<PAGE>   1
                                                                   EXHIBIT 10.42


                               LICENSE AGREEMENT
                               -----------------

      AGREEMENT dated as of May 14, 1997 by and between ELLEN TRACY INC.
("Ellen Tracy"), a New Jersey corporation, with its principal offices located at
575 Seventh Avenue, New York, New York 10018, and GARGOYLES ACQUISITION
CORPORATION II (""Licensee"), a Washington corporation and a wholly-owned
subsidiary of Gargoyles, Inc., with its principal offices located at 5866 South
194th Street, Kent, Washington 98032, through its Private Eyes Sunglass
Division.

                              W I T N E S S E T H:
                              --------------------

      WHEREAS, Ellen Tracy is the owner of the Licensed Properties (as defined
in Section 1(c) hereof) and the goodwill associated therewith; and

      WHEREAS, Ellen Tracy is a party to a License Agreement (the "Private Eyes
License Agreement") dated as of January 1, 1995 with The Private Eyes Sunglass
Corporation ("Private Eyes") pursuant to which Ellen Tracy granted to Private
Eyes an exclusive license to use or reproduce certain of the Licensed
Properties on certain of the Licensed Articles (as hereinafter defined) in
connection with the manufacture, sale and distribution of such Licensed
Articles; and 

      WHEREAS, Licensee intends to purchase the business of Private Eyes; and

      WHEREAS, Ellen Tracy and Private Eyes have agreed to terminate the
Private Eyes License Agreement on the Effective Date (as hereinafter defined);
and
<PAGE>   2
      WHEREAS, Ellen Tracy desires to grant to Licensee a license, effective on
the Effective Date, to use the Licensed Properties on the Licensed Articles and
Licensee desires to be granted such a license.

      NOW, THEREFORE, in consideration of the foregoing and of the mutual
promises, covenants and agreements hereinafter set forth, and of other good and
valuable consideration, receipt of which is hereby acknowledged, the parties
hereto do hereby agree as follows:

      1.    Definitions. As used in this Agreement:

            (a)   "Advertising Materials" means all advertising and promotional
materials and all packaging, wrapping and labeling materials and display
fixtures for the Licensed Articles (including without limitation, catalogues,
trade advertisements, flyers, sales sheets, labels, package inserts, hangtags
and displays) which are produced by or for the License and which make use of
any of the Licensed Properties.

            (b)    "Effective Date" shall have the meaning set forth in Section
2(c) hereof.

            (c)   "Licensed Properties" means the names, logos, trademarks and
other intellectual properties set forth on Schedule A, attached hereto.

            (d)   "Licensed Articles" means the goods or products set forth on
Schedule B, attached hereto, whether produced by License or any contract
manufacturer pursuant to Section 15 hereof for Licensee, and which bear the
Licensed Properties.

            (e)   "Licensed Territory" means the world except Japan, Singapore,
Taiwan, China, Hong Kong and Thailand.

            (f)   "Net Sales Price" means the amount invoiced by Licensee to
its retail customers or distributors for Licensed Articles less authorized
returns actually received (up to 10%) and customary trade and/or industry
discounts. In computing Net Sales Price, no costs incurred in manufacturing,
selling, advertising or distributing the Licensed Articles shall be deducted,
nor shall   



                                      -2-
<PAGE>   3
any deduction be made for uncollectible accounts. If a sale, transfer or other
disposition is made otherwise than at arm's length, including, without
limitation, a sale by Licensee to an affiliate of Licensee, the Net Sales Price
of such Licensed Articles shall be deemed to be the Net Sales Price of like
quantities of like products sold at arm's length.

            (g)   "Retail" means better department stores, optical specialty
shops, and retailers of eyewear and/or sunglasses within the Licensed Territory
and within Licensee's industry including, without limitation, those listed on
Schedule C, attached hereto. Such list may be amended from time to time with
the mutual written approval of Ellen Tracy and Licensee.

            (h)   "Term" shall have the meaning set forth in Section 3(b)
hereof.

            (i)   "Premiums" means any article used for the purpose of
increasing the sale, promoting or publicizing any other product, or any
service, including, without limitation, incentives for sales forces and for
fund raising, give-aways and entries in sweepstakes.

