UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended January 29, 2005

or

For the transition period fromto

Commission File Number 1-7562

THE GAP, INC.

(Exact name of registrant as specified in its charter)

Two Folsom Street

San Francisco, California 94105

(Address of principal executive offices) (Zip code)

Registrant’s telephone number, including area code: (650) 952-4400

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ¨    No  x

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act:

Large accelerated filer  x    Accelerated filer  

¨    Non-accelerated filer  ¨

Indicate by check mark whether Registrantthe registrant is an accelerated filera shell company (as defined in Rule 12b-2 of the Exchange Act).¨  Yes    x  No¨

The aggregate market value of the common equity held by non-affiliates of the registrant as of July 31, 200430, 2005 was approximately $15,461,000,000$13,938,227,715 based upon the last price reported for such date in the NYSE-Composite transactions.

The number of shares of the registrant’s Common Stock outstanding as of March 14, 200513, 2006 was 858,529,251.

853,611,821.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s 20042005 Annual Report to Shareholders, which is included as Exhibit 13 to the Annual Report on Form 10-K, are incorporated into Parts I, II and IV.

Portions of the registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on May 10, 20059, 2006 (hereinafter referred to as the “2005“2006 Proxy Statement”) are incorporated into Part III.

The Exhibit Index is located on Page 1516 hereof.

This Annual Report on Form 10-K contains forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements other than those that are purely historical are forward-looking statements. Words such as “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan,” and similar expressions also identify forward-looking statements. Forward-looking statements include statements regarding: our currentfuture strategies and initiatives; our launch ofplans regarding successor IT systems, including IT systems related to our supply chain;chain, point of sale, real estate, finance and human resources; the expected service level enhancements and cost savings resulting from our launch of other successor IT systems;services agreement with IBM; our plans to expand internationally through franchising and outcomesimilar arrangements; and our expectations regarding the impact of legal actions.

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. These factors include, without limitation, the following: the risk that we will be unsuccessful in gauging fashion trends and changing consumer preferences; the highly competitive nature of our business in the U.S. and internationally and our dependence on consumer spending patterns, which are influenced by numerous other factors; the risk that we will be unsuccessful in identifying and negotiating new store locations effectively; the risk that comparable store sales and margins will experience fluctuations; the risk that we will be unsuccessful in implementing our strategic, operating and people initiatives; the risk that adverse changes in our credit ratings may have a negative impact on our financing costs and structure in future periods; the risk that trade matters, events causing disruptions in product shipments from China and other foreign countries, or IT systems changes may disrupt our supply chain or operations; and the risk that we will not be successful in defending various proceedings, lawsuits, disputes, claims, and audits; any of which could impact net sales, costs and expenses, and/or planned strategies. Additional information regarding factors that could cause results to differ can be found in this Annual Report on Form 10-K.

10-K and our other filings with the Securities and Exchange Commission.

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 March 25, 200528, 2006 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.

PART I

Item 1 - Business

General

The Company was incorporated in the State of California in July 1969 and was reincorporated under the laws of the State of Delaware in May 1988.

We are a global specialty retailer operating retail and outlet stores selling casual apparel, accessories, and personal care products for men, women and children under the Gap, Old Navy, Banana Republic, and Old NavyForth & Towne brands. We operate stores in the United States, Canada, the United Kingdom, France and Japan. In addition, our U.S. customers may shop online at gap.com, bananarepublic.com, and oldnavy.com.

We design virtually all of our products, which are manufactured by independent sources, and sell them under threeour brands:

Gap. Founded in 1969, Gap stores offer extensive selections of classically styled, high quality, casual apparel at moderate price points. Products range from wardrobe basics such as denim, khakis and T-shirts to fashion apparel, accessories and personal care products for men and women, ages teen through adult. We entered the children’s apparel market with the introduction of GapKids in 1986 and babyGap in 1989. These stores offer casual apparel and accessories in the tradition of Gap style and quality for children, ages newborn through pre-teen. LaunchedWe launched GapBody in 1998 GapBody offersoffering women’s underwear,

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sleepwear, swimwear and personal care products.

Banana Republic. Acquired in 1983 with two We also operate Gap Outlet stores, Banana Republic now offers sophisticated, fashionable collectionswhich carry a similar line of dress-casual and tailored apparel, shoes and accessories for men and women at higher price points than Gap. Banana Republic products range from apparel, including intimate apparel, to personal care products.

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Old Navy. We launched Old Navy in 1994 to address the market for value-priced family apparel. Old Navy offers broad selections of apparel, shoes and accessories for adults, children and infants as well as other items, including personal care products, in an innovative, exciting shopping environment. Old Navy also offers a line of maternity and plus sizes in its stores. We also operate Old Navy Outlet stores, which carry a similar line of products.

Banana Republic. Acquired in 1983 with two stores, Banana Republic now offers sophisticated, fashionable collections of dress-casual and tailored apparel, shoes and accessories for men and women at higher price points than Gap. Banana Republic products range from apparel, including intimate apparel, to personal care products. We also operate Banana Republic Factory stores, which carry a similar line of products.

Forth & Towne. We opened the first stores of our newest retail concept in August 2005, targeting women over the age of 35. Forth & Towne offers customers smart, fashionable clothing and accessories tailored to a range of lifestyles. Forth &Towne offers great style, along with a beautiful setting and exceptional service.

As of January 29, 2005,28, 2006, we operated a total of 2,9943,053 store locations. For more information on the number of stores by brand and region, see the table in our Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Part II, Item 7 of this form by reference to page 2521 of our 20042005 Annual Report to Shareholders.

We established Gap Online, a web-based store located at www.gap.com, in 1997. Products comparable to those carried in Gap, GapKids and babyGap stores can be purchased on-line.online. Banana Republic introduced Banana Republic Online, a web-based store located at www.BananaRepublic.com, in 1999, which offers products comparable to those carried in the store collections. In 2000, we established Old Navy Online, a web-based store located at www.oldnavy.com. Old Navy Online also offers apparel and accessories comparable to those carried in the store collections. Our online businesses are offered as an extension of our store experience and are intended to strengthen our relationship with our customers.

