a fixed interest rate of 6.25 percent, payable in U.S. dollars, to 6.1 billion Japanese yen with a fixed interest rate of 2.43 percent. This debt was repaid in March 2009. The fair value of this debt was $49 million and $51 million as of January 31, 2009 and February 2, 2008, respectively and classified as current maturities of long-term debt on the Consolidated Balance Sheet as of January 31, 2009. In connection with the repayment of $50 million related to the maturity of this debt, we settled the corresponding cross-currency interest rate swap in March 2009.

In addition, we invest in fixed and variable income investments classified as cash, cash equivalents, and short-term investments. Our cash, cash equivalents, and short-term investments are placed primarily in treasury and prime money market funds, domestic commercial paper, and bank securities. Our cash equivalents and short-term investments are stated at amortized cost, which approximates fair market value due to the short maturities of these instruments. An increase in interest rates of 10 percent would not have a material impact on the value of these investments. However, changes in interest rates would impact the interest income derived from our investments. We earned interest income of $37 million, $117 million, and $131 million in fiscal 2008, 2007, and 2006, respectively.

34 G AP I NC . F ORM 10-K

Item 8. Financial Statements and Supplementary Data.

THE GAP, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


		Page
Report of Independent Registered Public Accounting Firm		36

Consolidated Balance Sheets as of January 31, 2009 and February 2, 2008		37

Consolidated Statements of Earnings for the fiscal years ended January 31, 2009, February 2, 2008, and February 3, 2007		38

Consolidated Statements of Stockholders’ Equity for the fiscal years ended January 31, 2009, February 2, 2008, and February 3, 2007		39

Consolidated Statements of Cash Flows for the fiscal years ended January 31, 2009, February 2, 2008, and February 3, 2007		40

Notes to Consolidated Financial Statements		41

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of The Gap, Inc.:

We have audited the accompanying consolidated balance sheets of The Gap, Inc. and subsidiaries (the “Company”) as of January 31, 2009 and February 2, 2008, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the three fiscal years in the period ended January 31, 2009. We also have audited the Company’s internal control over financial reporting as of January 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Gap, Inc. and subsidiaries as of January 31, 2009 and February 2, 2008, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 31, 2009, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2009, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

As discussed in Note 1 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, on February 4, 2007.

/s/ Deloitte & Touche LLP

San Francisco, California

March 27, 2009

36 G AP I NC . F ORM 10-K

THE GAP, INC.

CONSOLIDATED BALANCE SHEETS


($ and shares in millions except par value)	January 31, 2009			February 2, 2008
ASSETS
Current assets:
Cash and cash equivalents	$	1,715		$	1,724
Short-term investments		—			177
Restricted cash		41			38
Merchandise inventory		1,506			1,575
Other current assets		743			572

Total current assets		4,005			4,086
Property and equipment, net		2,933			3,267
Other long-term assets		626			485

Total assets	$	7,564		$	7,838

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	50		$	138
Accounts payable		975			1,006
Accrued expenses and other current liabilities		1,076			1,259
Income taxes payable		57			30

Total current liabilities		2,158			2,433

Long-term liabilities:
Long-term debt		—			50
Lease incentives and other long-term liabilities		1,019			1,081

Total long-term liabilities		1,019			1,131

Commitments and contingencies (see Notes 11 and 15)
Stockholders’ equity:
Common stock $0.05 par value
Authorized 2,300 shares; Issued 1,105 and 1,100 shares; Outstanding 694 and 734 shares		55			55
Additional paid-in capital		2,895			2,783
Retained earnings		9,947			9,223
Accumulated other comprehensive earnings		123			125
Treasury stock, at cost (411 and 366 shares)		(8,633	)		(7,912	)

Total stockholders’ equity		4,387			4,274

Total liabilities and stockholders’ equity	$	7,564		$	7,838

See Notes to the Consolidated Financial Statements

THE GAP, INC.

CONSOLIDATED STATEMENTS OF EARNINGS


	Fiscal Year
($ and shares in millions except per share amounts)	2008			2007			2006
Net sales	$	14,526		$	15,763		$	15,923
Cost of goods sold and occupancy expenses		9,079			10,071			10,266

Gross profit		5,447			5,692			5,657
Operating expenses		3,899			4,377			4,432

Operating income		1,548			1,315			1,225
Interest expense		1			26			41
Interest income		(37	)		(117	)		(131	)

Earnings from continuing operations before income taxes		1,584			1,406			1,315
Income taxes		617			539			506

Earnings from continuing operations, net of income taxes		967			867			809
Loss from discontinued operation, net of income tax benefit		—			(34	)		(31	)

Net earnings	$	967		$	833		$	778

Weighted-average number of shares—basic		716			791			831
Weighted-average number of shares—diluted		719			794			836

Basic earnings per share:
Earnings from continuing operations, net of income taxes	$	1.35		$	1.10		$	0.97
Loss from discontinued operation, net of income tax benefit		—			(0.05	)		(0.03	)

Net earnings per share	$	1.35		$	1.05		$	0.94

Diluted earnings per share:
Earnings from continuing operations, net of income taxes	$	1.34		$	1.09		$	0.97
Loss from discontinued operation, net of income tax benefit		—			(0.04	)		(0.04	)

Net earnings per share	$	1.34		$	1.05		$	0.93

Cash dividends declared and paid per share	$	0.34		$	0.32		$	0.32

See Notes to the Consolidated Financial Statements

38 G AP I NC . F ORM 10-K

THE GAP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Earnings			Deferred Compensation			Treasury Stock					Total			Comprehensive Earnings
($ and shares in millions except per share amounts)	Shares	Amount		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Earnings			Deferred Compensation			Shares		Amount			Total			Comprehensive Earnings
Balance at January 28, 2006	1,079	$	54	$	2,402		$	8,133		$	51		$	(5	)	(222	)	$	(5,210	)	$	5,425
Net earnings								778														778		$	778
Foreign currency translation											10											10			10
Change in fair value of derivative financial instruments, net of tax of $10											15											15			15
Reclassification adjustment for realized losses on derivative financial instruments, net of tax benefit of ($1)											1											1			1
Issuance of common stock pursuant to stock option and other stock award plans, net of shares withheld for employee taxes	14		1		162																	163
Tax benefit from exercise of stock options and vesting of stock units					25																	25
Amortization of share-based compensation, net of estimated forfeitures					47																	47
Reversal of deferred compensation upon implementation of SFAS 123(R)					(5	)								5								—
Repurchases of common stock																(58	)		(1,050	)		(1,050	)
Reissuance of treasury stock					—											1			25			25
Cash dividends								(265	)													(265	)

Balance at February 3, 2007	1,093		55		2,631			8,646			77			—		(279	)		(6,235	)		5,174		$	804

Net earnings								833														833		$	833
Foreign currency translation											84											84			84
Change in fair value of derivative financial instruments, net of tax benefit of ($17)											(18	)										(18	)		(18	)
Reclassification adjustment for realized gains on derivative financial instruments, net of tax of $11											(18	)										(18	)		(18	)
Cumulative effect of adoption of FIN 48								(4	)													(4	)
Issuance of common stock pursuant to stock option and other stock award plans, net of shares withheld for employee taxes	7		—		93																	93
Tax benefit from exercise of stock options and vesting of stock units					8																	8
Amortization of share-based compensation, net of estimated forfeitures					49																	49
Repurchases of common stock																(89	)		(1,700	)		(1,700	)
Reissuance of treasury stock					2											2			23			25
Cash dividends								(252	)													(252	)

Balance at February 2, 2008	1,100		55		2,783			9,223			125			—		(366	)		(7,912	)		4,274		$	881

Net earnings								967														967		$	967
Foreign currency translation											(38	)										(38	)		(38	)
Change in fair value of derivative financial instruments, net of tax of $14											15											15			15
Reclassification adjustment for realized losses on derivative financial instruments, net of tax benefit of ($13)											21											21			21
Issuance of common stock pursuant to stock option and other stock award plans, net of shares withheld for employee taxes	5		—		52																	52
Tax benefit from exercise of stock options and vesting of stock units					5																	5
Amortization of share-based compensation, net of estimated forfeitures					56																	56
Repurchases of common stock																(46	)		(745	)		(745	)
Reissuance of treasury stock					(1	)										1			24			23
Cash dividends								(243	)													(243	)

Balance at January 31, 2009	1,105	$	55	$	2,895		$	9,947		$	123		$	—		(411	)	$	(8,633	)	$	4,387		$	965

See Notes to the Consolidated Financial Statements

THE GAP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Fiscal Year
($ in millions)	2008			2007			2006
Cash flows from operating activities:
Net earnings	$	967		$	833		$	778
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization (a)		568			547			530
Share-based compensation		55			52			54
Tax benefit from exercise of stock options and vesting of stock units		5			8			25
Excess tax benefit from exercise of stock options and vesting of stock units		(6	)		(7	)		(23	)
Non-cash and other items		61			54			11
Deferred income taxes		10			(51	)		(41	)
Changes in operating assets and liabilities:
Merchandise inventory		51			252			(97	)
Other current assets and other long-term assets		34			18			12
Accounts payable		(4	)		199			(6	)
Accrued expenses and other current liabilities		(284	)		32			56
Income taxes payable, net of prepaid and other tax-related items		(94	)		(4	)		(102	)
Lease incentives and other long-term liabilities		49			148			53

Net cash provided by operating activities		1,412			2,081			1,250

Cash flows from investing activities:
Purchases of property and equipment		(431	)		(682	)		(572	)
Proceeds from sale of property and equipment		1			11			22
Purchases of short-term investments		(75	)		(894	)		(1,460	)
Maturities of short-term investments		251			1,287			1,841
Acquisition of business, net of cash acquired		(142	)		—			—
Change in restricted cash		(1	)		7			11
Change in other long-term assets		(1	)		(3	)		8

Net cash used for investing activities		(398	)		(274	)		(150	)

Cash flows from financing activities:
Payments of long-term debt		(138	)		(326	)		—
Proceeds from share-based compensation, net		75			125			190
Repurchases of common stock		(705	)		(1,700	)		(1,050	)
Excess tax benefit from exercise of stock options and vesting of stock units		6			7			23
Cash dividends paid		(243	)		(252	)		(265	)

Net cash used for financing activities		(1,005	)		(2,146	)		(1,102	)

Effect of exchange rate fluctuations on cash		(18	)		33			(3	)

Net decrease in cash and cash equivalents		(9	)		(306	)		(5	)
Cash and cash equivalents at beginning of period		1,724			2,030			2,035

Cash and cash equivalents at end of period	$	1,715		$	1,724		$	2,030

Supplemental disclosure of cash flow information:
Cash paid for interest during the period	$	17		$	39		$	40
Cash paid for income taxes during the period	$	674		$	535		$	575

(a)	Depreciation and amortization is net of the amortization of lease incentives of $85 million, $88 million, and $84 million for fiscal 2008, 2007, and 2006, respectively.

See Notes to the Consolidated Financial Statements

40 G AP I NC . F ORM 10-K

Notes to Consolidated Financial Statements

For the Fiscal Years Ended January 31, 2009, February 2, 2008, and February 3, 2007

Note 1. Summary of Significant Accounting Policies

Organization

The Gap, Inc., a Delaware Corporation, is a global specialty retailer offering clothing, accessories, and personal care products for men, women, children, and babies under the Gap, Old Navy, Banana Republic, Piperlime, and Athleta brands. We operate stores in the United States, Canada, the United Kingdom, France, Ireland, and Japan, while our independent third-party franchisees own and operate stores in Asia, Europe, Latin America, and the Middle East under the Gap and Banana Republic brand names. Our U.S. customers can shop online at www.gap.com, www.oldnavy.com, www.bananarepublic.com, www.piperlime.com, and www.athleta.com.

Principles of Consolidation

The Consolidated Financial Statements include the accounts of The Gap, Inc. and its subsidiaries (the “Company,” “we,” “our”). All intercompany transactions and balances have been eliminated.

Fiscal Year

Our fiscal year is a 52- or 53-week period ending on the Saturday closest to January 31. Fiscal years ended January 31, 2009 (fiscal 2008) and February 2, 2008 (fiscal 2007) consisted of 52 weeks. Fiscal year ended February 3, 2007 (fiscal 2006) consisted of 53 weeks, and the additional week contributed approximately $200 million of net sales. Net sales and operating expenses for the last fiscal month of fiscal 2006, which was a five-week period, were accounted for as a regular five-week month.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents, Short-Term Investments, and Restricted Cash

Amounts in-transit from banks for customer credit card and debit card transactions that process in less than seven days are classified as cash and cash equivalents in the Consolidated Balance Sheets. The banks process the majority of these amounts within one to two business days.

All highly liquid investments with maturities of 91 days or less at the date of purchase are classified as cash equivalents. Highly liquid investments with maturities greater than 91 days and less than one year at the date of purchase are classified as short-term investments. Our short-term and cash equivalent investments are classified as held-to-maturity based on our positive intent and ability to hold the securities to maturity. Our cash, cash equivalents, and short-term investments are placed primarily in treasury and prime money market funds, domestic commercial paper, and bank securities. Our cash equivalents and short-term investments are stated at amortized cost, which approximates fair market value due to the short maturities of these instruments. Income related to these securities is reported as a component of interest income in the Consolidated Statements of Earnings.

Merchandise Inventory

Effective January 29, 2006 (the beginning of fiscal 2006), we changed our inventory flow assumption from the first-in, first-out (“FIFO”) method to the weighted-average cost method. The change in inventory accounting method did not have a material impact on the fiscal 2006 Consolidated Financial Statements.

Derivative Financial Instruments

We apply Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. (“SFAS”) 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, which establishes the accounting and reporting standards for derivative instruments and hedging activities. We record all derivative instruments in our Consolidated Balance Sheets at fair value. See Note 8 of Notes to the Consolidated Financial Statements.

Property and Equipment

Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Estimated useful lives are as follows:


Category		Term
Leasehold improvements		Shorter of lease term or economic life, up to 15 years
Furniture and equipment		Up to 15 years
Buildings		39 years
Software		3 to 7 years

The cost of assets sold or retired and the related accumulated depreciation are removed from the accounts with any resulting gain or loss included in operating expenses in the Consolidated Statements of Earnings. Maintenance and repairs are expensed as incurred.

Interest related to assets under construction is capitalized during the construction period up to the amount of interest expense actually incurred.

Lease Rights and Key Money

Lease rights are costs incurred to acquire the right to lease a specific property. A majority of our lease rights are related to premiums paid to landlords. Key money is the amount of funds paid to a landlord or tenant to acquire the rights of tenancy under a commercial property lease for a property located in France. These rights can be subsequently sold by us to a new tenant or the amount of key money paid can potentially be recovered from the landlord should the landlord refuse to allow the automatic right of renewal to be exercised. Lease rights and key money are recorded at cost and are amortized over the corresponding lease term. Lease rights and key money are recorded in other long-term assets in the Consolidated Balance Sheets.

Insurance and Self-Insurance

42 G AP I NC . F ORM 10-K

Asset Retirement Obligations

We account for asset retirement obligations in accordance with SFAS 143, “Accounting for Asset Retirement Obligations,” and the FASB Interpretation No. (“FIN”) 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143.” An asset retirement obligation represents a legal obligation associated with the retirement of a tangible long-lived asset that is incurred upon the acquisition, construction, development, or normal operation of that long-lived asset. The Company’s asset retirement obligations are primarily associated with leasehold improvements which, at the end of a lease, we are contractually obligated to remove in order to comply with the lease agreement. We recognize asset retirement obligations at the inception of a lease with such conditions, if a reasonable estimate of fair value can be made. The asset retirement obligation is recorded in lease incentives and other long-term liabilities in the Consolidated Balance Sheets and is subsequently adjusted for changes in fair value. The associated estimated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and depreciated over its useful life.

Treasury Stock

We account for treasury stock under the cost method, using a FIFO flow assumption, and include treasury stock as a component of stockholders’ equity.

Revenue Recognition

We recognize revenue and the related cost of goods sold at the time the products are received by the customers in accordance with the provisions of Staff Accounting Bulletin No. (“SAB”) 101, “Revenue Recognition in Financial Statements,” as amended by SAB 104, “Revenue Recognition.” Revenue is recognized for store sales when the customer receives and pays for the merchandise at the register. For sales from our online and catalog business, we estimate and defer revenue and the related product costs for shipments that are in-transit to the customer. Revenue is recognized at the time we estimate the customer receives the product which is typically within a few days of shipment. Deferred revenue was $4 million as of January 31, 2009 and February 2, 2008. Amounts related to shipping and handling that are billed to customers are reflected in net sales and the related costs are reflected in cost of goods sold and occupancy expenses in the Consolidated Statements of Earnings. Revenues are presented net of any taxes collected from customers and remitted to governmental authorities.

Allowances for estimated returns are recorded based on estimated gross profit using our historical return patterns.

We sell merchandise to franchisees under multi-year franchise agreements. We recognize revenue from sales to franchisees at the time merchandise ownership is transferred to the franchisee. These sales are classified as net sales and the related cost of goods sold is classified as cost of goods sold and occupancy expenses in the Consolidated Statements of Earnings. We also receive royalties from these franchisees based on a percentage of the total merchandise purchased by the franchisee, net of any refunds or credits due them. Royalty revenue is recognized when merchandise ownership is transferred to the franchisee and is classified as net sales in the Consolidated Statements of Earnings.

Classification of Expenses

Cost of goods sold and occupancy expenses include:

•

the cost of merchandise;

•

inventory shortage and valuation adjustments;

•

freight charges;

•

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

•

production costs;

•

insurance costs related to merchandise; and

•

rent, occupancy, depreciation, amortization, common area maintenance, real estate taxes, and utilities related to our store operations, distribution centers, and certain corporate functions.

Operating expenses include:

•

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

•

advertising;

•

general and administrative expenses;

•

costs to design and develop our products;

•

merchandise handling and receiving in distribution centers and stores;

•

distribution center general and administrative expenses;

•

rent, occupancy, depreciation, and amortization for corporate facilities; and

•

other expense (income).

The classification of the expenses noted above varies across the retail industry.

Rent Expense

Minimum rental expenses are recognized over the term of the lease. We recognize minimum rent starting when possession of the property is taken from the landlord, which normally includes a construction period prior to store opening. When a lease contains a predetermined fixed escalation of the minimum rent, we recognize the related rent expense on a straight-line basis and record the difference between the recognized rental expense and the amounts payable under the lease as a short-term or long-term deferred rent liability. We also receive tenant allowances upon entering into certain store leases which are recorded as a short-term or long-term tenant allowance liability and amortized as a reduction to rent expense over the term of the lease. Future payments for maintenance, insurance, and taxes to which the Company is obligated are excluded from minimum lease payments.

Certain leases provide for contingent rents that are not measurable at inception. These contingent rents are primarily based on a percentage of sales that are in excess of a predetermined level. These amounts are excluded from minimum rent and are included in the determination of rent expense when it is probable that the expense has been incurred and the amount is reasonably estimable.

Impairment of Long-Lived Assets

In accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we review the carrying value of long-lived assets, including lease rights, key money, and intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Events that result in an impairment review include the decision to close a store, corporate facility, or distribution center, or a significant decrease in the operating performance of the long-lived asset. Assets are considered impaired if the estimated undiscounted future cash flows of the long-lived assets are less than the carrying value. For an impaired asset, we recognize a loss equal to the difference between the carrying value and the asset’s estimated fair value. The fair value of the assets is based on discounted future cash flows of the assets using a discount rate commensurate with the risk. Our estimate of future cash flows requires assumptions and judgment, including forecasting future sales and expenses and estimating useful lives of the assets.

Goodwill and Trade Name

44 G AP I NC . F ORM 10-K

goodwill and trade name have indefinite useful lives and, accordingly, are not amortized. Instead, we review the carrying value of goodwill and the trade name for impairment annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Events that result in an impairment review include significant changes in the business climate, declines in our operating results, or an expectation that the carrying amount may not be recoverable. We assess potential impairment considering present economic conditions as well as future expectations. The fair value of the reporting unit used to test goodwill for impairment and the fair value of the trade name are estimated using the income approach. This approach requires assumptions and judgment, including forecasting future sales and expenses. Goodwill and the trade name are recorded in other long-term assets in the Consolidated Balance Sheets.

Lease Losses

The decision to close or sublease a store, corporate facility, or distribution center can result in accelerated depreciation over the revised remaining useful life of the long-lived asset. In addition, we record a charge and corresponding sublease loss reserve for the net present value of the difference between the contractual rent obligations and the rate at which we expect to be able to sublease the properties. We estimate the reserve based on the status of our efforts to lease vacant office space and stores, a review of real estate market conditions, our projections for sublease income, and our assumptions regarding sublease commencement.

Advertising

Costs associated with the production of advertising, such as writing, copy, printing, and other costs, are expensed as incurred. Costs associated with communicating advertising that has been produced, such as television and magazine, are expensed when the advertising event takes place. Advertising expense was $435 million, $476 million, and $573 million in fiscal 2008, 2007, and 2006, respectively, and is included in operating expenses in the Consolidated Statements of Earnings.

Prepaid catalog expense consists of the cost to prepare, print, and distribute catalogs. Such costs are amortized over their expected period of future benefit, which is approximately five to seven months. Prepaid catalog expense was $3 million as of January 31, 2009 and is included in other current assets in the Consolidated Balance Sheet. There was no prepaid catalog expense as of February 2, 2008.

Share-Based Compensation

Share-based compensation expense for all share-based compensation awards granted after January 29, 2006 is determined based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R), “Share-Based Payment.” We recognize share-based compensation cost net of estimated forfeitures over the vesting period of the share-based compensation awards. We estimate the forfeiture rate based on historical experience as well as expected future behavior. See Note 10 of Notes to Consolidated Financial Statements.

Unredeemed Gift Cards, Gift Certificates, and Vouchers

Upon the purchase of a gift card or issuance of a gift certificate or voucher, a liability is established for its cash value. The liability is relieved and income is recorded as net sales upon redemption by the customer. Over time, some portion of these instruments is not redeemed (“breakage”). We determine breakage income for gift cards, gift certificates, and vouchers based on historical redemption patterns. Breakage income is recorded as other income, which is a component of operating expenses in the Consolidated Statements of Earnings, when it can be determined that the likelihood of redemption is remote and there is no legal obligation to remit the unredeemed portion to relevant jurisdictions. Our gift cards, gift certificates, and vouchers do not have expiration dates. In the second quarter of 2006, we changed our estimate of the elapsed time for recording breakage income associated with unredeemed gift cards to three years from our prior estimate of five years and, as a result, recorded $31 million of other income in fiscal 2006. For gift certificates and vouchers, we recognize breakage income after five years.

Credit Cards

We have credit card agreements (the “Agreements”) with third parties to provide our customers with private label credit cards and/or co-branded credit cards (collectively the “Credit Cards”). Each private label credit card bears the

logo of one of our brands and can be used at any of our U.S. or Canadian store locations and online. The co-branded credit card is a VISA credit card bearing the logo of one of our brands and can be used any place that accepts VISA credit cards. A third-party financing company is the sole owner of the accounts issued under the Credit Card programs and this third-party absorbs the losses associated with non-payment by the cardholder and a portion of any fraudulent usage of the accounts. We receive cash from the third-party financing company in accordance with the Agreements and based on usage of the Credit Cards. We also receive cash from Visa U.S.A. Inc. in accordance with the Agreements and based on specified transactional fees. We recognize income when the amounts are fixed or determinable and collectibility is reasonably assured which is generally the time the actual usage of the Credit Cards or specified transaction occurs. The income is classified as a component of operating expenses in our Consolidated Statements of Earnings.

