Good morning, ladies andgentlemen, and welcome to Gap Inc.'s Third Quarter 2007 Conference Call. At this time, all participantsare in a listen-only mode. (Operator Instructions) The conference call andwebcast are being simultaneously recorded on behalf of Gap Inc., and consist ofcopyrighted material. They may not be rerecorded, reproduced, retransmitted,rebroadcast or downloaded without Gap Inc.'s express written permission. Your participation representsyour consent to these terms and conditions, which are governed under California law. Yourparticipation on the call also constitutes your consent to having any commentsor statements you make may appear on any transcript or broadcast of this call.If you have any questions regarding this policy, please contact Gap Inc.,Investor Relations at 415-427-2175. I would now like to introduceyour host, Evan Price, Vice President of Investor Relations.

Good morning everyone. I wouldlike to welcome you to Gap Inc.'s third quarter 2007 Earnings Call. For those of you participating inthe webcast, please turn to slides two and three. I would like to remind youthat the information made available on this webcast and conference callcontains forward-looking statements including those identified in today'searnings press release, which is available on gapinc.com, as well as otherstatements that express our expectations, anticipations, beliefs, estimates,intentions, plans, and forecasts. Because these forward-lookingstatements involve risks and uncertainties, there are important factors thatcould cause our actual results to differ materially from those in theforward-looking statements. Information regarding factors that could causeresults to differ can be found in our annual report on Form 10-K for the fiscalyear ended February 3, 2007. Investors should also consult our quarterly reporton Form 10-Q for the quarter ended August 4, 2007, and today's press release,which is available on gapinc.com. Future economic and industrytrends that could potentially impact net sales and profitability are difficultto predict. These forward-looking statements are based on information as ofNovember 21, 2007, and we assume no obligation to publicly update or revise ourforward-looking statements, even if experience or future changes make it clearthat any projected results expressed or implied therein will not be realized. This presentation includesnon-generally accepted accounting principles measures, free cash flow anddiluted earnings per share excluding Forth & Towne's net loss and expensesassociated with the company's cost reduction initiatives, which under SECRegulation G we are required to reconcile with GAAP. The reconciliations ofthese measures to GAAP financial measures are included in today's earningspress release, which is available on gapinc.com. Joining us on the call today areChairman and CEO, Glenn Murphy and EVP of Finance and acting CFO, SabrinaSimmons. Now I'd like to turn the call over to Glenn.

Thank you, Evan, and welcomeeverybody. Thank you for joining us on this Thanksgiving eve. I'd like to makea couple of general comments and then I am going to hand it over to Sabrina,who will take you through the third quarter financial results. There are a couple of commonthemes in our financial performance in the third quarter I would like to touchon. First and foremost, we continued with our disciplined inventory management,which we have been quite disciplined around last 12 months. At the end of thethird quarter, our inventories were actually down 8% on a per foot basis. Also,we had some cost reductions. The majority of the cost reductions in the quartercame from $75 million reduction of marketing expenses. Beyond the financial componentsin the third quarter, I want to just touch on that we continue to push thenotion of simplification. And we really are pushing down responsibility andaccountability into the brands. We filled a number of key executive positionsin the quarter that we feel good about. And lastly, we launched a co-brandedvisa card across all our brands in September of this year and while it's early days,we actually feel good about the consumer response to-date. As we look forward to this longweekend selling season, two of our brands really participate at a higher levelwhen it comes to the Thanksgiving, the Black Friday and the selling season thatensues on the Saturday and the Sunday. First and foremost, that's Old Navy, andOld Navy will be opening almost all of their stores, 90% to be exact at 5o'clock in the morning this year, and that compares to 7 o'clock in the morninglast year. More importantly, Dawn and herteam really have a fully integrated marketing campaign going on for theThanksgiving. We started the Thanksgiving selling season and going rightthrough to the end of the holiday.…