      2.    Grant of License.

            (a)   Grant. Subject to the terms, conditions and limitations set
forth in this Agreement, Ellen Tracy hereby grants to Licensee, effective as of
the Effective Date, the right, license and privilege, during the Term hereof,
to use or reproduce the Licensed Properties solely on the Licensed Articles or
in connection with the manufacture, sale and distribution of the Licensed
Articles through Retail channels of distribution throughout the Licensed
Territory (the "License"). The License shall include the right to use the
Licensed Properties to advertise, market and promote the Licensed Articles.
Licensee hereby covenants and agrees to use its best efforts to manufacture,
distribute, sell, advertise and promote, in accordance with Section 5 hereof,
the Licensed Articles in the Territory during the Term.



                                      -3-
<PAGE>   4
            (b)   Exclusivity. The License granted herein shall be exclusive in
the Licensed Territory.

            (c)   Effective Date. This Agreement, including the License granted
in Section 2(a) above, shall become effective on the date that the purchase by
Licensee of the business of Private Eyes is consummated (the "Effective Date").

            (d)   Limitations. Licensee shall not sell the Licensed Articles
outside the Licensed Territory, or sell to those third parties Licensee knows
or has reason to know will sell the Licensed Articles outside the Licensed
Territory. The License does not include the right to export any Licensed
Articles from the Licensed Territory. The Licensed Articles shall not be used
as Premiums, in combination sales, as give-aways, as charitable contributions
or disposed of under similar methods of merchandising or other transfer without
the prior written consent of Ellen Tracy.

      3.    Term.

            (a)   Contract Term. The term (the "Contract Term") of this
Agreement shall commence on the Effective Date and shall expire on December 31,
2002, unless sooner terminated in accordance with the terms hereof. Each
12-month period commencing on January 1 during the Term (as hereinafter
defined) shall be referred to as an "Annual Period" except that the first
Annual Period hereunder shall commence on the Effective Date and shall end on
December 31, 1997.

            (b)   Renewal. Upon the expiration of the Contract Term, this
Agreement shall automatically renew for an additional five (5) years the (the
"First Renewal Period"), provided that (i) Licensee is not in breach of any of
the terms hereof upon the expiration of the Contract Term, (ii) Licensee has
achieved the Projected Annual Sales (as hereinafter defined) and expended the
Annual Advertising Amount (as hereinafter defined) for the Annual Period
commencing January 1, 2002 and (iii) Ellen Tracy and Licensee shall have agreed
to the Projected Annual Sales, Guaranteed Minimum 




                                      -4-
<PAGE>   5
Royalties (as hereinafter defined), the rate of Actual Royalties (as
hereinafter defined), and the Annual Advertising Amount for each Annual Period
during the First Renewal Period. Upon the expiration of the First Renewal
Period, this Agreement shall automatically renew for an additional five (5)
years (the "Second Renewal Period"), provided that (i) Licensee is not in
breach of any of the terms hereof upon the expiration of the First Renewal
Period, (ii) Licensee has achieved the Projected Annual Sales (as hereinafter
defined) and expended the Annual Advertising Amount (as hereinafter defined)
for the Annual Period commencing January 1, 2007 and (iii) Ellen Tracy and
Licensee shall have agreed to the Projected Annual Sales, Guaranteed Minimum
Royalties (as hereinafter defined), the rate of Actual Royalties (as
hereinafter defined), and the Annual Advertising Amount for each Annual Period
during the Second Renewal Period. The Contract Term, the First Renewal Period
and the Second Renewal Period are collectively referred to herein as the "Term."

     4.   Royalties. In consideration for the License granted to Licensee
hereunder, Licensee agrees to pay the following during the Contract Term:

          (a)  Guaranteed Minimum Royalties. Licensee shall pay to Ellen Tracy
the following amounts (the "Guaranteed Minimum Royalties") for each Annual
Period hereunder which are based on the projected annual sales of Licensed
Articles (excluding Close-Outs (as hereinafter defined)) ("Projected Annual
Sales") for the respective Annual Periods:

<TABLE>
<CAPTION>
                                                            PROJECTED
FOR ANNUAL PERIOD COMMENCING            AMOUNT            ANNUAL SALES
----------------------------            ------            ------------
<S>                                     <C>                 <C>
Effective Date                          $*                  $[***]**
January 1, 1998                         $[***]              $[***]
January 1, 1999                         $[***]              $[***]
January 1, 2000                         $[***]              $[***]
January 1, 2001                         $[***]              $[***]
January 1, 2002                         $[***]              $[***]
</TABLE>



                                      -5-






<PAGE>   6

 *The Guaranteed Minimum Royalties for the Annual Period commencing on the
Effective Date shall equal $[***] minus the amount paid by Private Eyes as
Guaranteed Minimum Royalties under Section 4(a) of the Private Eyes License
Agreement during the period between January 1, 1997 and the Effective Date.

