Good afternoon, ladies and gentlemen, and welcome to Gap Inc.'s second quarter 2007 conference call. (Operator Instructions) I would now like to introduce your host, Evan Price, Vice President of Investor Relations. Mr. Price, please go ahead.

Good afternoon, everyone. I would like to welcome you to Gap Inc.'s second quarter 2007 earnings conference call. For those of you participating in the webcast, please turn to slides 2 and 3. I would like to remind you that the information made available on this webcast and conference call contains forward-looking statements including those identified in today's earnings press release which is available on GapInc.com as well as other statements that express our expectations, anticipations, beliefs, estimates, intentions, plans, and forecasts. 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. Information regarding factors that could cause results to differ can be found in our annual report on Form 10-K for the fiscal year ended February 3, 2007. Investors should also consult our quarterly report on Form 10-Q for the quarter ended May 5, 2007, and today's press release. 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 August 23, 2007 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. This presentation includes non-GAAP measures, free cash flow and diluted earnings per share excluding Forth & Towne's net loss and expenses associated with the company's cost reduction initiatives which under SEC Regulation G we are required to reconcile with GAAP. The reconciliations of these measures to GAAP financial measures are included in today's earnings press release which is available on GapInc.com. Joining us on the call today are Chairman and CEO Glenn Murphy; CFO Byron Pollitt; Director Bob Fisher; and…

Thanks, Byron. Reflecting on the first half of the year, we've seen a lot of change, and with that change we've made solid progress on what we believe is necessary to get our business back on track. First, we've streamlined the organization with the goal of becoming more nimble and cost effective. The majority of job reductions are behind us, and we continue to find ways to simplify our business. Our teams are focusing on further improving our operating efficiency and bringing costs back in line at the corporate and brand levels. At Gap and Old Navy, Marka and Dawn have put strategies in place and have begun to execute. The brands remain focused on disciplined inventory management, and we are comfortable with our inventory levels as we enter the fall season. Of course the most exciting news of the quarter was the announcement of our new Chairman and CEO, Glenn Murphy. Although he has been on the job just a few weeks, it is clear we found the right leader to take Gap Inc. forward. You will hear from Glenn in a few minutes. Now let's take a look at each brand. Looking first at Gap adult, we're seeing indications that our strategies are moving the business in the right direction. For instance, woven tops and clean pants performed well in the second quarter. This is a good sign that we're starting to resonate with our new target customer which we've identified as being in the 24 to 34 age range with a sweet spot in the late 20's. We're pleased to see positive response as we work to assort more fully to this customer in the coming seasons. During the quarter we improved our execution and cleared through merchandise with less aggressive markdowns than last year. We entered…

Thanks, Glenn. That concludes our prepared remarks. We will now open the call to questions. We'd appreciate limiting your questions to one per person.

Your first question comes from Dana Cohen - Banc of America Securities. Dana Cohen - Banc of America Securities: Glenn, welcome. By all accounts you could have taken a lot of positions and I guess I am intrigued by what attracted you to the Gap? Since there are a lot of mountains to climb out there in retail, what attracted you to this one? Glenn Murphy: I guess first and foremost I was looking for a great opportunity with a brand, and obviously in this business there are three outstanding brands, and also a customer-facing challenge that had an international component to it, and when I put in both of those together, and you're very kind to say that I had a number of different options. There may have been a few, but for the minute that this became a possibility for me, this was the one I clearly was focused on.

Your next question comes from John Morris - Wachovia Securities. John Morris - Wachovia Securities: On the $100 million in cost savings you've detailed for us, you have referred to the bulk of the workforce reduction as now complete. Do you foresee additional cost savings on top of the $100 million to come that might be beyond the workforce reductions? What areas would those be in generally? With respect to the eliminated functions that have occurred, excluding Forth & Towne, what are the functions? What kind of information can you give us about those positions that you have eliminated so that we understand that it is not cutting into the bone so to speak? Thank you. Byron Pollitt: You bet, John. We do consider the focus on head count reductions as the first area of primary focus, but there will be other areas. You may recall in my remarks I mentioned that we are also focused on reducing corporate office space, specifically we are targeting a reduction to be implemented this year of approximately 380,000 square feet and we will be reporting out on this activity as well as other related cost productivity savings in future earnings calls, so on that note stay tuned. With regards to the type of reductions we've made, excluding Forth & Towne, we mentioned that we were reducing 1,600 positions. What I can tell you is that the leveling of these positions range from entry level all the way up to very senior executive levels. We've had a strong focus on tightening our spans of control, and that these areas, roughly two-thirds of these reductions have been in areas unrelated to stores. On those reductions that have impacted the stores, these are all related to store management, so they are not the individuals that most directly touch the customer service proposition in our store units.