Great. Thank you, Glenn. Goodmorning everyone. I'll begin today by reviewing third quarter performance andthen I'll take you through guidance for fiscal 2007. First, highlights for thequarter. For webcast participants pleaseturn to slide 4. Net earnings increased 26% to $238 million, diluted earningsper share increased $0.30 per share from $0.23 per share last year. Operating expenses decreased by$82 million, driven almost entirely by $75 million reduction in marketingexpenses. We repaid $326 million in debt and finally we repurchased 48 millionshares during the quarter for $887 million. This resulted in weighted averagediluted shares of $791 million for the quarter. Please turn to slide 5, salesperformance. Third quarter total sales were $3.9 billion, flat to last year.Total company comp store sales were down 5% in the quarter versus down 5% lastyear. An important contributor to the spread between total sales and comp saleswas the continued growth of online, which grew 36% to $247 million. Pleaserefer to our earnings press release for total sales and comps by division. Turning to slide 6, gross profit.Third quarter gross profit was flat to last year's $1.4 billion. Gross marginwas 37.5%, up 10 basis points compared to last year. Merchandise marginsimproved 100 basis points, which was partially offset by 90 basis points ofoccupancy deleveraging. Please turn to slide 7 foroperating expenses. Third quarter operating expenses were $1.1 billion, down$82 million from last year, driven by a reduction in marketing expenses ofabout $75 million. As I will discuss in more detail shortly, substantially allof the second half savings we anticipated in marketing, were realized in thethird quarter. Marketing expenses for the quarter were $124 million versus $199million last year. This decrease was primarily driven by reductions at Gap andOld Navy. Turning to inventory on slide 8.We ended the third quarter with $2.5 billion in inventory, down 5% over…

Well, that concludes our preparedremarks. We will now open up the call to questions. We'd appreciate limitingyour questions to one per person.

(Operator Instructions). Yourfirst question is from Dana Cohen with Banc of America.

Hi, good morning, guys. Twothings on the SG&A. Can you just talk about with marketing having been up$35 million in Q4 last year, not seem to pay back. Why you would be spendingthe same amount? And then as well, there is then the 100 million of SG&Acuts coming out of home office, doesn't sound like you got any other benefitsin Q3, should we start to see that in Q4? Thanks.

Yeah. So, on the first piece onQ4 SG&A, we are realizing some savings in some divisions. Obviously, Gapbrand isn't running four weeks of television in Q4 that they ran last year.That said, we have seven operating divisions and so we are choosing to makesome selective investments that are offsetting some of the savings, forexample, in Gap brand. So, one example that I'll take, as Glenn mentioned, wedid launch our co-brand credit card in the third quarter, and so we arechoosing to make selective investments in that program in the fourth quarter.And then, just remember we have the other operating divisions internationally,as well as outlet, as well as online. So, there is lots of moving part, so weare reducing for example, the television at Gap brand. So, that's the firstquestion. On your second question, regardingoverall savings, as a reminder, we said that given our headcount elimination,we would expect savings of about $100 million on an annualized basis which,using simple math, is about $25 million a quarter. What we are seeing in thethird quarter is we were still finishing some of those cost initiative. So, wewouldn't anticipate the full effect. What we've seen in savings innon-marketing areas, is $7 million, but remember in our reported SG&A, wehave about $5 million kind of severance one-time cost initiative expensesincluded. So, what you really have is about $12 million of non-marketingsavings in the third quarter. So, there too we are electing to make certaininvestments that are offsetting some of the savings we are seeing in areas inour online division, for example, that's driving very healthy 36% revenuesimprovement, we're selectively making decisions to invest there. So, we thinkthe number makes sense. That said, we of course are very focused in continuing,as Glenn has said to manage our expenses on every line item.

Great. Thank you.

The next question is from Brian Tunick with JP Morgan.

Hi,thanks. I guess our question, sort of a bit on Old Navy. We went back andlisten to what Dawn had said a couple quarters ago and talked about thestrategies and process, so we're just trying to understand. What do youthink Glenn, is happening in Old Navy and besides Macro, why don't think thatbusiness is getting any better?

