Gap (GPS)

Cash Flows from Operating Activities

Net cash provided by operating activities during the first quarter of fiscal 2009 increased $26 million compared with the prior year comparable period primarily due to a lower payout for bonuses and lower overall expenditures as a result of cost management efforts during the first quarter of fiscal 2009 compared with the first quarter of fiscal 2008, offset by a decrease in net earnings.

Inventory management remains an area of focus. We continue to execute against our strategy of managing inventory levels in a manner that supports delivering healthy merchandise margins. As a result, inventory per square foot at May 2, 2009 decreased 12 percent compared with inventory per square foot at May 3, 2008.

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. The seasonality of our operations may lead to significant fluctuations in certain asset and liability accounts between fiscal year-end and subsequent interim periods.

Cash Flows from Operating Activities

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

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

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.

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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:

Cash Flows from Operating Activities

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

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

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

Cash Flows from Operating Activities

Net cash provided by operating activities for the first half of fiscal 2008 decreased $107 million from the prior year comparable period. This decrease was mainly due to the payment of fiscal 2007 bonuses in the first quarter of fiscal 2008.

Inventory management remains an area of focus. We continue to execute against our strategies of managing inventory levels in a manner that supports delivering healthy merchandise margins. As a result, inventory per square foot at August 2, 2008 was $39 which represents a 17 percent decrease from the prior year comparable period.

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

Cash Flows from Operating Activities

Net cash provided by operating activities for the first quarter of fiscal 2008 decreased $105 million from the prior year comparable period. This decrease was mainly due to the payment of fiscal 2007 bonuses in the first quarter of fiscal 2008.

Inventory management remains an area of focus. We continue to execute against our strategies of managing inventory levels in a manner that supports more selling at regular price and healthy merchandise margins. As a result, inventory per square foot at May 3, 2008 was $37 which represents a 17 percent decrease from the prior year comparable period.

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

Cash Flows from Operating Activities

Our largest source of operating cash flows is cash collections from our customers. Our primary uses of cash include merchandise inventory purchases, personnel related expenses, and payment of taxes and occupancy. In fiscal 2007, net cash provided by operating activities increased $831 million compared with fiscal 2006, primarily due to higher net earnings, 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.

For fiscal 2006, the $301 million decrease in cash provided by operating activities compared with fiscal 2005 was primarily due to the decrease in net earnings, higher prepaid taxes and higher inventory levels, offset by an increase in accrued expenses.

Inventory management remains an area of focus. We continue to execute against our strategies of managing inventory levels in a manner that supports more selling at regular price and healthy merchandise margins. As a result, inventory per square foot at February 2, 2008 was $37, compared with inventory per square foot of $44 at February 3, 2007 and $43 at January 28, 2006.

We fund inventory expenditures during normal and peak periods through cash flows from operating activities and available cash. Our business follows a seasonal pattern, peaking over a total of about thirteen weeks during the

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back-to-school and holiday periods. During fiscal 2007, fiscal 2006, and fiscal 2005, these periods accounted for 32 percent, 31 percent, and 32 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.

As part of our normal business practices, we periodically benchmark vendor payment terms within our industry. Based upon this review, we determined that there was an opportunity to modify our merchandise vendor payment terms to be more in line with our competitors. This change became effective in September 2007 and, as a result, we have an extended time to pay.

Cash Flows from Operating Activities

Our largest source of operating cash
flows is cash collections from our customers. Our primary uses of cash include merchandise inventory purchases, personnel related expenses, and payment of taxes and occupancy. In fiscal 2007, net cash provided by operating activities increased $831
million compared with fiscal 2006, primarily due to higher net earnings, 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.

For fiscal 2006, the $301 million decrease in cash provided by operating activities compared with fiscal
2005 was primarily due to the decrease in net earnings, higher prepaid taxes and higher inventory levels, offset by an increase in accrued expenses.

