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 August 3, 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, 283,511,071 shares as of September 13, 1996 PART 1 THE GAP, INC. AND SUBSIDIARIES ITEM 1 CONSOLIDATED BALANCE SHEETS ($000) August 3, February 3, July 29, 1996 1996 1995 (Unaudited) (See Note 1)(Unaudited) ASSETS Current Assets: Cash and equivalents 514,213 579,566 249,217 Short-term investments 74,061 89,506 143,416 Merchandise inventory 573,080 482,575 508,641 Prepaid expenses and other 142,549 128,398 111,748 Total Current Assets 1,303,903 1,280,045 1,013,022 Property and equipment (net) 1,018,729 957,752 882,949 Long-term investments 53,963 30,370 7,059 Lease rights and other assets 82,705 74,901 97,436 Total Assets 2,459,300 2,343,068 2,000,466 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable 67,196 21,815 - Accounts payable 313,866 262,505 293,396 Accrued expenses 218,655 194,426 145,227 Income taxes payable 32,877 66,094 9,325 Deferred lease credits and other 8,902 6,904 6,173 current liabilities Total Current Liabilities 641,496 551,744 454,121 Long-term Liabilities: Deferred lease credits and other liabilities 166,395 150,851 135,985 166,395 150,851 135,985 Stockholders' Equity: Common stock $.05 par value (a) Authorized 500,000,000 shares Issued 317,312,752, 315,971,306 and 315,433,286 shares Outstanding 283,396,874, 287,747,984 and 288,480,630 shares 15,866 15,799 15,772 Additional paid-in capital (a) 415,135 335,193 322,840 Retained earnings 1,674,266 1,569,347 1,331,348 Foreign currency translation adjustment (7,468) (9,071) (6,491) Restricted stock plan deferred compensation (46,903) (48,735) (60,386) Treasury stock, at cost (399,487) (222,060) (192,723) 1,651,409 1,640,473 1,410,360 Total Liabilities and Stockholders' Equity 2,459,300 2,343,068 2,000,466 See accompanying notes to consolidated financial statements. (a) Reflects the two-for-one split of common stock in the form of a stock dividend to stockholders of record on March 18, 1996. THE GAP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Thirteen Weeks Ended Twenty-six Weeks Ended Unaudited August 3, July 29, August 3, July 29, ($000 except per share amounts) 1996 1995 1996 1995 Net sales $ 1,120,335 $ 868,514 $ 2,233,489 $ 1,717,202 Costs and expenses Cost of goods sold and 720,165 609,321 1,419,479 1,177,452 occupancy expenses Operating expenses 295,381 210,043 578,008 412,618 Net interest income (3,956) (4,430) (7,574) (9,279) Earnings before income taxes 108,745 53,580 243,576 136,411 Income taxes 42,955 21,166 96,213 53,884 Net earnings $ 65,790 $ 32,414 $ 147,363 $ 82,527 Weighted average number of shares (a) 286,179,138 288,233,222 287,092,901 287,988,160 Earnings per share (a) $ 0.23 $ 0.11 $ 0.51 $ 0.28 Cash dividends per share (a) $ 0.075 $ 0.06 $ 0.15 $ 0.12 See accompanying notes to consolidated financial statements. (a) Reflects the two-for-one split of common stock in the form of a stock dividend to stockholders of record on March 18, 1996. THE GAP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited ($000) Twenty-six Weeks Ended August 3, 1996 July 29, 1995 Cash Flows from Operating Activities: Net earnings $147,363 $ 82,527 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization (a) 105,986 95,514 Tax benefit from exercise of stock options by employees and from vesting of restricted stock 43,526 8,710 Change in operating assets and liabilities: Merchandise inventory (90,068) (137,186) Prepaid expenses and other (14,973) (16,090) Accounts payable 50,131 29,890 Accrued expenses 24,035 (40,281) Income taxes payable (33,385) (32,006) Deferred lease credits and other long-term liabilities 17,392 5,518 Net cash provided by (used for) operating activities 250,007 (3,404) Cash Flows from Investing Activities: Net maturity of short-term investments 23,463 55,165 Purchase of long-term investments (31,611) - Purchases of property and equipment (151,033) (134,662) Acquisition of lease rights and other assets (8,428) (10,183) Net cash used for investing activities (167,609) (89,680) Cash Flows from Financing Activities: Net increase (decrease) in notes payable 44,639 (3,590) Issuance of common stock 26,565 6,127 Purchase of treasury stock (177,427) (41,977) Cash dividends paid (42,444) (33,481) Net cash used for financing activities (148,667) (72,921) Effect of exchange rate changes on cash 916 735 Net decrease in cash and equivalents (65,353) (165,270) Cash and equivalents at beginning of year 579,566 414,487 Cash and equivalents at end of quarter $514,213 $249,217 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 August 3, 1996 and July 29,1995, and the interim consolidated statements of earnings and the interim consolidated statements of cash flows for the thirteen and twenty-six weeks ended August 3, 1996 and July 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 August 3, 1996 and July 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 twenty-six weeks ended August 3, 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 $1.9 million and $1.0 million respectively; income tax payments were $85.7 million and $76.3 