Certain financial information about international operations is set forth under the heading “Segment Information” in Note ML to Notes to Consolidated Financial Statements, incorporated by referenceincluded in Item 8 – Financial Statements and Supplementary Data.

Store Operations

Our stores offer a shopper-friendly environment with an assortment of casual apparel and accessories which emphasize style, quality and good value. The range of merchandise displayed in each store varies depending on the selling season and the size and location of the store.

Our stores generally are open seven days per week (where permitted by law) and most holidays. All sales are tendered for cash, personal checks, debit cards, or credit cards, including Gap, Banana Republic and Old Navy private label credit cards which are issued by a third party. We also issue and redeem gift cards through our brands.

Each of our brands has a loyalty program through which frequent customers receive benefits.

Merchandise Vendors

We purchase merchandise on average from approximately 700600 vendors with facilities in approximately 50 countries. No vendor accounted for more than 5% of the dollar amount of our fiscal 20042005 purchases. Of our merchandise sold during fiscal 2004,2005, approximately 2% of all units (representing approximately 2% of total cost) was produced domestically while the remaining 98% of all units (representing approximately 98% of total cost) was made outside the United States. Approximately 18%20% of our total merchandise units (representing approximately 19%22% of total

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cost) was made in China, with the remainder coming from more than 50 other countries. Any event causing disruption of imports from China or other foreign countries, including the imposition of additional import restrictions, could have a material adverse effect on our operations. Substantially all of our foreign purchases of merchandise are negotiated and paid for in U.S. dollars. Also see the section entitled “Certain Additional Business Risk“Risk Factors – Trade matters and IT system changes may disrupt our supply chain” below in this Item 1.

1A.

Seasonal Business

Our business follows a seasonal pattern, with sales peaking over a total of about 13 weeks during the Back-to-School (August) and Holiday (November through December) periods. During fiscal 2004,2005, these periods accounted for approximately 32% of our net sales.

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Brand Building

Our continued ability to develop new brands and continually change and evolve our existing brands is a key to our success. We believe our distinct brands are among our most important assets. All aspects of brand development from product design and distribution, to marketing, merchandising and shopping environments are controlled by us. We continue to invest in the development of our brands through consumer research and advertising. We have also made investments to enhance the customer experience through the expansion and remodeling of existing stores, the closure of under-performing stores, and a focus on customer service.

Advertising

We place print ads in major metropolitan newspapers and their Sunday magazines, major news weeklies and lifestyle and fashion magazines. Our ads also appear in various outdoor venues, such as mass transit posters, exterior bus panels, bus shelters and billboards. We have also run TV ads for Gap, Old Navy and Banana Republic and radio ads for Old Navy.Navy and Forth & Towne. We plan to continue our investments in advertising and marketing in 2005.fiscal 2006. There can be no assurances that these investments will result in increased sales or profitability.

Employees

As of January 29, 2005, we had a work force of approximately 152,000 employees, which includes a combination of part and full-time employees. We hire temporary employees primarily during the peak Back-to-School and Holiday seasons.

To remain competitive in the apparel retail industry we must attract, develop and retain skilled employees, including executives. Competition for such personnel is intense. Our success is dependent to a significant degree on the continued contributions of key employees. The inability to develop effective plans to motivate, develop and retain key personnel could lead to unexpected loss of personnel and could have a material adverse effect on our results of operations. Also see the section entitled “Certain Additional Business Risk Factors – We must successfully gauge fashion trends and changing consumer preferences to succeed” below in this Item 1.

Trademarks and Service Marks

Gap, GapKids, babyGap, GapBody, Banana Republic, and Old Navy and Forth & Towne trademarks and service marks, and certain other trademarks, have been registered, or are the subject of pending trademark applications with the United States Patent and Trademark Office and with the registries of many foreign countries and/or are protected by common law.

Franchising

In January 2006, we entered into a franchise agreement with an unaffiliated franchisee in Singapore and a distribution agreement with an unaffiliated distributor in Malaysia, which we expect to convert into a franchise agreement after regulatory approval. Under these agreements, a third party will operate stores that will sell apparel, purchased from us, under our brand names in Malaysia and Singapore. While we expect that this will be a small part of our business in the near future, our plan is to increase the number of countries in which we enter into these types of arrangements over time as part of our efforts to expand internationally. For additional information on risks related to our franchise business, see the section entitled “Risk Factors – Our efforts to expand internationally through franchising and similar arrangements may not be successful and could impair the value of our brands” below in Item 1A.

Certain Additional Business Risk FactorsInventory

The cyclical nature of the retail business requires us to carry a significant amount of inventory, especially prior to peak selling seasons when we and other retailers generally build up our inventory levels. We review our inventory levels in order to identify slow-moving merchandise and broken assortments (items no longer in stock in a sufficient range of sizes) and use markdowns to clear merchandise. Because we do not carry much replenishment inventory in our stores, much of our inventory is maintained in distribution centers. Also see the section entitled “Risk Factors – We must successfully gauge fashion trends and changing consumer preferences to succeed” below in Item 1A.

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Competitors

The global specialty apparel industry is highly competitive. We compete with national and local department stores, specialty and discount store chains, independent retail stores and internet businesses that market similar lines of merchandise. We are also faced with competition in European, Japanese and Canadian markets from established regional and national chains. Also see the section entitled “Risk Factors – Our business is highly competitive and depends on consumer spending patterns” below in Item 1A.

Employees

As of January 28, 2006, we had a work force of approximately 153,000 employees, which includes a combination of part and full-time employees. We hire temporary employees primarily during the peak Back-to-School and Holiday seasons.

To remain competitive in the apparel retail industry we must attract, develop and retain skilled employees, including executives. Competition for such personnel is intense. Our success is dependent to a significant degree on the continued contributions of key employees. Also see the section entitled “Risk Factors – We must successfully gauge fashion trends and changing consumer preferences to succeed” below in Item 1A.