Well, what I would say, Brian, isthat Dawn is going through quite the evolutionary change in her brand and thesethings take time, and what you probably witnessed in the third quarter was notacross the entire offering within Old Navy. There were some challenges withinwomen's in particular, and not within men's and babies and kids. She is really trying to instituteagain. It's an evolutionary change in her business to get it focused on her keycore customers going forward and these changes take a little bit of time. As Imentioned in my opening comments, I'm finding from a marketing alignment towhat the brand targeted customer is going for an Old Navy. We are going to see the first ofthat really hitting this holiday season starting with the Thanksgiving programshe has in place of running right through the holiday. That's the first timethat she will have everything fully integrated to where the brand positioningneeds to be. So, whether if she was talking September-Octoberish and there weresome challenges on women's I think, then we'll get a better read on her newmarketing position to her key brand customer in this fourth quarter.

Okay thanks and good luck

The next question is from JeffBlack with Lehman Brothers.

Yes thanks, good afternooneverybody. Glenn, I know it's early on, but can you tell us at least yourthoughts bout the existing remodel program. What might be the fate of thatprogram, as we head into next year? Do we morph into something a littledifferent? Do we table this until we get something better etcetera. Anythoughts on that, much appreciated, thanks.

I'm waiting to get a better readto be honest with you. Some of the, I guess we are not different than manyother retailers, some of the remodeled program is backend loaded. I hate tomake any harsh decision after a month of sales or even three months of sales.So I'll have much better read for you sometime early next year about theremodel activity we've gone through. Having said that, to support thefact that there is an aging component to our fleet, there is a certain amount of remodeled capital we haveto put into our stores, whether that iswholly defined as maintenance capital in fitting rooms and cash raps and HVAC,some of that has to take place. We are also spending quite a bitof time with the teams right now defining what different levels of remodels,which I don't think we've really had in the past. And trying to define as wehave our real estate strategy set and better understood, by market what kind ofcapital should we be spending if any, in selected stores that will support ouroverall market strategy. So, that work has been put intoplace right now, but what we're going to end up with is some stores may not beworthy of a remodel, in some cases it may be a minor remodel what people in theindustry call it cheap and cheerful. In some cases it might be worthy of a full[gut]. These are all decisions that Ithink when you really understand what your strategy is by each one of thebrands, by market, become much easier decisions to make, so more to come onthis. When we speak to you at the end of our fourth quarter, and at which pointwe'll be talking a little bit forward about 2008.

Great. Good luck in holiday.Thanks.

The next question is from JohnMorris with Wachovia.

Thanks, good morning. I guess,first of all, relating to the cost savings as we look out into next year, haveyou identified further potential for non-marketing cost savings into next year?And Sabrina, assuming that that's kind of a $25 million quarterly that you'retalking about, would you continue to reinvest some of that into furtherinvestments like you talked about the co-branded Visa Card into next year, andwhat would those investments be. So really kind of cost savings into '08?

Yes, John. A quick comment justbefore I hand over to Sabrina to get into some of the detail. One thing we havedone in the last number of weeks is, we've broken down SG&A. I think it’s,SG&A is a total pool of cost. We've worked hard with the teams here to getdown to 30 to 50 significant cost centers, and ultimately those all add up toan SG&A number. We've really got focus in thebusiness down to much more detailed information, all the elements that make upSG&A. So that work again has just begun. And we're going to be looking atall of those elements across all of our brands from the corporate entity allthe way down to divisional business and finding ways to take out non-valueadded cost and make sure that we are simplifying the business and working hardto get more productivity and efficiency out of the company. I'll let Sabrina answer thesecond part of your question.

Yeah, John. Overall, as areminder, we definitely have eliminated the positions that represent about $100million in annual savings. That said, as we enter every year, just like everyretailer, there is momentum for pay raises, for inflationary items etceterathat we have to battle against. So part of our job, as we enter anew year, is to make sure that we're really capturing the savings and workingreally hard to offset the natural momentum on expenses that you have as youenter each and every year. So, we are very focused on that. In addition, we will make choiceswhere, we believe, we will get a return for making the expenditures. So, I usedagain online business and our investment in marketing for our co-branded creditcard as examples. We think those are smart decisions. So, there will be some ofthose shifts, but overall, as Glenn said, we will be looking on a continuousbasis to every line item to look where we can simplify and reduce. And as a reminder again in '07not only did we eliminate the headcount, but we also closed the distributioncenter, and then we've consolidated some of our office space in San Franciscoand San Bruno, in particular, and that should bring us about $10 million inannualized savings as well.