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 & Touche LLP 		2101 Webster Street			 Telephone: (510)287-2700 	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 August 3, 1996 and July 29, 1995 and the related consolidated statements of earnings for the thirteen week and twenty-six week periods ended August 3, 1996 and July 29, 1995 and consolidated statements of cash flows for the twenty-six week periods ended August 3, 1996 and July 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 August 14, 1996 Deloitte Touche Tohmatsu International 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 Twenty-six Weeks Ended August 3, 1996 July 29, 1995 August 3, 1996 July 29, 1995 Net sales ($000) 1,120,335 868,514 2,233,489 1,717,202 Total net sales growth percentage 29 12 30 13 Comparable store sales growth percentage (Based on comparable 13 and 26 week periods respectively) 9 <4> 9 <3> Net sales dollars per average square foot 96 88 194 178 Average square footage of gross store space (000) 11,707 9,903 11,520 9,647 Fifty-three Fifty-two weeks ended weeks ended August 3, 1996 July 29, 1995 Number of New stores 219 195 Expanded stores 47 62 Closed stores 47 39 The increases in second quarter and year-to-date 1996 net sales over the same periods last year were attributable to the opening of new stores (net of stores closed), an increase in comparable stores sales, and the expansion of existing stores. The increases in second quarter and year-to-date net sales per average square foot from the same periods last year were primarily attributable to increases in comparable store sales partially offset by the growing impact of the Old Navy division where lower priced merchandise and significantly larger stores resulted in lower net sales per average square foot when compared to other divisions. Since the end of the second quarter, the rate of growth of total net sales has decelerated. For the four week period ended August 31, 1996, net sales increased 19 percent over the same period last year. Comparable store sales for August 1996 were flat. Cost of Goods Sold and Occupancy Expenses Cost of goods sold and occupancy expenses as a percentage of net sales decreased to 64.3 percent for the second quarter of 1996 from 70.1 percent for the same period in 1995. The resulting 5.8 percentage point increase in gross margin net of occupancy expenses was attributable to a 3.8 percentage point increase in merchandise margins as a percentage of net sales and a 2.0 percentage point decrease in occupancy expenses as a percentage of net sales. For the first half of 1996, cost of goods sold and occupancy expenses as a percentage of net sales decreased to 63.5 percent from 68.6 percent for the same period in 1995. The resulting 5.1 percentage point increase in gross margin net of occupancy expenses was attributable to a 3.1 percentage point increase in merchandise margins as a percentage of net sales and a 2.0 percentage point decrease in occupancy expenses as a percentage of net sales. For the second quarter and first half of fiscal 1996, increases in merchandise margins as a percentage of net sales resulted from higher initial merchandise margins and a larger percentage of merchandise sold at regular prices when compared to the same periods last year. Margins achieved on marked down goods were also higher than 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. For the second quarter and first half of fiscal 1996, occupancy expenses decreased as a percentage of net sales when compared to the same periods last year. The decreases in occupancy expenses as a percentage of net sales were primarily attributable to leverage achieved through increases in comparable store sales. The growth of the Old Navy division with lower occupancy expenses as a percentage of net sales when compared to other divisions also contributed to the decrease. Operating Expenses Operating expenses as a percentage of net sales increased to 26.4 percent for the second quarter of 1996 from 24.2 percent for the same period in 1995. The 2.2 percentage point increase was primarily attributable to a 1.1 percentage point increase in incentive bonus expense, a .7 percentage point increase in advertising costs to support the Company's brands, and a .4 percentage point increase in charitable contributions expense. For the first half of 1996, operating expenses as a percentage of net sales increased to 25.9 percent from 24.0 percent for the same period in 1995. The 1.9 percentage point increase was primarily attributable to a 1.1 percentage point increase in incentive bonus expense, a .3 percentage point increase in advertising costs and a .2 percentage point increase in charitable contributions expense. Incentive bonus expense is accrued quarterly based on year-to-date performance measured against established targets. No incentive bonus was recognized in the first half of 1995. Net Interest Income/Expense Net interest income was approximately $4.0 million for the second quarter and $7.6 million for the first half of 1996 compared to net interest income of $4.4 million and $9.3 million for the same periods in 1995. Income Taxes The Company does not anticipate any change in the effective tax rate of 39.5 percent for the remainder of fiscal 1996. LIQUIDITY AND CAPITAL RESOURCES 	The following sets forth certain measures of the Company's liquidity: Twenty-six weeks ended August 3, 1996 July 29, 1995 Cash provided by (used for) operating activities ($000) $250,007 $(3,404) Working capital ($000) $662,407 $558,901 Current ratio 2.0:1 2.2:1 For the twenty-six weeks ended August 3, 1996, the increase in cash flows provided by operating activities was primarily attributable to an increase in net earnings exclusive of depreciation expense, an increase in accrued bonus expense, and improved inventory management. 