Your next question comes from Lorraine Maikis - Merrill Lynch. Lorraine Maikis - Merrill Lynch: You're guiding for a relatively flat second half, and I assume that we'll be seeing the benefits of some of these cost reduction initiatives, so can you comment a little bit on the differential, whether that's gross margins or sales? Byron Pollitt: With regards to earnings in the second half, the upper end of our guidance is based on first half actual and second half in line with 2006. Basically what our perspective here is a recognition that we still are in turnaround. It is hard to predict at this point with our largest selling seasons ahead of us how well the product will be accepted, and I think Gap along with many other retailers are viewing the second half in terms of a macro environment with caution. So when you ask what part of the P&L, the truth of the matter is we feel like we have more control over the cost side than we do the merchandise margin side since that is so directly related to how well the product is accepted. I would add, however, that we do go into the second half with inventory levels we're very comfortable with and with very strong inventory discipline.

Your next question comes from Brian Tunick - JP Morgan. Brian Tunick - JP Morgan: Not trying to read too much into July, but just wondering, do you think obviously the Gap division being positive, can you continue that trend without positive traffic into the back half? The same kind of question at Old Navy. Why did you take early deliveries regarding fall products? Just sort of trying to understand a little more about July and how you're thinking about those two processes going forward. Sabrina Simmons: What I would say about July is I wouldn't read too much into July. As you know, July is a big clearance month for all of our brands, and in particular I will start with Old Navy. What we talked about is we were disappointed with the traffic number at Old Navy in July, but we knew some of the traffic would be negative because we were anniversarying against two very large promotions we had done in 2006, so we had done an additional 50% off, and then we had Stuff and Save in 2006 both in July. The Stuff and Save moved into August. With regard to pulling forward fall products, we actually moved some of the best product at Old Navy at a good velocity in May and June, so we made the decision to pull forward some fall product into July, and that quite frankly didn't resonate that well. Some of the reason may be because it just wasn't wear now enough for the July customer, but I think you really want to wait until August and September to get a truer read of fall. With regard to Gap, I will say that we're very pleased that with the comp there, but again it is a sale month, and just as a reminder, last July at the Gap brand we did go very deep in markdowns in advance of setting our new visual presentation in our stores under our old leadership teams, so I think the circumstances were really different, and I think the much truer read of fall is August and September.

Our next question is from the line of Dorothy Lakner - CIBC World Markets. Dorothy Lakner - CIBC World Markets: Thanks, and good afternoon, everyone. I wanted to ask the other side of Dana's question, and that is for Glenn. Certainly we've heard all kinds of good things from the company. We ourselves have heard some good things from people in Canada, but I wanted you to put in your own words what you think you can bring to the Gap and to make this process of turn around move forward? What your experience in Canada, how that will help us turn things around at the Gap here? Glenn Murphy: I would like to think it has less to do in some ways with my experience in Canada and more to do with the fact that while I was in Canada I had experience in three fairly distinct retail sectors: food, books, and health and beauty. It is my belief and philosophy that there is enough common ground between retail sectors that I can bring a nice complementary skill set to people like Marka, Dawn, Jack, Tom, Steven, John and Toby from the direct business. Given my experience in retail and the focus from looking at the business from the customer up, understanding the importance of a great real estate strategy, understanding the critical nature of consistent store execution, and then applied in this business at a level above both of those, the importance of creativity, innovation, product development and rewarding people who are on brand but are not afraid to make sure that our brand gets represented properly every single season through really strong product presentation and development. So I am hoping, and I believe the feeling from the people around the executive table and the people around the board is that I will have very solid retail background that shows it can be transferred to other sectors, and when you complement that with the people I mentioned earlier, that that will be a very strong management team going forward.

