SECURITIES AND EXCHANGE COMMISSION 	Washington, D.C. 20549 	FORM 10-Q (Mark One) [ X ]		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended May 4, 1996 or [ ]		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______________ to ______________ Commission File Number 1-7562 	THE GAP, INC. 	(Exact name of registrant as specified in its charter) Delaware 				 94-1697231 (State of Incorporation) 		 (I.R.S. Employer 				 				 Identification No.) 	One Harrison 	San Francisco, California 94105 	(Address of principal executive offices) 	Registrant's telephone number, including area code: (415) 952-4400 	_______________________ 	Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.05 par value			New York Stock Exchange, Inc. (Title of class)				 Pacific Stock Exchange, Inc. 				 (Name of each exchange where registered) 	Securities registered pursuant to Section 12(g) of the Act: None 	_______________________ 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 the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. 	Common Stock, $0.05 par value, 286,822,510 shares as of June 14, 1996 PART 1 THE GAP, INC. AND SUBSIDIARIES ITEM 1 CONSOLIDATED BALANCE SHEETS ($000) May 4, February 3, April 29, 1996 1996 1995 (Unaudited) (See Note 1) (Unaudited) ASSETS Current Assets: Cash and equivalents $ 552,729 $ 579,566 $ 298,218 Short-term investments 79,819 89,506 157,498 Merchandise inventory 489,719 482,575 408,952 Prepaid expenses and other 146,791 128,398 113,894 Total Current Assets 1,269,058 1,280,045 978,562 Property and equipment (net) 			 981,011 957,752 852,824 Long-term investments 41,573 30,370 16,949 Lease rights and other assets 81,672 74,901 86,393 Total Assets $ 2,373,314 $ 2,343,068 $ 1,934,728 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable 46,836 21,815 - Accounts payable 204,951 262,505 233,194 Accrued expenses 214,131 194,426 153,142 Income taxes payable 13,901 66,094 30,786 Deferred lease credits and other current 	 	7,034 6,904 5,707 liabilities Total Current Liabilities 486,853 551,744 422,829 Long-term Liabilities: Deferred lease credits and other liabilities 156,864 150,851 127,753 156,864 150,851 127,753 Stockholders' Equity: Common stock $.05 par value Authorized 500,000,000 shares Issued 316,892,180, 315,971,306 and 314,786,422 shares Outstanding 287,248,358, 287,747,984 and 287,833,766 shares 15,845 15,799 15,739 Additional paid-in capital 399,619 335,193 312,788 Retained earnings 1,629,666 1,569,347 1,315,707 Foreign currency translation adjustment (9,830) (9,071) (6,612) Restricted stock plan deferred compensation (43,757) (48,735) (60,753) Treasury stock, at cost (261,946) (222,060) (192,723) 1,729,597 1,640,473 1,384,146 Total Liabilities and Stockholders' Equity $ 2,373,314 $ 2,343,068 $ 1,934,728 See accompanying notes to consolidated financial statements. THE GAP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Unaudited ($000 except per share amounts) Thirteen Weeks Ended May 4, 1996 April 29, 1995 Net Sales $ 1,113,154 $ 848,688 Costs and expenses Cost of goods sold and occupancy expenses 699,314 568,131 Operating expenses 282,627 202,575 Net interest income (3,618) (4,849) Earnings before income taxes 134,831 82,831 Income taxes 53,258 32,718 Net earnings $ 81,573 $ 50,113 Weighted average number of shares 288,010,684 287,744,200 Earnings per share $ .28 $ .17 Cash dividends per share $ .08 $ .06 See accompanying notes to consolidated financial statements. 					THE GAP, INC. AND SUBSIDIARIES		 	 					CONSOLIDATED STATEMENTS OF CASH FLOWS	 		 								 Unaudited ($000)					 		Thirteen Weeks Ended	 						 May 4, 1996 April 29, 1995 Cash Flows from Operating Activities:						 	Net earnings				 $ 81,573 		$ 50,113 	Adjustments to reconcile net earnings to net cash			 	 provided by operating activities:					 	 Depreciation and amortization (a)			 52,616 	 	45,429 	 Tax benefit from exercise of stock options by			 		 employees and from vesting of restricted stock	 41,276 	 	6,765 	 Change in operating assets and liabilities:				 	 Merchandise inventory				 (7,212)	 	(37,370) 	 Prepaid expenses and other		 	(18,750)	 	(17,132) 	 Accounts payable				 (57,289)	 	(31,204) 	 Accrued expenses		 		19,787 	 (32,400) 	 Income taxes payable			 	(52,201)	 	(10,606) 	 