**The Projected Annual Sales for the Annual Period commencing on the Effective
Date includes the sales made by Private Eyes under the Private Eyes License
Agreement during the period between January 1, 1997 and the Effective Date.

The Guaranteed Minimum Royalties for each Annual Period shall be paid in equal
quarterly installments in accordance with the provisions of Section 4(c)
hereof. The Guaranteed Minimum Royalties shall be considered to be advances
against and not in addition to the royalties otherwise payable under Section
4(b) hereof during the same Annual Period but in no event shall the Guaranteed
Minimum Royalties be repayable or refundable to Licensee or carried forward to
the succeeding Annual Period.

        (b) Actual Royalties. Licensee shall pay to Ellen Tracy, at the times
and in the manner set forth in Section 4(c) hereof, a royalty equal to [***]
percent ([*]%) of the aggregate Net Sales Price of the Licensed Articles sold
during the Term during the period between the Effective Date and December 31,
1997 and seven percent ([*]%) for the remainder of the Contract Term ("Actual
Royalties"). All Actual Royalties due to Ellen Tracy shall accrue upon the sale
of the Licensed Articles, regardless of the time of collection by the Licensee.
For purposes of this Agreement, a Licensed Article shall be considered "sold"
as of the date on which such Licensed Article is billed, invoiced, shipped or
paid for, whichever event occurs first.

        (c) Statements and Payments. Within thirty (30) days after the close of
the calendar quarter in which the initial shipment of any Licensed Articles is
made, and thereafter within thirty (30) days after the close of each successive
calendar quarter during the Term hereof, Licensee shall furnish to Ellen Tracy
complete and accurate statements (the "Quarterly Statements") certified


                                      -6-
<PAGE>   7
by the President or Chief Financial Officer of Licensee showing in a format
provided by or acceptable to Ellen Tracy the number, style description and Net
Sales Price of each Licensed Article sold by Licensee during the preceding
calendar quarter, together with the list of customer accounts to which such
Licensed Articles were sold, the quantity and invoice value of any returns and
allowances made during the preceding quarter and the calculation of the Actual
Royalties thereon due to Ellen Tracy. The Quarterly Statements also shall
include the amount expended, and the manner in which such amount was expended,
on advertising during the preceding quarter as required by Section 5(a) hereof.
The Quarterly Statements shall be furnished to Ellen Tracy whether or not any
Licensed Articles have been sold and whether or not Actual Royalties are due
and payable for the preceding calendar quarter. Payment of the greater of (i)
the quarterly installment of the Guaranteed Minimum Royalties or (ii) the
amount shown on the Quarterly Statements due as Actual Royalties shall
accompany the Quarterly Statements; provided, however, that if, in a given
quarter, the Actual Royalties exceed the Guaranteed Minimum Royalties and such
Actual Royalties are paid for such quarter (the amount of such excess
hereinafter the "Overage") then, in those succeeding quarters in which the
Guaranteed Minimum Royalties exceed the Actual Royalties, the Overage
theretofore paid shall be credited against the Guaranteed Minimum Royalties due
for such quarters in an amount equal to the amount by which the Guaranteed
Minimum Royalties exceed the Actual Royalties until the Overage is fully
credited. All payments shall be made in U.S. dollars. Licensee hereby waives
all claims to the refund of any Guaranteed Minimum Royalty or Actual Royalty
payments once made, other than claims for refunds of payments for returns of
Licensed Articles in subsequent reporting periods for which an adjustment shall
be made in the subsequent reporting periods.



                                      -7-
<PAGE>   8
          (d)  No Waiver. The receipt or acceptance by Ellen Tracy of any of
the Quarterly Statements or of any Actual Royalties or Guaranteed Minimum
Royalties paid hereunder (or the cashing of any checks evidencing such
payments) shall not preclude Ellen Tracy from questioning the correctness
thereof at any time, and in the event any inconsistencies, mistakes or errors
are discovered in the Quarterly Statements or payments, such mistakes shall be
immediately rectified and the appropriate payment made by Licensee.