Your next question comes from Lauren Levitan - Cowen & Co. Lauren Levitan - Cowen and Co.: Byron, I recall you explaining the expense opportunity in three big buckets of store labor and marketing and then all of the other areas. I am wondering if you could spend a little bit more time updating us on the marketing piece and if there is opportunity either in '07 or beyond for that as an area for expense reduction, or if you think that the current run rate is the appropriate level? Then with respect to the all other, I know you call that some of the corporate office space, but are there any other significant areas that either in this year or in next year we should be watching as possible areas of improved efficiency? Thanks very much. Byron Pollitt: So let me divide remarks at this point into two elements. The first is just recall that in 2006 we made some significant incremental investments in marketing, frankly for which we did not get a return, mostly in Gap brand, and so it is not our intent this year to repeat those investments. Having said that, in our assessment of marketing, it is never about cutting marketing, it is about determining what level of marketing is effective in driving the business, and with the two big brands, reformulating their strategies about how best to target their customer demographic and how best to support the stores in reattracting our customers and recapturing market share, I think it is premature to draw any conclusions with regards to what level of marketing we'll be doing going forward. But having said that, we do expect it to be down for the year and that primarily relates to not repeating the incremental investments that we spent last year. With regards to broader cost reductions, our first priority is to drive costs down perpetually in those areas that have the least direct impact on our product and our customer service proposition, so that third bucket which is everything other than store labor and marketing takes the first priority. Marketing will be under review, and store labor is something, again each of the brands will be studying hard over the next 12 months in order to better define the service level proposition in the stores and to identify whether there are opportunities to be more cost effective in delivering our brand and customer proposition.

Your next question comes from Jeff Klinefelter - Piper Jaffray. Jeffrey Klinefelter - Piper Jaffray: Historically Gap Inc. and the Gap brand successes really seems to have been centered on a key item cycle, and looking back at the last couple of years and what has been mostly associated with the denim cycle, what do you look at in terms of what you might have missed now in terms of execution from marketing, product styling or pricing, and how is this playing into how you've refined your assortment planning going forward?

Well, let me take that initially and then I will have Sabrina take it from there. I think that when I look back on the last couple of years there have been a couple of things we've missed. One is color. Gap has always been about color, and we've let a lot of competitors take that space from us. So, we have had, yes, great key items in lots of colors and been well priced, and we haven't done a good job aesthetically or through the color selection. I think on the bottoms side, khaki pants and denim, we've had confusing assortments, we've been over assorted. We put cost into the product that wasn't readily noticeable to the customer, that inflated our retails. So I guess my answer is I believe we are still a key item business, but we've got to enhance that with the right fashion as well. So color, bottoms focus through denim and khaki, key items as an important piece of what we do. Sabrina Simmons: Jeff, what I would add to that is I think a lot of this is anchored in our target market. So we talked about with Marka a couple quarters ago that in today's environment we had been targeting two broad of an audience from 18 to 34, and that's why I think you hear Bob say our assortments got a little broad. I think with our new focus on 24 to 34 with a sweet spot in the late 20's, that is already helping us be much more focused with our point of view in the store and how we assort the line, so that in and of itself is helping. I think now we're very clear as well that we are anchored in casual weekend and work, and that's a much clearer focus than we've had in the recent past.

I think if you go into stores today, you will see the results of a fairly dramatic customer choice reduction, 30% plus or so. I think while we're certainly not there and we haven't yet seen the fruition of the new design team, you'll still see a much more focused product assortment, and that makes it easier for customers to shop.

Your next question comes from Jennifer Black - Jennifer Black & Associates. Jennifer Black - Jennifer Black & Associates: My question is kind of a follow-up to what you were just talking about. On the last call when you spoke about the number of TCs being reduced by 30%, you're right, the stores look much cleaner and easier to shop. I wanted to know if you're happy with the magnitude of the reduction and are you happy with the way your flowing your goods at the Gap brand and if you have any comments on any of the other brands? Thanks. Sabrina Simmons: Let me start and I will turn it over to Bob, Jennifer. I want to make one point really clear. There is about a third reduction in the TCs this Fall versus LY, but to be clear, there was a proliferation of TCs last year, so I would say it is important to keep in mind that we are going back to a much more normalized level of TCs, so that's just an important point, and I think we're happy but of course it is an evolution.