Available Information

We make available on our website, www.gapinc.com, under “Investors, Financials, SEC Filings” free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the U.S. Securities and Exchange Commission (“SEC”).

Our Code of Business Conduct, Board of Directors Committee Charters (Audit and Finance, Compensation and Management Development, Governance, Nominating and Social Responsibility Committees), and Corporate Governance Guidelines are also available on our website. The Code of Business Conduct can be found at www.gapinc.com, under “Investors, Corporate Compliance, Code of Business Conduct.” Any amendments and waivers to the code will also be available on the website. The Committee Charters and Governance Guidelines can be found on our website under “Investors, Governance.” All of these documents are also available in print to any shareholder who requests them.

Executive Officers of the Registrant

The following are our executive officers:

Name, Age, Position and Principal Occupation During Past Five Years:

Donald Fisher, 77, Founder; Chairman Emeritus since 2004; Chairman of the Company from 1969 to 2004; Chief Executive Officer of the Company from 1969 to 1995.

Cynthia Harriss, 53, President of Gap North America since April 2005; President of Gap Inc. Outlet Division from February 2004 to April 2005; President of Disneyland Resort from December 1999 until October 2003.

Jenny Ming, 50, President, Old Navy Brand since 1998. Joined in 1986.

Byron Pollitt, 54, Executive Vice President and Chief Financial Officer since January 2003; Executive Vice President and Chief Financial Officer of Walt Disney Parks and Resorts from 1999 to 2003.

Paul Pressler, 49, President and Chief Executive Officer of the Company since 2002; Chairman of Walt Disney Parks and Resorts from 2000 to 2002.

Eva Sage-Gavin, 47, Executive Vice President Human Resources since March 2003; Senior Vice President Human Resources of Sun Microsystems, Inc. from 2000 to 2003.

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Lauri Shanahan, 43, Executive Vice President, Chief Compliance Officer, General Counsel and Corporate Secretary since May 2005; Executive Vice President, General Counsel and Corporate Secretary from December 2004 until May 2005; Senior Vice President, General Counsel and Corporate Secretary from 2001 to 2004.

Item 1A – Risk Factors

Our past performance may not be a reliable indicator of future performance because actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, the risks and uncertainties discussed below. In addition, historical trends should not be used to anticipate results or trends in future periods.

We must successfully gauge fashion trends and changing consumer preferences to succeed.

Our success is largely dependent upon our ability to gauge the fashion tastes of our customers and to provide merchandise that satisfies customer demand in a timely manner. The global specialty retail business fluctuates according to changes in consumer preferences dictated, in part, by fashion and season. To the extent we misjudge the market for our merchandise or the products suitable for local markets, our sales will be adversely affected and the markdowns required to move the resulting excess inventory will adversely affect our operating results. In prior years, a disproportionate partSome of our past product offerings may have not been too fashion-forward forwell received by our broad and diverse customer base. While we believe our current strategies and initiatives appropriately address these issues, merchandiseMerchandise misjudgments could have a material adverse effect on our image with our customers and on our operating results.

Our ability to anticipate and effectively respond to changing fashion trends depends in part on our ability to attract and retain key personnel in our design, merchandising, marketing and other functions. Competition for this personnel is intense, and we cannot be sure that we will be able to attract and retain a sufficient number of qualified personnel in future periods. Also see the section entitled “Employees” above in this Item 1.

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Fluctuations in the global specialty retail business especially affect the inventory owned by apparel retailers, since merchandise usually must be ordered well in advance of the season and frequently before fashion trends are evidenced by customer purchases. In addition, the cyclical nature of the global specialty retail business requires us to carry a significant amount of inventory, especially prior to peak Back-to-School and Holiday selling seasons when we build up our inventory levels. We must enter into contracts for the purchase and manufacture of merchandise well in advance of the applicable selling season. As a result, we are vulnerable to demand and pricing shifts and to suboptimal selection and timing of merchandise purchases. In the past, we have not always predicted our customers’ preferences and acceptance levels of our fashion items with accuracy. In addition, lead times for many of our purchases are long, which may make it more difficult for us to respond rapidly to new or changing fashion trends or consumer acceptance for our products. If sales do not meet expectations, too much inventory may cause excessive markdowns and, therefore, lower than planned margins. Also see the section entitled “We experience fluctuations in our comparable store sales and margins” below in this Item 1.

Our business is highly competitive and depends on consumer spending patterns.

The global specialty apparel retail industry is highly competitive. We compete with national and local department stores, specialty and discount store chains, independent retail stores and internet businesses that market similar lines of merchandise. We face a variety of competitive challenges including:

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Our business is sensitive to a number of factors that influence the levels of consumer spending, including political and economic conditions such as recessionary environments, the levels of disposable consumer income, consumer debt, interest rates and consumer confidence. Declines in consumer spending on apparel and accessories could have an adverse effect on our operating results.

We are also faced with competition in European, Japanese and Canadian markets from established regional and national chains. Our success in these markets depends on determining a sustainable profit formula to build brand loyalty and gain market share in these especially challenging retail environments. If our international business is not successful or if we cannot effectively take advantage of international growth opportunities, our results of operations could be adversely affected.

The market for prime real estate is competitive.

Our ability to effectively obtain real estate to open new stores depends upon the availability of real estate that meets our criteria, including traffic, square footage, co-tenancies, average sales per square foot, lease economics, demographics, and other factors, and our ability to negotiate terms that meet our financial targets. In addition, we must be able to effectively renew our existing store leases. Failure to secure real estate locations adequate to meet annual targets as well as effectively managemanaging the profitability of our existing fleet of stores could have a material adverse effect on our results of operations.

We experience fluctuations in our comparable store sales and margins.