          (e)  Time of Essence; Interest. Time is of the essence with respect
to the furnishing of all statements and the making of all payments due
hereunder. All amounts payable by Licensee to Ellen Tracy paid more than 30
days after the due date thereof shall bear interest equal to the lower of (i)
the maximum rate allowed by law or (ii) 1-1/2% per month, computed from the
original due date until paid.

     5.   Amounts Expended for Advertising and Promotion.

          (a)  Annual Advertising Amount. Licensee shall expend during each
Annual Period during the Term the amounts set forth below for the purposes of
advertising the Licensed Articles in various advertising media and for
promoting and publicizing the Licensed Articles (hereinafter, the "Annual
Advertising Amount"):

<TABLE>
<CAPTION>
FOR ANNUAL PERIOD COMMENCING            AMOUNT      
----------------------------            ------      
<S>                                     <C>          
Effective Date                          $    *           
January 1, 1998                         $[***]   
January 1, 1999                         $[***]    
January 1, 2000                         $[***]    
January 1, 2001                         $[***]   
January 1, 2002                         $[***]   
</TABLE>



                                      -8-
<PAGE>   9
*The Annual Advertising Amount for the Annual Period commencing on the
Effective Date shall equal [$******] minus the amount expended by Private Eyes
under Section 5(a) of the Private Eyes License Agreement for the period between
January 1, 1997 and the Effective Date.

At least 50% of the Annual Advertising Amount shall be spent by Licensee on
national advertising. Advertisements in national catalogues (other than
advertisements included in Sunglass Hut catalogues) shall not be deemed to be
national advertising and any amounts expended for advertising in such
catalogues shall not be included in the National Advertising Amount. Licensee
shall utilize Ellen Tracy's advertising agency, Ziccardi & Partners (the
"Advertising Agency"), for all national advertising. All such national
advertising shall be approved in advanced by Ellen Tracy. If Licensee fails to
spend at least 50% of the Annual Advertising Amount on national advertising,
within 30 days following the end of the Annual Period Licensee shall pay
directly to Ellen Tracy such unspent portion and Ellen Tracy shall expend such
amount on national advertising.

          (b)  Budgets. Not later than 30 days prior to the end of each
calendar six-month period during the Term hereof, Licensee shall send Ellen
Tracy the advertising budget and plan for the succeeding six-month period;
provided, however, that Licensee shall submit to Ellen Tracy the advertising
budget and plan for the first six-month period of the first Annual Period as
soon as practicable following execution hereof. Such advertising budget must be
approved in writing by Ellen Tracy within 20 days prior to the commencement of
the succeeding six-month period.

          (c)  Cooperative Advertising. The portion of any cooperative
advertising paid by stores or expenses for packaging shall not be deemed to be
amounts expended on advertising by Licensee for purposes of this Agreement.

          (d)  Use of Licensed Properties. The Licensed Properties alone shall
be used in advertising and promotion. No other trademark or trade name,
including Licensee's own trademark



                                      -9-

<PAGE>   10
or trade name, may be associated with the Licensed Properties; provided,
however, that Licensee may use its name in trade advertising with the prior
written approval of Ellen Tracy, which shall not be unreasonably withheld.

          (e)  Failure to Expend Annual Advertising Amount. If Licensee shall
for any two consecutive Annual Periods during the Term hereof fail to spend the
Annual Advertising Amount for such two Annual Periods, then Licensee shall
remit to Ellen Tracy, within 60 days after the end of such second Annual
Period, the difference between the actual dollars spent for advertising during
such two Annual Periods and the aggregate Annual Advertising Amounts for such
two Annual Periods. Ellen Tracy shall expend such amounts on advertising of the
Licensed Articles.

          (f)  Documentation. During the Term hereof, Licensee shall provide
Ellen Tracy with any documentation and records satisfactory to Ellen Tracy,
including paid invoices, receipts of payment and tear sheets or photocopies,
which demonstrate that Licensee has expended the sums set forth in this Section
5 on advertising as and in the manner required by this Section 5. Such
documentation shall be provided to Ellen Tracy quarterly together with the
Quarterly Statements.