I would say in terms of the ease of shopping, we've seen I think pretty good improvement. In terms of the styling, I would say we are 50% of the way there. We have a pretty young design team in New York, and a lot of what you're seeing for fall was remerchandised, so it is not what I would consider all new product. In terms of flow and flow strategy, it is really too early to say. August is really the beginning of the fall season. We haven't seen delivered our fall 2 set. That will come in sometime in mid-September, so as you know, there are a lot of learnings that go on all the time, and we're not going to know whether we've got a proper flow strategy, until we get probably into spring.

Your next question comes from Mark Montagna - C.L. King & Associates. Mark Montagna - CL King: I was hoping you could talk about how the headcount reduction has streamlined the decision-making process at headquarters? Byron Pollitt: One of the objectives we set out with this is to, on a continuum of centralized decision making to decentralize, the intent is to move down the continuum to a more empowered decentralized set of brands and operating divisions, streamlining the number of people involved in decisions, whether that is in the sourcing organization and the selection of products, selection of vendors, how many people participate in inventory. So it is an attempt to empower the brands, simplify the decision making, involve fewer decision makers, speed up the process because we're all convinced that part of the unlock in our turn around is time to market and speed of decision making and to do that in a way which removes, I guess there's probably no better word than a level of well-intentioned bureaucratic involvement that just isn't consistent with the competitive environment we face today. Mark Montagna - CL King: Is there a way of perhaps describing how much bureaucracy is removed? Are you cutting the amount of people with their fingers in their pie by 30%, 40%, or is it possible to quantify it that way? Byron Pollitt: I would say it is pretty tough to quantify at this point.

Our next question is from the line of Gabrielle Kivitz - Deutsche Bank. Gabrielle Kivitz - Deutsche Bank: This question is for Glenn and a follow-up on Dorothy's question. So Glenn, you spoke about the similarities that apparel retailing has to areas of your background. Curious if you could talk about what the differences are versus apparel, what do you think will require the greatest amount of learning for you? Thank you. Glenn Murphy: The thing I was touching on earlier is that I have not worked in an environment that everything was vertically integrated on the product. In my past life I did work for a large retail business where innovation and product differentiation was key and 40% of what the consumer ultimately saw in the store was developed by that business, so I think that there is a learning curve which has been more than reported when it comes to the apparel side of our business. It is the reason I mentioned that I will be spending a lot of time initially and ongoing with the people in the merchandise and design side and to build on the previous question and Byron's answer, I think making sure that team knows that we reward them and appreciate them based on their creative skill and once they know the brand, and what that customer's expectation is, to not shackle them with too much bureaucracy or research and make sure they know we want them to make the brand come alive every single day inside our stores. So that's a message I can deliver to them. I want to spend time with them and get a deeper appreciation of the product development cycle. My commitment to them when I was in New York is while I will do that and that's a guarantee I will spend time with them and make sure that they have all the tools necessary and the freedom to make the right decision for the brand, the quid pro quo for them is that I will invest also an equal amount of time making sure the store execution and the quality of the four walls in which their product gets showcased is up to standard and a representation of the brand to the consumer. I do believe that those two in tandem will make this business’ ability to turn itself around that much more likely.

Your next question comes from Barbara Wyckoff - Buckingham Research. Barbara Wyckoff - Buckingham Research Group: The narrower customer niche in Gap has given us a clear point of view. How is the Old Navy team viewing its customer these days in terms of age, lifestyle, product end use, etc.? Sabrina Simmons: As you know, the Old Navy team is focused on the 20-something customer, and similar to Gap, when you have a very clear target, it really helps drive a clear point of view in your store and in your marketing, so it is really helping us develop that integrated marketing campaign which as an example we feel like a great first step in that is the denim campaign that's running right now where it is on television, you see it visually in the store, it includes the three new fit camps in denim for women, so we think that that refinement of the target is really critical. At Old Navy we don't want to alienate the shoppers that have shopped with us, so that young 20 something woman can be a mother, certainly mothers shopping for her children, making that decision, but again what we feel it does is it really drives a much clearer perspective around our assortments and our marketing, so we're pleased with the step we're taking in evolving that.