Our continued success depends, in part, upon our ability to continue to further improve sales, as well as both gross margins and operating margins. Our comparable store sales have fluctuated significantly in the past on an annual, quarterly and monthly basis, and we expect that they will continue to fluctuate in the future. For example,

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over the past three years, our quarterly comparable store sales have ranged from a decrease of 17% in the first fiscal quarter of fiscal 2002 to an increase of 12% in the first fiscal quarter of fiscal 2003 to a decrease of 3%7% in the lastthird fiscal quarter of 2005. Our comparable store sales in fiscal 2005 decreased 5% from fiscal 2004. A variety of factors affect comparable store sales, including fashion trends, competition, current economic conditions, the timing of release of new merchandise and promotional events, changes in our merchandise mix, the success of marketing programs and weather conditions. These factors may cause our comparable store sales results to differ materially from prior periods and from expectations. Over the past five years our reported gross margins have ranged from 37% in fiscal 2000 toa low of 30% in fiscal 2001 to 34% in fiscal 2002 to 38% in fiscal 2003 toa high of 39% in fiscal 2004. In addition, over the past five years our reported operating margins have ranged from 10.1% in fiscal 2000 toa low of 2.2% in fiscal 2001 to 7.0% in fiscal 2002 to 11.9% in fiscal 2003 toa high of 12.2% in fiscal 2004.

Our ability to deliver healthystrong comparable store sales results and margins depends in large part on accurately forecasting demand and fashion trends, selecting effective marketing techniques, providing an appropriate mix of merchandise for our broad and diverse customer base, managing inventory effectively, using more effective pricing strategies, and optimizing store performance by closing under performing stores. Any failure to meet the expectations of investors, security analysts or credit rating agencies in one or more future periods could reduce the market price of our common stock and cause our credit ratings to decline.

Changes in our credit ratings may have a negative or positive impact on our financing costs and structure in future periods.

In November 2001, we issued $500 million aggregate principal amount of debt securities of which only $138 million remains outstanding at an original annual interest rate of 8.80 %, due December 15, 2008 (the “notes”). The interest rate payable on the notes is subject to adjustment from time to time if either Moody’s Investors Service (“Moody’s”) or Standard & Poor’s Rating Service (“Standard & Poor’s”) reduces the rating ascribed to the notes below Baa2, in the case of Moody’s, or below BBB+, in the case of Standard & Poor’s. The interest rate on the notes increases by 0.25 % for each rating category downgrade by either rating agency. In addition, if Moody’s or Standard & Poor’s subsequently increases the rating ascribed to the notes, the ongoing interest rate then payable on the notes decreases by 0.25% for each rating category upgrade by either rating agency up to Baa2, in the case of Moody’s, or BBB+, in the case of Standard & Poor’s. In no event will the interest rate be reduced below the original interest rate payable on the notes. As a result of downgrades to our long-term credit ratings, the interest rate payable by us on the notes increased to 10.05% per annum as of January 29, 2005. On February 10, 2005, Standard & Poor’s upgraded our long term credit rating which will decrease the interest rate payable on the notes to 9.80% effective June 15, 2005. Given our current credit ratings, we do not have meaningful access to the commercial paper market. Any future reduction in our long-term senior unsecured credit rating could result in reduced access to the capital markets and higher interest costs on future financings.

For further information on our credit rating including outlook see the section entitled “Credit Facility and Debt” in our Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Part II, Item 7 of this form by reference to page 31 our 2004 Annual Report to Shareholders.

Trade matters and IT systems changes may disrupt our supply chain.

We cannot predict whether any of the countries in which our merchandise currently is manufactured or may be manufactured in the future will be subject to additional trade restrictions imposed by the U.S. and other foreign governments, including the likelihood, type or effect of any such restrictions. Trade restrictions, including increased tariffs or quotas, embargoes, safeguards and customs restrictions, against apparel items, as well as U.S. or foreign labor strikes, work stoppages or boycotts, could increase the cost or reduce the supply of apparel available to us and adversely affect our business, financial condition and results of operations. Although the quota system established by the Agreement on Textiles and Clothing was completely phased out for World Trade Organization countries effective

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January 1, 2005, there can be no assurances that restrictions will not be reestablished for certain categories in specific countries. We are unable to determine the impact of the changes to the quota system on our global sourcing operations, including China. Our sourcing operations may be adversely affected by trade limits or political and financial instability resulting in the disruption of trade from exporting countries, significant fluctuation in the value of the U.S. dollar against foreign currencies, restrictions on the transfer of funds and/or other trade disruptions.

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Our success depends, in large part, on our ability to source and distribute merchandise efficiently. We continue to evaluate and are currently implementing modifications and upgrades to our information technology systems supporting the product pipeline, including merchandise planning and forecasting, inventory and price management. Modifications involve replacing legacy systems with successor systems or making changes to legacy systems. We are aware of inherent risks associated with replacing and changing these core systems, including accurately capturing data and possibly encountering supply chain disruptions, and believe we are taking appropriate action to mitigate the risks through testing, training and staging implementation as well as securingensuring appropriate commercial contracts are in place with third-party vendors supplying such replacement technologies. The launch of these successor systems will take place in a phased approach over an approximate five-yearfive to six year period that began in 2002. Although we are on track with the replacement of our systems, there can be no assurances that we will successfully launch these new systems as planned or that they will occur without supply chain or other disruptions. Supply chain disruptions, if not anticipated and appropriately mitigated, could have a material adverse effect on our operations.

We are implementing certain other changes to our IT systems that may disrupt operations.