          (g)  Quality of Advertising. Licensee shall use its best efforts to
ensure that all advertising produced by Licensee or Licensee's designees
hereunder shall be of the highest caliber.

          (h)  Audit. Licensee's expenditures for advertising and promotion
shall be subject to audit by Ellen Tracy in accordance with Section 7 hereof.

     6.  Showroom: Sales Offices; Monitoring.

          (a)   Showroom. Licensee shall maintain a showroom in New York City in
which Licensee shall display and market the Licensed Articles in a separate,
segregated area. In such separate, segregated area, only Licensed Articles
shall be displayed. Licensee shall ensure that the showroom is adequately 
staffed.



                                      -10-

<PAGE>   11
                (b)     Sales Offices. Licensee shall ensure that any sales 
offices through which Licensed Articles are distributed and sold are adequately
staffed.

                (c)     Monitoring. From time to time senior personnel of 
Licensee shall, as reasonably required, visit Retail locations where the
Licensed Articles are sold to ensure that the Licensed Articles are being
displayed and merchandised in accordance with the highest standards.

        7.      Books and Records: Audit. Licensee shall keep accurate books of
account and records at its principal place of business covering all
transactions relating to the License granted hereunder.  Ellen Tracy and Ellen
Tracy's duly authorized representatives shall have the right during regular
business hours upon five business days' notice to examine said books of account
and records and all other documents and material in the possession or under
control of Licensee with respect to the subject matter and terms of this
Agreement, and shall have free and full access thereto to make copies and
extracts thereof. In order to facilitate inspection by Ellen Tracy or Ellen
Tracy's representatives, Licensee shall maintain books and records concerning
the Licensed Articles separately from the books and records of goods which are
not licensed hereunder. Within 30 days of a demand by Ellen Tracy, Licensee, at
Ellen Tracy's expense (except as provided below), shall furnish to Ellen Tracy
a detailed statement by an independent certified accountant showing pricing
information and the number and description of the Licensed Articles shipped
and/or sold by Licensee up to the date of Ellen Tracy's demand. If any audit
discloses that Licensee owes Actual Royalties to Ellen Tracy in excess of 2% of
those previously paid, Licensee shall pay, in addition to such deficiency, the
cost of such examination and collection. If any audit discloses that Licensee
owes Actual Royalties to Ellen Tracy in an amount in excess of 5% of the Actual
Royalties previously paid, then, in addition to any and all other remedies that
Ellen Tracy may have hereunder, Ellen Tracy shall have the right to terminate
this Agreement upon written notice to Licensee. All books


                                      -11-
<PAGE>   12
of account and records shall be kept available for at least three years after
the expiration of the Term or earlier termination of this Agreement. At least
90 days prior to the destruction of any such books of account or records,
Licensee shall provide Ellen Tracy with a "Notice of Intent to Destroy" and
upon the request of Ellen Tracy, all such books or records shall be delivered
to Ellen Tracy. All information obtained by Ellen Tracy and its representatives
pursuant to this Section 7 shall be kept confidential except as may be
necessary to enforce Ellen Tracy's rights pursuant to this Agreement.

     8.   Quality Control/Approval Process.

          (a)  Number of Lines. Ellen Tracy and Licensee agree that one line of
sunglasses shall be developed, manufactured and sold per Annual Period. Such
line shall be available for line release in July or August of each Annual
Period, it being acknowledged that Licensee may add certain items to the line
through November of each such Annual Period. Two optical lines shall be
developed, manufactured and sold during each Annual Period. Such lines shall be
available for line release from March to April and from September to November,
respectively, during each Annual Period.

          (b)  General. Licensee shall comply with all reasonable procedures
consistent herewith which Ellen Tracy may from time to time adopt and give to
Licensee in writing regarding Ellen Tracy's approval of Licensed Articles and
Advertising Materials which Licensee proposes to manufacture, sell, or use under
this Agreement.

          (c)  Research and Development. Licensee covenants and agrees that it
will research and develop new designs (shapes) and materials representative of
the eyewear industry and suitable for the marketing direction of the Licensed
Articles and that it will research new sources 




                                      -12-
<PAGE>   13
for production of the Licensed Articles so as to assure that during the Term
hereof the Licensed Articles shall maintain a standard of high fashion.