Your next question comes from Richard Jaffe - Stifel Nicolaus. Richard Jaffe - Stifel Nicolaus: Glenn, congratulations and welcome. If you could give us some landmarks ahead and a calendar for those landmarks in your next three years. You've been around a bit, you've seen how these turnarounds evolve. Could you give us some sense of how you see timing and how we should judge you if there are landmarks we could look for or milestones that you think you can meet in a certain timeframe? Glenn Murphy: I think it is a little early to put any kind of clear milestones established right now. What I can tell you is that as I mentioned earlier I am going to continue to reinforce the near term priorities the business has set out, and you heard them articulated today, and I think Byron just touched one of them which is the simplification of our business in allowing people the freedom to make decisions and be accountable for those decisions, and over time I think we recognize our duty as a publicly traded company. We'll make sure that our shareholders and the analysts on the phone understand what we will be working towards and what you can hold us accountable for in terms of the planning and the strategic initiatives we want to put forward to make sure we get to the goal we've established for ourselves which is long-term sustainable improvement in earnings. So I think that time will come, I don't believe in any kind of mass unveiling, but we will make sure that it is clear from 150,000 employees, so it is clear with them, and that we're all tugging in the right direction by brand and make sure that it is also clear to our shareholders.

Your next question comes from Kimberly Greenberger - Citigroup. Kimberly Greenberger - Citigroup: Thank you, and congratulations to Glenn on the new position. I wanted to ask about the Gap brand new target of focus, 24 to 34-year-olds. When would you expect that new age demographic focus to be fully represented in stores? You canceled the Gap brand television campaign here for fall, and I just wanted to see if you had any opportunity to consider the holiday campaign, any plans to cut that as well? Thanks. Sabrina Simmons: So with regard to the reflection of the new target in the Gap stores, what we said is, as you know Marka joined the brand in about February of this year. So she is really owning the line more beginning in spring '08, but then you add onto that the Gap Adult President, Gary Muto and Patrick Robinson our new head of design joined even a bit later. So I think in our business as you always know it is an evolution. I think Marka will have a much more market impact on the line beginning in Spring '08, but it will evolve with her team, her design team with Gary as the year progresses, so that's the answer to that one. With regard to the marketing, it is a little bit early to talk about holiday, but what I would say, Kimberly, is that there is probably not going to be a big change in our position with regard to the fact that Byron mentioned we had made incremental investments in 2006, especially at Gap brand, that didn't have a high return for us, and as Marka and the team continues to work on the product and that holiday product again was really done under a different leadership team, although they are impacting it on the margin, we're likely not to put as much fire power behind that as we did in 2006 certainly.

Your final question comes from Dana Telsey - Telsey Advisory Group. Dana Telsey - Telsey Advisory Group: Glenn, I just wanted to get your assessment as you look at the customer base, who the brands are targeting, and what we heard that you've done at Shoppers Drugmart, how do you look at attracting customer into the store and driving productivity within the box? Service versus product extensions, marketing, how do you look at the landscape? Thank you. Glenn Murphy: I think that there is still the elements of success for us from my perspective are still being developed in my mind as I've gone across as I mentioned the country and spent time with key brand presidents understanding the different levers in order for us to get to that productivity targets we've held for ourselves. You've mentioned three of them, I could mention another three or four. There are a lot of options for us in order for the business to get to the productivity and to the results and to the earnings we would like to have long-term. Clearly I have said this internally a number of times and I've stated twice on the phone today, the creative merchandising component of our business will continue to be unleashed and allowed for that team to be as on brand and as unfettered when it comes to bureaucracy as possible. What I would like to do then is as that group continues to be right on product is to elevate the strength of our real estate in terms of how it presents itself to customers every single day, the execution inside our stores back to the simplification and making sure our stores have all the right tools, but don't over complicate their lives so the product that gets developed can be presented and merchandised properly in a visual way at a store level, and make sure as a company we are always mindful of the need for cost containment and reducing costs in an appropriate way to be reinvested in the business to drive productivity. So there is a lot of elements and they may differ to some degrees by brand, but we're certainly looking forward to the next number of months as we sit down with brand presidents and map out the long range plan for the business and determining which one of those priorities by brand will be most important with product being at the top in order for the three brands to fire on all cylinders.