Inventory
management remains an area of focus. We continue to execute against our strategies of managing inventory levels in a manner that supports more selling at regular price and healthy merchandise margins. As a result, inventory per square foot at
February 2, 2008 was $37, compared with inventory per square foot of $44 at February 3, 2007 and $43 at January 28, 2006.

We fund inventory
expenditures during normal and peak periods through cash flows from operating activities and available cash. Our business follows a seasonal pattern, peaking over a total of about thirteen weeks during the

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back-to-school and holiday periods. During fiscal 2007, fiscal 2006, and fiscal 2005, these periods accounted for 32 percent, 31 percent, and 32 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.

Cash Flows from Operating Activities

Our largest source of operating cash flows is cash collections from our customers. Our primary uses of cash include personnel related expenses, merchandise inventory purchases, and payment of taxes and occupancy. Net cash provided by operating activities for the thirty-nine weeks ended November 3, 2007 increased $383 million from the prior year comparable period. This increase was mainly due to a decrease in inventory purchases, an increase in accounts payable and lower income taxes paid in the thirty-nine weeks ended November 3, 2007 compared with the thirty-nine weeks ended October 28, 2006.

Inventory management remains an area of focus. We continue to execute against our strategies of managing inventory levels in a manner that supports more selling at regular price and healthy merchandise margins. Inventory per square foot at November 3, 2007 was $59 which represents an eight percent decrease from the prior year comparable period. We expect inventory per square foot as of February 2, 2008 to be approximately four to six percent less than inventory per square foot as of 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, peaking over a total of about thirteen weeks during the back-to-school and holiday periods. The seasonality of our operations may lead to significant fluctuations in certain asset and liability accounts between fiscal year-end and subsequent interim periods.

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As part of our normal business practices, we periodically benchmark vendor payment terms within our industry. Based upon this review, we determined that there was an opportunity to modify our merchandise vendor payment terms to be more in line with our competitors. This change became effective in September 2007 and, as a result, we will have an extended time to pay.

Cash Flows from Operating Activities

Our largest source of operating cash flows is cash collections from our customers. Our primary uses of cash include personnel related expenses, merchandise inventory purchases, and payment of taxes and occupancy. Net cash provided by operating activities for the first half of fiscal year 2007 increased $136 million from the prior year comparable period. This increase was mainly due to fewer inventory purchases and lower income taxes paid in the first half of fiscal year 2007 compared to the first half of fiscal year 2006, offset by a decrease in net earnings and higher bonus payments in the first half of fiscal year 2007 compared to the first half of fiscal year 2006.

Inventory management remains an area of focus. We continue to execute against our strategies to optimize inventory productivity and more tightly manage the receipt and timing of our inventory, while maintaining appropriate in-store merchandise levels and product assortment to support sales growth. Inventory per square foot at August 4, 2007 was $47, a 6 percent decrease from the prior year comparable period due to the continued focus on inventory management.

We fund inventory expenditures during normal and peak periods through cash flows from operating activities and available cash. Our business follows a seasonal pattern, peaking over a total of about 13 weeks during the Back-to-School and Holiday periods. The seasonality of our operations may lead to significant fluctuations in certain asset and liability accounts between fiscal year-end and subsequent interim periods.

We expect the percent change in inventory per square foot at the end of the third and fourth quarters of fiscal year 2007 to be down in the mid-single digits on a year-over-year basis.

Cash Flows from Operating Activities

Our largest source of operating cash flows is cash collections from our customers. Our primary uses of cash include personnel related expenses, merchandise inventory purchases, and payment of taxes and occupancy. Net cash provided by operating activities for the first quarter of fiscal year 2007 decreased $35 million from the prior year comparable period. This decrease was mainly due to a decrease in net earnings and higher bonus payments offset by fewer inventory purchases along with a corresponding decrease in accounts payable.

Inventory management remains an area of focus. We continue to execute against our strategies to optimize inventory productivity and more tightly manage the receipt and timing of our inventory, while maintaining appropriate in-store merchandise levels and product assortment to support sales growth. Inventory per square foot at May 5, 2007 was $44, an 8 percent decrease from the prior year comparable period due to the continued focus on inventory management.