Deferred lease credits and other				 	 long-term liabilities			 	6,117 	 	(3,339) 								 Net cash provided by (used for) operating						 activities					 		 65,917 	 	(29,744) 								 Cash Flows from Investing Activities:						 	Net maturity of short-term investments		 9,687 	 	31,193 	Purchase of long-term investments			 (11,203)		 - 	Purchase of property and equipment			 (69,186)	 	(60,693) 	(Acquisition) Disposition of lease rights						 	and other assets					 (7,799)	 1,012 								 Net cash used for investing activities		 		(78,501)	 (28,488) 								 Cash Flows from Financing Activities:						 Net increase (decrease) in notes payable	 	24,897 	 	(3,517) 	Issuance of common stock		 	 	22,121 	 	3,452 	Purchase of treasury stock				 (39,886)	 	(41,977) 	Cash dividends paid				 (21,254) 		(16,707) 								 Net cash used for financing activities			 (14,122)	 	(58,749) 							 Effect of exchange rate changes on cash			 (131)	 	712 								 Net increase (decrease) in cash and equivalents 	 	(26,837)	 (116,269) 								 Cash and equivalents at beginning of year			 579,566 	 	414,487 Cash and equivalents at end of quarter			 $ 552,729 		$ 298,218 								 See accompanying notes to consolidated financial statements.		 (a) Includes amortization of restricted stock.					 	THE GAP, INC. AND SUBSIDIARIES 	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 	(Unaudited) 1.	BASIS OF PRESENTATION 	The consolidated balance sheets as of May 4, 1996 and April 29, 1995, and the interim consolidated statements of earnings and the interim consolidated statements of cash flows for the thirteen weeks ended May 4, 1996 and April 29, 1995 have been prepared by the Company, without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) considered necessary to present fairly the financial position, results of operations and cash flows of the Company at May 4, 1996 and April 29, 1995, and for all periods presented, have been made. 	Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been omitted from these interim financial statements. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended February 3, 1996. 	The results of operations for the thirteen weeks ended May 4, 1996 are not necessarily indicative of the operating results that may be expected for the year ending February 1, 1997. 2.	SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION 	Year-to-date 1996 and 1995 gross interest payments were $0.8 million and $0.5 million respectively; income tax payments were $64.1 million and $36.4 million respectively. 3.	TWO-FOR-ONE STOCK SPLIT 	On February 27, 1996, the Company's Board of Directors authorized a two-for-one split of its common stock effective April 10, 1996, in the form of a stock dividend for stockholders of record on March 18, 1996. Per share amounts in the accompanying consolidated financial statements give effect to the stock split. Deloitte &	2101 Webster Street 		Telephone (510)287-2700 Touche	Oakland, California 94612-3027 	Facsimile (510)835-4888 INDEPENDENT ACCOUNTANTS' REPORT To the Board of Directors and Stockholders of The Gap, Inc.: We have reviewed the accompanying consolidated balance sheets of The Gap, Inc. and subsidiaries as of May 4, 1996 and April 29, 1995 and the related consolidated statements of earnings and cash flows for the thirteen week periods ended May 4, 1996 and April 29, 1995. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to such consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of The Gap, Inc. and subsidiaries as of February 3, 1996, and the related consolidated statements of earnings, stockholders' equity and cash flows for the year then ended (not presented herein); and in our report dated February 29, 1996 (except for the effects of the stock split, as to which the date is April 10, 1996), we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of February 3, 1996 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it was derived. /S/ Deloitte & Touche LLP May 16, 1996 THE GAP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Net Sales Thirteen weeks ended May 4, 1996 April 29, 1995 Net sales ($000) $1,113,154 $848,688 Total net sales growth percentage 31 13 Comparable store sales growth percentage (Based on a comparable 13 - week period) 9 <2> Net sales per average square foot 98 90 Average square footage of gross store space (000) 11,334 9,392 Fifty-three Fifty-two weeks ended weeks ended May 4, 1996 April 29, 1995 Number of New stores 225 176 Expanded stores 50 77 Closed stores 44 39 The increase in first quarter fiscal 1996 net sales over the same period last year was attributable to the opening of new stores (net of stores closed), an increase in comparable store sales, and the expansion of existing stores. The increase in net sales per average square foot compared with the same period last year was primarily attributable to an increase in comparable stores sales partially offset by the growing impact of the Old Navy division where lower priced merchandise and significantly larger stores result in lower net sales per average square foot when compared to other divisions . Cost of Goods Sold and Occupancy Expenses Cost of goods sold and occupancy expenses as a percentage of net sales decreased to 62.8 percent for the first quarter of fiscal 1996 from 66.9 percent for the same period in fiscal 1995. The resulting 4.1 percentage point increase in gross margin net of occupancy expenses was attributable to a 2.4 percentage point increase in merchandise margins as a percentage of net sales and a 1.7 percentage point decrease in occupancy expenses as a percentage of net sales. The increase in merchandise margins as a percentage of net sales was primarily attributable to higher initial merchandise margins. The decrease in occupancy expense as a percentage of net sales was primarily attributable to sales leverage resulting from positive comparable store sales growth. The growth of the Old Navy division with lower occupancy expenses as a percentage of net sales per average square foot when compared to other divisions also contributed to the decrease when compared to the same period last year. The Company reviews its inventory levels in order to identify slow- moving merchandise and broken assortments (items no longer in stock in a sufficient range of sizes) and uses markdowns to clear merchandise. Such markdowns may have an adverse impact on earnings depending upon the extent of the markdowns and amount of inventory affected. Operating Expenses Operating expenses as a percentage of net sales increased to 25.4 percent for first quarter of fiscal 1996 compared to 23.9 percent for the same period last year. The 1.5 percentage point increase in operating expenses was primarily attributable to a 1.1 percentage point increase in incentive bonus expense as a percentage of net sales. No incentive bonus expense was recognized in the first quarter of fiscal 1995 . Insurance recoveries received in the first quarter last year for business interruption losses resulted in a .4 percentage point unfavorable comparison this year as a percentage of net sales. Net Interest Income/Expense Net interest income was approximately $3.6 million for the first quarter of fiscal 1996 compared to $4.8 million for the same period last year. Income Taxes The effective tax rate was 39.5 percent for the thirteen weeks ended May 4, 1996 and April 29, 1995 . LIQUIDITY AND CAPITAL RESOURCES The following sets forth certain measures of the Company's liquidity: Thirteen weeks ended May 4, 1996 April 29, 1995 Cash provided by (used for) operating activities ($000) $ 65,917 $(29,744) Working capital ($000) $782,205 $555,733 Current ratio 2.61:1 2.31:1 For the thirteen weeks ended May 4, 1996, the increase in cash provided by operating activities was primarily attributable to an increase in net earnings exclusive of depreciation expense. The Company funds inventory expenditures during normal and peak periods through a combination of cash flows provided by operations and normal trade credit arrangements. The Company's business follows a seasonal pattern, peaking over a total of about ten to twelve weeks during the late summer and holiday periods. For the thirteen weeks ended May 4, 1996, capital expenditures, net of construction allowances and dispositions, totaled approximately $66 million. These expenditures included the addition of 40 new stores, the expansion of 9 stores and the remodeling of certain stores resulting in a net increase in store space of approximately 336,000 