The Credit Card programs offer incentives to cardholders in the form of reward certificates upon the cumulative purchase of an established amount. The cost associated with reward certificates is accrued as the rewards are earned by the cardholder and is classified as cost of goods sold and occupancy expenses in the Consolidated Statements of Earnings.

Foreign Currency Translation

Our international subsidiaries primarily use local currencies as the functional currency and translate their assets and liabilities at the current rate of exchange in effect at the balance sheet date. Revenue and expenses from their operations are translated using the monthly average exchange rates in effect for the period in which the transactions occur. The resulting gains and losses from translation are classified as accumulated other comprehensive earnings in the Consolidated Statements of Stockholders’ Equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the local functional currency are included in the Consolidated Statements of Earnings. The amounts of gains and losses included in the Consolidated Statements of Earnings were a loss of $13 million, a gain of $4 million, and a loss of $4 million in fiscal 2008, 2007, and 2006, respectively, and included a gain of $51 million, a gain of $25 million, and a loss of $15 million in fiscal 2008, 2007, and 2006, respectively, for changes in the fair value and the settlements of certain derivative financial instruments.

Comprehensive Earnings

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

Income Taxes

Income taxes are accounted for in accordance with SFAS 109, “Accounting for Income Taxes.” Deferred income taxes are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in the Consolidated Financial Statements. A valuation allowance is established against deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Our income tax expense includes changes in our estimated liability for exposures associated with our various tax filing positions in accordance with FIN 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB No. 109.” At any point in time, many tax years are subject to or in the process of audit by various taxing authorities. To the extent that our estimates of settlements change or the final tax outcome of these matters is different than the amounts recorded, such differences will impact the income tax provision in the period in which such determinations are made.

On February 4, 2007, the Company adopted FIN 48 which prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure, and transition issues. The cumulative effects of applying this interpretation have been recorded as a decrease of $4 million to opening retained earnings, an increase of $85 million to short-term and long-term income tax assets and an increase of $89 million to short-term and long-term income tax liabilities as of February 4, 2007. The Company recognizes

46 G AP I NC . F ORM 10-K

interest related to unrecognized tax benefits in interest expense and penalties related to unrecognized tax benefits in operating expenses in the Consolidated Statements of Earnings.

Recent Accounting Pronouncements

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

In December 2007, the FASB issued SFAS 141(R), “Business Combinations.” SFAS 141(R) establishes principles and requirements for recognizing and measuring assets acquired and liabilities assumed in a business combination. SFAS 141(R) also provides guidance for recognizing and measuring goodwill acquired in a business combination, and requires an acquiring entity to disclose information it needs to evaluate and understand the financial effect of the business combination. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the first fiscal period beginning on or after December 15, 2008. The effect of the adoption of SFAS 141(R) will depend on future acquisitions, if any, and, as such, we do not know whether SFAS 141(R) will have a material impact to our prospective Consolidated Financial Statements.

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

Note 2. Additional Financial Statement Information

Cash and Cash Equivalents and Short-Term Investments

Cash, cash equivalents, and short-term investments consist of the following:


($ in millions)	January 31, 2009		February 2, 2008
Cash	$	1,195	$	923

U.S. Treasury and agency securities		—		148
Domestic commercial paper		275		348
Bank certificates of deposit and time deposits		245		305

Total cash equivalents (original maturities of 91 days or less)		520		801

Total cash and cash equivalents	$	1,715	$	1,724

U.S. Treasury and agency securities	$	—	$	126
Bank certificates of deposit and time deposits		—		51

Total short-term investments (original maturities of greater than 91 days)	$	—	$	177

We did not record any impairment charges on our cash equivalents and short-term investments in fiscal 2008, 2007, or 2006.

Restricted Cash

Restricted cash of $41 million and $38 million as of January 31, 2009 and February 2, 2008, respectively, represents cash that serves as collateral for our insurance obligations and cross-currency interest rate swap and other cash that is restricted from withdrawal.

Subsequent to January 31, 2009, we received $19 million as a return of collateral for our cross-currency interest rate swap in connection with the settlement.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and consist of the following:


($ in millions)	January 31, 2009			February 2, 2008
Leasehold improvements	$	3,026		$	3,077
Furniture and equipment		2,377			2,401
Land and buildings		988			1,022
Software		774			655
Construction-in-progress		80			165

Property and equipment, at cost		7,245			7,320
Less: Accumulated depreciation		(4,312	)		(4,053	)

Property and equipment, net of accumulated depreciation	$	2,933		$	3,267

Depreciation expense for property and equipment was $643 million, $625 million, and $601 million for fiscal 2008, 2007, and 2006, respectively.

Interest expense of $8 million, $10 million, and $8 million related to assets under construction was capitalized in fiscal 2008, 2007, and 2006, respectively.

We recorded a charge for the impairment of long-lived assets, primarily related to our Stores reportable segment, of $5 million, $13 million, and $29 million for fiscal 2008, 2007, and 2006, respectively, which is classified as operating expenses in the Consolidated Statements of Earnings. See Note 4 of Notes to the Consolidated Financial Statements for the impairment charge related to the closure of Forth & Towne.

Other Long-Term Assets

Other long-term assets consist of the following:


($ in millions)	January 31, 2009		February 2, 2008
Long-term tax-related assets	$	326	$	350
Goodwill		99		—
Trade name		54		—
Lease rights and key money, net of accumulated amortization of $125 and $147		31		43
Deferred compensation plan assets		18		24
Intangible assets subject to amortization		13		—
Other		85		68

Other long-term assets	$	626	$	485

See Note 3 of Notes to the Consolidated Financial Statements for goodwill, trade name, and intangible assets subject to amortization related to the acquisition of Athleta.

Both the cost and accumulated amortization of lease rights and key money are impacted by fluctuations in foreign currency rates. Amortization expense associated with lease rights and key money was $8 million, $10 million, and $10 million in fiscal 2008, 2007, and 2006, respectively.

48 G AP I NC . F ORM 10-K

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:


($ in millions)	January 31, 2009		February 2, 2008
Accrued compensation and benefits	$	327	$	380
Unredeemed gift cards, gift certificates, and vouchers		255		319
Deferred rent and tenant allowances		105		110
Derivative financial instruments		41		50
Workers’ compensation		39		38
General insurance liability		25		28
Sales return allowance		21		22
Credit card reward certificates		16		18
Accrued advertising		15		30
Other		232		264

Accrued expenses and other current liabilities	$	1,076	$	1,259

No other items accounted for greater than five percent of total current liabilities as of January 31, 2009 or February 2, 2008.

Lease Incentives and Other Long-Term Liabilities

Lease incentives and other long-term liabilities consist of the following:


($ in millions)	January 31, 2009		February 2, 2008
Deferred rent and tenant allowances	$	772	$	832
Long-term tax-related liabilities		174		173
Asset retirement obligations		33		29
Deferred compensation plan liabilities		18		25
Derivative financial instruments		11		6
Other		11		16

Lease incentives and other long-term liabilities	$	1,019	$	1,081

The activity related to asset retirement obligations was not material for fiscal 2008 and includes fluctuations in foreign currency rates.

Accumulated Other Comprehensive Earnings

Accumulated other comprehensive earnings consist of the following:


($ in millions)	January 31, 2009		February 2, 2008
Foreign currency translation	$	109	$	147
Accumulated changes in fair value of derivative financial instruments, net of tax		14		(22	)

Total accumulated other comprehensive earnings	$	123	$	125

Sales Return Allowance

A summary of activity in the sales return allowance account is as follows:


($ in millions)	January 31, 2009			February 2, 2008			February 3, 2007
Balance at beginning of fiscal year	$	22		$	21		$	18
Additions		700			698			672
Returns		(701	)		(697	)		(669	)

Balance at end of fiscal year	$	21		$	22		$	21

Note 3. Acquisition

On September 28, 2008, we acquired all of the outstanding capital stock of Athleta, a women’s sports and active apparel company based in Petaluma, California, for an aggregate purchase price of $148 million in cash, including transaction costs. The acquisition will allow us to enhance our presence in the growing women’s active apparel sector in the United States. The results of operations for Athleta are included in the Consolidated Statements of Earnings beginning September 29, 2008. The impact of the acquisition on the Company’s results of operations, as if the acquisition had been completed as of the beginning of the periods presented, is not significant.

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


($ in millions)
Goodwill	$	99
Trade name		54
Intangible assets subject to amortization		15
Net liabilities assumed		(20	)

Total purchase price	$	148

All of the assets above have been allocated to the Direct reportable segment.

None of the goodwill acquired is deductible for tax purposes. During fiscal 2008, there were no material changes in the carrying amount of goodwill or trade name. Intangible assets subject to amortization, consisting primarily of customer relationships, are being amortized over a weighted-average amortization period of four years and are as follows:


($ in millions)	January 31, 2009
Gross carrying amount	$	15
Less: Accumulated amortization		(2	)

Intangible assets subject to amortization, net of accumulated amortization	$	13

Amortization expense for intangible assets subject to amortization for fiscal 2008 was $2 million and is classified as operating expenses in the Consolidated Statement of Earnings.

As of January 31, 2009, future amortization expense associated with intangible assets subject to amortization for each of the five succeeding fiscal years is as follows:


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

50 G AP I NC . F ORM 10-K

Note 4. Discontinued Operation of Forth & Towne

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


	Fiscal Year
($ in millions)	2008		2007			2006
Net sales	$	—	$	16		$	20

Loss from discontinued operation, before income tax benefit	$	—	$	(56	)	$	(51	)
Add: Income tax benefit		—		22			20

Loss from discontinued operation, net of income tax benefit	$	—	$	(34	)	$	(31	)

For fiscal 2007, the loss from the discontinued operation of Forth & Towne included the following charges on a pre-tax basis: $29 million related to the impairment of long-lived assets, $6 million of lease settlement charges, $5 million of employee severance, $4 million of administrative and other costs, and $2 million of net sublease losses.

Future cash payments for Forth & Towne primarily relate to obligations associated with certain leases and these payments will be made over the various remaining lease terms through 2017. Based on our current assumptions as of January 31, 2009, we expect our lease payments, net of sublease income, to be immaterial.

Note 5. Debt

In September 2007, we paid $326 million related to the maturity of our 6.90 percent notes payable. In December 2008, we paid $138 million related to the maturity of our 8.80 percent notes payable. The remaining $50 million notes payable with a fixed interest rate of 6.25 percent per annum was classified as current maturities of long-term debt in the Consolidated Balance Sheet as of January 31, 2009 and was repaid in March 2009. See Note 8 for information on the cross-currency interest rate swap used in connection with this debt. The fair value of the debt was $49 million and $51 million as of January 31, 2009 and February 2, 2008, respectively.

Note 6. Credit Facilities

As of January 31, 2009, our credit facility consisted of a $500 million, five-year, unsecured revolving credit facility with an expiration date of August 2012 (the “Facility”). The Facility is available for general corporate purposes, including commercial paper backstop, working capital, trade letters of credit, and standby letters of credit. The facility usage fees and fees related to the Facility fluctuate based on our long-term senior unsecured credit ratings and our leverage ratio. If we were to draw on the Facility, interest would be a base rate (typically the London Interbank Offered Rate) plus a margin based on our long-term senior unsecured credit ratings and our leverage ratio on the unpaid principal amount. To maintain availability of funds under the Facility, we pay a facility fee on the full facility amount, regardless of usage. As of January 31, 2009, there were no borrowings under the Facility.

Note 7. Fair Value Measurements

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


			Fair Value Measurements at Reporting Date Using
($ in millions)	January 31, 2009		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Derivative financial instruments	$	87	$	—	$	87	$	—
Deferred compensation plan assets		18		18		—		—

Total	$	105	$	18	$	87	$	—

Liabilities
Derivative financial instruments	$	52	$	—	$	52	$	—

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

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

In addition, we have highly liquid investments classified as cash equivalents as of January 31, 2009. These investments are classified as held-to-maturity based on our positive intent and ability to hold the securities to maturity. Our cash and cash equivalents are placed primarily in treasury and prime money market funds, domestic commercial paper, and bank securities. These securities are stated at amortized cost, which approximates fair market value due to the short maturities of these investments and are recorded based on quoted market prices.

Note 8. Derivative Financial Instruments

We operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate fluctuations. Our risk management policy is to hedge a significant portion of forecasted merchandise purchases for foreign operations, forecasted intercompany royalty payments, and intercompany obligations that bear foreign exchange risk using foreign exchange forward contracts. The principal currencies hedged are U.S. dollars, Euro, British pounds, Japanese yen, and Canadian dollars. We do not enter into derivative financial contracts for trading purposes. Our derivative financial instruments are recorded in the Consolidated Balance Sheets at fair value determined using pricing models based on current market rates. Cash flows from derivative financial instruments are classified as cash flows from operating activities in the Consolidated Statements of Cash Flows.

52 G AP I NC . F ORM 10-K

Forward contracts used to hedge forecasted merchandise purchases are designated as cash flow hedges. These forward contracts are used to hedge forecasted merchandise purchases generally over approximately 12 to 18 months. Changes in the fair value of the forward contracts are recorded as a component of accumulated other comprehensive earnings within stockholders’ equity, to the extent they are effective, and are recognized in cost of goods sold and occupancy expenses in the period which approximates the time the underlying transaction occurs. At January 31, 2009 and February 2, 2008, we had an unrealized gain, net of tax, of $18 million and an unrealized loss, net of tax, of $24 million, respectively. Substantially all of the unrealized gain of $18 million at January 31, 2009 will be recognized in cost of goods sold and occupancy expenses over the next 12 months at the then current values, which can be different from fiscal year-end values. There were no material amounts recorded in fiscal 2008, 2007, or 2006 resulting from hedge ineffectiveness. At January 31, 2009, the fair value of these forward contracts was $60 million in other current assets, $20 million in accrued expenses and other current liabilities, and $11 million in lease incentives and other long-term liabilities in the Consolidated Balance Sheet. At February 2, 2008, the fair value of these forward contracts was $1 million in other current assets and $33 million in accrued expenses and other current liabilities in the Consolidated Balance Sheet.

We use forward contracts to hedge forecasted intercompany royalty payments and these forward contracts are designated as cash flow hedges. These forward contracts are used to hedge intercompany royalty payments generally over approximately 12 to 15 months. Changes in the fair value of the forward contracts are recorded as a component of accumulated other comprehensive earnings within stockholders’ equity, to the extent they are effective, and are recognized in operating expenses in the period which approximates the time the royalty payment is made. We had an unrealized loss, net of tax, of $2 million as of January 31, 2009 and February 2, 2008. There were no material amounts recorded in fiscal 2008, 2007, or 2006 resulting from hedge ineffectiveness. At January 31, 2009 and February 2, 2008, the fair value of these forward contracts was zero and $0.3 million, respectively, in other current assets and $3 million and $3 million, respectively, in accrued expenses and other current liabilities in the Consolidated Balance Sheets.

We also use forward contracts to hedge our market risk exposure associated with foreign currency exchange rate fluctuations for certain intercompany balances denominated in currencies other than the functional currency of the entity with the intercompany balance. At January 31, 2009 and February 2, 2008, the fair value of these forward contracts was $28 million and $0.5 million, respectively, in other current assets and $0.8 million and $0.3 million, respectively, in accrued expenses and other current liabilities in the Consolidated Balance Sheets. These forward contracts are not designated as hedging instruments therefore changes in the fair value of these foreign currency contracts, as well as the remeasurement of the underlying intercompany balances, are recognized in operating expenses in the same period and generally offset.

Beginning in fiscal 2007, we used forward contracts to hedge the net assets of international subsidiaries to offset the foreign currency translation and economic exposures related to our investment in the subsidiaries. We designated the hedge as a net investment hedge and changes in fair value were recorded as a component of accumulated other comprehensive earnings within stockholders’ equity to offset the foreign currency translation adjustments on the investment. As of January 31, 2009, all of our net investment hedge forward contracts had matured. At January 31, 2009 and February 2, 2008 we had a loss of $12 million and $10 million, respectively, recorded in accumulated other comprehensive earnings. At February 2, 2008, the fair value of these forward contracts was $4 million in other current assets and $14 million in accrued expenses and other current liabilities in the Consolidated Balance Sheet.

In addition, we used a cross-currency interest rate swap to swap the interest and principal payable of $50 million debt of our Japanese subsidiary, Gap (Japan) KK, from a fixed interest rate of 6.25 percent, payable in U.S. dollars, to 6.1 billion Japanese yen with a fixed interest rate of 2.43 percent. We designated such swap as a cash flow hedge to hedge the total variability in functional currency. At January 31, 2009, the fair value of the swap was $17 million and was included in accrued expenses and other current liabilities in the Consolidated Balance Sheet. The fair value of the swap as of February 2, 2008 was $6 million and was included in lease incentives and other long-term liabilities in the Consolidated Balance Sheet. In connection with the maturity of the $50 million debt, the cross-currency interest rate swap was settled in March 2009.

Note 9. Common Stock

Common and Preferred Stock

The Board of Directors is authorized to issue 60 million shares of Class B common stock, which is convertible into shares of common stock on a share-for-share basis. Transfer of the shares is restricted. In addition, the holders of the Class B common stock have six votes per share on most matters and are entitled to a lower cash dividend. No Class B shares have been issued as of January 31, 2009.

The Board of Directors is authorized to issue 30 million shares of one or more series of preferred stock, par value of $0.05 per share, and to establish at the time of issuance the issue price, dividend rate, redemption price, liquidation value, conversion features, and such other terms and conditions of each series (including voting rights) as the Board of Directors deems appropriate, without further action on the part of the stockholders. No preferred shares have been issued as of January 31, 2009.

Share Repurchases

Share repurchases are as follows:


	Fiscal Year
($ and S hares in millions except average per S hare C ost)	2008		2007		2006
Number of shares repurchased		46		89		58
Total cost	$	745	$	1,700	$	1,050
Average per share cost including commissions	$	16.36	$	19.05	$	17.97

In fiscal 2006, the Board of Directors authorized share repurchases of $1.3 billion, which were fully utilized in fiscal 2006 and 2007. In August 2007, the Board of Directors authorized $1.5 billion for share repurchases which was fully utilized in fiscal 2007. In February 2008, the Board of Directors authorized $1 billion for additional share repurchases, of which $745 million was utilized through January 31, 2009. In connection with the fiscal 2007 and 2008 authorizations, we also entered into purchase agreements with individual members of the Fisher family. The Fisher family shares are purchased (related party transactions) at the same weighted average market price that we pay for share repurchases in the open market. The purchase agreements may be terminated upon 15 business days notice by the Company or individual Fisher family members. During fiscal 2008 and 2007, approximately 7 million and 13 million shares, respectively, were repurchased for $117 million and $249 million, respectively, from the Fisher family subject to these agreements. In total, we expect that approximately $158 million, or 16%, of the $1 billion share repurchase authorization will be purchased from the Fisher family under these agreements.

All except $40 million of total share repurchases were paid for as of January 31, 2009. Of the $40 million accrual, $21 million was payable to Fisher family members as of January 31, 2009.

Note 10. Share-Based Compensation

Total share-based compensation expense recognized in the Consolidated Statements of Earnings, primarily in operating expenses, is as follows:


	Fiscal Year
($ in millions)	2008			2007			2006
Stock options	$	12		$	14		$	29
Stock units		39			34			13
Employee stock purchase plan		4			4			6

Share-based compensation expense		55			52			48
Less: Income tax benefit		(21	)		(20	)		(21	)

Share-based compensation expense recognized in net earnings, net of tax	$	34		$	32		$	27

No share-based compensation expense was capitalized in fiscal 2008, 2007, and 2006.

54 G AP I NC . F ORM 10-K

Other than the stock option modification noted below, there were no other material modifications made to our outstanding stock options and other stock awards in fiscal 2008, 2007, and 2006.

General Description of Stock Option and Other Stock Award Plans

The 1996 Stock Option and Award Plan (the “1996 Plan”) was established on March 26, 1996, and amended and restated on January 28, 2003. The 1996 Plan was further amended and restated on January 24, 2006 and renamed the 2006 Long-Term Incentive Plan (the “2006 Plan”). Under the 2006 Plan, nonqualified stock options and other stock awards are granted to officers, directors, eligible employees, and consultants at exercise prices or with initial values equal to the fair market value of the stock at the date of grant or as determined by the Compensation and Management Development Committee of the Board of Directors (the “Committee”).

The 2002 Stock Option Plan (the “2002 Plan”) was established on January 1, 1999. On May 9, 2006, the 2002 Plan was discontinued and only those awards then outstanding continue to be subject to the terms of the 2002 Plan under which they were granted. The 2002 Plan empowered the Committee to award nonqualified stock options to non-officer employees.

As of January 31, 2009, we had 125,982,981 shares of our common stock available for future issuance for our stock option and other stock award plans. Stock options generally expire 10 years from the grant date, three months after employee termination, or one year after the date of an employees’ retirement or death, if earlier. In addition, stock options generally vest over a four year period, with shares becoming exercisable in equal annual installments of 25 percent. Other stock awards generally vest over a four year period in equal annual installments of 25 percent. Shares for stock options exercised by directors and employees in Japan are issued from treasury stock.

Stock Option and Other Stock Award Modification

In February 2007, the Committee approved the modification of certain stock options and other stock awards held by designated employees such that at the time of an involuntary termination without cause, any outstanding, unvested time-based options or other stock awards scheduled to vest within a defined time frame will be accelerated. No material amounts were recognized in fiscal 2008 or 2007 as a result of the modification. The modification clause expired in February 2009.

Compensation Cost for Stock Options

We use the Black-Scholes-Merton option-pricing model to determine the fair value of stock options. This model requires the input of subjective assumptions that were developed based on SFAS 123(R) and the U.S. Securities and Exchange Commission guidance contained in SAB 107, “Share-Based Payment.” The determination of the fair value of stock options on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding expected term, expected volatility, dividend yield, and risk-free interest rate.

We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting award forfeitures and record share-based compensation expense only for those awards that are expected to vest.

The fair value of options issued during fiscal 2008, 2007, and 2006 was estimated on the date of grant using the following assumptions:


	Fiscal Year
	2008		2007		2006
Expected term (in years)	4.7		6.0		4.8
Expected volatility	38.3	%	28.9	%	28.7	%
Dividend yield	1.7	%	1.6	%	1.6	%
Risk-free interest rate	2.5	%	4.9	%	4.6	%

A summary of stock option activity under the 2006 Plan and 2002 Plan for fiscal 2008 is as follows:


	Shares		Weighted- Average Exercise Price
Balance at February 2, 2008	40,226,298		$	21.03
Granted	4,346,868		$	19.47
Exercised	(4,040,223	)	$	15.35
Forfeited/Canceled/Expired	(5,811,601	)	$	22.88

Balance at January 31, 2009	34,721,342		$	21.18

A summary of additional information about stock options is as follows:


	Fiscal Year
	2008		2007		2006
Weighted-average fair value per share of stock options granted	$	5.99	$	4.99	$	5.07
Aggregate intrinsic value of stock options exercised (in millions)	$	19	$	32	$	87
Fair value of stock options vested (in millions)	$	17	$	30	$	47

Information about stock options outstanding, vested or expected to vest, and exercisable at January 31, 2009, is as follows:


	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number of Shares at January 31, 2009	Weighted- Average Remaining Contractual Life (in Years)	Weighted- Average Exercise Price		Number of Shares at January 31, 2009	Weighted- Average Exercise Price
$ 2.85 - $16.01	6,063,537	3.43	$	13.65	5,963,537	$	13.64
$16.17 - $18.26	5,883,291	7.07	$	17.27	2,609,806	$	17.55
$18.29 - $19.68	6,342,135	8.18	$	19.36	962,215	$	19.25
$19.70 - $21.55	7,703,812	4.99	$	21.22	7,360,585	$	21.25
$21.60 - $30.66	5,788,352	3.14	$	23.92	5,788,352	$	23.92
$31.48 - $47.50	2,940,215	0.72	$	42.93	2,940,215	$	42.93

	34,721,342	5.26	$	21.18	25,624,710	$	22.12

Vested or expected to vest at January 31, 2009	29,756,612	4.71	$	21.63

The aggregate intrinsic value of options outstanding, options vested or expected to vest, and options exercisable at January 31, 2009 was $0.5 million, $0.5 million, and $0.5 million, respectively. Options exercisable at January 31, 2009 had a weighted-average remaining contractual life of 4.09 years.

