Gap (GPS)

RESULTS OF OPERATIONS

Business in the third quarter continued to be challenging and we experienced a decrease in sales at Gap and Old Navy brands, offset by an increase in sales at Banana Republic and online for overall flat sales compared to the third quarter of last year. Our operating expenses were higher than last year as we invested in marketing and store-related activities to improve performance and continued to invest in our growth initiatives. For the thirteen weeks ended October 28, 2006, net earnings decreased 11 percent to $189 million or $0.23 per diluted share, compared to net earnings of $212 million or $0.24 per diluted share for the thirteen weeks ended October 29, 2005. For the thirty-nine weeks ended October 28, 2006, net earnings decreased 28 percent to $559 million or $0.66 per diluted share, compared to net earnings of $775 million or $0.86 per diluted share for the thirty-nine weeks ended October 29, 2005.

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RESULTS OF OPERATIONS

Business in the second quarter continued to be challenging due to disappointing sales performance coupled with higher operating expenses. For the thirteen weeks ended July 29, 2006, net earnings decreased 53% percent to $128 million or $0.15 per diluted share, compared to net earnings of $272 million or $0.30 per diluted share for the thirteen weeks ended July 30, 2005. For the twenty-six weeks ended July 29, 2006, net earnings decreased 34% percent to $370 million or $0.43 per diluted share, compared to net earnings of $563 million or $0.61 per diluted share for the twenty-six weeks ended July 30, 2005.

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RESULTS OF OPERATIONS

Business in the first quarter was challenging, as expected. Net earnings decreased 17 percent to $242 million or $0.28 per share, compared to net earnings of $291 million or $0.31 per share.

RESULTS OF OPERATIONS

In fiscal 2005, diluted earnings per share increased by $0.03 to $1.24 compared to $1.21 in fiscal 2004, while net earnings decreased 3 percent to $1.1 billion compared to net earnings of $1.2 billion in fiscal 2004. Operating margins decreased 1.3 percentage points to 10.9 percent in fiscal 2005, reflecting product acceptance challenges that resulted in increased promotions and markdowns.

RESULTS OF OPERATIONS

For the thirteen weeks ended October 29, 2005, net earnings decreased 20% percent to $212 million or $0.24 per share, compared to net earnings of $265 million or $0.28 per share for the comparable period in the prior year. For the thirty-nine weeks ended October 29, 2005, net earnings were $775 million or $0.86 per share, compared to net earnings of $772 million or $0.81 per share for the comparable period in the prior year.

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RESULTS OF OPERATIONS

For the thirteen weeks ended July 30, 2005, net earnings increased 39% percent to $272 million or $0.30 per share, compared to net earnings of $195 million or $0.21 per share. For the twenty-six weeks ended July 30, 2005, net earnings increased 11% percent to $563 million or $0.61 per share, compared to net earnings of $507 million or $0.53 per share.

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RESULTS OF OPERATIONS

Business in the first quarter was challenging. Net earnings decreased 7 percent to $291 million or $0.31 per share, compared to net earnings of $312 million or $0.33 per share.

RESULTS OF OPERATIONS

We delivered healthy operating results for the year. Our net earnings grew 12 percent to $1.2 billion or $1.21 per share, compared to net earnings of $1.0 billion or $1.09 per share in fiscal 2003. We improved our operating and gross margin by 0.3 percentage points and 1.6 percentage points, respectively, and generated free cash flow of $1.2 billion and $1.9 billion in fiscal 2004 and 2003, respectively. For a reconciliation of free cash flow, a non-GAAP measure, to a GAAP measure, see the Liquidity section in this Management’s Discussion and Analysis.