In addition to modifying and replacing our systems related to sourcingmerchandise planning and distributing merchandise,inventory management, we continue to evaluate and are currently implementing modifications andimplement upgrades to our information technology systems for point of sales (cash registers), real estate, finance and human resources. ModificationsUpgrades involve replacing legacy systems with current and industry-accepted successor systems, making changes to legacy systems or cost-effectively acquiring new systems with new functionality. We are aware of inherent risks associated with replacing these systems, including accurately capturing data and system disruptions, and believe we are taking appropriate action to mitigate the risks through testing, training and staging implementation as well as securingensuring appropriate commercial contracts with third-party vendors supplying such replacement technologies.technologies are in place. The launch of these successor systems will take place in a phased approach over an approximate five to six year period that began in 2002. In 2004 we completed installation of our new point of sales system in all of our domestic stores, implemented our global financial systems, and replaced our lease management systems. In 2005 we introduced a new online platform, completed implementation of our perpetual and financial inventory system and implemented a new human resources/payroll system. In late fiscal 2005, we entered into an agreement with International Business Machines Corporation (Also see the following paragraph entitled “The implementation of our IT services agreement with IBM could cause disruptions in our operations and an adverse effect on our financial results”). Although we are on track with replacement of our systems, there can be no assurances that we will successfully launch the remaining systems as planned or that they will occur without disruptions to operations. Information technology system disruptions, if not anticipated and appropriately mitigated, could have a material adverse effect on our operations.

The implementation of our IT services agreement with IBM could cause disruptions in our operations and an adverse effect on our financial results.

In January 2006, we entered into a non-exclusive services agreement with International Business Machines Corporation (“IBM”) under which IBM will operate certain significant aspects of our information technology infrastructure that historically have been operated by us, including technology services supporting our mainframe, server, network and data center, and store operations, as well as help desk, end user support, and some disaster recovery services. As a result of this agreement, we expect to enhance the capabilities of and level of service realized from our technology infrastructure, while reducing the costs associated with these functions over time. However, our ability to realize the expected benefits of this arrangement is subject to various risks, some of which are not within our complete control. These risks include the risk that we will be unable to transition these services to IBM on a timely basis, the risk that IBM will not be able to provide the anticipated levels of service initially and as our business changes over time, and the risk that IBM will be unable to maintain the security and integrity of the Company’s data under the terms of the agreement. In addition, although there are certain pricing protections built into the services agreement, there is a risk that our costs under this arrangement, including the amounts that we are obligated to pay IBM, will exceed the costs that we would have incurred if we had not entered into this arrangement.

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We are unable to provide assurances that some or all of these risks will not occur, in particular, because we do not have experience outsourcing these aspects of our technology infrastructure. Failure to effectively mitigate these risks if they occur could have a material adverse effect on our operations and financial results.

Our growth is dependent on strategy development.

Our ability to grow our existing brands and develop or identify new growth opportunities depends in part on our ability to appropriately identify, develop and effectively execute strategies and initiatives. Failure to effectively identify, develop and execute strategies and initiatives may lead to increased operating costs without offsetting benefits and could have a material adverse effect on our results of operations.

Available InformationOur efforts to expand internationally through franchising and similar arrangements may not be successful and could impair the value of our brands.

We make availableIn January 2006, we entered into a franchise agreement with an unaffiliated franchisee in Singapore and a distribution agreement with an unaffiliated distributor in Malaysia, which we expect to convert into a franchise agreement after regulatory approval. Under these agreements, a third party will operate stores that will sell apparel, purchased from us, under our brand names in Malaysia and Singapore. Prior to 2006, we had no experience operating through these types of third party arrangements, and we can provide no assurance that these arrangements will be successful. While we expect that this will be a small part of our business in the near future, our plan is to increase the number of countries in which we enter into these types of arrangements over time as part of our efforts to expand internationally. The effect of these arrangements on our website, www.gapinc.com, under “Financials & Media, SEC Filings” freebusiness and results of charge,operations is uncertain and will depend upon various factors, including the demand for our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-Kproducts in new markets internationally and amendmentsour ability to those reportssuccessfully identify appropriate third parties to act as soonfranchisees, distributors or in a similar capacity. In addition, certain aspects of these arrangements are not directly within our control, such as reasonably practicable after we electronically file or furnish such materialsthe ability of these third parties to meet their projections regarding store openings and sales. Moreover, while the agreements we’ve entered into and plan to enter into in the future provide us with certain termination rights, to the U.S. Securitiesextent that these third parties do not operate their stores in a manner consistent with our requirements regarding our brand identities and Exchange Commission (“SEC”).

Our Codecustomer experience standards, the value of Business Conduct, Boardour brands could be impaired. Failure to successfully expand internationally through franchising or similar arrangements, or a failure to protect the value of Directors Committee Charters (Audit and Finance, Compensation and Management Development, Governance, Nominating and Social Responsibility Committees), and Corporate Governance Guidelines are also availableour brands, could have a material adverse effect on our website. The Coderesults of Business Conduct can be found at www.gapinc.com, under “Financials & Media, Corporate Compliance, Code of Business Conduct.” Any amendments and waivers to the code will also be available on the website. The Committee Charters and Governance Guidelines can be found on our website under “Financials & Media, Corporate Governance.” All of these documents are also available in print to any shareholder who requests them.operations.

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Executive Officers of the RegistrantItem 1B – Unresolved Staff Comments

The following are our executive officers:

Name, Age, Position and Principal Occupation During Past Five Years:

Nick Cullen, 50, Executive Vice President and Chief Supply Chain Officer since October 2003; President, North America Supply, Diageo PLC, a division of a global beer, wine and spirits distributor from 2000 to 2003; Director UK Operations Diageo PLC from 1999 to 2000.

Donald Fisher, 76, Founder and Chairman Emeritus since 2004; Chairman of the Company, 1969-2004.

Anne Gust, 47, Executive Vice President, Chief Administrative Officer since 2000 and Chief Compliance Officer since 1998; Executive Vice President, Human Resources, Legal, Global Compliance and Corporate Administration from 1999 to 2000. Joined in 1991.

Jenny Ming, 49, President, Old Navy Brand since 1998. Joined in 1986.

Byron Pollitt, 53, Executive Vice President and Chief Financial Officer since January 2003; Executive Vice President and Chief Financial Officer of Walt Disney Parks and Resorts from 1999 to 2003.