            (d)   Preliminary Activities. Licensee shall designate at least one
individual employed by Licensee (the "Designer") who shall have principal
responsibility for the design of each line of the Licensed Articles for each
season. The Designer shall devote a substantial portion of his or her working
hours to the design of the Licensed Articles. Ellen Tracy shall have the right,
once each Annual Period for the sunglass line, and twice each Annual Period for
the optical line, to call a meeting (each, a "Design Meeting") with Licensee to
commence the design of each line. At such meeting, the Designer shall consult
with Ellen Tracy as to proposed concepts, styles, colors, and attitude of such
line, discuss future trends in the eyewear industry, the competitive market
direction of the eyewear industry, and other issues deemed relevant by Ellen
Tracy. At such meeting, the Designer shall advise Ellen Tracy of all of the
latest developments in design and materials in the eyewear industry and shall
submit prototypes of proposed designs (shapes) and discuss color direction. In
order to present a representative seasonal collection, Licensee shall submit to
Ellen Tracy a sufficient number of designs for each category of Licensed
Articles set forth on Schedule B and Licensee shall manufacture sufficient
quantities of Licensed Articles from each such category so that each seasonal
collection is well-balanced.

            (e)   Approval of Licensed Articles. At each Design Meeting, Ellen
Tracy will, from the prototypes presented, indicate its selection and approval
for each of the designs (shapes) that Licensee will produce for the next
season. Licensee will note priorities for any designs (shapes) -- i.e., selected
designs, requested revisions to designs, and rejected designs. Following such
meeting, Licensee will reconfirm or alter for production purposes any
prototypes to comply with

                                      -13-
<PAGE>   14
Ellen Tracy's approval requests. If any designs cannot be altered or produced
according to Ellen Tracy's specifications, Licensee shall inform Ellen Tracy.

            Immediately thereafter, Licensee will authorize the start of
tooling, secure production space, and order raw materials needed to manufacture
each prototype into samples and production. Once the tooling process and raw
material ordering has begun, Ellen Tracy acknowledges that it cannot request
any changes to the designs it has selected. Licensee will then make all other
arrangements to attempt to insure that the production of each of the Licensed
Articles proceeds in a timely manner. Within 30 days following such meeting,
Licensee shall submit to Ellen Tracy photographs and/or sketches of prototypes
which shall be updated after the Licensed Articles have received final
approval. The parties acknowledge that thereafter further meetings between them
may be necessary from time to time to resolve any manufacturing complications
or other design related problems that may arise. At least five business days
prior to the line release date, Licensee shall submit to Ellen Tracy for final
review and approval one sample of each Licensed Article showing the exact form,
finish, quality and color of such Licensed Article.

            Licensee shall comply with all of the foregoing approval steps for
each Licensed Article, unless by prior written notice from Ellen Tracy it is
exempted from any such step with respect to a specific Licensed Article.

            (f)   Approval of Advertising Materials. With respect to each
different item of Advertising Material which Licensee (or any party acting on
its behalf) proposes to produce and use under this Agreement, Licensee shall
submit to Ellen Tracy and/or the Advertising Agency for review and approval the
following materials, in the order stated:

                 (i)   proposed written copy for the item of Advertising
Material, with attached rough art showing how the Licensed Properties will be 
used in connection with the copy; 

                                      -14-
<PAGE>   15
                    (ii)  final copy for the item, with finished "lift" art, 
showing the use of the Licensed Properties;

                    (iii) finished "mechanicals" for the item; and

                    (iv)  a final printed sample of the item, where feasible 
(as, for example, in the case of labels, hangtags, printed brochures, 
catalogues, and the like).

            Licensee shall be required to comply with all of the foregoing
approval steps for each item of Advertising Material, obtaining written
approval within 10 business days after receipt from Ellen Tracy and/or the
Advertising Agency at each step of the procedure, unless by prior written
notice from Ellen Tracy and/or the Advertising Agency it is exempted from any
such step with respect to a specific item of Advertising Material. With respect
to those kinds of Advertising Materials (such as print media advertisements,
catalogues, promotional flyers, and the like) which Licensee proposes to use for
the purpose of advertising and promoting the Licensed Articles to the general
public, Licensee, when submitting such Advertising Materials to Ellen Tracy
and/or the Advertising Agency for approval, shall describe the proposed uses of
the Advertising Agency (including the media to be used in exploiting the same)
and the duration of such proposed uses. In such cases, approval of the
Advertising Materials by Ellen Tracy and/or the Advertising Agency shall extend
only to those proposed uses, durations of use, etc., described in Licensee's
submissions. Licensee will submit further uses and durations of use as in the
above provided manner.