Compensation Cost for Stock Units

Under the 2006 Plan, units are granted to employees and members of the Board of Directors whereby one share of common stock is issued for each unit as the unit vests (“Stock Units”). Vesting is based on continued service by the employee and is immediate in the case of members of the Board of Directors. In some cases, vesting is subject to the attainment of a pre-determined financial target (“Performance Shares”).

In accordance with SFAS 123(R), we recognize the estimated share-based compensation cost of Stock Units net of estimated forfeitures. Prior to the adoption of SFAS 123(R), we recognized share-based compensation expense related to Stock Units based on actual forfeitures. As such, we evaluated the need to record a cumulative effect adjustment for estimated forfeitures upon the adoption of SFAS 123(R). Because the adjustment was not material, it was recognized as a credit to operating expenses in the first quarter of fiscal 2006.

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We evaluate the probability that the Performance Shares will vest at the end of each reporting period. We record share-based compensation cost based on the grant-date fair value and the probability that the pre-determined financial target will be achieved.

A summary of Stock Unit activity under the 2006 Plan for fiscal 2008 is as follows:


	Shares		Weighted-Average Grant-Date Fair Value
Balance at February 2, 2008	8,169,093		$	18.16
Granted	4,048,873		$	18.15
Vested	(1,518,487	)	$	18.49
Forfeited	(1,262,803	)	$	18.35

Balance at January 31, 2009	9,436,676		$	18.20

A summary of additional information about Stock Units is as follows:


	Fiscal Year
	2008		2007		2006
Weighted-average fair value per share of Stock Units granted	$	18.15	$	17.63	$	18.37
Grant-date fair value of Stock Units vested (in millions)	$	28	$	11	$	10

The aggregate intrinsic value of unvested Stock Units at January 31, 2009 was $106 million with a weighted-average remaining contractual life of 1.95 years.

At January 31, 2009, there was $50 million (before any related tax benefit) of unrecognized share-based compensation, adjusted for estimated forfeitures, related to unvested Stock Units that is expected to be recognized over a weighted-average period of 2.83 years. Total unrecognized share-based compensation may be adjusted for future changes in estimated forfeitures.

Compensation Cost for Stock Units Based on Performance Metrics

Under the 2006 Plan, some Stock Units are granted to certain employees only after the achievement of pre-determined performance metrics. Once the Stock Unit is granted, vesting is then subject to continued service by the employee.

In accordance with SFAS 123(R), at the end of each reporting period, we evaluate the probability that Stock Units will be granted. We record share-based compensation cost based on the probability that the performance metrics will be achieved, with an offsetting increase to current liabilities. We revalue the liability at the end of each reporting period and record an adjustment to share-based compensation cost as required, based on the probability that the performance metrics will be achieved. Upon achievement of the performance metrics, a Stock Unit is granted. At that time, the associated liability is reclassified to stockholders’ equity.

Out of 4,048,873 and 6,048,873 Stock Units granted in fiscal 2008 and 2007, respectively, 600,544 and 119,102 Stock Units, respectively, were granted based on satisfaction of performance metrics. During fiscal 2006, no Stock Units were granted based on satisfaction of performance metrics.

At January 31, 2009 and February 2, 2008, the liability related to potential Stock Units based on performance metrics was $2 million and $3 million, respectively, which is included in accrued expenses and other current liabilities in the Consolidated Balance Sheets.

Employee Stock Purchase Plan

Prior to December 1, 2006, under our Employee Stock Purchase Plan (“ESPP”), eligible U.S. employees could purchase our common stock at 85 percent of the lower of the closing price on the New York Stock Exchange on the first or last day of a six-month purchase period (“Option Feature”). After December 1, 2006, eligible U.S. employees are able to purchase our common stock at 85 percent of the closing price on the New York Stock Exchange on the

last day of the three-month purchase period. Accordingly, compensation cost is equal to the 15 percent discount and the Black-Scholes-Merton option-pricing model is no longer used to estimate the fair value of the ESPP Option Feature after December 1, 2006. Employees pay for their stock purchases through payroll deductions at a rate equal to any whole percentage from 1 percent to 15 percent. There were 1,543,827, 1,485,699, and 1,613,116 shares issued under the ESPP during fiscal 2008, 2007, and 2006, respectively. All shares for ESPP purchases are issued from treasury stock. At January 31, 2009, there were 10,259,290 shares reserved for future issuances.

Note 11. Leases

We lease most of our store premises and some of our corporate facilities and distribution centers. These operating leases expire at various dates through 2033. Most store leases are for a five year base period and include options that allow us to extend the lease term beyond the initial base period, subject to terms agreed to at lease inception. Some leases also include early termination options, which can be exercised under specific conditions.

We also lease certain equipment under operating leases that expire at various dates through 2012.

The aggregate minimum non-cancelable annual lease payments under leases in effect on January 31, 2009, are as follows:


($ in millions)
Fiscal Year
2009	$	1,069
2010		927
2011		712
2012		520
2013		386
Thereafter		1,080

Total minimum lease commitments	$	4,694

The total minimum lease commitment amount above does not include minimum sublease rental income of $24 million receivable in the future under non-cancelable sublease agreements.

Rental expense for our operating leases is as follows:


	Fiscal Year
($ in millions)	2008			2007			2006
Minimum rental expense	$	992		$	970		$	923
Contingent rental expense		126			129			127
Less: Sublease income		(4	)		(4	)		(5	)

Total	$	1,114		$	1,095		$	1,045

We have excess facility space as of January 31, 2009 and have recorded a sublease loss reserve for the net present value of the difference between the contractual rent obligations and the amount for which we expect to be able to sublease the properties. We had sublease loss reserves of $10 million as of January 31, 2009 and February 2, 2008. Sublease losses are included in operating expenses in the Consolidated Statements of Earnings and were not material for fiscal 2008, 2007, and 2006. Remaining cash expenditures associated with our sublease loss reserve are expected to be paid over the various remaining lease terms through 2016. Based on our current assumptions as of January 31, 2009, we expect a total net cash outlay of approximately $14 million for future rent.

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Note 12. Income Taxes

For financial reporting purposes, components of earnings from continuing operations before income taxes are as follows:


	Fiscal Year
($ in millions)	2008		2007		2006
United States	$	1,209	$	1,073	$	995
Foreign		375		333		320

	$	1,584	$	1,406	$	1,315

The provision for income taxes consists of the following:


	Fiscal Year
($ in millions)	2008		2007			2006
Current
Federal	$	440	$	443		$	468
State		43		56			67
Foreign		124		91			50

Total current		607		590			585

Deferred
Federal		5		(42	)		(77	)
State		5		(18	)		(9	)
Foreign		—		9			7

Total deferred		10		(51	)		(79	)

Total provision	$	617	$	539		$	506

During fiscal 2008, we assessed the anticipated cash needs and overall financial position of our Canadian and Japanese subsidiaries. As a result, we determined that we no longer intend to utilize $137 million and $63 million of the undistributed earnings of our Canadian and Japanese subsidiaries, respectively, in foreign operations indefinitely. Of these amounts, $157 million was repatriated in the second quarter of fiscal 2008. Accordingly, we have established a deferred tax asset and liability for U.S. income taxes with respect to the repatriated earnings as of January 31, 2009 and have recorded a related tax benefit. The amount of the tax benefit was immaterial.

The foreign component of pre-tax earnings before elimination of intercompany transactions in fiscal 2008, 2007, and 2006 was $375 million, $333 million, and $320 million, respectively. Except as noted above and where required by U.S. tax law, no provision was made for U.S. income taxes on the undistributed earnings of the foreign subsidiaries as we intend to utilize those earnings in the foreign operations for an indefinite period of time or repatriate such earnings only when tax-effective to do so. That portion of accumulated undistributed earnings of foreign subsidiaries as of January 31, 2009 and February 2, 2008 was approximately $1.1 billion and $867 million, respectively. If the undistributed earnings were repatriated, the unrecorded deferred tax liability as of January 31, 2009 and February 2, 2008 would have been approximately $147 million and $97 million, respectively.

The difference between the effective income tax rate and the U.S. federal income tax rate is as follows:


	Fiscal Year
	2008		2007		2006
Federal tax rate	35.0	%	35.0	%	35.0	%
State income taxes, less federal benefit	3.5		3.1		3.2
Tax impact of foreign operations	1.7		2.3		2.2
Other	(1.2	)	(2.1	)	(1.9	)

Effective tax rate	39.0	%	38.3	%	38.5	%

Deferred tax assets (liabilities) consist of the following:


($ in millions)	January 31, 2009			February 2, 2008
Deferred tax assets
Deferred rent	$	115		$	115
Accrued payroll and related benefits		82			57
Nondeductible accruals		68			72
Inventory capitalization and other adjustments		53			64
Depreciation		43			88
State and foreign net operating losses (“NOLs”)		28			27
Fair value of derivative financial instruments included in accumulated other comprehensive earnings		(9	)		18
Other		99			100

Total deferred tax assets		479			541
NOL valuation allowance		(17	)		(12	)
Total deferred tax liabilities		(23	)		(18	)

Net deferred tax assets	$	439		$	511

Current portion (included in other current assets)	$	166		$	216
Non-current portion (included in other long-term assets)		273			295

Total	$	439		$	511

At January 31, 2009 we had approximately $90 million state and $83 million foreign gross net operating loss (“NOL”) carryovers in multiple taxing jurisdictions that could be utilized to reduce the tax liabilities of future years. The tax effected NOL was approximately $6 million for state and $22 million for foreign as of January 31, 2009. We provided a valuation allowance of approximately $2 million and $15 million against the deferred tax asset related to the state and foreign NOLs, respectively. The state losses expire between fiscal 2009 and fiscal 2023, approximately $57 million of the foreign losses expire by 2014, and $26 million of the foreign losses do not expire.

The activity related to our unrecognized tax benefits is as follows:


($ in millions)	January 31, 2009			February 2, 2008
Balance at beginning of fiscal year	$	123		$	135
Increases related to current year tax positions		6			14
Prior year tax positions
Increases		69			33
Decreases		(43	)		(20	)
Cash settlements		(8	)		(5	)
Expiration of statute of limitations		(11	)		(39	)
Foreign currency translation		(5	)		5

Balance at end of fiscal year	$	131		$	123

60 G AP I NC . F ORM 10-K

Of the $131 million and $123 million of total unrecognized tax benefits at January 31, 2009 and February 2, 2008, respectively, approximately $33 million and $51 million (net of the federal benefit on state issues), respectively, represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. During fiscal 2008, the total amount of interest reversal recognized in the Consolidated Statement of Earnings was $9 million. During fiscal 2007, the total amount of interest recognized in the Consolidated Statement of Earnings was $2 million. As of January 31, 2009 and February 2, 2008, the Company had total accrued interest related to the unrecognized tax benefits of $18 million and $32 million, respectively. There were no accrued penalties related to the unrecognized tax benefits as of January 31, 2009 and February 2, 2008.

The Company conducts business globally and, as a result, files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as Canada, France, Hong Kong, Japan, the United Kingdom, and the United States. With few exceptions, we are no longer subject to U.S. federal, state, local, or non-U.S. income tax examinations for fiscal years before 1998.

The Company engages in continual discussions with taxing authorities regarding tax matters in the various jurisdictions. It is reasonably possible that certain foreign and state tax issues may be concluded in the next 12 months. In late fiscal 2008, the Internal Revenue Service (“IRS”) commenced an audit of the Company’s refund claims for fiscal 2001 through 2004. The Company expects to conclude this IRS audit in the next 12 months. The Company does not anticipate recording any significant increases or decreases in total gross unrecognized tax benefits within the next 12 months.

Note 13. Employee Benefit Plans

We have a qualified defined contribution retirement plan, called GapShare, which is available to employees who meet certain age and service requirements. This plan permits employees to make contributions up to the maximum limits allowable under the Internal Revenue Code. Under the plan, we match, in cash, all or a portion of employees’ contributions under a predetermined formula. Our contributions vest immediately. Our contributions to GapShare were $34 million, $36 million, and $35 million in fiscal 2008, 2007, and 2006, respectively.

We also have a deferred compensation plan which allows eligible employees and non-employee members of the Board of Directors to defer compensation up to a maximum amount. Plan investments are recorded at market value and are designated for the deferred compensation plan. The Company’s deferred compensation plan assets are determined based on quoted market prices. As of January 31, 2009 and February 2, 2008, the assets relating to the deferred compensation plan were $18 million and $24 million, respectively, and were included in other long-term assets in the Consolidated Balance Sheets. As of January 31, 2009 and February 2, 2008, the corresponding liabilities relating to the deferred compensation plan were $18 million and $25 million, respectively, and were included in lease incentives and other long-term liabilities in the Consolidated Balance Sheets. We match all or a portion of employees’ contributions under a predetermined formula. Plan investments are elected by the participants, and investment returns are not guaranteed by the Company. Our contributions to the deferred compensation plan in fiscal 2008, 2007, and 2006 were not material. We do not match non-employee members of the Board of Directors contributions under the deferred compensation plan.

Note 14. Earnings Per Share

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

Weighted-average number of shares is as follows:


	Fiscal Year
(shares in millions)	2008	2007	2006
Weighted-average number of shares—basic	716	791	831
Common stock equivalents	3	3	5

Weighted-average number of shares—diluted	719	794	836

The above computations of weighted-average number of shares—diluted exclude stock options and other stock awards to purchase 31 million, 33 million, and 42 million shares of common stock for fiscal 2008, 2007, and 2006, respectively, as their inclusion would be antidilutive.

Note 15. Commitments and Contingencies

In January 2006, we entered into a non-exclusive services agreement with International Business Machines Corporation (“IBM”) to operate certain aspects of our information technology infrastructure. The agreement was amended effective March 2, 2009. The services agreement expires in March 2016, and we have the right to renew it for up to three additional years. We have various options to terminate the agreement, and we pay IBM under a combination of fixed and variable charges, with the variable charges fluctuating based on our actual consumption of services. IBM also has certain termination rights in the event of our material breach of the agreement and failure to cure. We paid $134 million, $146 million, and $118 million to IBM for fixed charges during fiscal 2008, 2007, and 2006, respectively. Based on the current projection of service needs, we expect to pay approximately $741 million to IBM over the remaining term of the contract.

We are a party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters. These contracts primarily relate to our commercial contracts, operating leases, trademarks, intellectual property, financial agreements, and various other agreements. Under these contracts we may provide certain routine indemnifications relating to representations and warranties (e.g., ownership of assets, environmental or tax indemnifications), or personal injury matters. The terms of these indemnifications range in duration and may not be explicitly defined. Generally, the maximum obligation under such indemnifications is not explicitly stated and as a result, the overall amount of these obligations cannot be reasonably estimated. Historically, we have not made significant payments for these indemnifications. We believe that if we were to incur a loss in any of these matters, the loss would not have a material effect on our financial condition or results of operations.

As party to a reinsurance pool for workers’ compensation, general liability and automobile liability, we have guarantees with a maximum exposure of $14 million as of January 31, 2009, of which $0.2 million has been cash collateralized. We are currently in the process of winding down our participation in the reinsurance pool. Our maximum exposure and cash collateralized balance are expected to decrease in the future as our participation in the reinsurance pool diminishes.

As a multinational company, we are subject to various proceedings, lawsuits, disputes and claims (“Actions”) arising in the ordinary course of our business. Many of these Actions raise complex factual and legal issues and are subject to uncertainties. Actions filed against us from time to time include commercial, intellectual property, customer, employment, data privacy, and securities related claims, including class action lawsuits in which plaintiffs allege that we violated federal and state wage and hour and other laws. The plaintiffs in some Actions seek unspecified damages or injunctive relief, or both. Actions are in various procedural stages, and some are

62 G AP I NC . F ORM 10-K

covered in part by insurance. If the outcome of an action is expected to result in a loss that is considered probable and reasonably estimable, we will record a liability for the estimated loss.

Note 16. Segment Information

We identify our operating segments according to how our business activities are managed and evaluated. All of our operating segments are in the business of selling clothing, accessories, and personal care products. Beginning in the fourth quarter of fiscal 2008, we have two reportable segments:

•

Stores – The Stores reportable segment includes the results of our retail stores for each of our brands: Gap, Old Navy, and Banana Republic. We have aggregated the results of all Stores operating segments into one reportable segment because we believe that the operating segments have similar economic characteristics in accordance with SFAS 131, “Disclosures about Segments of an Enterprise and Related Information.”

•

Direct – The Direct operating segment includes the results of our online business for each of our web-based brands: gap.com, oldnavy.com, bananarepublic.com, piperlime.com, and, beginning in September 2008, athleta.com. The Direct operating segment also includes Athleta’s catalog business. Based on the different distribution method associated with the Direct operating segment, Direct is considered a reportable segment.

The accounting policies for each of our operating segments are the same as those described in Note 1 Summary of Significant Accounting Policies.

Net sales by brand, region, and reportable segment are as follows:


($ in millions) Fiscal Year 2008	Gap		Old Navy		Banana Republic		Other (3)		Total		Percentage of Net Sales
U.S. (1)	$	3,840	$	4,840	$	2,221	$	—	$	10,901	75	%
Canada		329		392		146		—		867	6	%
Europe		724		—		23		33		780	6	%
Asia		732		—		101		47		880	6	%
Other Regions		—		—		—		68		68	—

Total Stores reportable segment		5,625		5,232		2,491		148		13,496	93	%
Direct reportable segment (2)		333		475		145		77		1,030	7	%

Total	$	5,958	$	5,707	$	2,636	$	225	$	14,526	100	%


Fiscal Year 2007	Gap		Old Navy		Banana Republic		Other (3)		Total		Percentage of Net Sales
U.S. (1)	$	4,146	$	5,776	$	2,351	$	—	$	12,273	78	%
Canada		364		461		147		—		972	6	%
Europe		822		—		—		5		827	5	%
Asia		613		—		89		36		738	5	%
Other Regions		—		—		—		50		50	—

Total Stores reportable segment		5,945		6,237		2,587		91		14,860	94	%
Direct reportable segment (2)		308		428		136		31		903	6	%

Total	$	6,253	$	6,665	$	2,723	$	122	$	15,763	100	%


Fiscal Year 2006	Gap		Old Navy		Banana Republic		Other (3)		Total		Percentage of Net Sales
U.S. (1)	$	4,494	$	6,042	$	2,251	$	—	$	12,787	80	%
Canada		379		442		119		—		940	6	%
Europe		792		—		—		1		793	5	%
Asia		581		—		61		7		649	4	%
Other Regions		—		—		—		24		24	—

Total Stores reportable segment		6,246		6,484		2,431		32		15,193	95	%
Direct reportable segment (2)		261		345		117		7		730	5	%

Total	$	6,507	$	6,829	$	2,548	$	39	$	15,923	100	%

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

(2)	U.S. only. Direct includes Athleta beginning September 2008.

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

Financial Information for Reportable Segments

The measure of profit we use to make decisions on allocating resources to our operating segments and to assess the operating performance of each operating segment is operating income. Operating income is defined as income from continuing operations before interest expense, interest income, and income taxes. Corporate costs are allocated to each operating segment, and included in operating income, based on a rational and systematic basis.

Reportable segment assets presented below include those assets that are directly used in, or allocable to, that segment’s operations. Total assets for the Stores reportable segment primarily consist of merchandise inventory, the net book value of store facilities, and prepaid expenses and receivables related to store operations. Total assets for the Direct reportable segment primarily consist of merchandise inventory, the net book value of information technology and distribution center assets, and the net book value of goodwill and intangible assets as a result of the acquisition of Athleta. We do not allocate corporate assets to our operating segments. Unallocated corporate assets include cash and cash equivalents, short-term investments, restricted cash, the net book value of corporate property and equipment, and tax-related assets. Reportable segment capital expenditures are direct purchases of property and equipment by that segment. Unallocated capital expenditures primarily consist of corporate purchases of property and equipment.

64 G AP I NC . F ORM 10-K

Selected financial information by reportable segment, excluding results of the discontinued operation of Forth & Towne, and reconciliations to our consolidated totals are as follows:


	Fiscal Year
($ in millions)	2008		2007		2006
Operating income:
Stores	$	1,338	$	1,135	$	1,110
Direct (1)		210		180		115

Operating income	$	1,548	$	1,315	$	1,225

Depreciation and amortization expense (2):
Stores	$	517	$	509	$	496
Direct (3)		51		38		34

Depreciation and amortization expense	$	568	$	547	$	530

Segment assets:
Stores	$	3,368	$	3,696	$	3,755
Direct		499		288		282
Unallocated		3,697		3,854		4,507

Total assets	$	7,564	$	7,838	$	8,544

Purchases of property and equipment:
Stores	$	303	$	528	$	386
Direct		47		30		30
Unallocated		81		124		156

Purchases of property and equipment	$	431	$	682	$	572

(1)	Included in Direct’s operating income is $40 million, $39 million, and $38 million of net allocated corporate expenses for fiscal 2008, 2007, and 2006, respectively.

(2)	Depreciation and amortization is net of the amortization of lease incentives.

(3)	Included in Direct’s depreciation and amortization expense is $8 million, $7 million, and $7 million of net allocated corporate depreciation and amortization expense for fiscal 2008, fiscal 2007, and fiscal 2006, respectively.