So, you are saying that you wouldcontinue to see further non-marketing cost savings into next year, correct,because of some of those headcount reductions?

We are absolutely working toreduce our cost base. That said, we have some offsets that are going to go onin terms of momentum entering a new year and investments we choose to make. So,we are capturing savings on an annualized basis from our actions.

Okay, thanks. Sorry, go ahead.

Also, we are trying to shift anotion of one time to the concept of perpetual, and this is just the market inwhich we operate. I know we are against a very highly competitive set ofcompetitors here in North America and aroundthe world. We have to make sure we're perpetually trying to find ways,innovative ways, creative ways to get costs [out] of our business. The businessis committed to doing it. These things do take time. Round one is justidentifying what we're willing to do and then we choose a time in which we'regoing to execute on taking those costs out of our business.

Very helpful. Good luck forholiday. This of course looks great. Thank you.

The next question is from Paul Lejuezwith Credit Suisse.

Hey, thanks guys. Can you justgive us a breakdown of how many Gap adults [versus] kids, baby, and body’sthere are, maybe talk about what the right numbers are for each of those goingforward. Glenn, maybe you have some initial thoughts. And then just a second,you're a few months into monthly flows at Old Navy. Are you are finding thatthe systems in DCs in place are adequate to handle that or are there piecesmissing?

You know, I'll just start. Justreminding, Paul, sort of where we are at in store count. So, I'll talk more inconcept, because many of our boxes contain kids and body and adult. So overallwe have about 750 adult concepts, we have about 700 kids and baby concepts andwe have about 200 body concepts.

And I would think that that, ifMarka was joining us today, I mean, she would admit that her portfolio ofstores is a little bit more disaggregated than she would like it to be, andthat's why I think the work has begun, led by Eric Bauer within the Gap brandbusiness, to really be crystal clear on what the outcome on the real estatestrategy they'd like to have over the next five years. That will drivedecisions and will drive priorities. But there is definitely a need to makethat portfolio a little more in keeping with how we believe we should bepresenting ourselves to the consumer going forward. On the distribution center front,Don's work at Old Navy, in terms of a month flow there has been some of thattaking place in November and December. But the real move to her new flow ofproducts on a monthly basis will begin in February. And yes, our distributioncenters have been working in a parallel way with people in Old Navy to makesure they are prepared. We didn't have to make any significant capitaladjustments inside the DCs, they are really just process adjustments from thevendor to our DCs out to the stores, and all that work has been going on forthe last three to four months.

What about the design system ingeneral, I mean is everything smooth flowing on the Old Navy side with themonthly flows?

Again I think it’s early days. Weare making quite a change from the way we used to flow goods, the way we flowgoods today. And I think there were some categories that were embarking on amonthly flow this fall. But in terms of the entire store, we will see thatstarting in February, and of course we've made, knowing that we didn't want todo the whole store immediately, we wanted to get a some sort of category bycategory test at this fall, we will have a much better read. But yeah, whateveradjustments and they were not significant. Again, they're more processadjustments from the vendor to our DCs and into the stores. Those are stillbeing worked on, but I would say are well under control.

Thanks. Best of luck.

The next question is from JanetKloppenburg with JJK Research.

Hi Glenn, hi Sabrina, how areyou?

Okay. Thanks. Good.

Glenn, I was wondering if youcould talk a little bit about the repositioning of Old Navy? We don't have theadvantage of seeing the product for spring in the go forward and I'm wonderingif you have confidence in this new positioning of targeting a younger customerand a distinct customer from the old, maybe kids customer. And I'm wondering ifwe don't see improvement there in the holiday season or in the first quarter,if you would consider cutting the marketing expense for this brand as well.Thanks very much.

