Gap (GPS)

NOTE 6. SUBLEASE LOSS RESERVE

We have excess facility space as of February 2, 2008 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. These estimates and assumptions are monitored on at least a quarterly basis for changes in circumstances. We estimate the reserve based on the status of our efforts to lease vacant office space and stores, including a review of real estate market conditions, our projections for sublease income and sublease commencement assumptions. Sublease losses (reversals) are included in operating expenses in our Consolidated Statements of Earnings.

In each of fiscal 2007 and 2006, we recorded a net sublease loss of $5 million. In fiscal 2005, we released a net amount of $61 million of sublease loss reserve. During the second fiscal quarter of 2005 we completed our assessment of available space and future office facility needs and decided that we would occupy one of our vacant leased properties in San Francisco. As a result, the sublease loss reserve of $58 million associated with this space was reversed. The remaining reduction in the provision was related to our decision to occupy certain other office space.

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 February 2, 2008, we expect our lease payments, net of sublease income, to result in a total net cash outlay of approximately $13 million for future rent. Our gross sublease loss reserve of $34 million at February 2, 2008 was net of approximately $21 million of estimated sublease income to be generated from sublease contracts.

Gap Inc. Form 10-K  51

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Excluding Forth & Towne, the reserve balances and activities for our sublease loss reserve are as follows:

NOTE 6. SUBLEASE LOSS RESERVE

7. SUBLEASE LOSS RESERVE

As a result of our 2001 decision to consolidate and downsize corporate facilities in our San Francisco and San Bruno campuses, we have excess facility space as of April 29, 2006. We record a sublease loss reserve for the net present value of the difference between the contract rent obligations and the rate at which we expect to be able to sublease the properties. These estimates and assumptions are monitored on at least a quarterly basis for changes in circumstances. We estimate the reserve based on the status of our efforts to lease vacant office space, including a review of real estate market conditions, our projections for sublease income and sublease commencement assumptions. Sublease loss charges are reflected in operating expenses in our condensed consolidated statements of income.

The following table provides the liability balances and activities of our sublease loss reserve:

During the second fiscal quarter of 2005 we completed our assessment of available space and future office facility needs and decided that we would occupy one of our vacant leased properties in San Francisco. As a result, in the same quarter the sublease loss reserve of $58 million associated with this space at April 30, 2005 was reversed.

Remaining cash expenditures associated with the headquarter facilities sublease loss reserve are expected to be paid over the various remaining lease terms through 2012. Based on our assumptions as of April 29, 2006, we expected our lease payments, net of sublease income, to result in a total net cash outlay of approximately $19 million for future rent.