Long-lived assets, as defined in SFAS 131, located in the United States and in foreign locations are as follows:


($ in millions)	January 31, 2009		February 2, 2008
United States	$	2,743	$	2,824
Foreign		544		632

Total long-lived assets	$	3,287	$	3,456

Note 17. Quarterly Information (Unaudited)

The following quarterly data are derived from our Consolidated Statements of Earnings:


($ in millions except per share amounts)	13 Weeks Ended May 3, 2008			13 Weeks Ended August 2, 2008			13 Weeks Ended November 1, 2008			13 Weeks Ended January 31, 2009		52 Weeks Ended January 31, 2009
Net sales	$	3,384		$	3,499		$	3,561		$	4,082	$	14,526
Gross profit	$	1,342		$	1,338		$	1,378		$	1,389	$	5,447
Earnings from continuing operations, net of income taxes	$	249		$	229		$	246		$	243	$	967
Loss from discontinued operation, net of income tax benefit	$	—		$	—		$	—		$	—	$	—
Net earnings	$	249		$	229		$	246		$	243	$	967
Basic earnings per share (1):
Earnings from continuing operations, net of income taxes	$	0.34		$	0.32		$	0.35		$	0.34	$	1.35
Loss from discontinued operation, net of income tax benefit	$	—		$	—		$	—		$	—	$	—
Net earnings per share	$	0.34		$	0.32		$	0.35		$	0.34	$	1.35
Diluted earnings per share (1):
Earnings from continuing operations, net of income taxes	$	0.34		$	0.32		$	0.35		$	0.34	$	1.34
Loss from discontinued operation, net of income tax benefit	$	—		$	—		$	—		$	—	$	—
Net earnings per share	$	0.34		$	0.32		$	0.35		$	0.34	$	1.34

($ in millions except per share amounts)	13 Weeks Ended May 5, 2007			13 Weeks Ended August 4, 2007 (2)			13 Weeks Ended November 3, 2007			13 Weeks Ended February 2, 2008		52 Weeks Ended February 2, 2008
Net sales	$	3,549		$	3,685		$	3,854		$	4,675	$	15,763
Gross profit	$	1,355		$	1,264		$	1,447		$	1,626	$	5,692
Earnings from continuing operations, net of income taxes	$	205		$	158		$	239		$	265	$	867
Loss from discontinued operation, net of income tax benefit	$	(27	)	$	(6	)	$	(1	)	$	—	$	(34	)
Net earnings	$	178		$	152		$	238		$	265	$	833
Basic earnings per share (1):
Earnings from continuing operations, net of income taxes	$	0.25		$	0.19		$	0.30		$	0.36	$	1.10
Loss from discontinued operation, net of income tax benefit	$	(0.03	)	$	—		$	—		$	—	$	(0.05	)
Net earnings per share	$	0.22		$	0.19		$	0.30		$	0.36	$	1.05
Diluted earnings per share (1):
Earnings from continuing operations, net of income taxes	$	0.25		$	0.19		$	0.30		$	0.35	$	1.09
Loss from discontinued operation, net of income tax benefit	$	(0.03	)	$	—		$	—		$	—	$	(0.04	)
Net earnings per share	$	0.22		$	0.19		$	0.30		$	0.35	$	1.05

(1)	Earnings per share were computed individually for each of the periods presented; therefore, the sum of the earnings per share amounts for the quarters may not equal the total for the year.

(2)	During the second quarter of fiscal 2007, we recognized $20 million of expenses, the majority of which was severance payments, as a result of our cost reduction initiatives.

66 G AP I NC . F ORM 10-K

Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Management conducted an assessment of our internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework . Based on the assessment, management concluded that, as of January 31, 2009, our internal control over financial reporting is effective. The Company’s internal control over financial reporting as of January 31, 2009, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Changes in Internal Control over Financial Reporting

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

Item 9B. Other Information.

Not applicable.

Part III

Item 10. Directors, Executive Officers and Corporate Governance.

The information required by this item is incorporated herein by reference to the sections entitled “Nominees for Election as Directors,” “Corporate Governance—Audit and Finance Committee” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the 2009 Proxy Statement. See also Part I, Item 1 above in the section entitled “Executive Officers of the Registrant.”

The Company has adopted a code of ethics, our Code of Business Conduct, that applies to all employees including our principal executive officer, principal financial officer, controller and persons performing similar functions. Our Code of Business Conduct is available on our website, www.gapinc.com, under “Investors, Corporate Compliance, Code of Business Conduct” and in print to any person who requests it. Any amendments and waivers to the code will also be available on the website.

Item 11. Executive Compensation.

The information required by this item is incorporated herein by reference to the sections entitled “Compensation of Directors,” “Corporate Governance—Compensation and Management Development Committee” and “Executive Compensation and Related Information” in the 2009 Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this item is incorporated herein by reference to the sections entitled “Equity Compensation Plan Information” and “Beneficial Ownership of Shares” in the 2009 Proxy Statement.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information required by this item is incorporated herein by reference to the sections entitled “Other Information” and “Director Independence” in the 2009 Proxy Statement.

Item 14. Principal Accountant Fees and Services.

The information required by this item is incorporated herein by reference to the section entitled “Principal Accounting Firm Fees” in the 2009 Proxy Statement.

68 G AP I NC . F ORM 10-K

Part IV

Item 15. Exhibits, Financial Statement Schedules.

1.	Financial Statements: See “Index to Consolidated Financial Statements” in Part II, Item 8 of this Form 10-K.

2.	Financial Statement Schedule: Schedules are included in the Consolidated Financial Statements or notes of this Form 10-K or are not required.

3.	Exhibits: The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Form 10-K.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	THE GAP, INC.

Date: March 27, 2009	By	/s/ G LENN K. M URPHY
		Glenn K. Murphy Chairman and Chief Executive Officer (Principal Executive Officer)

Date: March 27, 2009	By	/s/ S ABRINA L. S IMMONS
		Sabrina L. Simmons Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



Date: March 27, 2009	By	/s/ H OWARD P. B EHAR Howard P. Behar, Director

Date: March 27, 2009	By	/s/ A DRIAN D. P. B ELLAMY Adrian D. P. Bellamy, Director

Date: March 27, 2009	By	/s/ D OMENICO D E S OLE Domenico De Sole, Director

Date: March 27, 2009	By	/s/ D ONALD G. F ISHER Donald G. Fisher, Director

Date: March 27, 2009	By	/s/ D ORIS F. F ISHER Doris F. Fisher, Director

Date: March 27, 2009	By	/s/ R OBERT J. F ISHER Robert J. Fisher, Director

Date: March 27, 2009	By	/s/ P ENELOPE L. H UGHES Penelope L. Hughes, Director

Date: March 27, 2009	By	/s/ B OB L. M ARTIN Bob L. Martin, Director

Date: March 27, 2009	By	/s/ J ORGE P. M ONTOYA Jorge P. Montoya, Director

Date: March 27, 2009	By	/s/ G LENN K. M URPHY Glenn K. Murphy, Director

Date: March 27, 2009	By	/s/ J AMES M. S CHNEIDER James M. Schneider, Director

Date: March 27, 2009	By	/s/ M AYO A. S HATTUCK III Mayo A. Shattuck III, Director

Date: March 27, 2009	By	/s/ K NEELAND C. Y OUNGBLOOD Kneeland C. Youngblood, Director

70 G AP I NC . F ORM 10-K

Exhibit Index



3.1		Registrant’s Amended and Restated Certificate of Incorporation, filed as Exhibit 3.1 to Registrant’s Annual Report on Form 10-K for the year ended January 30, 1993, Commission File No. 1-7562.

3.2		Certificate of Amendment of Amended and Restated Certificate of Incorporation, filed as Exhibit 3.2 to Registrant’s Annual Report on Form 10-K for year ended January 29, 2000, Commission File No. 1-7562.

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

4.1		Indenture, dated September 1, 1997, between Registrant and Harris Trust Company of California, filed as Exhibit 4 to Registrant’s Form 10-Q for the quarter ended November 1, 1997, Commission File No. 1-7562.

4.2		Indenture, dated November 21, 2001, between Registrant and The Bank of New York, filed as Exhibit 4.2 to Registrant’s Annual Report on Form 10-K for the year ended February 2, 2002, Commission File No. 1-7562.

10.1		Credit Agreement, dated as of August 30, 2004, among The Gap, Inc., the LC Subsidiaries, the Subsidiary Borrowers, the Lenders and the Issuing Banks (as such terms are defined in the Credit Agreement), Citigroup Global Markets Inc. (“CGMI”) and Banc of America Securities LLC (“BAS”) as joint lead arrangers (the “Joint Lead Arrangers”), Bank of America, N.A., HSBC Bank USA, National Association and JPMorgan Chase Bank as co-syndication agents, and Citigroup USA, Inc., as agent for the Lenders and the Issuing Banks thereunder, filed as Exhibit 10.1 to Registrant’s Form 8-K on September 2, 2004, Commission File No. 1-7562.

10.2		Amendment No. 1 to the Credit Agreement dated May 18, 2007, filed as Exhibit 10.1 to Registrant’s Form 8-K on May 24, 2007, Commission File No. 1-7562.

10.3		3-Year LC Agreement dated as of May 6, 2005 among The Gap, Inc., LC Subsidiaries, and Bank of America, N.A., as LC Issuer, filed as Exhibit 10.1 to the Registrant’s Form 8-K on May 11, 2005, Commission File No. 1-7562.

10.4		Amendment to 3-Year Letter of Credit Agreement with Bank of America, N.A. dated May 18, 2007, filed as Exhibit 10.4 to Registrant’s Form 8-K on May 24, 2007, Commission File No. 1-7562.

10.5		3-Year LC Agreement dated as of May 6, 2005 among The Gap, Inc., LC Subsidiaries, and JPMorgan Chase Bank, as LC Issuer, filed as Exhibit 10.2 to the Registrant’s Form 8-K on May 11, 2005, Commission File No. 1-7562.

10.6		Amendment to 3-Year Letter of Credit Agreement with JPMorgan Chase Bank dated May 18, 2007, filed as Exhibit 10.5 to Registrant’s Form 8-K on May 24, 2007, Commission File No. 1-7562.

10.7		3-Year LC Agreement dated as of May 6, 2005 among The Gap, Inc., LC Subsidiaries, and HSBC Bank USA, National Association (formerly HSBC Bank USA), as LC Issuer, filed as Exhibit 10.3 to the Registrant’s Form 8-K on May 11, 2005, Commission File No. 1-7562.

10.8		Letter Amendment No. 1 to the 3-Year Letter of Credit Agreement with HSBC Bank USA, National Association dated May 18, 2007, filed as Exhibit 10.3 to Registrant’s Form 8-K on May 24, 2007, Commission File No. 1-7562.

10.9		Letter Agreement dated April 1, 2008 regarding the 3-Year Letter of Credit Agreement with HSBC Bank USA, National Association, filed as Exhibit 10.8 to Registrant’s Form 10-Q for the quarter ended May 3, 2008, Commission File No. 1-7562.

10.10		3-Year LC Agreement dated as of May 6, 2005 among The Gap, Inc., LC Subsidiaries, and Citibank, N.A., as LC Issuer, filed as Exhibit 10.4 to the Registrant’s Form 8-K on May 11, 2005, Commission File No. 1-7562.



10.11		Letter Amendment No. 1 to the 3-Year Letter of Credit Agreement with Citibank, N.A. dated May 18, 2007, filed as Exhibit 10.2 to Registrant’s Form 8-K on May 24, 2007, Commission File No. 1-7562.

10.12		Letter Agreement dated April 1, 2008 regarding the 3-Year Letter of Credit Agreement with Citicorp USA Inc., filed as Exhibit 10.7 to Registrant’s Form 10-Q for the quarter ended May 3, 2008, Commission File No. 1-7562.

10.13		364-Day LC Agreement dated as of May 6, 2005 among The Gap, Inc., LC Subsidiaries, and Bank of America, N.A., as LC Issuer, filed as Exhibit 10.5 to the Registrant’s Form 8-K on May 11, 2005, Commission File No. 1-7562.

10.14		364-Day LC Agreement dated as of May 6, 2005 among The Gap, Inc., LC Subsidiaries, and JPMorgan Chase Bank, as LC Issuer, filed as Exhibit 10.6 to the Registrant’s Form 8-K on May 11, 2005, Commission File No. 1-7562.

10.15		364-Day LC Agreement dated as of May 6, 2005 among The Gap, Inc., LC Subsidiaries, and HSBC Bank USA, National Association (formerly HSBC Bank USA), as LC Issuer, filed as Exhibit 10.7 to the Registrant’s Form 8-K on May 11, 2005, Commission File No. 1-7562.

10.16		364-Day LC Agreement dated as of May 6, 2005 among The Gap, Inc., LC Subsidiaries, and Citibank, N.A., as LC Issuer, filed as Exhibit 10.8 to the Registrant’s Form 8-K on May 11, 2005, Commission File No. 1-7562.

10.17		Master Services Agreement between Registrant and IBM, dated as of January 13, 2006, filed as Exhibit 10.18 to Registrant’s Form 10-K for the year ended January 28, 2006, Commission File No. 1-7562. (1)

10.18		Purchase Agreement with Donald G. Fisher and Doris F. Fisher dated August 22, 2007, filed as Exhibit 10.1 to Registrant’s Form 8-K on August 23, 2007, Commission File No. 1-7562.

10.19		Purchase Agreement with John J. Fisher dated August 22, 2007, filed as Exhibit 10.2 to Registrant’s Form 8-K on August 23, 2007, Commission File No. 1-7562.

10.20		Purchase Agreement with Robert J. Fisher dated August 22, 2007, filed as Exhibit 10.3 to Registrant’s Form 8-K on August 23, 2007, Commission File No. 1-7562.

10.21		Purchase Agreement with William S. Fisher dated August 22, 2007, filed as Exhibit 10.4 to Registrant’s Form 8-K on August 23, 2007, Commission File No. 1-7562.

10.22		Purchase Agreement with Donald G. Fisher and Doris F. Fisher dated February 27, 2008, filed as Exhibit 10.1 to Registrant’s Form 8-K on February 28, 2008, Commission File No. 1-7562.

10.23		Purchase Agreement with John J. Fisher dated February 27, 2008, filed as Exhibit 10.2 to Registrant’s Form 8-K on February 28, 2008, Commission File No. 1-7562.

10.24		Purchase Agreement with Robert J. Fisher dated February 27, 2008, filed as Exhibit 10.3 to Registrant’s Form 8-K on February 28, 2008, Commission File No. 1-7562.

10.25		Purchase Agreement with William S. Fisher dated February 27, 2008, filed as Exhibit 10.4 to Registrant’s Form 8-K on February 28, 2008, Commission File No. 1-7562.

EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS

10.26		Executive Management Incentive Compensation Award Plan, filed as Exhibit 10.1 to the Registrant’s Form 8-K on May 11, 2005, Commission File No. 1-7562.

10.27		The Gap, Inc. Executive Deferred Compensation Plan, filed as Exhibit 10.3 to Registrant’s Form 10-Q for the quarter ended October 31, 1998, Commission File No.1-7562.

10.28		Amendment to Executive Deferred Compensation Plan – Freezing of Plan Effective December 31, 2005, filed as Exhibit 10.1 to Registrant’s Form 8-K on November 8, 2005, Commission File No. 1-7562.

72 G AP I NC . F ORM 10-K



10.29*		Amendment to Executive Deferred Compensation Plan – Merging of Plan into the Supplemental Deferred Compensation Plan.

10.30*		Amendment to Executive Deferred Compensation Plan – Suspension of Pending Merger into Supplemental Deferred Compensation Plan.

10.31		Supplemental Deferred Compensation Plan, filed as Exhibit 4.1 to the Company’s Registration Statement on Form S-8, dated November 29, 2005, Commission File No. 333-129986.

10.32*		First Amendment to Supplemental Deferred Compensation Plan.

10.33*		Second Amendment to Supplemental Deferred Compensation Plan – Merging of Executive Deferred Compensation Plan into the Plan and Name Change to Deferred Compensation Plan.

10.34*		Third Amendment to Supplemental Deferred Compensation Plan – Suspension of Pending Merging of Executive Deferred Compensation Plan into the Plan and Name Change to Deferred Compensation Plan.

10.35		1981 Stock Option Plan, filed as Exhibit 4.1 to Registrant’s Registration Statement on Form S-8, Commission File No. 33-54690.

10.36		Management Incentive Restricted Stock Plan II, filed as Exhibit 4.1 to Registrant’s Registration Statement on Form S-8, Commission File No. 33-54686.

10.37		1996 Stock Option and Award Plan, filed as Exhibit A to Registrant’s definitive proxy statement for its annual meeting of stockholders held on May 21, 1996, Commission File No. 1-7562.

10.38		Amendment Number 1 to Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.1 to Registrant’s Form 10-Q for the quarter ended August 2, 1997, Commission File No. 1-7562.

10.39		Amendment Number 2 to Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.15 to Registrant’s Form 10-K for the year ended January 31, 1998, Commission File No. 1-7562.

10.40		Amendment Number 3 to Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.1 to Registrant’s Form 10-Q for the quarter ended October 31, 1998, Commission File No. 1-7562.

10.41		Amendment Number 4 to Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.3 to Registrant’s Form 10-Q for the quarter ended July 29, 2000, Commission File No. 1-7562.

10.42		Amendment Number 5 to Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.13 to Registrant’s Form 10-K for the year ended February 3, 2001, Commission File No. 1-7562.

10.43		Amendment Number 6 to Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.1 to Registrant’s Form 10-Q for the quarter ended May 5, 2001, Commission File No. 1-7562.

10.44		1996 Stock Option and Award Plan (As Amended and Restated Effective as of January 28, 2003), filed as Appendix C to Registrant’s definitive proxy statement for its annual meeting of stockholders held on May 14, 2003, Commission File No. 1-7562.

10.45		Form of Nonqualified Stock Option Agreement for employees under Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.5 to Registrant’s Form 10-Q for the quarter ended August 2, 1997, Commission File No. 1-7562.

10.46		Form of Nonqualified Stock Option Agreement for directors under Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.6 to Registrant’s Form 10-Q for the quarter ended August 2, 1997, Commission File No. 1-7562.

10.47		Form of Nonqualified Stock Option Agreement for consultants under Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.4 to Registrant’s Form 10-Q for the quarter ended October 31, 1998, Commission File No. 1-7562.



10.48		Form of Nonqualified Stock Option Agreement for employees in France under Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.5 to Registrant’s Form 10-Q for the quarter ended October 31, 1998, Commission File No. 1-7562.

10.49		Form of Nonqualified Stock Option Agreement for international employees under Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.6 to Registrant’s Form 10-Q for the quarter ended October 31, 1998, Commission File No. 1-7562.

10.50		Form of Nonqualified Stock Option Agreement for employees in Japan under Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.7 to Registrant’s Form 10-Q for the quarter ended October 31, 1998, Commission File No. 1-7562.

10.51		Form of Stock Option Agreement for employees under the UK Sub-plan to the U.S. Stock Option and Award Plan, filed as Exhibit 10.8 to Registrant’s Form 10-Q for the quarter ended October 31, 1998, Commission File No. 1-7562.

10.52		Form of Nonqualified Stock Option Agreement for directors effective April 3, 2001 under Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.4 to Registrant’s Form 10-Q for the quarter ended May 5, 2001, Commission File No. 1-7562.

10.53		Form of Nonqualified Stock Option Agreement under Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.3 to Registrant’s Form 10-Q for the quarter ended November 3, 2001, Commission File No. 1-7562.

10.54		[Reserved]

10.55		Form of Stock Award Agreement under Registrant’s 1996 Stock Option and Award Plan filed as Exhibit 10.2 to Registrant’s Form 8-K on January 27, 2005, Commission File No. 1-7562.

10.56		Form of Stock Award Agreement under Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.2 to Registrant’s Form 8-K on March 16, 2005, Commission File No. 1-7562.

10.57		Form of Stock Award Agreement under Registrant’s 1996 Stock Option and Award Plan, filed as Exhibit 10.4 to Registrant’s Form 10-Q for the quarter ended October 29, 2005, Commission File No. 1-7562.

10.58		Form of Stock Award Agreement for Paul Pressler under the Company’s 1996 Stock Option Award Plan, filed as Exhibit 10.1 to Registrant’s Form 10-Q for the quarter ended October 29, 2005, Commission File No. 1-7562.

10.59		UK Employee Stock Purchase Plan, filed as Exhibit 4.1 to Registrant’s Registration Statement on Form S-8, Commission File No. 333-47508.

10.60		2002 Stock Option Plan, as amended, (formerly the 1999 Stock Option Plan as amended and Stock Up On Success, The Gap, Inc.’s Stock Option Bonus Program) filed as Exhibit 4.1 to Registrant’s Registration Statement on Form S-8, Commission File No. 333-103128.

10.61		Form of Nonqualified Stock Option Agreement under Registrant’s 2002 Stock Option Plan (formerly the 1999 Stock Option Plan as amended), filed as Exhibit 4.6 to Registrant’s Registration Statement on Form S-8, Commission File No. 333-76523.

10.62		Form of Domestic Nonqualified Stock Option Agreement under Registrant’s 2002 Stock Option Plan, as amended, filed as Exhibit 4.6 to Registrant’s Registration Statement on Form S-8, Commission File No. 333-72921.

10.63		Form of International Nonqualified Stock Option Agreement under Registrant’s 2002 Stock Option Plan, as amended, filed as Exhibit 4.7 to Registrant’s Registration Statement on Form S-8, Commission File No. 333-72921.

74 G AP I NC . F ORM 10-K



10.64		Form of Amended and Restated Nonqualified Stock Option Agreement, dated October 19, 2001, amending option agreement dated January 23, 2001, between Registrant and John M. Lillie, filed as Exhibit 10.2 to Registrant’s Form 10-Q for the quarter ended November 3, 2001, Commission File No. 1-7562.

10.65		Non-Employee Director Retirement Plan, dated October 27, 1992, filed as Exhibit 10.43 to Registrant’s Annual Report on Form 10-K for the year ended January 30, 1993, Commission File No. 1-7562.

10.66		Amendment, authorized as of August 20, 2008, to Nonemployee Director Retirement Plan, dated October 27, 1992, filed as Exhibit 10.2 to Registrant’s Form 10-Q for the quarter ended November 1, 2008, Commission File No. 1-7562.

10.67		Statement Regarding Non-Employee Director Retirement Plan, filed as Exhibit 10.25 to Registrant’s Form 10-K for the year ended January 31, 1998, Commission File No. 1-7562.

10.68		Nonemployee Director Deferred Compensation Plan, filed as Exhibit 4.1 to Registrant’s Registration Statement on Form S-8, Commission File No. 333-36265.

10.69		Amendment Number 1 to Registrant’s Nonemployee Director Deferred Compensation Plan, filed as Exhibit 10.2 to Registrant’s Form 10-Q for the quarter ended October 31, 1998, Commission File No. 1-7562.

10.70		Amendment Number 2 to Registrant’s Nonemployee Director Deferred Compensation Plan, filed as Exhibit 10.4 to Registrant’s Form 10-Q for the quarter ended July 29, 2000, Commission File No. 1-7562.

10.71		Amendment Number 3 to Registrant’s Nonemployee Director Deferred Compensation Plan, filed as Exhibit 10.2 to Registrant’s Form 10-Q for the quarter ended May 5, 2001, Commission File No. 1-7562.

10.72		Nonemployee Director Deferred Compensation Plan, as amended and restated on October 30, 2001, filed as Exhibit 10.1 to Registrant’s Form 10-Q for the quarter ended November 3, 2001, Commission File No. 1-7562.

10.73		Nonemployee Director Deferred Compensation Plan, as amended and restated on December 9, 2003, filed as Exhibit 10.35 to Registrant’s Form 10-K for the year ended January 31, 2004, Commission File No. 1-7562.

10.74		Form of Discounted Stock Option Agreement under the Nonemployee Director Deferred Compensation Plan, filed as Exhibit 4.5 to Registrant’s Registration Statement on Form S-8, Commission File No. 333-36265.

10.75		Form of Nonqualified Stock Option Agreement for directors effective April 3, 2001 under Registrant’s Nonemployee Director Deferred Compensation Plan, filed as Exhibit 10.5 to Registrant’s Form 10-Q for the quarter ended May 5, 2001, Commission File No. 1-7562.

10.76		Nonemployee Director Deferred Compensation Plan – Suspension of Plan Effective January 6, 2005, filed as Exhibit 10.1 to Registrant’s Form 8-K on January 7, 2005, Commission File No. 1-7562.