No problem. First of all, I wantto say that I think when you make the changes that are going on in Old Navy,nothing is set in stone permanently. But I don't mean there is always going tobe minor, on emphasized minor adjustments as Dawn and her team learned howcustomers react to this evolution they are going through at Old Navy. And the key thing is that we arevery focused on the 20-something customer, and I think I believe in that, Ithink that is the right strategy. Without giving up on the mom which is acritical component to what Old Navy is about. And I think trying to find the rightbalance is something that the marketing campaign will see a little bit thisfall, but definitely in the next spring, is what Dawn and the team are going tostrike. I am actually feeling that they are making the right strategicdecisions. Now like anything, once the strategy is understood inside thatbusiness as how does the execution now in terms of product and marketing, andhow does that resonate with customers and how do we make along this journey, theminor adjustments that need to be made as we get good, solid feedback from ourcustomers. I don't believe personally and Iam sure Dawn feels the same way, this is not a massive departure from where wewere before and what customers Old Navy have always had and have been loyal tothat brand. But yes, it is an adjustment and an evolution from where we havebeen over the last 12 years. So more to come, we are definitely committed tolisten to the customers, hearing what their feedbacks are (inaudible) makingnecessary adjustments. But overall, at a very high level strategically, I thinkDawn is, and her team, are on the right course.

And the marketing?

Marketing decisions, I think that,again we are going to get a very early read, as I mentioned in my openingcomments, starting this Thanksgiving, her first five-week campaign that isfully integrated to our new customer positioning. We'll see that into the NewYear and all of us agree that if for some reason the marketing, whether it's themedium or the overall message is not resonated appropriately, we are more thanprepared to make the adjustments necessary. But let’s get a read first and seewhat customers have to say and see how the stores perform and look at grossmargin dollars per foot. And once we have those indicators, obviously, we wantto be successful. So we will make the appropriate adjustments.

Thanks very much.

The next question is fromAdrienne Tennant with Friedman Billings.

Good morning. My question is onthe guidance for the fourth quarter. So, on a similar comp as the third quarter,are you telling us to think that we would not see leverage on the SG&Aline. Is that kind of how we should read it?

You know, Adrienne, we are tryingto be helpful by guiding to the operating margin line as well as the EPS line.So just as a reminder, what we've said is a lot of the leverage because we'vegot over 2 points of leverage on operating expenses in the third quarter andsome of that leverage came from the very large marketing expense decrease andthe shift out of the fourth quarter into the third. So I'll just leave you withthat notion.

Okay. And then I guess, as youare looking at the mall traffics obviously, it's still down it seems. Are youseeing kind of an offset uptick, I mean clearly the direct business is growing,but are you seeing even the more so kind of offsetting some of the weaknessthat's happening in the malls?

That can be part of our onlineincrease. It's always hard to say. There has been a decline in overall malltraffic, but our traffic has been negative for quite sometime. So we work allof our other comp levers to try and offset that. Overall in the quarter, in thebrands where we were able to overcome and deliver a comp that was better thantheir traffic comp, we've actually seen those conversion in AUR support thedelivery of that.

Okay. Thanks so much and goodluck.

Your next question comes from LorraineMaikis with Merrill Lynch.

Thank you, good morning. You’vebeen very smart about your inventory buys in this tough macro environment andyou were just curious to hear when you will feel confident enough in theproduct and in your traffic levels to start boosting that buy a little bit tosupport comps? Thank you.

Yeah. That's a great question.Our position currently is that we want to continue to buy our inventories at ahigh level sort of inline with current traffic. We feel that it's reallyimportant in driving to our strategy of supporting the probability of gettingbetter regular price selling, and also improving our margins overall, we'drather add on the side of running out of the few item, than having too much andhaving to drive back down to markdown and increase the amount of cost sold atmarkdown. So, I think time will tell, we're watching it closely but in the nearterm, we are very pleased, especially, given the macro economic climate, in thenear term, we don't have an intention of moving off with that.

Thank you.

Your next question comesfrom Kimberly Greenberger withCitigroup.

Great, thank you. Glenn, your commentson the Gap real estate strategy were very helpful and I was just wondering ifyou could, just help us think big picture about what your view is on the OldNavy store base and the future growth there?

