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2005 annual report

table of contents
Letter From the Chairman Letter to Shareholders Gap Banana Republic Old Navy Forth & Towne Gap Inc. Direct Social Responsibility Financial Highlights Key Financial Statistics Gap Inc. Financials 1 2 6 7 8 9 10 11 12 13 14

letter from the chairman
Fiscal 2005 was a year of progress as well as challenges.
During a year where we had disappointing topline results, we still delivered solid earnings and focused on creating value for our shareholders by repurchasing 99 million shares for $2 billion and doubling our dividend. We continued to improve our financial strength and ended the year with $3 billion of cash and investments. And we made notable progress against our longer term growth initiatives, including the launch of Forth & Towne and thedevelopment of an entirely new e-commerce platform. We fully recognize, however, that our long-term success depends on growing our top line. Gap Inc.’s Board of Directors is highly aligned in the priority of heritage is based on supporting management to improve the business and with people through generate revenue growth over time. Under the leadership of Paul Pressler, Gap Inc. has built a strongfoundation. along the way. We are a more disciplined and well-managed company today and the Board remains confident that this foundation is a competitive advantage as we work to re-connect with customers across each of our brands. I am pleased with the progress the Board has made over the past year—both from a governance year— both perspective and as the governing body of this company. We are adiverse group with experience that spans disciplines, industries and geographies. Even with such varied experiences, I believe the Board works well together — and is asking the tough questions necessary to challenge and guide management in the best interest of our shareholders. In 2005, the Board maintained its commitment to continually evolve and adopt appropriate governance best practices. Forexample, we adopted a majority vote guideline for director elections — and we continued our proactive approach to be transparent in compensation disclosure. In addition to providing a director compensation table, we are including a CEO tally sheet in this years’ proxy statement. We have also approved an improved pay-for-performance bonus structure for executives across the organization. I’d like topersonally thank the Board for its ongoing contributions and commitment. More detail on Gap Inc.’s Board of Directors is available on page 62. My experience at Gap Inc. now spans more than two decades and I’ve seen many ups and downs in the business. Clearly, it is more rewarding for our shareholders when the product offering is resonating with customers. The Board and I feel strongly that Gap Inc.has the leadership, talent, systems and financial strength to return to our position as a leader in providing customers with the product and experience they expect from our brands. This will be the key to re-establishing top line growth and driving long-term shareholder value.

Robert J. Fisher Chairman

Gap Inc.’s connecting

great style and experiences—and

by making cultural connectionsgap inc. 2005 annual report 1

letter to shareholders
None of us is satisfied with our overall 2005 business performance—we know we can do better. Building on our foundation of iconic brands, strong balance sheet, solid operations and talented people, we are aggressively taking actions to win back the customers we’ve disappointed. Despite disappointing top line results, we have continued tofocus on creating value for our shareholders. In 2005, we generated nearly $1 billion in free cash flow,* enabling us to complete a $2 billion share repurchase program and double our dividend to 18 cents per share. Reflecting our ongoing confidence in generating strong cash flow, we plan to continue our share repurchase program and increase our dividend to 32 cents per share in 2006. We strengthened...