10.77		Nonemployee Director Deferred Compensation Plan – Termination of Plan Effective September 27, 2005, filed as Exhibit 10.1 to Registrant’s Form 8-K on September 28, 2005, Commission File No. 1-7562.

10.78		2006 Long-Term Incentive Plan, filed as Appendix B to Registrant’s definitive proxy statement for its annual meeting of stockholders held on May 9, 2006, Commission File No. 1-7562.

10.79		2006 Long-Term Incentive Plan, as amended and restated effective August 20, 2008, filed as Exhibit 10.1 to Registrant’s Form 10-Q for the quarter ended November 1, 2008, Commission File No. 1-7562.

10.80		Amendment No. 1 to Registrant’s 2006 Long-Term Incentive Plan, filed as Exhibit 10.62 to Registrant’s Form 10-K for the year ended February 3, 2007, Commission File No. 1-7562.

10.81		Form of Non-qualified Stock Option Agreement for Executives under the 2006 Long-Term Incentive Plan, filed as Exhibit 10.1 to Registrant’s Form 8-K on March 23, 2006, Commission File No. 1-7562.



10.82		Form of Stock Award Agreement for Executives under the 2006 Long-Term Incentive Plan, filed as Exhibit 10.2 to Registrant’s Form 8-K on March 23, 2006, Commission File No. 1-7562.

10.83		Form of Nonqualified Stock Option Agreement for Chief Executive Officer under the 2006 Long-Term Incentive Plan, filed as Exhibit 10.3 to Registrant’s Form 8-K on March 23, 2006, Commission File No. 1-7562.

10.84		Form of Stock Award Agreement for Chief Executive Officer under the 2006 Long-Term Incentive Plan, filed as Exhibit 10.4 to Registrant’s Form 8-K on March 23, 2006, Commission File No. 1-7562.

10.85		Form of Stock Unit Agreement and Stock Unit Deferral Election Form for Nonemployee Directors under the 2006 Long-Term Incentive Plan, filed as Exhibit 10.5 to Registrant’s Form 8-K on March 23, 2006, Commission File No. 1-7562.

10.86		Form of Stock Unit Agreement and Stock Unit Deferral Election Form for Nonemployee Directors under the 2006 Long-Term Incentive Plan, filed as Exhibit 10.2 to Registrant’s Form 10-Q for the quarter ended July 29, 2006, Commission File No. 1-7562.

10.87		Form of Performance Share Agreement for Executives under the 2006 Long-Term, Incentive Plan, filed as Exhibit 10.2 to Registrant’s Form 8-K on July 26, 2007, Commission File No. 1-7562.

10.88		Form of Restricted Stock Unit Award Agreement under the 2006 Long-Term Incentive Plan, filed as Exhibit 10.1 to Registrant’s Form 10-Q for the quarter ended November 3, 2007, Commission File No. 1-7562.

10.89		Form of Performance Unit Award Agreement under the 2006 Long-Term Incentive Plan, filed as Exhibit 10.2 to Registrant’s Form 10-Q for the quarter ended November 3, 2007, Commission File No. 1-7562.

10.90		Form of Performance Share Agreement under the 2006 Long-Term Incentive Plan, filed as Exhibit 10.3 to Registrant’s Form 10-Q for the quarter ended November 3, 2007, Commission File No. 1-7562.

10.91		Form of Director Stock Unit Agreement and Stock Unit Deferral Election Form under the 2006 Long-Term Incentive Plan, filed as Exhibit 10.4 to Registrant’s Form 10-Q for the quarter ended November 3, 2007, Commission File No. 1-7562.

10.92		Summary of Revised Timing of Annual Board Member Stock Unit Grants, effective August 20, 2008, filed as Exhibit 10.3 to Registrant’s Form 10-Q for the quarter ended November 1, 2008, Commission File No. 1-7562.

10.93		Agreement with Marka Hansen dated February 16, 2007, and confirmed on February 20, 2007, filed as Exhibit 10.2 to Registrant’s Form 10-Q for the quarter ended May 5, 2007, Commission File No. 1-7562.

10.94*		Amendment to Agreement with Marka Hansen dated November 23, 2008, and confirmed on December 15, 2008.

10.95		Agreement with Art Peck dated March 16, 2007, and confirmed on March 27, 2007, filed as Exhibit 10.3 to Registrant’s Form 10-Q for the quarter ended May 5, 2007, Commission File No. 1-7562.

10.96*		Amendment to Agreement with Art Peck dated November 23, 2008, and confirmed on December 15, 2008.

10.97		Agreement with Dawn Robertson dated October 6, 2006, and confirmed on October 14, 2006, filed as Exhibit 10.4 to Registrant’s Form 10-Q for the quarter ended May 5, 2007, Commission File No. 1-7562.

10.98		Agreement with Dawn Robertson dated February 16, 2007, and confirmed on February 21, 2007, filed as Exhibit 10.5 to Registrant’s Form 10-Q for the quarter ended May 5, 2007, Commission File No. 1-7562.

10.99		Agreement and Release with Dawn Robertson dated March 25, 2008, filed as Exhibit 10.4 to Registrant’s Form 10-Q for the quarter ended May 3, 2008, Commission File No. 1-7562.

76 G AP I NC . F ORM 10-K



10.100		Agreement with Eva Sage-Gavin dated March 16, 2007, and confirmed on March 27, 2007, filed as Exhibit 10.6 to Registrant’s Form 10-Q for the quarter ended May 5, 2007, Commission File No. 1-7562.

10.101*		Amendment to Agreement with Eva Sage-Gavin dated November 23, 2008, and confirmed on November 10, 2008.

10.102		Agreement with Lauri Shanahan dated March 16, 2007, and confirmed on April 3, 2007, filed as Exhibit 10.7 to Registrant’s Form 10-Q for the quarter ended May 5, 2007, Commission File No. 1-7562.

10.103		Amendment dated March 24, 2008 and March 26, 2008 to Agreement dated March 16, 2007 with Lauri Shanahan, filed as Exhibit 10.2 to Registrant’s Form 10-Q for the quarter ended May 3, 2008, Commission File No. 1-7562.

10.104		Agreement and Release with Lauri Shanahan dated March 20, 2008, filed as Exhibit 10.3 to Registrant’s Form 10-Q for the quarter ended May 3, 2008, Commission File No. 1-7562.

10.105		Employment Agreement confirmed on July 25, 2007, by and between Glenn Murphy and the Company, filed as Exhibit 10.1 to Registrant’s Form 8-K on July 26, 2007, Commission File No. 1-7562.

10.106*		Amended and Restated Employment Agreement by and between Glenn Murphy and the Company, dated December 1, 2008 and confirmed on December 1, 2008.

10.107		Agreement with Michael Tasooji dated March 16, 2007, and confirmed on March 26, 2007, filed as Exhibit 10.92 to Registrant’s Form 10-K for the year ended February 2, 2008, Commission File No. 1-7562.

10.108*		Amendment to Agreement with Michael Tasooji dated December 15, 2008, and confirmed on December 15, 2008.

10.109		Agreement with Sabrina L. Simmons dated February 4, 2008, and confirmed on February 6, 2008, filed as Exhibit 10.1 to Registrant’s Form 8-K on February 12, 2008, Commission File No. 1-7562.

10.110*		Amendment to Agreement with Sabrina Simmons dated November 23, 2008, and confirmed on December 22, 2008.

10.111		Agreement with Tom Wyatt dated October 11, 2007, filed as Exhibit 10.4 to Registrant’s Form 10-Q for the quarter ended November 1, 2008, Commission File No. 1-7562.

10.112*		Amendment to Agreement with Tom Wyatt dated November 23, 2008, and confirmed on December 9, 2008.

10.113		Summary of Non-employee Director Compensation, filed as Exhibit 10.77 to Registrant’s Form 10-K for the year ended January 28, 2006, Commission File No. 1-7562.

10.114		Summary of Non-employee Director Compensation effective May 2006, filed as Exhibit 10.6 to Registrant’s Form 8-K on March 23, 2006, Commission File No. 1-7562.

10.115		Summary of Changes to Lead Independent Director Compensation, filed as Exhibit 10.8 to Registrant’s Form 10-Q for the quarter ended May 5, 2007, Commission File No. 1-7562.

10.116		Summary of Changes to Non-employee Director Compensation effective February 15, 2008, filed as Exhibit 10.6 to Registrant’s Form 10-Q for the quarter ended May 3, 2008, Commission File No. 1-7562.

10.117		Summary of Executive Officer Compensation, filed as Exhibit 10.1 to Registrant’s Form 8-K on March 16, 2005, Commission File No. 1-7562.

10.118		Summary of Changed Name Executive Officer Compensation Arrangements, filed as Exhibit 10.1 to Registrant’s Form 8-K on March 17, 2006, Commission File No. 1-7562.

10.119		Summary of Changed Named Executive Officer Compensation, filed as Exhibit 10.1 to Registrant’s Form 8-K on April 28, 2006, Commission File No. 1-7562.

10.120		Summary of Changes to Executive Compensation Arrangements, filed as Exhibit 10.9 to Registrant’s Form 10-Q for the quarter ended May 5, 2007, Commission File No. 1-7562.



10.121		Summary of Changes to Executive Compensation Arrangements, filed as Exhibit 10.5 to Registrant’s Form 10-Q for the quarter ended May 3, 2008, Commission File No. 1-7562.

10.122		Description of Arrangement with Glenn Murphy for Corporate Jet Usage and Reimbursement for Commercial Travel, filed as Exhibit 101 to Registrant’s Form 10-K for the year ended February 2, 2008, Commission File No. 1-7562.

14		Code of Business Conduct, filed as Exhibit 14 to Registrant’s Form 10-K for the year ended January 28, 2005, Commission File No. 1-7562.

21*		Subsidiaries of Registrant

23*		Consent of Independent Registered Public Accounting Firm

31.1*		Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer of The Gap, Inc. (Section 302 of the Sarbanes-Oxley Act of 2002)

31.2*		Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of The Gap, Inc. (Section 302 of the Sarbanes-Oxley Act of 2002)

32.1*		Certification of the Chief Executive Officer of The Gap, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*		Certification of the Chief Financial Officer of The Gap, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*	Filed herewith

+	Furnished herewith

(1)	Pursuant to a request for confidential treatment, portions of this Exhibit have been redacted and have been provided separately to the Securities and Exchange Commission.

78 G AP I NC . F ORM 10-K

Exhibit 10.29

AMENDMENT

THE GAP, INC. EXECUTIVE DEFERRED COMPENSATION PLAN

WHEREAS, The Gap, Inc. (the “Company”) maintains The Gap, Inc. Executive Deferred Compensation Plan (the “Plan”), as amended and restated effective January 1, 1999; and

WHEREAS, the Plan previously has been amended; and

WHEREAS, further amendment of the Plan now is considered desirable to provide for the merger of the Plan into The Gap, Inc. Deferred Compensation Plan (prior to March 2, 2009 known as the Gap Inc. Supplemental Deferred Compensation Plan);

NOW, THEREFORE, IT IS RESOLVED that, pursuant to the power reserved to the Company under Section 9.2 of the Plan, and in exercise of the authority delegated to the undersigned officer by resolutions of the Board of Directors of the Company dated November 19, 2008, the Plan is hereby amended by adding a new Supplement A to the Plan, in the form attached hereto.

* * *

IN WITNESS WHEREOF, the undersigned officer has executed this amendment on behalf of the Company, this 24 ^th day of November, 2008.


THE GAP, INC.

By:		/s/ Williams Tompkins
		Sr. Vice President, Total Rewards

APPENDIX A

Special Provisions Relating to the Merger of

The Gap, Inc. Executive Deferred Compensation Plan into

The Gap, Inc. Deferred Compensation Plan

(prior to March 2, 2009 known as the

Gap Inc. Supplemental Deferred Compensation Plan)

A-1. Introduction . The Gap, Inc. (the “Company”) maintains the Plan and The Gap, Inc. Deferred Compensation Plan (prior to March 2, 2009 known as the Gap Inc. Supplemental Deferred Compensation Plan) (“SDCP”) for the benefit of certain of its eligible employees. Effective as of the beginning of business on March 2, 2009 (the “Merger Date”), the Plan shall be merged into, and continued in the form of, the SDCP.

A-2. Participation . Each Plan Participant who had an account balance on the last business day prior to the Merger Date shall automatically become a participant in the SDCP on the Merger Date, to the extent he had not already begun participating in the SDCP prior to the Merger Date.

A-3. Merger . Effective on the Merger Date, the Plan shall be merged into the SDCP. The merger into the SDCP and the transfer of notional amounts shall comply with the American Jobs Creation Act of 2004, as amended, and section 409A of the Internal Revenue Code, to the extent deemed necessary and desirable by the Company.

A-4. Transfer of Accounts . All notional amounts credited to notional accounts maintained under the Plan for Participants shall be adjusted as of the Merger Date in accordance with the terms of the Plan. The net credit balances in such notional accounts, as adjusted, shall be transferred to the SDCP and credited as of the Merger Date to the corresponding notional accounts already maintained for SDCP Participants in the same amounts as the Participants’ notional accounts had been invested under the Plan, to the extent determined by the Investment Committee and, at the discretion of the Investment Committee, as directed by the Participant.

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Exhibit 10.30

AMENDMENT

THE GAP, INC. EXECUTIVE DEFERRED COMPENSATION PLAN

WHEREAS, The Gap, Inc. (the “Company”) maintains The Gap, Inc. Executive Deferred Compensation Plan (the “Plan”), as amended and restated effective January 1, 1999; and

WHEREAS, the Plan previously has been amended; and

WHEREAS, further amendment of the Plan now is considered desirable to suspend the pending merger of the Plan into the Gap Inc. Supplemental Deferred Compensation Plan;

NOW, THEREFORE, IT IS RESOLVED that, pursuant to the power reserved to the Company under Section 9.2 of the Plan, and in exercise of the authority delegated to the undersigned officer by resolutions of the Board of Directors of the Company dated November 19, 2008, the Plan is hereby amended, effective on the date of the execution of this amendment, by rescinding Appendix A to the Plan such that no Appendix A shall be added to the Plan pursuant to the previous amendment.

* * *

IN WITNESS WHEREOF, the undersigned officer has executed this amendment on behalf of the Company, this 19th day of December, 2008.


THE GAP, INC.

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

Exhibit 10.32

FIRST AMENDMENT

GAP INC. SUPPLEMENTAL DEFERRED COMPENSATION PLAN

WHEREAS, The Gap, Inc. (the “Company”) maintains the Gap Inc. Supplemental Deferred Compensation Plan (the “Plan”); and

WHEREAS, amendment of the Plan now is considered desirable;

NOW, THEREFORE, IT IS RESOLVED that, pursuant to the power reserved to the Company under Section 12 of the Plan, and in exercise of the authority delegated to the undersigned officer by resolutions of the Compensation and Management Development Committee of the Company dated May 8, 2006, the Plan is hereby amended in the following particulars:

1. Effective as of May 8, 2006, by substituting the following in place of subsection 1.3 of the Plan:

“1.3 Plan Administration

The Company shall be the administrator (as that term is defined in Section 3(16)(A) of ERISA) of the Plan and shall be responsible for the administration of the Plan; provided, however, the Company may delegate all or any part of its powers, rights and duties under the Plan to such person or persons as it may deem advisable. Any notice or document relating to the Plan which is to be filed with the Company may be delivered, or mailed by registered or certified mail, postage pre-paid, to the Company, or to any designated Company representative, in care of the Company, at its principal office.”

2. Effective as of May 8, 2006, by substituting the word “Company” in place of the word “Committee” in each place the latter word appears in the first sentence of subsection 2.2, subsection 2.27, Sections 3, 4, 6, 7, and 9, subsections 10.13 through 10.17, and subsections 11.5 through 11.8 of the Plan.

3. Effective as of May 8, 2006, by substituting the phrase “US Savings Plan Investment Committee” in place of the phrase “Global Benefits Committee” where the latter phrase appears in subsection 2.8 of the Plan.

4. Effective January 1, 2008, by adding the following sentence to the end of subsection 2.21 of the Plan:

“By becoming a Participant and making deferrals under this Plan, each Participant agrees to be bound by the provisions of the Plan and the determinations of the Company and the Committee hereunder.”

5. Effective January 1, 2008, by substituting the following in place of subsection 2.27 of the Plan:

“2.27 Termination Date

‘Termination Date’ means, with respect to an Employee Participant, the date on which the Participant has a separation from service (within the meaning of Section 409A of the Code and the regulations, notices and other guidance thereunder, including death) with the Employers, the Company and any subsidiary or affiliate of the Company, and, with respect to a non-employee Board member Participant, the date on which the Board member resigns, is removed or otherwise terminates service on the Board (including death). The date that an Employee’s performance of services for all the Employers is reduced to a level of less than 20% of the average level of services performed in the preceding 36-month period, shall be considered a Termination Date, and the performance of services at a level of 50% or more of the average level of services performed in the preceding 36-month period shall not be considered a Termination Date.”

6. Effective as of January 1, 2006, by substituting the phrase “Eligible Individual eligible to participate in the Plan while he is determined by the Company to satisfy the criteria described in (a) immediately preceding, who is eligible to participate in the Plan” in place of the phrase “Eligible Individual eligible to participate in the Plan” where the latter phrase appears in the first sentence of subsection 3.1 of the Plan.

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7. Effective as of January 1, 2006, by substituting the phrase “total remuneration from the Employer while the Participant is an Eligible Individual which” in place of the phrase “total remuneration from the Employer which” where the latter phrase appears in the first sentence of subsection 2.10 of the Plan.

8. Effective as of January 1, 2006, by substituting the word “satisfied” in place of the word “satisifed” where the latter word appears in subsection 3.3 of the Plan.

9. Effective as of December 30, 2006, by substituting the following in place of the second sentence of the first paragraph of subsection 4.1 of the Plan:

“Except as otherwise provided in this subsection, a Participant’s deferral election for a Plan Year under this subsection must be made not later than December 31 of the preceding Plan year with respect to Compensation earned during the first payroll period of the next calendar year (considered for purposes of the Plan to be the payroll period containing December 31 of the prior year) or, in the case of Board Members, Compensation earned in fiscal year quarters beginning on and after January 1 of the following calendar year.”

10. Effective as of January 1, 2007, by substituting the following in place of the second-to-last sentence of the first paragraph of subsection 4.1 of the Plan:

“Any such deferral election under this subsection must be made within 30 days of the date the Employee or Board Member first becomes an Eligible Individual; provided, however, that the date that an Employee or Board Member first becomes Eligible for the Plan shall be determined based on proper notification of the Employee or Board Member by the Company in accordance with procedures determined by the Company.”

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11. Effective January 1, 2008, by adding the following after the first paragraph of subsection 4.1 of the Plan:

“In the case of an Employee, or non-employee Board member who is rehired (or who recommences Board Service) after having previously been an Eligible Individual, the phrase ‘first becomes an Eligible Individual’ in the first sentence of the preceding paragraph shall be interpreted to apply only where the Eligible Individual is rehired (or recommences Board Service or recommences providing services to an Employer) at least 24 months after his last day as a previously Eligible Individual prior to again becoming such an Eligible Individual. In all other cases such rehired Employee or Board Member may not elect to make Compensation Deferrals until the next date determined by the Company with respect to Compensation earned after the following January 1. Similarly, in the case of an Employee who recommences status as an Eligible Individual for any other reason after having previously lost his status as an Eligible Individual (due to Compensation fluctuations, transfer from an ineligible location or job classification, or otherwise), the phrase ‘first becomes an Eligible Individual’ shall be interpreted to apply only where the Eligible Individual regains his status as an Eligible Individual at least 24 months after his last day as a previously Eligible Individual prior to again becoming such an Eligible Individual. In all other cases such Re-Eligible Participant may not elect to make Compensation Deferrals until the next date determined by the Company with respect to Compensation earned after the following January 1.”

12. Effective as of December 30, 2006, by substituting the following in place of the first sentence of the second paragraph of subsection 4.1 of the Plan:

“An election to make Compensation Deferrals under this subsection 4.1 shall be irrevocable, and shall remain in effect for Compensation earned during the last payroll period ending on or before December 30 of the calendar year to which the election applies while the Participant is an Eligible Individual (except as provided in subsection 4.4) (or, in the case of non-Employee Board members, for Compensation earned through the Fiscal Year quarter that ends on or after December 31 of the calendar year to which the election applies).”

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13. Effective January 1, 2008, by substituting the following three sentences in place of the third sentence of subsection 4.2 of the Plan:

“Notwithstanding the foregoing, effective January 1, 2008, an Employee who first becomes an Eligible Individual during a Plan Year by virtue of commencement of employment with the Employers shall be permitted to make a Bonus Deferral election to defer receipt of up to 90 percent (or such other amount as determined by the Company) of his Bonus (other than his Sign-on Bonus) into the Plan, but only if he makes such election within 30 days of first becoming an Eligible Individual. In case such Bonus Deferral election in the first year of eligibility described in the preceding sentence is made after the beginning of the Bonus performance period, the Bonus Deferral election will apply only to the portion of the Bonus equal to the total amount of the Bonus for the performance period multiplied by the ratio of the number of days remaining in the performance period after the effective date of the Bonus Deferral election over the total number of days in the performance period. If an Eligible Individual does not elect to make a Bonus Deferral election during that initial 30-day period, he may not later elect to make an election for that performance period under this subsection.”

14. Effective as of May 8, 2006, by substituting the phrase “the Company” in place of the phrase “the Committee” where the latter phrase appears in the first four sentences of subsection 5.2 of the Plan, the second-to-last sentence of subsection 5.2 of the Plan, and the last sentence of subsection 5.3 of the Plan.

15. Effective January 1, 2008, by substituting the following in place of the second sentence of subsection 9.1 of the Plan:

“Subject to subsection 9.3 hereof, it is the Company’s intention to distribute a Participant’s Accounts payable in a lump sum under this subsection 9.1 on the first day of the fourth month following the Participant’s Termination Date, or, if calculation of the amount of the payment is not administratively practicable due to events beyond the control of the Participant or his beneficiary, during the first calendar year in which the calculation of the amount is administratively practicable.”

16. Effective January 1, 2008, by substituting the following in place of the first sentence of the last paragraph of subsection 9.1 of the Plan:

“Subject to subsection 9.3 hereof, it is the intention of the company to make payments pursuant to an in-service distribution election under subparagraphs (a) or (b) of this subsection 9.1 by the end of the calendar year in which the payment was elected to be made, or, if calculation of the amount of the payment is not administratively practicable due to events beyond the control of the Participant or his beneficiary, during the first calendar year in which the calculation of the amount is administratively practicable.”

-5-

17. Effective January 1, 2008, by inserting the following sentence after the second sentence of subsection 9.2 of the Plan:

“Subject to subsection 9.3 hereof, it is the Company’s intention to distribute a Participant’s Accounts payable in a lump sum under this subsection 9.2 on the first day of the fourth month following the Participant’s Termination Date, or, if calculation of the amount of the payment is not administratively practicable due to events beyond the control of the Participant or his beneficiary, during the first calendar year in which the calculation of the amount is administratively practicable.”

18. Effective January 1, 2008, by substituting the following in place of the first sentence of subsection 9.2(b) of the Plan:

“It is the intention of the Company to make the first installment payment by the end of the calendar year in which occurs the Participant’s Retirement Date or death, or, if calculation of the amount of the payment is not administratively practicable due to events beyond the control of the Participant or his beneficiary, during the first calendar year in which the calculation of the amount is administratively practicable.”