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 twenty-six weeks ended August 3, 1996, capital expenditures totaled approximately $145 million, net of disposals. These expenditures included the addition of 88 new stores, the expansion of 21 stores and the remodeling of certain stores resulting in a net increase in store space of approximately 705,000 square feet or 6 percent since February 3, 1996. For fiscal 1996, the Company expects capital expenditures to total approximately $300 to $350 million before dispositions, 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 became fully operational in September 1996. Additionally in May 1996, the Company purchased land and a building in the Netherlands for approximately $10 million to relocate its European distribution center. The distribution center which began operating in June 1996 provides a central shipping location to the European continent. 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 100 percent stock dividend to 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, on a committed basis, for the issuance of letters of credit up to $450 million at any one time. Outstanding letters of credit, including committed and uncommitted lines of credit, totaled approximately $517 million at August 3, 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 5,879,600 shares during the first half of 1996 for approximately $178 million. To date under this program, 13,019,400 shares have been repurchased for approximately $299 million. 								PART II	 								OTHER INFORMATION Item 4. Submissions of Matters to a Vote of Security Holders 	a)	On May 21, 1996, the Annual Meeting of Stockholders of the Company was held in San Francisco, California. There were 288,377,346 shares of common stock outstanding on the record date and entitled to vote at the Annual Meeting. 	b)	The following directors were elected: Votes in favor Against Adrian D.P. Bellamy 	256,065,121		 1,338,431 John G. Bowes 			256,055,453 		1,348,099 Millard S. Drexler	 		256,001,073	 	1,402,479 Donald G. Fisher 			 256,994,083		 1,409,469 Doris F. Fisher	 		 256,999,857 		1,403,695 Robert J. Fisher	 		256,001,021	 	1,402,531 Lucie J. Fjeldstad		 	256,061,069		 1,342,483 William A. Hasler 			253,808,457 		3,595,095 John M. Lillie 			256,000,215	 	1,403,337 Charles R. Schwab		 	256,002,073		 1,401,479 Brooks Walker, Jr.			 256,059,251		 1,344,301 	There were no abstentions and no broker non-votes. 	c)	The adoption of the 1996 Stock Option and Award Plan was ratified with 156,655,514 votes in favor and 85,552,653 against. 	There were 15,195,385 abstentions. 	d)	The adoption of the Executive Long-Term Cash Award Performance Plan was ratified with 252,004,591 votes in favor and 3,392,617 against. 	There were 2,006,344 abstentions. 	e)	the selection of Deloitte & Touche, LLP as independent auditors for the fiscal year ending February 1, 1997 was ratified with 256,992,328 votes in favor and 207,548 against. 	There were 203,676 abstentions. Item 6. Exhibits and Reports on Form 8-K 	a) Exhibits 		(10)	Amendment to the Credit Agreement, dated as of June 3, 1996, among Registrant and Citicorp USA Inc.; Bank of America National Trust & Savings Association; National Westminster Bank PLC; Nationsbank of Texas, N.A.; The Royal Bank of Canada; Bank of Montreal; Societe Generale; The Fuji Bank, Limited; U.S. National Bank of Oregon; Morgan Guaranty Trust Company of New York; The Sumitomo Bank Limited; and Citibank, N.A. 		(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 August 3, 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: September 13, 1996	 By /s/ Warren R. Hashagen 								Warren R. Hashagen 								Chief Financial Officer 								(Principal financial officer of the registrant) Date: September 13, 1996				 By /s/ Millard S. Drexler 			 Millard S. Drexler 								President and Chief Executive Officer 								EXHIBIT INDEX (10)	 Amendment to the Credit Agreement, dated as of June 3, 1996, among Registrant and Citicorp USA Inc.; Bank of America National Trust & Savings Association; National Westminster Bank PLC; Nationsbank of Texas, N.A.; The Royal Bank of Canada; Bank of Montreal; Societe Generale; The Fuji Bank, Limited; U.S. National Bank of Oregon; Morgan Guaranty Trust Company of New York; The Sumitomo Bank Limited; and Citibank, N.A. (11)	 Computation of Earnings per Share (15)	 Letter re: Unaudited Interim Financial Information (27)	 Financial Data Schedule