Gap (GPS)

Compensation Cost for Performance Units

Under the 2006 Plan, some Stock Units are granted to certain employees only after the achievement of pre-determined performance metrics at the end of an annual performance period. These rights are referred to as Performance Units herein. 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 for outstanding Performance Units. 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 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 6,048,873 Stock Unit grants in fiscal 2007, 119,102 Stock Units were granted for Performance Units outstanding in fiscal 2006. During fiscal 2006 and 2005, no Stock Units were granted for previously outstanding Performance Units.

At February 2, 2008, the liability related to outstanding Performance Units was $3 million, which is included in accrued expenses and other current liabilities in the accompanying Consolidated Balance Sheet.