Paul Pressler, 48, President and Chief Executive Officer of the Company since 2002; Chairman of Walt Disney Parks and Resorts, an entertainment company, 2000-2002; President of Walt Disney Attractions, an entertainment company, 1998-2000.

Eva Sage-Gavin, 46, Executive Vice President Human Resources since March 2003; Senior Vice President Human Resources of Sun Microsystems, Inc. from 2000 to 2003; Senior Vice President Human Resources of Disney Consumer Products from 1997 to 2000.

None.

Item 2 – Properties

We operate stores in the United States, Canada, the United Kingdom, France, and Japan. The stores operated as of January 29, 200528, 2006 aggregated approximately 36.637.8 million square feet. Almost all our stores are leased either on a short termshort-term basis with one or more options after our initial term, or slightly longer terms with negotiated sales termination clauses at predetermined sales thresholds. Economic terms vary by type of location.

We own approximately 1.2 million square feet of headquarters office space located in San Francisco, San Bruno and Rocklin, California. We lease approximately 1.5 million square feet of headquarters office space, located in San Francisco, San Bruno and Rocklin, California; New York, New York; and Albuquerque, New Mexico.Mexico; Toronto, Ontario; and Miami, Florida. Of the 1.5 million square feet of office space leased, approximately 130,000145,000 square feet is under sublease to others and approximately 450,00076,000 square feet is being marketed for sublease to others. 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. We also lease approximately 2524 domestic regional offices and approximately 35 international offices. We own approximately 9.58.9 million square feet of distribution space located in Fresno, California; Edgewood, Maryland; Fishkill, New York; Groveport, Ohio; Gallatin, Tennessee; Brampton, Ontario, Canada; and Rugby, England. We recently announced that we will be closing one of our Edgewood, Maryland facilityBrampton, Ontario, Canada facilities and consolidating its operations into several of ourthe other facilitiesBrampton facility in the summerfall of 2005.2006. We lease approximately 1.71.8 million square feet of distribution space located in Grove City, Ohio and in the Northern Kentucky suburbs outside Cincinnati, Ohio. A third-party logistics company provides

9

logistics services to us through a 390,000 square foot and a 46,000 square foot distribution warehouse in Ichikawa City and Funabashi City, Chiba, Japan.

In fiscal 2004, we recorded certain additional sublease loss reserves relating to certain facilities. See Note F to Notes to Consolidated Financial Statements, incorporated by reference in Item 8 - Financial Statements and Supplementary Data.

Item 3 - Legal Proceedings

As a multinational company, we are subject to various proceedings, lawsuits, disputes and claims (“Actions”) arising in the ordinary course of our business. Many of these Actions raise complex factual and legal issues and are subject to uncertainties. Actions filed against us include commercial, intellectual property, customer, and labor and employment related claims, including class action lawsuits in which plaintiffs allege that we violated federal and state wage and hour and other laws. The plaintiffs in some Actions seek unspecified damages or injunctive relief, or both. Actions are in various procedural stages, and some are covered in part by insurance.

8

We cannot predict with assurance the outcome of Actions brought against us. Accordingly, adverse developments, settlements or resolutions may occur and negatively impact earnings in the quarter of such development, settlement or resolution. However, we do not believe that the outcome of any current Action would have a material adverse effect on our results of operations, liquidity or financial position taken as a whole.

Item 4 - Submission of Matters to a Vote of Security Holders

Not applicable.

PART II

Item 5 - Market For Registrant’s Common Equity, and Related Stockholder Matters and Issuer Purchases of Equity Securities

(a) The principal markets on which our stock is traded are the New York Stock Exchange and the Pacific Exchange. The number of holders or record of our stock as of March 13, 2006 was 10,246. Additional information required by this item is incorporated herein by reference toprovided on page 64 of the 2004 Annual Report to Shareholders included as Exhibit 13F-27 to this Annual Report on Form 10-K.

(b) Not applicable.

(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table presents information with respect to purchases of common stock of the Company made during the thirteen weeks ended January 29, 2005,28, 2006, by Gap Inc. or any affiliated purchaser, as defined in Rule 10b-18(a)(3) under the Exchange Act.

10

Item 6 - Selected Financial Data

The information required by this item is incorporated herein by reference to page 2015 of the 20042005 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K.

Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information required by this item is incorporated herein by reference to pages 2116 through 3631 of the 20042005 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K.

9

Item 7A - Quantitative and Qualitative Disclosures about Market Risk

The information required by this item is incorporated herein by reference to pages 3732 through 3833 of the 20042005 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K.

Item 8 - Financial Statements and Supplementary Data

The information required by this item is incorporated herein by reference toprovided on pages 41F-3 through 64 of the 2004 Annual Report to Shareholders included as Exhibit 13F-27 to this Annual Report on Form 10-K.

Item 9 - Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

Not applicable.

None

Item 9A – Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended. Based on this review, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of January 29, 2005.

As part of these disclosure controls and procedures, we review the appropriateness of our accounting policies. During the fourth quarter of fiscal 2004, we initiated a reassessment of our policy related to the accounting for operating leases with scheduled rent increases. We determined that our policy should be corrected to recognize minimum rent payments on a straight-line basis beginning with the time we take possession of the premises, instead of the previous policy of using the store opening date. The previously reported financial statements included in this Form 10-K have been restated to reflect this correction.

During fiscal 2003, we also reassessed our accounting policy that classified a portion of our lease incentives as a reduction of leasehold improvements. Effective February 1, 2004, we prospectively changed our accounting policy to treat lease incentives received as deferred lease incentives. The controls related to the application of this new policy were evaluated and deemed to be operating effectively as of January 29, 2005. We corrected the prior year financial statements in conjunction with the restatement.

28, 2006.

Management’s Report on Internal ControlsControl Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Securities Exchange Act Rule 13a-15(f). Our system of internal control is evaluated on a cost benefit basis and is designed to provide reasonable, not absolute, assurance that reported financial information is materially accurate.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the design and effectiveness of our internal control over financial reporting based on the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations (“COSO”). Based on this evaluation, our management concluded that the Company’s internal control over financial reporting was effective as of January 29, 2005.