19. Effective January 1, 2008, by substituting the following in place of subsection 9.3 of the Plan:

“ 9.3 Key Employees

Notwithstanding anything herein to the contrary, and subject to Code Section 409A, payment shall not be made or commence as a result of the Participant’s Termination Date to any Participant who is a key employee (defined below) before the date that is not less than six months after the Participant’s Termination Date. For this purpose, a key employee includes a ‘specified employee’ (as defined in Code Section 409A(a)(2)(B)) during the entire 12-month period determined by the Company ending with the annual date upon which key employees are identified by the Company, and also including any Employee identified by the Company in good faith with respect to any distribution as belonging to the group of identified key employees, to a maximum of 200 such key employees, regardless of whether such Employee is subsequently determined

-6-

by the Employer, any governmental agency, or a court not to be a key employee. In the event amounts are payable to a key employee in installments in accordance with subsection 9.2, the first installment shall be delayed by six months, with all other installment payments payable as originally scheduled. The identification date for determining key employees shall be each December 31 (and the new key employee list shall be updated and effective each subsequent April 1).”

20. Effective January 1, 2008, by substituting the phrase “the applicable dollar amount under Section 402(g) of the Code,” in place of the phrase “$10,000” where the latter phrase appears in subsection 9.4 of the Plan.

21. Effective January 1, 2008, by substituting the following in place of the second sentence of subsection 9.4 of the Plan:

“Subject to subsection 9.3 hereof, it is the Company’s intention to distribute a Participant’s Accounts payable in a lump sum under this subsection 9.4 on the first day of the fourth month following the Participant’s Termination Date, or, if calculation of the amount of the payment is not administratively practicable due to events beyond the control of the Participant or his beneficiary, during the first calendar year in which the calculation of the amount is administratively practicable.”

22. Effective as of May 8, 2006, by substituting the phrase “the Company reserves the right” in place of the phrase “the Company and the Committee reserve the right” where the latter phrase appears throughout Section 12 of the Plan.

23. Effective as of May 8, 2006, by substituting the title “SECTION 11 PLAN ADMINISTRATION” in place of the title “SECTION 11 THE COMMITTEE” in Section 11 of the Plan, and by substituting the following in place of subsection 11.1 of the Plan and the first paragraph of subsection 11.2 immediately preceding subparagraph 11.2(a) of the Plan:

“11.1 Establishment of Committee

The Plan shall be administered by the Company. A Committee established by the Company, which as of May 8, 2006 is the US Savings Plan Investment Committee, shall be responsible for the duties described in subsection 11.2 below.

-7-

11.2 Committee General Powers, Rights and Duties

Except as otherwise specifically provided herein, and in addition to the powers, rights and duties specifically given to the Committee elsewhere in the Plan or otherwise delegated to the Committee by the Company or the Compensation and Management Development Committee, the Committee shall have the full power and authority for the establishment of an investment policy for the Plan, and the selection, monitoring, and termination of notional investment options for the Plan, and such other powers, rights and duties as may be described from time to time in the Committee’s Charter. Except as otherwise specifically provided herein, and in addition to the powers, rights and duties specifically given to the Company elsewhere in the Plan, the Company shall have the following powers, rights and duties, which shall be exercisable in the sole discretion of the Company:”

24. Effective as of May 8, 2006, by substituting the word “Company” in place of the word “Committee” where the latter word appears in subparagraphs 11.2 (d), (h) and (i) of the Plan.

* * *

IN WITNESS WHEREOF, the undersigned officer has executed this amendment on behalf of the Company, this 19 ^th day of December, 2007.


THE GAP, INC.

By:		/s/ William Tompkins
		Vice President, Total Rewards

-8-

Exhibit 10.33

SECOND AMENDMENT

GAP INC. SUPPLEMENTAL DEFERRED COMPENSATION PLAN

WHEREAS, The Gap, Inc. (the “Company”) maintains the Gap Inc. Supplemental Deferred Compensation Plan (the “Plan”); and

WHEREAS, the Plan previously has been amended; and

WHEREAS, further amendment of the Plan now is considered desirable to provide for the merger of The Gap, Inc. Executive Deferred Compensation Plan into the Plan, the discontinuance of the notional Gap Stock Fund in the Plan, and a change in the name of the Plan to “The Gap, Inc. Deferred Compensation Plan”;

1. By renaming the Plan “The Gap, Inc. Deferred Compensation Plan.”

2. By substituting the name “The Gap, Inc. Deferred Compensation Plan” in place of the name “Gap Inc. Supplemental Deferred Compensation Plan” where the latter name appears in the first sentence of subsection 1.1 of the Plan.

3. Effective January 1, 2009, by adding the following at the end of subsection 2.18 of the Plan:

“Effective January 1, 2009, the Gap Stock Fund shall be frozen and no new notional investments shall be made to the Gap Stock Fund after December 31, 2008. Effective January 1, 2009, a Participant shall not be permitted to elect to transfer additional amounts into the Gap Stock Fund. The Gap Stock Fund shall be liquidated on March 2, 2009.”

4. Effective January 1, 2009, by substituting the following for subsection 5.1 of the Plan:

“ 5.1 Investment Funds

The Committee may designate, in its discretion, one or more Investment Funds for the notional investment of Participants’ Accounts. The Committee, in its discretion, may from time to time establish new Investment Funds or eliminate existing Investment Funds. The Investment Funds are for recordkeeping purposes only and do not allow Participants to direct any Company assets (including, if applicable, the assets of any trust related to the Plan). Each Participant’s Accounts shall be adjusted pursuant to the Participant’s notional investment elections made in accordance with this Section 5, except as otherwise determined by the Committee in its sole discretion. Effective as of the beginning of business on January 1, 2009, the Gap Stock Fund shall be frozen and no new notional investments shall be made to the Gap Stock Fund after December 31, 2008. The Gap Stock Fund shall be discontinued and liquidated as described in subsection 5.2 of the Plan.”

-2-

5. Effective January 1, 2009, by adding the following new sentence at the end of subsection 5.2 of the Plan:

“Notwithstanding the foregoing and any other provision of the Plan to the contrary, amounts subject to a Participant’s notional investment election to defer amounts into the Gap Stock Fund after December 31, 2008 shall be notionally invested in the RiverSource Cash Management Fund, and shall be credited with notional interest through March 1, 2009. Amounts remaining in the RiverSource Cash Management Fund or any amounts remaining in the Gap Stock Fund shall be liquidated and automatically transferred into the American Funds Balanced Fund on or as soon as administratively feasible after March 2, 2009.”

6. Effective January 1, 2009, by adding the following new sentence at the end of subsection 5.3 of the Plan:

“Effective January 1, 2009, a Participant shall not be permitted to elect to transfer additional amounts into the Gap Stock Fund. If a Participant does not make an election to transfer amounts out of the Gap Stock Fund prior to March 1, 2009, the Participant’s Accounts invested in the Gap Stock Fund or the RiverSource Cash Management Fund shall be transferred to the American Funds Balanced Fund on or as soon as administratively feasible after March 2, 2009.”

7. Effective December 31, 2008, by deleting the second sentence of subsection 9.6 of the Plan, and by substituting the word “continue” in place of the word “cease” in the first sentence of subsection 9.6 of the Plan.

8. By adding a new Supplement A to the Plan, in the form attached hereto.

* * *

-3-

IN WITNESS WHEREOF, the undersigned officer has executed this amendment on behalf of the Company, this 24 ^th day of November, 2008.


THE GAP, INC.

By:		/s/ William Tompkins
		Sr. Vice President, Total Rewards

-4-

APPENDIX A

Merger of

The Gap, Inc. Executive Deferred Compensation Plan

into

The Gap, Inc. Deferred Compensation Plan

(prior to March 2, 2009, known as the Gap Inc. Supplemental Deferred Compensation Plan)

A-1. Introduction . The Gap, Inc. (the “Company”) maintains The Gap, Inc. Executive Deferred Compensation Plan (the “EDCP”) for the benefit of certain of its eligible employees. As of the beginning of business on March 2, 2009 (the “Merger Date”), the EDCP shall be merged into and continued in the form of this Plan.

A-2. Purpose . The purpose of this Appendix A is to set forth special provisions which will apply under the Plan on and after March 1, 2009 to reflect the merger and resulting transfer of notional accounts of participants in the EDCP into the Plan on the Merger Date. The Plan is designed to comply with the American Jobs Creation Act of 2004, as amended (the “Jobs Act”), and section 409A of the Code. The Plan is intended to conform to the requirements of the Jobs Act and section 409A of the Code, and final Treasury Regulations issued thereunder, with respect to Non-Grandfathered amounts under the Plan. Prior to January 1, 2009, it is intended that the provisions of the Plan relating to the amounts merged into the Plan from the EDCP be interpreted according to a good faith interpretation of the Jobs Act and section 409A of the Code, and consistent with published guidance thereunder, including, without limitation, IRS Notice 2005-1 and the proposed and final Treasury Regulations under section 409A of the Code. Treatment of amounts deferred under the Plan pursuant to and in accordance with any transition rules provided under all IRS published guidance and other applicable authorities in connection with the Jobs Act or section 409A of the Code, shall be expressly authorized hereunder and shall be administered in accordance with procedures established by the Company. In the event of any inconsistency between the terms of the Plan and the Jobs Act or section 409A of the Code with respect to Non-Grandfathered amounts, the terms of the Jobs Act and section 409A of the Code shall prevail and govern. “Grandfathered Amounts” shall mean the portion of the participant’s account balance under the EDCP as of December 31, 2004, the right to which was earned and vested (within the meaning of Treasury Regulation §1.409A-6(a)(2)) as of December 31, 2004, plus the right to future contributions to the account the right to which was earned and vested (within the meaning of Treasury Regulation. §1.409A-6(a)(2)) as of December 31, 2004, to the extent such contributions are actually made, each determined by reference to the terms of the EDCP in effect as of October 3, 2004, but only to the extent such EDCP terms have not been materially modified (within the meaning of Treasury Regulation §1.409A-6(a)(4)) after October 3, 2004. Grandfathered Amounts shall include any earnings (within the meaning of Treasury Regulation. §1.409A-1(o)) attributable thereto. “Non-Grandfathered Amounts” shall mean the Participant’s Account balance under the Plan less any portion of the Participant’s Account balance under the Plan constituting Grandfathered Amounts.

A-3. Participation in the Plan . Each employee of the Company who, on March 1, 2009, was a participant with an account under the EDCP (an “Appendix A Participant”) became a Participant with an Account under the Plan effective as of the Merger Date, in accordance with the provisions of the Plan, as described in paragraph A-4 below.

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A-4. Prior Accounts . Notional amounts credited to the notional accounts maintained under the EDCP for Appendix A Participants, as adjusted as of the Merger Date in accordance with the terms of the EDCP ( the “Prior Accounts”), will be credited to this Plan as of the Merger Date, and shall be notionally invested in the corresponding Investment Funds under this Plan to the extent determined by the Investment Committee and, at the discretion of the Investment Committee, as directed by the Appendix A Participant. Notwithstanding the foregoing, “Grandfathered Amounts” shall be held in separate “Grandfathered Accounts” and subaccounts to the extent deemed necessary and desirable by the Company.

A-5. Termination Date . The Termination Date with respect to an Appendix A Participant applicable to an Appendix A Participant’s Grandfathered Amounts shall be the date on which the Appendix A Participant ceases to perform services with the Company and any affiliate.

A-6. Former Participants . Former participants in the EDCP who terminated employment prior to the Merger Date but have not received payment in full of their vested Prior Account balances by that date shall have their remaining Prior Account balances maintained under the Plan. Such former participants in the EDCP with Prior Account balances under the Plan (or, in case of their death, their beneficiaries) may direct the notional investment of their Accounts pursuant to the provisions of the Plan until such Accounts are paid out in full and only for this purpose shall be treated as a “Participant” or a “Beneficiary”, as the case may be, under the Plan. Until payment in full is made, the Prior Account balances shall be adjusted pursuant to the terms of the Plan.

A-7. Manner of Distribution . The elections made by participants under the EDCP with respect to the manner of distribution of their Prior Account balances, plus notional appreciation, income, and earnings and minus notional depreciation and losses thereon (“Adjusted Prior Account Balances”) shall continue to apply to Adjusted Prior Account Balances of Appendix A Participants under this Plan on and after the Merger Date. Upon the Participant’s Termination date, the unvested portion of such Account shall be permanently forfeited.

A-8. In-Service Withdrawals . With respect to Grandfathered Amounts, the Company, in its sole discretion and notwithstanding any contrary provision of the Plan, may determine that all or part of the Appendix A Participant’s vested Prior Account shall be paid to him or her immediately as an in-service withdrawal; provided, however, that an amount equal to ten percent of the total amount of the in-service withdrawal shall be withheld by the Company and permanently forfeited. Appendix A Participants shall be limited to one in-service withdrawal per Plan Year.

A-9. Timing of Distributions . Adjusted Prior Account Balances of Appendix A Participants shall be distributed pursuant to the terms of this Plan. Notwithstanding the foregoing, with respect to Grandfathered Amounts, distributions shall be made as soon as practicable following an Appendix A Participant’s Termination Date. Installment payments shall be made as soon as practicable following an Appendix A Participant’s Retirement date (age 50)

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or death, with respect to Grandfathered Amounts. Payments made pursuant to an in-service distribution election with respect to Grandfathered Amounts shall be made on or before the last working day of April of the plan year in which such payment was elected to be made. Within the specific time periods described in this Appendix A, the Company shall have sole discretion to determine the specific timing of the payment of any Grandfathered Amounts under the Plan. The provisions of subsection 5.4 of the Plan shall apply only to Non-Grandfathered Amounts for Appendix A Participants.

A-10. Use of Terms . Terms used in this Appendix A with respect to the Plan shall, unless defined in this Appendix A, have the meanings of those terms as defined in the Plan. All of the terms and provisions of the Plan shall apply to this Appendix A.

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Exhibit 10.34

THIRD AMENDMENT

GAP INC. SUPPLEMENTAL DEFERRED COMPENSATION PLAN

WHEREAS, The Gap, Inc. (the “Company”) maintains the Gap Inc. Supplemental Deferred Compensation Plan (the “Plan”); and

WHEREAS, the Plan previously has been amended; and

WHEREAS, further amendment of the Plan now is considered desirable to suspend the pending merger of The Gap, Inc. Executive Deferred Compensation Plan into the Plan, and to suspend the change in the name of the Plan, both of which changes were adopted in the Second Amendment to the Plan;

NOW, THEREFORE, IT IS RESOLVED that, pursuant to the power reserved to the Company under Section 12 of the Plan, and in exercise of the authority delegated to the undersigned officer by resolutions of the Board of Directors of the Company dated November 19, 2008, the Plan is hereby amended, effective on the date of the execution of this amendment, by rescinding Particulars 1, 2 and 8 of the Second Amendment to the Plan, such that no Appendix A shall be added to the Plan pursuant to such Second Amendment, and the name of the Plan shall remain the Gap Inc. Supplemental Deferred Compensation Plan until such time as the officers authorized by resolution of the Board of Directors determine that the name shall be changed.

* * *

IN WITNESS WHEREOF, the undersigned officer has executed this amendment on behalf of the Company, this 19 ^th day of December, 2008.


THE GAP, INC.

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

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Exhibit 10.94

AMENDMENT TO AGREEMENT

Gap Inc. (“Company”) and Marka Hansen (referred to in the second person) hereby amend the letter agreement dated February 16, 2007, replacing the section entitled “Termination/Severance” with the following provision:

Termination/Severance . In the event that your employment is involuntarily terminated by the Company for reasons other than For Cause (as defined below) prior to February 13, 2012, the Company will provide you the following after your “separation from service” within the meaning of Section 409A of the Internal Revenue Code (the “Separation from Service”), provided you sign a general release of claims in the form requested by the Company and it becomes effective within 45 calendar days after such Separation from Service (the “Release Deadline”):

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

(2) Through the end of the period in which you are receiving payments under paragraph (1) above, if you elect COBRA coverage, payment of a portion of your COBRA coverage equal to the Company-paid portion of comparable active employee coverage as in effect on your termination date. In order to receive this benefit, the Company may require that you substantiate your COBRA coverage.

(3) Through the end of the period in which you are receiving payments under paragraph (1) above, reimbursement for your costs to maintain the same or comparable financial counseling program the Company provides to senior executives in effect at the time of your Separation from Service. The amount of expenses eligible for reimbursement during a calendar year shall not affect the expenses eligible for reimbursement in any other calendar year. Reimbursement shall be made on or before the last day of the calendar year following the calendar year in which the reimbursement is incurred but not later than the end of the second calendar year following the calendar year of your Separation from Service.

In the event that your employment is involuntarily terminated by the Company for reasons other than For Cause (as defined below) prior to February 13, 2009, the Company will provide you, in addition to the compensation and benefits described above, the following if you sign a general release of claims in the form requested by the Company and it becomes effective by the Release Deadline:

(1) The vesting on the Release Deadline of stock options and stock awards that otherwise would not have vested as of your termination date from the date of termination up to and including the date 18 months from your termination date, provided that the stock options and stock awards shall otherwise remain subject to their terms. Note that pursuant to your stock option agreements, you will have until the date three months from your termination date to exercise these stock options. This paragraph is not applicable to any stock options or stock awards that have performance-based vesting.

Marka Hansen

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The payments above are taxable income to you and are subject to tax withholding. If the aggregate amount that would be payable to you under paragraphs (1) and (3) above through the date which is six months after your Separation from Service exceeds the limit under Treas. Reg. Section 1.409A-1(b)(9)(iii)(A) and you are a “specified employee” under Treas. Reg. Section 1.409A-1(i) on the date of your Separation from Service, then the excess will be paid to you no earlier than the date which is six months after the date of such separation (or such earlier time permitted under Section 409A(a)(2)(B)(i) of the Internal Revenue Code). This delay will only be imposed to the extent required to avoid the tax for which you would otherwise be liable under Section 409A(a)(1)(B) of the Internal Revenue Code. Any delayed payment instead will be made on the first business day following the expiration of the six month period, as applicable (or such earlier time permitted under Section 409A(a)(2)(B)(i) of the Internal Revenue Code).

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

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


EXECUTIVE

/s/ Marka Hansen		12/15/08
Marka Hansen		Date

THE GAP, INC.

By:	/s/ Glenn Murphy	11/23/08
	Glenn Murphy	Date
	Chairman and CEO

Exhibit 10.96

AMENDMENT TO AGREEMENT

Gap Inc. (“Company”) and Art Peck (referred to in the second person) hereby amend the letter agreement dated March 16, 2007, replacing the section entitled “Termination/Severance” with the following provision:

Art Peck

Page 2


EXECUTIVE

/s/ Art Peck		12/15/08
Art Peck		Date

THE GAP, INC.

By:	/s/ Glenn Murphy	11/23/08
	Glenn Murphy	Date
	Chairman and CEO

Exhibit 10.101

AMENDMENT TO AGREEMENT

Gap Inc. (“Company”) and Eva Sage-Gavin (referred to in the second person) hereby amend the letter agreement dated March 16, 2007, replacing the section entitled “Termination/Severance” with the following provision:

Eva Sage-Gavin

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EXECUTIVE

/s/ Eva Sage-Gavin		11/10/08
Eva Sage-Gavin		Date

THE GAP, INC.

By:	/s/ Glenn Murphy	11/23/08
	Glenn Murphy	Date
	Chairman and CEO

Exhibit 10.106

Dear Glenn,

In order to make changes required under Section 409A (defined in Section 14), this letter amends and restates your employment letter in its entirety effective as of July 25, 2007.

This letter and your employment will be effective on your Start Date (defined below) and sets forth our offer to you to join The Gap, Inc. (the “Company”) as Chief Executive Officer. Your “Start Date” shall be July 30, 2007 if you obtain admission to the United States by the United States Customs and Border Protection Agency in a classification authorizing work for the Company in the United States (“Admission”) on or before July 30, 2007, or if not, then your Start Date shall be the business day after the date you obtain Admission, provided that this letter and your employment will only be effective if the Company receives your authorization to work in the United States on or prior to your Start Date. You agree that (i) if you personally receive the Form I-797 Approval Notice issued by U.S. Citizenship and Immigration Services classifying you as an O-1 nonimmigrant (“Form I-797 Approval Notice”) by 9:00 a.m Eastern Time on July 29, 2007, you will seek Admission on July 29, 2007, and (ii) if you personally receive the Form I-797 Approval Notice after 9:00 a.m. Eastern Time on July 29, 2007, you will seek Admission within 24 hours of receipt of the Form I-797 Approval Notice.

1. Duties and Scope of Employment. The Company agrees to employ you on an “at-will” basis in the position of Chief Executive Officer. You will report directly to the Company’s Board of Directors (the “Board”) and be given such duties, authorities, and responsibilities that are consistent with your being the Company’s most senior executive officer as determined by the Board. During your employment, you will devote your full business efforts and time to the Company. You may engage in civic and charitable activities in your individual capacity, and, subject to the consent of the Board, may serve on the board of directors of another company so long as such activities do not interfere with the performance of your responsibilities to the Company. Your primary work place will be at the Company’s corporate headquarters in San Francisco, California.

2. Board Service. The Governance, Nominating and Social Responsibility Committee of the Board will recommend to the Board that you be made a Director of the Board without prejudice to the shareholders’ ability to remove or not re-elect you. The Governance, Nominating and Social Responsibility Committee of the Board will also recommend to the Board that you be made Chairman of the Board without prejudice to the Board’s ability to remove you as Chairman.

3. Salary and Incentive Compensation.

(a) Salary. Your annual salary will be U.S. $1,500,000, payable every two weeks in accordance with the Company’s normal payroll practices. The Compensation and Management Development Committee of the Board (“the Committee”) will review your salary at least annually.

(b) Initial Bonus. You will receive a bonus of U.S. $1,000,000 within 30 days of your Start Date. In the event you voluntarily terminate your employment without Good Reason (as defined in Section 13(b)) or your employment is terminated for Cause prior to the second anniversary of your Start Date, you will be required to repay a pro rata portion (based on the number of full calendar months remaining in the initial 24 months of employment divided by 24 months) of this bonus (net of any associated income or employment taxes not recovered in a later period) within sixty (60) days of your Termination Date (as defined in Section 9). For all purposes under this letter, the term “Cause” shall mean any of the following committed by you: (i) willful failure to follow the reasonable and lawful directions of the Board; (ii) conviction of a felony (or a plea of guilty or nolo contendere by you to a felony); (iii) acts of fraud, material dishonesty or misappropriation committed by you against the Company and intended to result in personal enrichment; (iv) willful misconduct by you in the performance of your material duties required by this letter which is likely to materially damage the Company’s financial position or reputation; (v) a material breach of this letter; (vi) your material breach of the Company’s policies and procedures; or (vii) any breach by you of the Company’s Code of Business Conduct. To terminate your employment for “Cause”, the Board must determine in good faith that Cause has occurred, the Company must give you written notice detailing the specific clause of the definition of Cause on which termination is based and the Company must deliver to you a copy of a resolution duly adopted by a majority of the entire Board (excluding you) at a meeting of the Board called and held for such purpose that finds in the good faith opinion of the Board, Cause has occurred and states the basis of that belief. With respect to Sections 3(b)(i), (v), (vi), and (vii), the Board shall give you 10 business days notice of its good faith determination that Cause has occurred and shall give you 10 business days following the end of such notice period during which to cure the applicable failure or breach to the good faith satisfaction of the entire Board (excluding you) at a meeting of the Board called and held for such purpose.