Well, I think that my commentabout the Gap brand when it came to its real estate position it really appliesto all brands, and I think that Dawn and her team and Jack, in Banana Republicand Tom Wyatt in Outlet or at our international businesses, they are all goingthrough the same exercise, and in terms of whether there are new storeopportunities for Old Navy, whether there is chances for relocations orexpansions or reductions or remodels will all come out of the strategy. It'stoo soon to predict, we already get there in February. We will have much betterindication of what our 2008 capital program looks like. What kind ofinvestments we feel are necessary and needed. And I think sub components ofthat will be whether it’s new store opportunities. And I will say to you that, allover North America, there are communities thatare growing, that are establishing themselves in different states. And I thinkit would be inappropriate for us, to not consider opportunities where theaverage disposable income of that marketplace and the population trendsindicate that it's appropriate for one of our brands to enter into that new anddeveloping market. So, we're going to considerthose, we don't want to say there will be no new store opportunities, but aseverybody on the phone knows that the focus over the last number of years hasbeen in reducing the fleet and now I think we are going to become a little moredisciplined going forward on a return on invested capital, when you marry thatup with our real estate strategy I think we will have much better answers forthe long-term and I am talking about three to five year internally understoodplan of how we're going to invest our capital and ensure we get a return forthat capital.

Terrific. Thanks, Glenn and goodluck for your holiday.

Thank you.

Your next question comesfrom Jennifer Black with Jennifer Black& Associates. Jennifer Black - Jennifer Black & Associates: Good morning, Glenn and Sabrina.My question really is, what kinds of things if any new things are you doing todrive traffic at Gap. And then, what kind of reaction have you had to the moresettled sales line at the Gap brand? Thank you.

So, what we find Jennifer isthat, traffic is typically for us a lagging indicator. So, Marka and his teamhave been very, very focused obviously in improving the product assortments andimproving the store presentation. And what we look to initially is signs ofimprovement is whether we're actually driving healthy margins, whether we aredriving growth margin dollar improvement. We feel that when those signsappear and we start driving a healthier business in terms of more regular priceselling, you naturally start to get back some of your traffic. We saw this halfwith Banana Republic several years ago. So, traffic again will be more of alagging indicator. With that said, we are still committed to doing what we canwith the marketing dollars that we have committed for the seasons to drivetraffic. So, we've chosen not to dotelevision, but we very much are investing in marketing for the importantholiday season. We are continuing to do magazines. I am sure you've seennewspaper, outdoor, so we are committed to keep our brand top of mind andpresent to the customer, the more improved product assortments and storeexperience. Jennifer Black - Jennifer Black & Associates: Great. And the subtle sales signsin Gap, have you had any response?

Well, we are probably talkingabout what's going on recently on November sales, Jennifer. Jennifer Black - Jennifer Black & Associates: Okay, great. Thank you very muchand good luck.

Sure. Thanks.

The next question is from Jeff Klinefelter with Piper Jaffray.

Yes. Just a question on sourcing,hearing more about some sourcing pressures coming out of Asia and specifically China,I'm curious, more on Old Navy where it seems to be impacting the lower costproviders in the apparel industry, as you look forward into '08. Are youanticipating that there would be some of these pressures and are therestrategies to sort of diversify your sourcing base to avoid that?

I think there is always going tobe pressure, this is the never ending talk between suppliers and retailers.There is no question we are aware of commodity price increases, but I will saythat we are a large company, we should be bringing the increasing level ofefficiency and leverage, given our size into the marketplace. Have we seen signs today? Theanswer is, no. We, as a business, is very prepared and poised to make sure thatwe can, if there was to be market increases across the board, that we can makesure those are minimal with side of business and we would have offsets againstit. The answer is also, yes. But right now, no indication. Again, we are benefitting from$16.5 billion in sales that we could bring to the marketplace. We have verystrong sourcing hubs around the world and they are working with vendors to makesure that we are getting speed, the quality that we ask for when it comes toour relations with these partners and making sure we are getting the cost ofgoods that we actually deserve given the size of this business. So, we areaware of the macro issues, but we believe we're well positioned to manageaccordingly coming into the New Year.

Okay. And Glenn, just one other thing, in terms of your Asianexpansion through a licensing franchising, would any more aggressive expansionon that front wait until after you see more of a stabilization or recovery ofyour US business, is that, what is contingent on?