In reaching its conclusion that the internal control over financial reporting was effective as of January 29, 2005, management carefully considered the facts and circumstances surrounding the restatement of the Company’s previously issued financial statements.

During fiscal 2003, we reassessed our accounting policy that classified a portion of our lease incentives as a reduction of leasehold improvements. Effective February 1, 2004, we prospectively changed our accounting policy

10

to treat lease incentives received as deferred lease incentives. The controls related to the application of this new policy were evaluated and deemed to be operating effectively as of January 29, 2005. We corrected the prior year financial statements in conjunction with the restatement.

A control deficiency in monitoring compliance with generally accepted accounting principles in the area of accounting for operating leases with scheduled rent increases was detected during our assessment process that resulted in cumulative, non-cash adjustments that would have been material to the financial performance of fiscal 2004. As a result, management decided to restate previously issued financial statements to provide transparency as to the effect of the correction on the prior period results, and enhance the comparability of the prior financial information.

The impact of this correction on the periods subject to restatement was immaterial. Substantially all of the adjustment related to periods prior to 2002, and the correcting cumulative adjustment was also immaterial to shareholders’ equity as of February 2, 2002. As a result, management concluded that this control deficiency was not a material weakness.

28, 2006.

Management’s assessment of the effectiveness of internal control over financial reporting as of January 29, 200528, 2006 was audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is incorporated herein by reference toprovided on page 40 of the 2004 Annual Report to Shareholders included as Exhibit 13F-3 to this Annual Report on Form 10-K.

Changes in Internal Control Over Financial Reporting

During fiscal 2004,2005, the Company initiated a company-wide implementation ofimplemented a new integratedperpetual inventory system. Although the Company did not replace its financial application software system. As of January 29, 2005, substantiallyinventory system, all of the Company’s businesses were usingunit inventory transactions are now processed by the new system. Management believes the newperpetual system represents an improvementand then fed to the internal control environment.legacy financial system for costing and posting to the general ledger. The new system was subject to review during its implementation phase, and audit and validation during the controls self assessmentself-assessment process. As a result

11

of these evaluations, it was concluded that the design and effectiveness of the internal controls over financial reporting related to the new system was functioning effectively.

were effective as of January 28, 2006.

Other than the change discussed above, during the Company’s fourth quarter of fiscal 2005, there were no changes in the Company’s internal control over financial reporting during the Company’s fourth quarter of fiscal 2004 that has materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B – Other Information

Not applicable.

PART III

Item 10 - Directors and Executive Officers of the Registrant

The information required by this item is incorporated herein by reference to the sections entitled “Nominees for Election as Directors,” “Board Committees – Audit and Finance Committee” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the 20052006 Proxy Statement. See also Item 1 above in the section entitled “Executive Officers of the Registrant.”

The Company has adopted a code of ethics, our Code of Business Conduct, that applies to all employees including our principal executive officer, principal financial officer, controller and persons performing similar functions. Our Code of Business Conduct is available on our website, www.gapinc.com, under “Financials & Media,“Investors, Corporate Compliance, Code of Business Conduct” and in print to any person who requests it. Any amendments and waivers to the code will also be available on the website.

11

Item 11 - Executive Compensation

The information required by this item is incorporated herein by reference to the sections entitled “Compensation of Directors,” “Summary of Executive Compensation,” “Charitable Gift Matching,” “Stock Options,” “Compensation Committee Interlocks and Insider Participation,” and “Employment Contracts, Termination of Employment and Change in Control Arrangements,” and “Report of Compensation and Management Development Committee on Executive Compensation – Ten-Year Option Repricings” in the 20052006 Proxy Statement.

Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item is incorporated herein by reference to the sections entitled “Equity Plan Compensation Information” and “Beneficial Ownership of Shares” in the 20052006 Proxy Statement.

Item 13 - Certain Relationships and Related Transactions

The information required by this item is incorporated herein by reference to the section entitled “Other Reportable Transactions” in the 20052006 Proxy Statement.

Item 14 – Principal Accountant Fees and Services

The information required by this item is incorporated herein by reference to the section entitled “Principal Accounting Firm Fees” in the 20052006 Proxy Statement.

PART IV

Item 15 – Exhibits and Financial Statement Schedules

(i) Report of Independent Registered Public Accounting Firm. Incorporated by reference to page 40 of the 2004 Annual Report to Shareholders included as Exhibit 13 to this Annual Report on Form 10-K.

12

(ii) Consolidated Balance Sheets.

(iii) Consolidated Statements of Operations.

(iv) Consolidated Statements of Shareholders’ Equity.

(v) Consolidated Statements of Cash Flows.

(vi) Notes to Consolidated Financial Statements.

Schedules have been omitted because they are not required or are not applicable or because the information required to be set forth therein either is not material or is included in the financial statements or notes thereto.

See attached Exhibit Index.

1213

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

1314

1415

Exhibit Index

15

16

EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS

17

16

18

17

19

18

20

21

1922

MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS

Management is responsible for the preparation of the Company’s consolidated financial statements and related information appearing in this report. Management believes that the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements reasonably present the Company’s financial position and results of operations in conformity with generally accepted accounting principles. Management also has included in the Company’s financial statements amounts that are based on estimates and judgments, which it believes are reasonable under the circumstances.

An independent registered public accounting firm audits the Company’s consolidated financial statements in accordance with the standards established by the Public Company Accounting Oversight Board (“PCAOB”).

The Board of Directors of the Company has an Audit and Finance Committee composed of four independent Directors. The committee meets periodically with financial management, the internal auditors and the independent registered public accounting firm to review accounting, control, auditing and financial reporting matters.