We fund inventory expenditures during normal and peak periods through cash flows from operating activities and available cash. Our business follows a seasonal pattern, peaking over a total of about 13 weeks during the Back-to-School and Holiday periods. The seasonality of our operations may lead to significant fluctuations in certain asset and liability accounts between fiscal year-end and subsequent interim periods.

We expect the percent change in inventory per square foot at the end of the second and third quarters of fiscal year 2007 to be down in the low-single digits on a year-over-year basis, compared with a 6 percent decline in the second quarter of fiscal 2006 and flat in the third quarter of fiscal 2006 .

Cash Flows from Operating Activities

Our largest source of operating cash flows is cash collections from our customers. Our primary uses of cash include personnel related expenses, merchandise inventory purchases, payment of taxes, and occupancy expenses. Net cash provided by operating activities decreased $301 million compared with fiscal 2005, primarily due to the decrease in net earnings, higher prepaid taxes and higher inventory levels, offset by an increase in accrued expenses.

For fiscal 2005, the $46 million decrease in cash provided by operating activities compared with fiscal 2004 was primarily due to the decrease in accounts payable mainly as a result of lower merchandise inventory levels, and the decrease in accrued expenses, driven primarily by the decreased bonus payout as a result of fiscal 2005 performance. These decreases were offset by an increase in cash provided by the decreased inventory balance as a result of disciplined inventory management.

Inventory management remains an area of focus. We continue to execute against our strategies to optimize inventory productivity and more tightly manage the receipt and timing of our inventory, while maintaining appropriate in-store merchandise levels and product assortment to support sales growth. Inventory per square foot at February 3, 2007 was $44, a 2 percent increase over fiscal 2005 primarily due to the change in shortage trends resulting in a lower shortage estimate. Inventory per square foot at January 28, 2006 was $43, an 11 percent decrease over fiscal 2004 primarily due to earlier Spring and later Summer product flow in fiscal 2004.

We fund inventory expenditures during normal and peak periods through cash flows from operating activities and available cash. Our business follows a seasonal pattern, peaking over a total of about 13 weeks during the Back-to-School and Holiday periods. During fiscal 2006, fiscal 2005, and fiscal 2004, these periods accounted for 31 percent, 32 percent, and 32 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.

We expect the percent increase in inventory per square foot at the end of both the first and second quarters of fiscal 2007 to be flat compared with last year.

Cash Flows from Operating Activities

Net cash provided by operating activities for the thirty-nine weeks ended October 28, 2006 was $620 million, an increase of $292 million compared with the same period in the prior year. This increase was mainly due to increases in accrued expenses and accounts payable offset by an increase in merchandise inventory and a decrease in net earnings.

Inventory per square foot at October 28, 2006 was $64, flat compared to the prior year. We fund inventory expenditures during normal and peak periods through cash flows from operating activities and available cash. Our business follows a seasonal pattern, peaking over a total of about 13 weeks during the back-to-school and holiday periods. The seasonality of our operations may lead to significant fluctuations in certain asset and liability accounts between fiscal year-end and subsequent interim periods.

We will continue to focus on inventory productivity. The percent increase in inventory per square foot at the end of the fourth quarter is still expected to be in the low-single digits, compared with an 11 percent decrease last year.

Cash Flows from Operating Activities

Net cash provided by operating activities for the first half of fiscal 2006 increased $237 million compared with the first half of fiscal 2005. This was primarily due to working capital improvements driven by higher accounts payable and accrued expenses in the first half of fiscal 2006 as compared to the first half of fiscal 2005, offset partially by the decrease in net earnings.

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Inventory per square foot at July 29, 2006 was $50, a 6 percent decrease compared to the prior year. We fund inventory expenditures during normal and peak periods through cash flows from operating activities and available cash. Our business follows a seasonal pattern, peaking over a total of about 13 weeks during the back-to-school and holiday periods. The seasonality of our operations may lead to significant fluctuations in certain asset and liability accounts between fiscal year-end and subsequent interim periods.