(c) Annual Bonus. You will be eligible for an annual bonus based on achievement of the Company’s financial objectives, subject to the terms and conditions of the Executive Management Incentive Compensation Award Plan or any successor plan. Your annual target bonus will be 150% of your base salary. Depending on results, your actual bonus, if any, may be higher or lower. Your maximum annual bonus will be 300% of your base salary. Any bonus payments will be prorated based on changes in base salary or incentive target that may occur during the fiscal year. The Committee has the right to modify the program at any time. Committee discretion can be used to modify the final award amount.

For fiscal year 2007 only, in lieu of the annual bonus described in this Section 3(c), you will receive a bonus equal to 150% of your base salary, prorated based on the Start Date for the time you are employed by the Company during fiscal 2007, provided you are employed by the Company on the date bonuses are paid to other executives of the Company.

Starting in fiscal year 2008, while you are employed under the terms of this letter, you will recommend performance measures and payout levels with respect to the Company’s annual bonus program for yourself and other senior executives, but such performance measures and payout levels will be determined by the Committee, in its sole discretion and in accordance with the terms and conditions of the applicable bonus program.

(d) Long-Term Incentive Awards . Your offer includes long-term incentive awards, which give you the opportunity to share in the Company’s success over time.

(i) Fair Market Value Stock Options . The Committee approved a stock option grant to you effective on your Start Date to purchase 2,000,000 shares of Company common stock, subject to the provisions of the Company’s 2006 Long-Term Incentive Plan and the award agreement thereunder. The option price is determined by the fair market value of the stock on the Start Date. These options will become vested and exercisable as shown in the schedule below, provided you are employed by the Company on the vesting date. These options must be exercised within ten years from the Start Date or within three months, or in the case of termination due to death or Retirement (as defined in the Company’s 2006 Long-Term Incentive Plan), within 12 months, of your Termination Date (as defined in Section 9), whichever is earlier, or you will lose your right to do so.

•

Option to purchase 200,000 shares vesting one year from the Start Date;

•

Option to purchase 300,000 shares vesting two years from the Start Date;

•

Option to purchase 300,000 shares vesting three years from the Start Date;

•

Option to purchase 400,000 shares vesting four years from the Start Date;

•

Option to purchase 400,000 shares vesting five years from the Start Date; and

•

Option to purchase 400,000 shares vesting six years from the Start Date.

(ii) Premium-Priced Stock Options . The Committee approved a stock option grant to you effective on your Start Date to purchase 2,000,000 shares of the Company common stock, subject to the provisions of the Company’s 2006 Long-Term Incentive Plan and the award agreement thereunder. The option price will be 115% of the fair market value of the stock on the Start Date. These options will become vested and exercisable as shown in the schedule below, provided you are employed by the Company on the vesting date. These options must be exercised within ten years from the Start Date or within three months, or in the case of termination due to death or Retirement (as defined in the Company’s 2006 Long-Term Incentive Plan), within 12 months, of your Termination Date (as defined in Section 9), whichever is earlier, or you will lose your right to do so.

•

Option to purchase 200,000 shares vesting one year from the Start Date;

•

Option to purchase 300,000 shares vesting two years from the Start Date;

•

Option to purchase 300,000 shares vesting three years from the Start Date;

•

Option to purchase 400,000 shares vesting four years from the Start Date;

•

Option to purchase 400,000 shares vesting five years from the Start Date; and

•

Option to purchase 400,000 shares vesting six years from the Start Date.

(iii) Performance Share Award . The Committee approved a performance share award for you with a target payout opportunity equal to 1,000,000 shares, effective on your Start Date, subject to the provisions of the Company’s 2006 Long-Term Incentive Plan and the award agreement thereunder (the “Initial Performance Share Award”). The Initial Performance Share Award will be paid in Company common stock upon vesting. The actual payout (ranging from zero to 2,000,000 shares) will be determined based upon cumulative reported net earnings (subject to adjustment for those items specified in the resolutions of the Committee approving the Initial Performance Share Award) for fiscal years 2008, 2009, 2010, and 2011, as follows:

•

Less than $4.164 billion: None;

•

Equal to or greater than $4.164 billion but less than $4.467 billion: 500,000 shares;

•

Equal to or greater than $4.467 billion but less than $5.011 billion: 1,000,000 shares;

•

Equal to or greater than $5.011 billion but less than $5.860 billion: 1,500,000 shares; and

•

Equal to or greater than $5.860 billion: 2,000,000 shares.

Subject to Section 11(iv), the award will become vested and paid out in Company common stock as shown in the schedule below, provided that the award is earned as set forth in this Section 3(d)(iii) and provided you are employed with the Company on the vesting date. For purposes of Section 409A (defined in Section 14), the payout at each vesting date shall be considered a separate payment.

•

One-third vesting five years from the Start Date;

•

One-third vesting six years from the Start Date; and

•

One-third vesting seven years from the Start Date.

Except as set forth in this letter or as may otherwise be determined by the Committee in its sole discretion, you will not be eligible to receive any other long-term incentive awards (whether stock or cash-based) until 2011. Beginning in 2011, during your employment hereunder, you will be eligible to participate in the Company’s long-term incentive compensation arrangements as in effect from time to time subject to the sole discretion of the Committee.

4. Benefits. During your employment with the Company hereunder, you will be eligible to participate in the Company’s employee benefit plans on terms and conditions generally applicable to other senior executives of the Company. Under the current policy (which is subject to change from time to time), you will be eligible for 30 days of Paid Time Off (“PTO”) on an annual basis in addition to seven company-paid holidays. PTO accrues each pay period up to a cap of 35 days based on regular hours paid, and can be used for vacation, illness or charitable, non-profit or other personal business.

5. Indemnification. The Company shall indemnify you to the maximum extent permitted by applicable law and the Company’s bylaws with respect to your employment hereunder and you shall also be covered under a directors and officers liability insurance policy(ies) paid for by the Company during your employment hereunder. The Company shall maintain directors and officers liability insurance for your benefit on terms and conditions generally applicable to the Company’s other senior executives. The Company’s obligations under this Section 5 are only for acts and omissions by you while you are employed by the Company under the terms of this letter but, with respect to such acts and omissions, shall survive termination of your employment and also termination or expiration of this letter.

6. Expenses. During your employment hereunder, you will be authorized to incur necessary and reasonable travel, entertainment and other business expenses in connection with your duties hereunder, and the Company shall promptly reimburse you for such expenses upon presentation of appropriate supporting documentation, all in accordance with the Company’s applicable policies.

7. Relocation. The Company will reimburse you for your reasonable relocation expenses related to your move from the Toronto, Ontario (Canada) metropolitan area to the San Francisco Bay Area (including temporary living expenses in the San Francisco Bay Area for up to 12 months until your family moves to California from Toronto). You will receive U.S. income tax restoration with respect to the relocation expenses in this Section 7, in the manner set forth in the Company’s relocation policy. You will also receive Canadian income tax restoration with respect to the relocation expenses in this Section 7, in a manner substantially consistent with the Company’s relocation policy as it applies to U.S. income tax restoration. In the event you voluntarily terminate your employment without Good Reason or your employment is terminated

for Cause (as defined in Section 3(b)) prior to the first anniversary of your Start Date, you will be required to repay all of the reimbursements described in this Section 7 within thirty (30) days of the Termination Date (as defined in Section 9). In the event you voluntarily terminate your employment without Good Reason or your employment is terminated for Cause (as defined in Section 3(b)) on or after the first anniversary of your Start Date but prior to the second anniversary of your Start Date, you will be required to repay a pro-rata portion of the reimbursements described in this Section 7 within thirty (30) days of the Termination Date (as defined in Section 9) based on the number of calendar days remaining in the two year period commencing on the Start Date. For purposes of the preceding sentence, notwithstanding anything to the contrary in the Company’s relocation policy, “Cause” shall have the meaning set forth in Section 3(b) of this letter.

8. Visa Fees. The Company will pay for all fees and expenses associated with your obtaining a visa and authorization to work for the Company in the United States.

9. Termination for Any Reason. Upon the termination of your employment for any reason, you will be entitled to: (a) all unpaid salary and unpaid PTO accrued through the Termination Date and (b) any unreimbursed business expenses. You may also be eligible for other post-employment payments and benefits as provided in this letter or pursuant to other agreements or plans with the Company. For all purposes under this letter, “Termination Date” means the effective date of your termination of employment with the Company.

10. Termination Not Related to a Change-in-Control . Subject to Section 14, except in a termination related to a Change-in-Control (as defined in Section 13(c)), in the event that your employment is involuntarily terminated by the Company for reasons other than for Cause (as defined in Section 3(b)), death or Disability (as defined in Section 13(a)), or you voluntarily terminate your employment for Good Reason (as defined in Section 13(b) and subject to the notice and cure provisions described therein) or Material Diminution of Responsibilities (as defined in Section 13(d) and subject to the notice and cure provisions described therein), the Company will provide you the following after your separation from service (within the meaning of 409A (defined in Section 14) and the Treasury regulations thereunder) in exchange for your release of any claims in a form reasonably acceptable to the Company, provided you sign such release and it becomes effective within 60 calendar days after such separation from service (the “Release Deadline”) :

(a) Subject to the last paragraph of this Section 10, your then current salary, at regular pay cycle intervals, for 24 months from the Termination Date (the “Severance Period”), as defined in Section 9, provided that no payment shall be made before the end of the Release Deadline and, on the first pay cycle in the calendar month following the calendar month containing the Release Deadline, you shall receive the salary continuation payment for that pay cycle plus any payments that were not made between the Termination Date and such first pay cycle.

(b) Subject to the last paragraph of this Section 10, a pro-rated amount of your annual bonus that you would otherwise have received had you continued to be employed through the applicable payment date for the annual bonus performance period in which your termination occurs (without any discretionary downward individual adjustments), payable, if and when paid to other executives (or, if later, immediately following the Release Deadline) and based on actual performance results for the annual bonus performance period in question. Such bonus will be pro-rated based on the number of days you were employed by the Company during the applicable annual bonus performance period.

(c) Subject to the last paragraph of this Section 10, your annual bonus that you would otherwise have received had you continued to be employed through the applicable payment dates for the two annual bonus performance periods following the annual bonus performance period in which your termination occurs (without any discretionary downward individual adjustments), up to an annual maximum payment equal to 150% of your base salary at the rate in effect on the Termination Date (as defined in Section 9), payable, if and when paid to other executives and based on actual performance results for the annual bonus performance period(s) in question.

(d) The accelerated vesting of 25% of the unvested portion (determined as of the Termination Date, as defined in Section 9) of both the Fair Market Value Stock Options and Premium-Priced Stock Options granted on the Start Date.

(e) During the period in which you are receiving payments under Section 10(a), to the extent you continue your medical coverage under COBRA, reimbursement for a portion of your COBRA premiums equal to the Company-paid portion of the cost of such coverage for active employees under the plan as of the Termination Date (based on the level of coverage (e.g., individual or family coverage) that you have in effect under COBRA), provided that you substantiate to the reasonable satisfaction of the Company the payment of such premiums.

If at any time during the period commencing on the Termination Date (as defined in Section 9) and ending on the latest date that any amount is payable to you under this Section 10, you accept other employment or professional relationship with a competitor of the Company (defined as either (i) another company primarily engaged in the apparel design or apparel retail business or (ii) any retailer with apparel sales in excess of $500 million annually (a “Competitor”)), or if you breach your remaining obligations to the Company (e.g., your duty to protect confidential information, agreement not to solicit Company employees), then the Company’s obligations under Sections 10(a), 10(b), and 10(c) will cease such that you will not be entitled to any further payments thereunder. In addition, cash payments under Sections 10(a), 10(b), and 10(c) will be reduced by any cash compensation you earn (whether paid, deferred, base, incentive, or otherwise) other than the Excepted Fees (defined in the next sentence) during the Severance Period (as defined in Section 10(a)) and beyond with respect to the bonuses in Section 10(c) from other employment or any other professional relationship with a non-Competitor and you shall inform the Company in advance and keep the Company reasonably informed on a continuing basis of the terms of such employment or other professional relationship for this purpose. The Excepted Fees are fees up to $500,000 per 12-month period commencing on the Termination Date earned for providing director and/or consulting services to a non-Competitor while you are unemployed.

11. Termination Related to a Change-in-Control . Subject to Section 14, in the event that one of the following occurs:

(a) Your employment is involuntarily terminated by the Company for reasons other than for Cause (as defined in Section 3(b)), death, or Disability (as defined in Section 13(a)) either in connection with a Change-in-Control (as defined in Section 13(c)) or within 12 months after such Change-in-Control; OR

(b) You voluntarily terminate your employment for Good Reason (as defined in Section 13(b) and subject to the notice and cure provisions described therein) within 12 months after such Change-in-Control; OR

(c) You voluntarily terminate your employment during the 30-day period commencing on the six-month anniversary of such Change-in-Control due to a Material Diminution of Responsibilities (as defined in Section 13(d) and subject to the notice and cure provisions described therein) that occurred on or after such Change-in-Control.

then the Company will provide you the following after your separation from service (within the meaning of 409A (defined in Section 14) and the Treasury regulations thereunder) i n exchange for your release of any claims in a form reasonably acceptable to the Company, provided you sign such release and it becomes effective on or before the Release Deadline (as defined in Section 10) :

(i) A lump sum equivalent of 24 months of your then current salary, payable upon expiration of the Release Deadline; provided, that, if required to comply with Section 409A (as defined in Section 14) and the Treasury regulations thereunder, this amount shall instead be paid in the time and form set forth in Section 10(a) without application of the last paragraph of Section 10.

(ii) A pro-rated amount of your annual bonus that you would otherwise have received had you continued to be employed through the applicable payment date for the annual bonus performance period in which your termination occurs (without any discretionary downward individual adjustments), payable, if and when paid to other executives (or, if later, immediately following the Release Deadline) and based on actual performance results for the annual bonus performance period in question. Such bonus will be pro-rated based on the number of days you were employed by the Company during the applicable annual bonus performance period.

(iii) Your annual bonus that you would otherwise have received had you continued to be employed through the applicable payment dates for the two annual bonus performance periods following the annual bonus performance period in which your termination occurs (without any discretionary downward individual adjustments), up to an annual maximum payment equal to 150% of your base salary at the rate in effect on the Termination Date (as defined in Section 9), payable, if and when paid to other executives and based on actual performance results for the annual bonus performance period(s) in question.

(iv) If your Termination Date (as defined in Section 9) occurs in Fiscal Year 2010 or 2011, in full satisfaction of the Initial Performance Share Award, you shall be entitled to receive, at the time of your separation from service, such pro-rated number of shares of Company common stock (which shall be fully vested) subject to the Company’s achievement of the cumulative reported net earnings targets (as adjusted for those items specified in the resolutions of the Committee approving the Initial Performance Share Award) for the completed fiscal years prior to the beginning of the fiscal year of your termination (i.e., Fiscal Years 2008 and 2009 for a Termination Date in Fiscal Year 2010, and Fiscal Years 2008, 2009, and 2010 for a Termination Date in Fiscal Year 2011), as set forth under the “Acceleration of Performance Shares in Change-in-Control” heading contained in the Committee’s resolutions approving the Initial Performance Share Award.

(v) If your Termination Date (as defined in Section 9) occurs after the end of fiscal year 2011, full vesting of any portion of the Initial Performance Share Award that has been earned based on performance (as set forth in Section 3(d)(iii) of this letter) but has not otherwise vested.

(vi) Full vesting of your Fair Market Value Stock Options and Premium-Priced Stock Options granted on the Start Date that otherwise are not vested as of the Termination Date (as defined in Section 9).

(vii) To the extent you continue your medical coverage under COBRA, reimbursement for a portion of your COBRA premiums equal to the Company-paid portion of the cost of such coverage for active employees under the plan as of the Termination Date (based on the level of coverage (e.g., individual or family coverage) that you have in effect under COBRA), provided that you substantiate to the reasonable satisfaction of the Company the payment of such premiums.

For purposes of Section 11(a), your employment shall be deemed to be involuntarily terminated by the Company for reasons other than for Cause (as defined in Section 3(b)) in connection with such Change-in-Control if such termination occurs prior to such Change-in-Control and (i) is expressly required by the merger agreement or other instrument definitively governing such Change-in-Control or (ii) is made at the express written request of the other party (or parties) to the transaction constituting such Change-in-Control.

12. Termination for Cause. Without limiting Section 18, in the event you are terminated for Cause (as defined in Section 3(b)), you will be eligible for none of the transition or severance benefits described in Sections 10 and 11. In addition, you will forfeit all unvested Company equity-based awards.

13. Certain Definitions Relating to Termination.

(a) Disability Definition. “Disability” means a permanent and total disability within the meaning of section 22(e)(3) of the Internal Revenue Code (the “Code”), provided that the Committee in its discretion may determine whether a permanent and total disability exists in accordance with uniform and non-discriminatory standards adopted by the Committee from time to time. Notwithstanding the preceding sentence, under no circumstances shall you be considered to have a Disability for purposes of this Section 13(a) if you are not eligible for long-term disability coverage under a Company-sponsored long-term disability plan that provides substantially comparable salary continuation benefits as those provided under the Company’s long-term disability plan in effect on the Start Date.

(b) Good Reason Definition. “Good Reason” shall mean any of the following that occur without your consent: (1) relocation of your primary work location by more than fifty (50) miles from San Francisco, (2) any reduction in your base salary or target annual bonus percentage opportunity, (3) your ceasing to be Chief Executive Officer of the Company, (4) the Company’s material breach of this letter or (5) the failure by the Company, following your written request to the Company’s General Counsel, to procure and deliver to you reasonably satisfactory evidence of the assumption of this Agreement by any successor as required by Section 21. Before “Good Reason” has been deemed to have occurred, you must give the Company written notice detailing why you believe a Good Reason event has occurred and such notice

must be provided to the Company within thirty days of your actual knowledge of the initial occurrence of such alleged Good Reason event. The Company shall then have thirty days after its receipt of written notice to cure the item cited in the written notice so that “Good Reason” will have not formally occurred with respect to the event in question.

(c) Change-in-Control Definition. “Change-in-Control” means the consummation of one or more of the following events: (i) any “person” (as such term is used in Section 13(d) of the Securities Exchange Act of 1934 (the “Exchange Act”)) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act) of shares representing more than 50% of the combined voting power of the then outstanding Voting Stock (as defined below in this Section 13(c)) of the Company; provided, however, that a “Change of Control” shall not be deemed to occur solely as the result of the acquisition by Donald G. Fisher, Doris F. Fisher, John J. Fisher, William Fisher and/or Robert R. Fisher (collectively, the “Fishers”) and the Permitted Designees (as defined below in this Section 13(c)) of shares representing in the aggregate more than 50% but less than 75% of the combined voting power of the then outstanding Voting Stock of the Company; (ii) the Company consolidates with or merges into any other corporation, any other corporation merges into the Company, or the Company effects a share exchange or the Company conveys, sells, transfers or leases all or substantially all (more than 75%) of its assets (other than to one or more of its wholly-owned subsidiaries), and, in the case of any such consolidation, merger or share exchange transaction, the outstanding Common Stock of the Company is reclassified into or exchanged for any other property or securities, unless the shareholders of the Company immediately before such transaction own, directly or indirectly immediately following such transaction, at least a majority of the combined voting power of the then outstanding Voting Stock of the entity resulting from such transaction in substantially the same proportion as their ownership of the Voting Stock of the Company immediately before such transaction, or unless such transaction is effected solely to change the jurisdiction of incorporation of the Company and results in a reclassification, conversion or exchange of outstanding shares of Common Stock solely into shares of Common Stock; (iii) the Company or the Company and its subsidiaries, taken as a whole, sells, assigns, conveys, transfers or leases all or substantially all (more than 75%) of the assets of the Company or of the Company and its subsidiaries, taken as a whole over a 12-month period, as applicable (other than to one or more wholly-owned subsidiaries of the Company); or (iv) any time the Continuing Directors (as defined below in this Section 13(c)) do not constitute a majority of the Board (or, if applicable, a successor entity to the Company).

For purposes of the above definition of Change-in-Control, “Continuing Directors” means, as of any date of determination, any member of the Board who (A) was a member of such Board on the Start Date (the “Original Directors”) or (B) was appointed, nominated for election, or elected to such Board with the approval of a majority of the Original Directors or Continuing Directors who were members of such Board at the time of such nomination or election.

For purposes of the above definition of Change-in-Control, “Permitted Designees” means (i) a spouse or lineal descendent by blood or adoption of any of the Fishers; (ii) trusts solely for the benefit of any of the Fishers, one or more charitable foundations, institutions or entities or any of the individuals referred to in clause (i); (iii) in the event of the death of a Fisher, his or her estate, heirs, executor, administrator, committee or other personal representative; or (iv) any Person (as defined below in this Section 13(c)) so long as any of the Fishers or any of the individuals referred to in clause (i) are the sole beneficial owners of more than 50% of the Voting Stock of such Person and constitute a majority of the board of directors of such Person, in the case of a corporation, or of the individuals exercising similar functions, in the case of an entity other than a corporation.

For purposes of the above definition of Change-in-Control, “Person” means any individual, corporation, partnership, joint venture, trust, estate, unincorporated organization, limited liability company or government or any agency or political subdivision thereof.

For purposes of the above definition of Change-in-Control, “Voting Stock” means all classes of capital stock (shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) equity of the applicable entity, but excluding any debt securities convertible into such equity) of the applicable Person then outstanding and normally entitled to vote in the election of directors.

(d) Material Diminution of Responsibilities Definition. “Material Diminution of Responsibilities” means the occurrence of any of the following without your consent (i) you cease to report directly to the Board of the ultimate parent entity, (ii) one or more of your direct reports is required by the Board to report directly and solely to the Board instead of to you, (iii) you are required by the Board to report to another officer, (iv) you are no longer the CEO of the ultimate parent entity, (v) you remain the CEO of the ultimate parent entity but you are not the sole highest ranking officer of such entity in terms of responsibility and authority, or (vi) following a Change-in-Control as a result of which the Company ceases to be publicly traded on the New York Stock Exchange, Nasdaq or otherwise, you suffer a

material adverse change in your authority as compared to your authority immediately prior to such Change-in-Control. In the event the Company ceases to be publicly traded on the New York Stock Exchange, Nasdaq or otherwise, the term “ultimate parent entity” used in this Section 13(d) shall not include any direct or indirect shareholders of the Company that are not publicly traded (other than parent entities that are both (i) operating companies whose primary purpose is not investment related and (ii) not directly or indirectly owned by a company whose primary purpose is investment related). A Material Diminution of Responsibilities shall not be deemed to have occurred solely by reason of the Company’s sale of one or more of its businesses or by an action taken in good faith to comply with applicable law, generally accepted accounting principles, regulatory guidance, or other similar guidance. Before “Material Diminution of Responsibilities” has been deemed to have occurred, you must give the Company written notice detailing why you believe a Material Diminution of Responsibilities event has occurred and such notice must be provided to the Company within thirty days of your actual knowledge of the initial occurrence of such alleged Material Diminution of Responsibilities event. The Company shall then have thirty days after its receipt of written notice to cure the item cited in the written notice so that “Material Diminution of Responsibilities” will have not formally occurred with respect to the event in question.