            (g)   Approval Standards. Ellen Tracy shall have the right to
disapprove any materials under Sections 8(d), 8(e) and 8(f) and request changes
thereto if it determines, in its sole discretion, that the materials in
question would impair the value and goodwill associated with the Licensed
Properties and/or Ellen Tracy's licensing program.

                                      -15-
<PAGE>   16
            (h)   Time for Approval. Ellen Tracy agrees to use reasonable
efforts to notify Licensee in writing of approval or disapproval by Ellen Tracy
of any materials submitted to Ellen Tracy under Sections 8(d), 8(e) and 8(f)
within 10 business days after Ellen Tracy's receipt of such materials.

      9.    Warranty of Quality; Maintenance of Quality of Licensed Articles

            (a)   Warranty of Quality. License warrants that the Licensed
Articles will be of good quality in design, material and workmanship and will be
suitable or their intended purpose; that no injurious, deleterious or toxic
substances will be used in or on the Licensed Articles; that the Licensed
Articles will not cause harm when used as instructed and with ordinary care for
their intended purpose; and that the Licensed Articles will be manufactured,
sold and distributed in strict compliance with all applicable laws and
regulations.

            (b)   Maintenance of Quality. Licensee agrees to maintain the
quality of Licensed Articles manufactured under this Agreement up to the
specifications, quality and finish of the production sample of such Licensed
Article approved by Ellen Tracy under Sections 8(c), 8(d) and 8(e), and agrees
not to change the Licensed Article in any respect or to make any change in the
artwork for the Licensed Article without first submitting to Ellen Tracy samples
showing such proposed changes and obtaining written approval of such samples
from Ellen Tracy. From time to time after it has commenced manufacturing the
Licensed Articles, Licensee, upon request from Ellen Tracy, shall furnish free
of charge to Ellen Tracy a reasonable number of random production samples of any
Licensed Article specified by Ellen Tracy in its request.

      10.   Prohibition Against Manufacture Sale or Use of Unapproved Licensed
Articles or Advertising Materials. Licensee shall not have the right to
manufacture, offer for sale, distribute, sell or use any Licensed Article or
item of Advertising Material unless it has complied with all of the

                                      -16-
<PAGE>   17
approval procedures and requirements set forth in Section 8 with respect to
such Licensed Article or item of Advertising Material, and has obtained prior
written approval of such Licensed Article or item of Advertising Material by
Ellen Tracy.

      11.   Close-outs.

            (a)   Definitions.

                  (i)   "Samples" are Licensed Articles which are trial
productions which are never part of the line.

                  (ii)  "Close-Outs" are Licensed Articles sold which are part
of a collection or line which Licensee is unable to market through Retail
channels of distribution and which are sold at reduced prices.

            (b)   GENERAL. Licensee may sell Close-Outs of Licensed Articles
pursuant to the terms set forth in this Section 11(b). Upon the execution
hereof, Licensee shall submit to Ellen Tracy a list of stores through which
Licensee is selling Close-Outs, and Licensee shall update such list every six
months. Ellen Tracy shall have the right to approve such stores, which approval
shall not be unreasonably withheld. Records as to sales of Close-Outs shall be
provided by Licensee to Ellen Tracy in accordance with Section 7 hereof.
Licensee hereby covenants and agrees to use its best efforts to comply with all
federal, state and local laws, rules and regulations relating to sales made on a
consignment basis.

            (c)   Royalties; Records. During each Annual Period hereunder, for
sales (including consignment) of Close-Outs up to fifteen percent (15%) of the
aggregate net sales of Licensed Articles during such Annual Period, Licensee
shall pay to Ellen Tracy Actual Royalties on such Close-Outs at the rate of
fifty percent (50%) of the otherwise applicable royalty rate. For all sales of
Close-Outs in excess of fifteen percent (15%) of the aggregate net sales of
Licensed Articles

                                      -17-
<PAGE>   18
during such Annual Period, Licensee shall pay to Ellen Tracy Actual Royalties
at the rate set forth in Section 4(b) hereof. Royalties due on Close-Outs shall
be paid at the same time and in the same manner as set forth in Section 4(c)
hereof.