Inventory per square foot decreased 7% in the third quarter of 2005 and decreased 11% in the fourth quarter of 2005 compared to the same periods last year. We will continue to focus on inventory productivity, and expect inventory per square foot to be flat at the end of the third quarter and up in the low-single digits at the end of the fourth quarter of 2006.

Cash Flows from Operating Activities

Our largest source of operating cash flows is cash collections from our customers. Our primary uses of cash include personnel related expenses, merchandise inventory purchases, payment of taxes, occupancy and capital expenditures. Net cash provided by operating activities for the first quarter of fiscal 2006 increased $81 million compared with the first quarter of fiscal 2005. This was mainly due to the timing of merchandise payables, higher bonus payments in the prior year, and payment of convertible bond interest in the prior year, offset slightly by an increase in inventory balance as a result of Easter 2006 being two weeks later than fiscal 2005.

Inventory per square foot at April 29, 2006 was $48, a 5 percent decrease compared to the prior year. We fund inventory expenditures during normal and peak periods through cash flows from operating activities and available cash. Our business follows a seasonal pattern, peaking over a total of about 13 weeks during the back-to-school and holiday periods. The seasonality of our operations may lead to significant fluctuations in certain asset and liability accounts between fiscal year-end and subsequent interim periods.

We expect inventory per square foot to be flat at the end of the second and third quarter of 2006 versus the comparable periods in the prior year.

Cash Flows from Operating Activities

Our largest source of operating cash flows is cash collections from our customers. Our primary uses of cash include personnel related expenses, merchandise inventory purchases, payment of taxes, occupancy and capital expenditures. Net cash provided by operating activities decreased $46 million compared with fiscal 2004. The decrease in source of cash from fiscal 2004 is primarily due to the decrease in accounts payable mainly as a result of lower merchandise inventory levels, and the decrease in accrued expenses, driven primarily by the decreased bonus as a result of fiscal 2005 performance. These decreases were offset by an increase in source of cash due to the decreased inventory balance as a result of disciplined inventory management.

For fiscal 2004, the $563 million decrease in cash provided by operating activities compared with fiscal 2003 was due to increased purchases to replenish our inventory to support our increased sales activity. In addition, higher tax payments due to our stronger earnings performance required more cash.

Inventory management remains an area of focus. We continue to execute against our strategies to optimize inventory productivity and more tightly manage the receipt and timing of our inventory, while maintaining appropriate in-store merchandise levels and product assortment to support sales growth. Inventory per square foot at January 28, 2006 was $43, an 11 percent decrease over fiscal 2004 primarily due to earlier Spring and later Summer product flow. Inventory per square foot at January 29, 2005 was $48, a 6 percent increase over fiscal 2003 primarily due to earlier Easter and Spring product flow and also missed holiday opportunities.

We fund inventory expenditures during normal and peak periods through cash flows from operating activities and available cash. Our business follows a seasonal pattern, peaking over a total of about 13 weeks during the back-to-school and holiday periods. During fiscal 2005, fiscal 2004, and fiscal 2003, these periods accounted for 32 percent, 32 percent, and 33 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.

We expect the percent decrease in inventory per square foot at the end of both the first and second quarters of 2006 to be in the low single digits compared to last year.

Cash Flows from Operating Activities

Net cash provided by operating activities for the thirty-nine weeks ended October 29, 2005 was $328 million, a decrease of $122 million compared with the same period in the prior year. This decrease was mainly due to changes in accrued expenses, accounts payable, and other assets, offset by an increase in merchandise inventory.

Inventory per square foot at October 29, 2005 was $64, a 7 percent decrease compared to the prior year. We fund inventory expenditures during normal and peak periods through cash flows from operating activities and available cash. Our business follows a seasonal pattern, peaking over a total of about 13 weeks during the back-to-school and holiday periods. The seasonality of our operations may lead to significant fluctuations in certain asset and liability accounts between fiscal year-end and subsequent interim periods.