14. Internal Revenue Code Section 409A. Notwithstanding anything contained in this letter to the contrary, if you are deemed by the Company at the time of your “separation from service” with the Company to be a “specified employee,” each within the meaning of Section 409A of the Code (“409A”), any compensation or benefits to which you become entitled under this letter (or any agreement or plan referenced in this letter) in connection with such separation shall not be made or commence until the date which is six (6) months after your “separation from service” (or, if earlier, your death). Such deferral shall only be effected to the extent required to avoid adverse tax treatment to you, including (without limitation) the additional twenty percent (20%) tax for which you would otherwise be liable under Section 409A(a)(1)(B) of the Code in the absence of such deferral. Upon the expiration of the applicable deferral period, any compensation or benefits which would have otherwise been paid during that period (whether in a single sum or in installments) in the absence of this Section shall be paid to you or your beneficiary in one lump sum. Any taxable reimbursements made to you pursuant to Section 6, 7 or Section 31 shall be made on or before the last day of the calendar year following the calendar year in which the applicable expense was incurred. With respect to any such taxable reimbursements, the amount of expenses eligible for reimbursement during a calendar year shall not affect the expenses eligible for reimbursement in any other calendar year. Any tax restoration payments made to you pursuant to Section 7 shall be made by the end of the calendar year following the calendar year in which you remit the related taxes .

15. Section 280G. In the event that it is determined that any payment or distribution of any type to you or for your benefit made by the Company, by any of its affiliates, by any person who acquires ownership or effective control or ownership of a substantial portion of the Company’s assets (within the meaning of Code Section 280G and the regulations thereunder) or by any affiliate of such person, whether paid or payable or distributed or distributable pursuant to the terms of this letter or otherwise, would be subject to the excise tax imposed by Code Section 4999 or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest or penalties, are collectively referred to as the “Excise Tax”), then such payments or distributions or benefits shall be payable either: (i) in full or (ii) as to such lesser amount which would result in no portion of such payments or distributions or benefits being subject to the Excise Tax. You shall determine whether to receive the amounts provided in (i) or (ii). If you select to reduce payments pursuant to (ii), then the payments will be reduced in accordance with the following order of priority: (x) first, Full Credit Payments (as defined below) will be reduced in reverse chronological order such that the payment owed on the latest date following the occurrence of the event triggering the Excise Tax will be the first payment to be reduced until such payment is reduced to zero, and then the payment owed on the next latest date following occurrence of the event triggering the Excise Tax will be the second payment to be reduced until such payment is equal to zero, and so forth, until all such Full Credit Payments have been reduced to zero, and (y) second, Partial Credit Payments (as defined below) will be reduced in a manner such as to obtain the best economic benefit for you so that after giving effect to such reduction, you retain the greatest economic value of such Partial Credit Payments. “Full Credit Payment” means a payment, distribution or benefit, whether paid or payable or distributed or distributable pursuant to the terms of this letter or otherwise, that if reduced in value by one dollar reduces the amount of the parachute payment (as defined in Section 280G) by one dollar. “Partial Credit Payment” means a payment, distribution or benefit, whether paid or payable or distributed or distributable pursuant to the terms of this letter or otherwise, that if reduced in value by one dollar reduces the amount of the parachute payment (as defined in Section 280G) by an amount that is less than one dollar. For clarification purposes only, a “Partial Credit Payment” would include a stock option as to which vesting is accelerated upon an event that triggers the Excise Tax, where the in the money value of the option exceeds the value of the option accleration that is added to the parachute payment. You and the Company shall furnish such documentation and documents as may be necessary for the Company’s independent external accountants to perform the requisite Code Section 280G computations and analysis.

16. No Conflicts with this Offer/Representations. You represent and warrant that you do not have any agreements, obligations, relationships or commitments to any other person or entity that conflict or would conflict with accepting this offer or fully performing your duties and obligations of this position, including, without limitation any ongoing obligations you may have to your former employer. You further represent that the credentials and information you provided to Company (or its agents) related to your qualifications and ability to perform this position are true and correct.

17. Abide by Company Policies. You agree to abide by all applicable Company policies including, but not limited to, policies contained in the Code of Business Conduct and the Securities Law Compliance Manual. You also agree to execute and abide by the attached Confidentiality, Non-Solicitation & Non-Disparagement Agreement before, during and after your employment with Company.

18. Recoupment Policy. You hereby agree and understand that you will be subject to the Company’s recoupment policy in effect from time to time. Under the current policy applicable to the Company’s senior executives, subject to the discretion and approval of the Board, the Company will, to the extent permitted by governing law, in all appropriate cases as determined by the Board, require reimbursement and/or cancellation of any bonus or other incentive compensation, including stock-based compensation, awarded to an executive officer or other member of the Company’s executive leadership team where all of the following factors are present: (a) the award was predicated upon the achievement of certain financial results that were subsequently the subject of a restatement, (b) in the Board’s view, the executive engaged in fraud or intentional misconduct that was a substantial contributing cause to the need for the restatement, and (c) a lower award would have been made to the executive based upon the restated financial results. In each such instance, the Company will seek to recover the individual executive’s entire annual bonus or award for the relevant period, plus a reasonable rate of interest.

19. Stock Ownership. Under Company policy, you are required to comply with certain stock ownership requirements as determined by the Board. Under current policy, you are required to own 150,000 shares of Company common stock within five years of the Start Date.

20. Choice of Law/Remedies for Breach. The validity, interpretation, construction and performance of this letter shall be governed by the laws of the State of California (except their provisions governing the choice of law). It is specifically understood and agreed that any breach of the attached Confidentiality, Non-Solicitation and Non-Disparagement Agreement and certain provisions of this letter (including, without limitation, Sections 1, 10, and 17) is likely to result in irreparable injury to the Company and that, in addition to any other remedy it may have, the Company shall, to the extent enforceable, be entitled to seek to enforce the specific performance of any obligation by you and to obtain both temporary and permanent injunctive relief without the necessity of proving actual damages. The parties hereby submit themselves to the Superior Court of California in and for the County of San Francisco for the purpose of enforcing this letter.

21. Successors. This letter shall be binding upon any successor (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company’s business and/or assets, and the Company will require any such successor to expressly assume and agree in writing to perform this letter in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. For all purposes under this letter, the term “Company” shall include any successor to the Company’s business and/or assets which becomes bound by this letter by contract, operation of law or otherwise. This letter will inure to the benefit of and be enforceable by you and your personal or legal representatives, executors, estate, trustee, administrators, successors, heirs, distributees, devisees and legatees, as applicable. If you die and any amounts become payable under this letter, the Company will pay those amounts to your estate or named beneficiary, as applicable, except as otherwise may be required by applicable law.

22. Notice. Notices and all other communications contemplated by this letter shall be in writing and shall be deemed to have been duly given when personally delivered, mailed by overnight courier, or sent by confirmed facsimile. In your case, mailed notices shall be addressed to you at the home address that you most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Chief Legal and Administrative Officer or General Counsel.

23. Modifications and Waivers. No provision of this letter shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by you and by the Chief Legal and Administrative Officer or General Counsel of the Company. No waiver by either party of any breach of, or of compliance with, any condition or provision of this letter by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time.

24. Whole Agreement. Except for those agreements or plans specifically referenced herein, this letter contains the entire understanding of the parties with respect to the subject matter hereof and supersedes any other agreements, representations or understandings (whether oral or written and whether express or implied) with respect to the subject matter hereof. In the event of any conflict in terms between this letter and any other agreement not specifically referenced herein executed by and between you and the Company, the terms of this letter shall prevail and govern. For the avoidance of doubt, in the case of a conflict between this letter and the terms of the Fair Market Value Stock Options, Premium-Priced Stock Options, and the Initial Performance Share Award, as set forth in the Company’s 2006 Long-Term Incentive Plan (and the related award agreements), except as set forth in Section 10(d), 11(iv), 11(v), and 11(vi) of this letter, the terms set forth in the Company’s 2006 Long-Term Incentive Plan (and the related award agreements) shall control. The attached Confidentiality, Non-Solicitation & Non-Disparagement Agreement shall be considered part of this letter for all purposes.

25. Legal Fees. The Company shall reimburse you for all reasonable legal fees and expenses (including, without limitation, reasonable legal fees for your immigration counsel) and reasonable fees of your tax advisors incurred in connection with the negotiation, preparation and execution of this letter not to exceed $50,000 in the aggregate.

26. Withholding Taxes. All payments made under this letter shall be subject to reduction to reflect taxes or other charges required to be withheld by law.

27. Severability. The invalidity or unenforceability of any provision or provisions of this letter shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect.

28. Assignment. The Company may assign its rights under this letter to any entity that expressly in writing assumes the Company’s obligations hereunder in the same manner and to the same extent that the Company would be required to perform such obligations in connection with any sale or transfer of all or substantially all of the Company’s assets to such entity.

29. No Mitigation. In the event of your termination of your employment, you will be under no obligation to seek other employment or take any other action by way of mitigation of the amounts payable, or benefits provided, to you under this letter.

30. Non-Exclusivity of Rights. Except as specifically set forth in this letter and without limiting the Committee’s sole discretion to provide otherwise, nothing in this letter will prevent or limit your future participation in any benefit or compensation plan, program, policy or practice provided by the Company and for which you may qualify, nor shall anything herein limit or otherwise affect such rights as you may have under any other contract or agreement entered into after the Start Date. Amounts that are vested benefits or that you are entitled to receive under any benefit or compensation plan, policy, practice or program of, or any contract or agreement entered into after the date hereof with, the Company at or subsequent to the date your employment with the Company terminates will be payable in accordance with such benefit or compensation plan, policy, practice, program, contract or agreement, except as explicitly modified by this letter.

31. Cooperation. Following termination of your employment for any reason, you shall reasonably cooperate with, assist and provide information to the Company and its respective affiliates concerning any matters about which you have knowledge because of your prior employment with the Company or their respective affiliates or your prior involvement as an officer or director of the Company and/or any of its affiliates. Your agreement to cooperate with, assist and/or provide information to the Company and their respective affiliates includes, if necessary, assistance by you in any litigation matters. Such assistance and cooperation will be scheduled at times and locations personally convenient for you and not inconsistent with the responsibilities you may have with subsequent employment or rendering of services, except where such scheduling is unreasonable or impracticable (giving the needs of both parties equal weight) under all of the circumstances. The Company or their respective affiliates shall pay, or reimburse you, for reasonable, out-of-pocket costs incurred by you in providing such assistance (e.g., reasonable travel costs and reasonable legal fees). In the event that you shall be required to provide services pursuant to this Section in excess of ten (10) hours in any month, you shall be compensated at a rate of $5,000 per 8-hour day (pro-rated for any partial days of service); provided, however, that you shall not be compensated for any service that you otherwise are required to perform pursuant to applicable law.

32. Counterparts. This letter may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

Please review and sign this letter, which incorporates the Confidentiality, Non-Solicitation & Non-Disparagement Agreement attached, and return them to Chief Legal and Administrative Officer. We must receive your signed letter before the Start Date.

Glenn, it is our pleasure to extend this offer. We look forward to working with you.

Yours sincerely,

/s/ Michelle Banks

Michelle Banks

SVP, General Counsel, and

Corporate Secretary and Chief Compliance Officer

Date: December 1, 2008

/s/ Glenn Murphy

Glenn Murphy

Date: December 1, 2008

CONFIDENTIALITY, NON-SOLICITATION & NON-DISPARAGEMENT AGREEMENT

I, Glenn Murphy, in consideration of the offer of employment with The Gap, Inc. (the “Company”), acknowledge that the services I will perform for the Company are unique and extraordinary and that I will be in a relationship of confidence and trust with the Company. As a result, during my employment with the Company, I will acquire “Confidential Information” that is (1) owned or controlled by the Company, (2) in the possession of the Company and belonging to third parties, and/or (3) conceived, originated, discovered or developed in whole or in part by me. Confidential Information includes trade secrets and other confidential or proprietary business, technical, strategic, marketing, legal, personnel or financial information (including, without limitation, financial forecasts or reports and pro-forma financial models), whether or not my work product, in written, graphic, oral or other tangible or intangible forms, including, but not limited to: board or executive presentations; strategic plans; unannounced product information, specifications, samples or designs; sales and pricing practices; computer programs; drawings, photographs, diagrams, models; vendor or customer names; the products a vendor supplies to the Company; customer research results; employee lists or organizational charts; company e-mail or telephone directories; individual employee compensation and benefits information; business or marketing plans; studies, analyses, projections and reports; communication with attorneys; and software systems and processes. Any information that is not readily available to the public shall be considered to be a trade secret and confidential and proprietary.

I agree that I will keep the Confidential Information in strictest confidence and trust. I will not, without the prior written consent of the Company’s General Counsel, directly or indirectly use or disclose to any person or entity any Confidential Information, during or after my employment, except as is necessary in the ordinary course of performing my duties while employed by the Company, or if required to be disclosed by order of a court of competent jurisdiction, administrative agency or governmental body, or by subpoena, summons or other legal process, provided that prior to such disclosure, the Company is given reasonable advance notice of such order and an opportunity to object to such disclosure.

I agree that in the event of my employment termination for any reason, I will immediately deliver to the Company all company property, including all documents, materials or property of any description, or any reproduction of such materials, containing or pertaining to any Confidential Information.

In order to protect the Confidential Information, I agree that so long as I am employed by the Company, and for a period of two years thereafter, I will not directly or indirectly, on behalf of me, any other person or entity, solicit, call upon, recruit, or attempt to solicit any of the Company’s employees or in any way encourage any Company employee to leave their employment with the Company. For this purpose, advertisements for employment that do not directly or indirectly identify me placed in newspapers of general circulation will not be considered solicitation. I further agree that I will not directly or indirectly, on behalf of me, any other person or entity, interfere or attempt to interfere with the Company’s relationship with any person who at any time was an employee, consultant, customer or vendor or otherwise has or had a business relationship with the Company.

I agree now, and after my employment with the Company terminates, not to directly or indirectly, disparage the Company in any way or to make negative, derogatory or untrue statements about the Company, its business activities, or any of its directors, managers, officers, employees, affiliates, agents or representatives to any person or entity.

ACKNOWLEDGED AND AGREED TO THIS 1 ^st DAY OF December, 2008.

/s/ Glenn Murphy

Glenn Murphy

Exhibit 10.108

AMENDMENT TO AGREEMENT

The Gap, Inc. (“Company”) and Michael Tasooji (referred to in the second person) hereby amend the letter agreement dated March 16, 2007, replacing the section entitled “Termination/Severance” with the following provision:

Termination/Severance . In the event that your employment is involuntarily terminated by the Company for reasons other than For Cause (as defined below) prior to February 13, 2009, the Company will provide you the following if, prior to your “separation from service” within the meaning of Section 409A of the Internal Revenue Code (the “Separation from Service”), you sign and do not revoke a general release of claims in the form requested by the Company:

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

(4) The vesting on the Separation from Service of stock options and stock awards that otherwise would have vested from the date of such separation up to and including the date 18 months from the date of such separation, provided that the stock options and stock awards shall otherwise remain subject to their terms. This provision is not applicable to any stock options or stock awards that have performance-based vesting.


EXECUTIVE

/s/ Michael Tasooji		12/15/2008
Michael Tasooji		Date

THE GAP, INC.

By:	/s/ Glenn Murphy	12/15/2008
	Glenn Murphy	Date
	Chairman and CEO

AGREEMENT AND RELEASE

The Gap, Inc. (“Company”) has informed Michael Tasooji (“Executive”) that Executive’s employment as Chief Information Officer will terminate effective January 31, 2009 and that Executive would be eligible for certain compensation and benefits under the Termination/Severance section of the letter agreement (“Agreement”) between Executive and the Company dated March 16, 2007 and as amended, as long as certain conditions in the Agreement are met, including Executive’s execution of the release of claims as follows:

Executive hereby releases and forever discharges the Company, its subsidiaries, affiliates, officers, directors, agents and employees, from any and all claims, liabilities and obligations, of every kind and nature, whether now known or unknown, suspected or unsuspected, which Executive ever had, or now has, with the exception of claims that cannot be legally waived (which includes future claims that the Company has breached its obligations under the Agreement). This release includes all federal and state statutory claims, federal and state common law claims (including those for contract and tort), and claims under any federal or state anti-discrimination statute or ordinance, including but not limited to, Title VII of the Civil Rights Act of 1964 (as amended), the Age Discrimination in Employment Act, 42 U.S.C. sections 1981 and 1983, the Employee Retirement Income Security Act of 1974, the Americans with Disabilities Act, the California Constitution, the California Fair Employment and Housing Act, the California Unfair Competition Act (California Business and Professions Code section 17200 et seq.), the California Unruh Act, and the California Labor Code. Executive expressly waives the protection of Section 1542 of the Civil Code of the State of California, which states:

“A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected the settlement with the debtor.”

This is a legally binding release. Executive is advised to consult with an attorney prior to signing this Release. Executive has 21 days to consider this Release. Within seven days of signing this Release, Executive may revoke this Release by notifying the Company in writing that Executive revokes it. Executive is also advised to seek his own financial and tax consultants related to the compensation and benefits described in the Agreement.

Agreed to this 21st day of January, 2009

/s/ Michael Tasooji

Michael Tasooji

Exhibit 10.110

AMENDMENT TO AGREEMENT

Gap Inc. (“Company”) and Sabrina Simmons (referred to in the second person) hereby amend the letter agreement dated February 4, 2008, replacing the section entitled “Termination/Severance” with the following provision:

Sabrina Simmons

Page 2


EXECUTIVE

/s/ Sabrina Simmons		12/22/08
Sabrina Simmons		Date

THE GAP, INC.

By:	/s/ Glenn Murphy	11/23/08
	Glenn Murphy	Date
	Chairman and CEO

Exhibit 10.112

AMENDMENT TO AGREEMENT

Gap Inc. (“Company”) and John T. Wyatt (referred to in the second person) hereby amend the letter agreement dated October 11, 2007, replacing the section entitled “Termination/Severance” with the following provision:

John T. Wyatt

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EXECUTIVE

/s/ John T. Wyatt		12/9/08
John T. Wyatt		Date

THE GAP, INC.

By:	/s/ Glenn Murphy	11/23/08
	Glenn Murphy	Date
	Chairman and CEO

Exhibit 21

The Gap, Inc.

Subsidiary List as of January 31, 2009


Athleta (ITM) Inc.		California
Athleta, Inc.		Delaware
Banana Republic (Apparel), LLC		California
Banana Republic (ITM) Inc.		California
Banana Republic (Japan) Y.K.		Japan
Banana Republic, LLC		Delaware
Direct Consumer Services, LLC		California
F&T Services LLC		Delaware
Forth & Towne (Apparel) LLC		California
Forth & Towne (Japan) Y.K.		Tokyo, Japan
Forth & Towne (ITM) Inc.		California
Forth & Towne LLC		Delaware
Gap (Apparel), LLC		California
Gap (Canada) Inc.		Canada
Gap (France) S.A.S.		Paris, France
Gap (ITM) Inc.		California
Gap (Japan) K.K.		Tokyo, Japan
Gap (Netherlands) B.V.		Amsterdam, The Netherlands
Gap (Puerto Rico), Inc.		Puerto Rico
Gap (RHC) B.V.		Amsterdam, The Netherlands
Gap (UK Holdings) Limited		England and Wales
Gap (UK) Limited		England and Wales
Gap Europe Holdings B.V.		Amsterdam, The Netherlands
Gap Europe Limited		England and Wales
Gap International B.V.		Amsterdam, The Netherlands
Gap International Sales, Inc.		Delaware
Gap International Sourcing (Americas) LLC		California
Gap International Sourcing (California), Inc.		California
Gap International Sourcing (Holdings) Limited		Hong Kong
Gap International Sourcing (India) Private Limited		New Delhi, India
Gap International Sourcing (Honduras) S.A. de C.V.		Honduras
Gap International Sourcing (JV), LLC		California
Gap International Sourcing (Mexico) S.A. de C.V.		Mexico
Gap International Sourcing (Thailand) Limited		Thailand
Gap International Sourcing (U.S.A.) Inc.		California
Gap International Sourcing FZE		Free Zone, United Arab Emirates
Gap International Sourcing Limited		Hong Kong
Gap International Sourcing Pte. Ltd.		Singapore
Gap International Sourcing, Inc.		California
Gap International Sourcing, Srl.		Florence, Italy
Gap Services, Inc.		California
Gap Stores (Ireland) Limited		Dublin, Ireland
Goldhawk B.V.		Amsterdam, The Netherlands
GPS (Bermuda) Insurance Services Limited		Bermuda
GPS (Great Britain) Limited		England and Wales
GPS Consumer Direct, Inc.		California
GPS Corporate Facilities, Inc.		California
GPS Distribution Facilities, LLC		California
GPS Park Restaurant, Inc.		California
GPS Real Estate, Inc.		California
GPS Services, Inc.		California
GPS Sourcing (South Africa) (Proprietary) Limited		Durban, South Africa
GPS Strategic Alliances LLC		Delaware
GPSDC (New York) Inc.		Delaware
GPSV LLC		Delaware
Old Navy (Apparel), LLC		California
Old Navy (Canada) Inc.		Canada
Old Navy (ITM) Inc.		California
Old Navy (Japan) Y.K.		Japan
Old Navy, LLC		Delaware
Piperlime (Japan) G.K.		Tokyo, Japan
WCB Twenty-Eight Limited Partnership		Delaware

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the following Registration Statements on Form S-8: No. 2-72586, No.2-60029, No. 33-39089, No. 33-40505, No. 33-54686, No. 33-54690, No. 33-56021, No. 333-00417, No. 333-12337, No. 333-36265, No. 333-68285, No. 333-72921, No. 333-76523, No. 333-47508, No. 333-59292, No. 333-88470, No. 333-90414, No. 333-103128, No. 333-105934, No. 333-129986, No. 333-136295, No. 333-147986 and No. 333-151560 of our report dated March 27, 2009 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the adoption of a new accounting standard), relating to the financial statements of The Gap, Inc. and subsidiaries (the “Company”), and the effectiveness of the Company’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of the Company for the fiscal year ended January 31, 2009.

/s/ Deloitte & Touche LLP

San Francisco, California

March 27, 2009

Exhibit 31.1

CERTIFICATIONS

I, Glenn K. Murphy, certify that:

1.	I have reviewed this annual report on Form 10-K of The Gap, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

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

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 27, 2009

/s/ Glenn K. Murphy

Glenn K. Murphy

Chairman and Chief Executive Officer

(Principal Executive Officer)

Exhibit 31.2

CERTIFICATIONS

I, Sabrina L. Simmons, certify that:

1.	I have reviewed this annual report on Form 10-K of The Gap, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(a)

(b)

(c)

(d)

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 27, 2009

/s/ Sabrina L. Simmons

Sabrina L. Simmons

Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

Exhibit 32.1

Certification of the Chief Executive Officer

Pursuant to 18 U.S.C. Section 1350,

As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of The Gap, Inc. (the “Company”) on Form 10-K for the period ended January 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Glenn K. Murphy, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Glenn K. Murphy

Glenn K. Murphy

Chairman and Chief Executive Officer

March 27, 2009

Exhibit 32.2

Certification of the Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350,

As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of The Gap, Inc. (the “Company”) on Form 10-K for the period ended January 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Sabrina L. Simmons, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Sabrina L. Simmons

Sabrina L. Simmons

Executive Vice President and Chief Financial Officer

March 27, 2009