square feet or 3 percent since February 3, 1996. For fiscal 1996, the Company expects capital expenditures to total approximately $300 to $350 million, net of construction allowances, representing the addition of approximately 175 to 200 new stores, the expansion of approximately 40 to 50 stores, and the remodeling of certain stores. Planned expenditures also include amounts for administrative facilities, distribution centers, and equipment. The Company expects to fund such capital expenditures with cash flow from operations. Square footage growth is expected to be approximately 15 percent before store closings. New stores are generally expected to be leased. During fiscal 1995, the Company commenced construction of a distribution center in Gallatin, Tennessee for an estimated cost at completion of $45 to $55 million. The facility is expected to be in operation in late fiscal 1996. Additionally in May 1996, the Company exercised an option to purchase land and a building in the Netherlands to relocate its European distribution center. The building was under construction at the time of purchase and is estimated to be operational by Summer 1996. Estimated cost at completion for the land and building is approximately $10 million. This move will result in a more centralized shipping location to the European continent and will support store growth in Europe. In February 1996, the Company exercised an option to purchase land for $9 million in San Bruno, California to expand its headquarters facilities. Construction commenced in April 1996 for an estimated cost at completion of $55 to $60 million. The facility is expected to be in operation in late fiscal 1997. On February 27, 1996, the Company's Board of Directors authorized a two- for-one split of its common stock effective April 10, 1996, in the form of a stock dividend for stockholders of record at the close of business on March 18, 1996. Per share amounts in the accompanying consolidated financial statements give effect to the stock split. The Company has a credit agreement which provides for a $250 million revolving credit facility through June 30, 1998. In addition, the credit agreement provides for the issuance of letters of credit up to $500 million at any one time. The Company had outstanding letters of credit of approximately $412 million at May 4, 1996. Under a program announced in October 1994 to repurchase up to 18 million shares of the Company's outstanding common stock, the Company acquired 1,420,500 shares during the first quarter of 1996 for approximately $40 million. To date under this program, 8,560,300 shares have been repurchased for approximately $161 million. 	 							PART II	 		 						OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 	a) Exhibits 		(10.1)	Form of Non-Qualified Stock Option Agreement for employees under Registrant's 1996 Stock Option and Award Plan 		(10.2)	Form of Non-Qualified Stock Option Agreement for non-employee directors under Registrant's 1996 Stock Option and Award Plan 		(10.3)	Form of Restricted Stock Agreement under Registrant's 1996 Stock Option and Award Plan 		(11)	Computation of Earnings per Share 		(15)	Letter re: Unaudited Interim Financial Information 		(27)	Financial Data Schedule 	b) The Company did not file any reports on Form 8-K during the three months ended May 4, 1996. 							SIGNATURES 	Pursuant to the requirements 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. 							 	THE GAP, INC. Date: June 14, 1996					 By /s/ Warren R. Hashagen 								Warren R. Hashagen 								Chief Financial Officer 								(Principal financial officer of the registrant) Date: June 14, 1996					 By /s/ Millard S. Drexler 								Millard S. Drexler 								President and Chief Executive Officer 							EXHIBIT INDEX 		 		 (10.1)	Form of Non-Qualified Stock Option Agreement for employees under Registrant's 1996 Stock Option and Award Plan 		 (10.2)	Form of Non-Qualified Stock Option Agreement for non-employee directors under Registrant's 1996 Stock Option and Award Plan 		 (10.3)	Form of Restricted Stock Agreement under Registrant's 1996 Stock Option and Award Plan 		 (11)	Computation of Earnings per Share 		 (15)	Letter re: Unaudited Interim Financial Information 		 (27)	Financial Data Schedule