We will continue to focus on inventory productivity, and expect inventory per square foot to be down on a percentage basis in the low single digits at the end of the fourth quarter and flat at the end of first quarter of fiscal 2006.

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Cash Flows from Operating Activities

Net cash provided by operating activities for the first half of fiscal 2005 increased $45 million compared with the second quarter of fiscal 2004. This was mainly due to the timing and amount of estimated tax and extension payments made during the first half of fiscal 2004 compared to the first half of fiscal 2005. In addition, our beginning inventory was higher in fiscal 2005 compared to fiscal 2004 due to earlier Easter and spring product flow.

Inventory per square foot at July 30, 2005 was $54, a 3 percent decrease compared to the prior year. We fund inventory expenditures during normal and peak periods through cash flows from operating activities and available cash. Our business follows a seasonal pattern, peaking over a total of about 13 weeks during the back-to-school and holiday periods. The seasonality of our operations may lead to significant fluctuations in certain asset and liability accounts between fiscal year-end and subsequent interim periods.

We will continue to focus on inventory productivity, and expect inventory per square foot to be down on a percentage basis in the low single digits at the end of the third quarter and flat for the fourth quarter of 2005.

Cash Flows from Operating Activities

Net cash provided by operating activities for the first quarter of fiscal 2005 increased $60 million compared with the first quarter of fiscal 2004. This was mainly due to the timing and amount of estimated tax and extension payments made during the first quarter of fiscal 2004 compared to the first quarter of fiscal 2005. This was partially offset by timing of receipt of certain receivables in the first quarter of fiscal 2005 compared to the first quarter of fiscal 2004.

Inventory per square foot at April 30, 2005 was $51, a 5 percent increase compared to the prior year primarily due to earlier receipt of summer merchandise. We fund inventory expenditures during normal and peak periods through cash flows from operating activities and available cash. Our business follows a seasonal pattern, peaking over a total of about 13 weeks during the back-to-school and holiday periods. The seasonality of our operations may lead to significant fluctuations in certain asset and liability accounts between fiscal year-end and subsequent interim periods.

We will continue to focus on inventory productivity, and expect inventory per square foot to be down on a percentage basis in the low single digits at the end of the second and third quarter of 2005.

Cash Flows from Operating Activities

Net cash provided by operating activities decreased $540 million compared with fiscal 2003. Although there was an improvement in net earnings, there was a larger use of cash in fiscal 2004 related to merchandise inventory and income taxes payable. We ended 2003 with lower inventory levels due to aggressive inventory management. In 2004, we increased our purchases to replenish our inventory to support our increased sales activity. In addition, higher tax payments due to our stronger earnings performance required more cash.

For fiscal 2003, the $917 million increase in net cash provided by operating activities compared with fiscal 2002 was primarily attributable to improvement in our net earnings and a decrease in merchandise inventory.

Although we experienced higher inventory turns, inventory management remains an area of focus. We continue to execute against our strategies to optimize inventory productivity and more tightly manage the receipt and timing of our inventory, while maintaining appropriate in-store merchandise levels and product assortment to support sales growth. Inventory per square foot at January 29, 2005 was $48, a 6 percent increase over fiscal 2003,

29

GAP INC. FINANCIALS 2004

primarily due to earlier Easter and spring product flow and also missed holiday opportunities. Inventory per square foot at January 31, 2004 was $45, a decrease of 16 percent over fiscal 2002, which reflected our aggressive inventory containment efforts during fiscal 2003. We expect inventory per square foot to be flat at the end of the first quarter of 2005 and to decrease in the low single digits at the end of the second quarter of 2005.

We fund inventory expenditures during normal and peak periods through cash flows from operating activities and available cash. Our business follows a seasonal pattern, peaking over a total of about 13 weeks during the back-to-school and holiday periods. During fiscal 2004 and fiscal 2003, these periods accounted for 32 percent and 33 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.