F-1

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Securities Exchange Act Rule 13a-15(f). Our system of internal control is evaluated on a cost benefit basis and is designed to provide reasonable, not absolute, assurance that reported financial information is materially accurate.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the design and effectiveness of our internal control over financial reporting based on the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations (“COSO”). Based on this evaluation, our management concluded that the Company’s internal control over financial reporting was effective as of January 28, 2006.

Management’s assessment of the effectiveness of internal control over financial reporting as of January 28, 2006 was audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report, which is included herein.

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of The Gap, Inc.:

We have audited the accompanying consolidated balance sheets of The Gap, Inc. and subsidiaries as of January 28, 2006 and January 29, 2005, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended January 28, 2006. We also have audited management’s assessment, included in the accompanying “Management’s Report on Internal Control over Financial Reporting”, that the Company maintained effective internal control over financial reporting as of January 28, 2006, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these financial statements, an opinion on management’s assessment, and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, such consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Gap, Inc. and subsidiaries as of January 28, 2006 and January 29, 2005, and the results of their operations and their cash flows for each of the three years in the period ended January 28, 2006, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of January 28, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 28, 2006, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

/s/ Deloitte & Touche LLP

San Francisco, California

March 27, 2006

F-3

CONSOLIDATED STATEMENTS OF OPERATIONS

See Notes to the Consolidated Financial Statements

F-4

CONSOLIDATED BALANCE SHEETS

See Notes to the Consolidated Financial Statements

F-5

CONSOLIDATED STATEMENTS OF CASH FLOWS

See Notes to the Consolidated Financial Statements

F-6

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

See Notes to the Consolidated Financial Statements

F-7

F-8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the 52 Weeks Ended January 28, 2006 (Fiscal 2005), January 29, 2005 (Fiscal 2004), and January 31, 2004 (Fiscal 2003).

NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

The Gap Inc. (the “Company,” “we,” “our”), a Delaware Corporation, is a global specialty retailer selling casual apparel, accessories and personal care products for men, women and children under a variety of brand names including Gap, Banana Republic, Old Navy, and Forth & Towne. Our principal markets consist of the United States, Canada, Europe and Japan, with the United States being the most significant. We sell our products through traditional retail stores, outlet stores and through our web sites.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated.

Translation adjustments result from translating foreign subsidiaries’ financial statements into U.S. dollars. Balance sheet accounts are translated at exchange rates in effect at the balance sheet date. Income statement accounts are translated at average exchange rates during the year. The resulting translation adjustments are included in accumulated other comprehensive earnings in the Consolidated Statements of Shareholders’ Equity.

Fiscal Year

Our fiscal year is a 52- or 53-week period ending on the Saturday closest to January 31. Fiscal 2005, 2004 and 2003 all consisted of 52 weeks. Fiscal 2006 will consist of 53 weeks.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

We have reclassified $23 million of cash provided by operating activities to cash provided by investing activities related to the non-cash portion of property and equipment purchases for fiscal 2004 in our Consolidated Statements of Cash Flows. This reclassification had no effect on the net decrease in cash and equivalents or on net earnings, as previously reported.

Cash and Equivalents

Cash and equivalents represent cash and short-term, highly liquid investments with original maturities of three months or less. Amounts in-transit from banks for customer credit card, debit card and electronic benefit transfer transactions that process in less than seven days are classified as cash and equivalents in our Consolidated Balance Sheets. The banks process the majority of these amounts within one to two business days. Outstanding checks classified in accounts payable on the Consolidated Balance Sheets totaled $67 million and $70 million as of the end of fiscal 2005 and 2004, respectively.

Short-term Investments

We have short-term investments, which generally have maturities of more than three months and less than one year from the date of purchase. Our short-term investments are classified as held-to-maturity based on our positive intent and ability to hold the securities to maturity. Primarily all securities held are U.S. government and agency securities and bank certificates of deposit and are stated at amortized cost, which approximates fair market value. Income related to these securities is reported as a component of interest income.

F-9

The tables below summarize our marketable securities as of January 28, 2006 and January 29, 2005, which are recorded as cash and equivalents on the Consolidated Balance Sheets, and our short-term investments:

Restricted Cash

Restricted cash primarily represents cash that serves as collateral and other cash that is restricted from withdrawal for use. As of January 28, 2006, restricted cash represents the restriction of $55 million, all of which serves as collateral for our insurance obligations. As of January 29, 2005, restricted cash represented the restriction of $1.0 billion, of which $900 million served as collateral for our committed bank lines that backed our letter of credit agreements to finance our inventory purchases, and the remainder was primarily restricted for our insurance obligations. The $900 million of restricted cash that collateralized the prior letter of credit agreements was fully released in May 2005. See Note B.

Hedging Instruments

We apply Statement of Financial Accounting Standards No. (“SFAS”) 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, which establishes the accounting and reporting standards for derivative instruments and hedging activities. We recognize all derivative instruments as either other current assets or accrued expenses and other current liabilities in our Consolidated Balance Sheets and measure those instruments at fair value.

Merchandise Inventory

Inventory is valued using the cost method, which values inventory at the lower of the actual cost or market. Cost is determined using the first-in, first-out (“FIFO”) method. Market is determined based on the estimated net realizable value, which generally is the merchandise selling price. We review our inventory levels in order to identify slow-moving merchandise and broken assortments (items no longer in stock in a sufficient range of sizes) and use markdowns to clear merchandise. We estimate and accrue shortage for the period between the last physical count and the balance sheet date. Our shortage estimate can be affected by changes in merchandise mix and changes in actual shortage trends.

F-10

Property and Equipment

Property and equipment are stated at cost and consists of the following:

Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets. Estimated useful lives are as follows:

The cost of assets sold or retired and the related accumulated depreciation or amortization are removed from the accounts with any resulting gain or loss included in net earnings. Maintenance and repairs are charged to expenses as incurred.

Interest costs related to assets under construction are capitalized during the construction period. Interest of $11 million, $10 million and $9 million was capitalized in fiscal 2005, 2004 and 2003, respectively.

Lease Rights and Key Money