I think it's early days. Wedefinitely dip the toe in the water in Asiawith some franchising arrangements we've made. We'll have definitely more tospeak about on that front in 2008 because most of those stores didn't openuntil this late summer and early fall and it's too soon to get a read on them,but we are believers in the initial strategy. We think there is some long-termpotential in our franchise business and as we get a better read, we'll be happyto discuss them in forums such as today, so that people know what the long-termopportunity may be for an expansion, similar to the one we've currentlyembarked on with franchise businesses in Asia.

Thank you

The next question is from ToddSlater with Lazard Capital Markets.

Thanks and good morning.

Good morning.

I want to be the first to predictCrazy Farrell's for holiday '09. Well, I was going to ask a little bit moreabout the international sort of the piggy back conversion on capital, becauseyou've got both owned and franchise stores, obviously depending on thegeography. Although most of the newer initiatives have been on the franchisingside. So maybe you can just tell sort of how much income that's generating fromfranchisees and sort of what line item does it hit in the P&L. And maybeyou could also just talk about what your outlook is for Piperlime? Thanks

Just on the franchise side wedon't break it our right now and have no intention of doing that going forward.What I would say, it's again, it’s early days. It's obviously a business thatwe would be watching carefully, reading it, understanding it and we've a verytalented team under the leadership of Art Peck. Who are doing some work on thefranchising side. It's got an attractive return on capital as you would expect,which is good to see. And I think we're going to be looking forward toanniversarying some of those stores early part of 2008 and getting a betterunderstanding of what the potential and long-term growth opportunities andinvestments will be in franchising.

But on the own side, I mean, dothose stores have, I don't think those stores have comped positively since 2000in its return on capital. Anything to talk about on the, in the UK, Japan,Ireland and France?

So, Todd we've been working onour fleet internationally. Japan, is actually a very healthy business in termsof return on cash flow, in particular. If you think about their model, we areoften within department stores. And so we have a variable rent agreement withinthose department stores. So that's a pretty solid healthy model, although thereis always opportunities to improve it. In Europe,there have historically been more challenges. Those leases are longer term innature and the rents can be high. So, we have been working in Europeto improve the state of the fleet. We're looking -- we've been looking at someclosures and those are within our closure accounts. We also think there isstill great opportunity within Europe. We'veopened some concession stores, so in Ireland for example and that's beengoing very well.

Okay great, that's helpful. Andon Piperlime?

Well, Piperlime I think, we justhad the anniversary of the Piperlime launch. Toby has a great track record ofbringing new brands to market on the online business, so far so good. He isexactly on the plan he'd like to be on. I think he will continue to grow thatbusiness. It's a nice -- it's a very nice compliment to our apparel brands. And I think that, we are -- eventhough it's not a very large opportunity, I think it's a nice compliment whatwe have today. And Toby, certainly is putting the right steps in place to getus to the sales that we want to get to and ultimately to the profitabilitylevel we believe we can get out of Piperlime.

Thank you.

Your next question is fromMichelle Tang with UBS.

Great thanks. I was wondering ifwe could get a little more color on the merchandise margin improvement in thequarter. I think you said it was up a 100 basis points. What did it look likeon an IMU versus markdown basis? And also the occupancy deleverage was higherthan I would have thought given the comps. So, perhaps a little more color thatwe could get on the occupancy deleverage in the quarter and then how we shouldthink about it for fourth? Thanks.

Sure. So a couple of things, Michelle,on our merchandise margin side, I would say overall, we were pleased that thatimprovement was driven by a higher percent of goods sold at regular price. Sothat is right on with our strategy. The second lever that supported theimprovement in merchandise margins was our markdown margins were very healthy.So, those are the two primary drivers, I wouldn't say there is any major changein IMU, certainly from a pricing perspective overall. We're not looking tochange that significantly. We're working always to reduce our average unitcost, but I would say overall, it's more regular price selling and bettermarkdown margins. With regard to the RODdeleveraging, if you're comparing it perhaps to Q2, we did deleverage a littlebit more and some of that is simply attributable to higher remodel activity inQ3 of this year, where we accelerate depreciation. So you get a little bit moredepreciation going from that activity.

Great, thanks. And I guess justlooking at Q4 also, it seems like the gross margin compare is prettymeaningfully easy, I was wondering if there is any major offset either becauseof the 53rd week or anything else that we should be aware of that make fourthquarter more challenging on the merchandise margin side?

I don't think there is anythingto call out in particular at this time.

Perfect. Thank you.

The next question is from LaurenLevitan with Cowen & Company. Lauren Levitan - Cowen & Company: Thanks. I also wanted tofollow-up a little bit more on the merchandise margins. Given in Q4, you wereup against, I believe, it’s about 450 basis points in decline over the last twoyears. On the lean inventories, we would hope that you would show again thosemerchandise margin improvement. I'm just curious if you could give us somesense as to whether or not there is anything in the competitive environment, inthe pricing environment that would prevent you from over the next severalquarters from getting back to, sort of the average merchandise margins that thebusinesses have generated? And then related to that with respect to BlackFriday, just curious if the stores that opened, in the outlets that opened atmidnight last year and the Old Navy's that opened further last year, if thesales in those incremental hours were sufficient to justify being opened? Andwhat kind of offers are going to be out there to compel people to make thosekinds of trips versus going to a big box retailer in the [hybrid] side ordiscounter who might have much higher ticket items discounted during thatdoor-buster kind of timeframe? Thanks.

Hi Lauren, it's Sabrina. I'llstart with the margins question. And I think the best way to answer that is, itis clearly our objective to improve growth margin dollars, primarily also grossmargin percent. Part of that strategy is supported by our lower inventorylevel. So a lot of the result, of course, depends on how the customer will voteand that is uncertain, especially in this environment. So, do we feel like weare taking the correct steps, not only with our inventory levels but also withthe teams in the brands working on the assortments and improving theassortments and point of view in the store and how we're presenting that. Weabsolutely feel like we are moving in the right direction in taking thosesteps. That said, there is a lot of uncertainty with regards to, A, how thecustomer will respond and B, we do anticipate that this holiday season as anexample will be highly competitive. So, we have to be prepared to take theactions that will be necessary to move through our unit.

And on the store openings, it's a combination of beingcompetitive to what's going on the marketplace and I think we were proactivehistorically when it came to store hours. The outlet business, for sure, makesense to open at midnight. I mean, that's really the cash A, of what thoseoutlet centers were all about, and I think we were leaders to get 70 outletmalls last year to move up to a 170 this year. And I think that we reallybelieve working together with all the other brands inside those centers, that'sour real plus. I am going to be in Florida forthe opening at midnight on one of our big stores in Orlando, and I am very impressed what I heardabout last year. And we think that's actually going to be a net positive for uson the outlet business. On Old Navy, the hours just keep sliding on us. We thought 5o'clock, when the decision was made by Dawn and his team about eight weeks agowas more than appropriate and competitive and now we have some retailersopening at 4 o'clock in the morning. There is a point and I can't tell you just yet, until we seethe results, but I think from an industry point of view, there is a point whereyou do get a lot diminishing returns. I think right now, we don't believethat's going to be the case, because we are going to manage our laborappropriately over the 5 o'clock opening to the 11 o'clock closing to make surethere is no incremental labor dollars for us. And the customers are going torespond positively. I think we have a great program in place. As I mentioned,it's fully integrated. That brand lends itself. And I think in some of ourlocations too, we find ourselves, I don't know the exact number, but we can getit fully later on. The percentage of our 1,000 stores are located rightadjacent to a Best Buy, which we think we get the nice [draft in] of thepartnering that goes on with some of those locations. So, you feel good aboutit. But to be fair, given the fact it is two hours earlier than last year, postBlack Friday, you compare, there is a number of people in Old Navy who will becarrying through the numbers, doing the right analysis, and making sure that wemake good sound economic decisions going forward. Lauren Levitan - Cowen & Company: That's very helpful. Thank you and good luck for holiday.

Thank you.

Operator, that will be our last call. So, I'd like to thankeveryone for joining us on the call today. As always, the Investor Relationsteam will be available after the call for further questions. Thank you.