     12.  Licensed Properties Rights and Obligations.

          (a)  General. All uses of the Licensed Properties hereunder shall
inure to Ellen Tracy's benefit. Licensee acknowledges that Ellen Tracy is the
exclusive owner of all the Licensed Properties and of any trademark
incorporating all or any part of any Licensed Property and the trademark rights
created by such uses. All ideas, designs and suggestions submitted or approved
by Ellen Tracy and incorporated in a collection of Licensed Articles shall be
deemed to be and shall remain the sole and exclusive property of Ellen Tracy,
except to the extent, if any, that the same are in the public domain, and
Licensee hereby agrees not to use or incorporate for use any such ideas and
designs in products manufactured or sold by Licensee, directly or indirectly,
other than the Licensed Articles, nor to sell to any third party or disclose
the same except through the promotion and sale of Licensed Articles hereunder;
provided, however, that Licensee shall be free to manufacture or have
manufactured, and to market and distribute, products similar to the Licensed
Articles in accordance with Section 21 hereof. Without limiting the foregoing,
Licensee hereby assigns to Ellen Tracy any trademark incorporating all or any
part of any Licensed Property and the trademark rights created by such uses
together with the goodwill attaching to that part of the business in connection
with which such Licensed Properties or trademarks are used. Licensee agrees to
execute and deliver to Ellen Tracy such documents as are required to register
Licensee as a registered user or permitted user of the Licensed Properties or
such trademarks and to follow Ellen Tracy's instructions for proper use thereof
in order that protection and/or registrations for the Licensed Properties and
such trademarks may be obtained or maintained.



                                      -18-
<PAGE>   19
          (b)  Prohibitions. Licensee agrees not to use any Licensed Properties
or any trademark incorporating all or any part of any Licensed Properties on
any business sign, business cards, stationery or forms (except as licensed
herein) or to use any Licensed Properties, as the name of Licensee's business
or any division thereof, unless otherwise agreed by Ellen Tracy in writing.

     13.  Registrations. Except with the written consent of Ellen Tracy,
neither Licensee, its parent or any subsidiary of Licensee shall register or
attempt in any country to register copyrights in, or to register as a
trademark, service mark, design patent or industrial design or business
designation, any of the Licensed Properties or derivations or adaptations
thereof, or any word, symbol or design which is so similar thereto as to
suggest association with or sponsorship by Ellen Tracy or any subsidiary of
Ellen Tracy. In the event of breach of the foregoing, Licensee agrees, at
Licensee's expense and Ellen Tracy's request, immediately to terminate the
unauthorized registration activity and promptly to execute and deliver, or
cause to be delivered, to Ellen Tracy such assignments and other documents as
Ellen Tracy may require to transfer to Ellen Tracy all rights to the
registrations, patents or applications involved.

     14.  Unauthorized Use of Licensed Materials.

          (a)  No Unauthorized Use. Licensee shall not use the Licensed
Properties or any other material the copyright to which is owned by Ellen Tracy
in any way other than as herein authorized (or as is authorized in such other
written contract signed by Ellen Tracy and Licensee as may be in effect between
such parties). In addition to any other remedy Ellen Tracy may have, Licensee
agrees that the profits from any use thereof on products other than the
Licensed Articles (unless authorized by Ellen Tracy in writing), and all
profits from the use of any other copyrighted material of Ellen Tracy without
written authorization, shall be payable to Ellen Tracy.



                                      -19-
<PAGE>   20
     (b)  Notice of Unauthorized Use.  Licensee shall give to Ellen Tracy prompt
written notice of any unauthorized use by third parties of Licensed Properties
and Licensee shall not, without written consent, bring or cause to be brought
any criminal prosecution, lawsuit or administrative action for infringement,
interference with or violation of any rights to Licensed Properties. Licensee
agrees to cooperate with Ellen Tracy at no expense to Licensee, and, if
necessary, to be named by Ellen Tracy as a sole complainant or co-complainant in
any action against an infringer of the Licensed Properties and Licensee agrees
to pay to Ellen Tracy all or any part of damages or other monetary relief
recovered in such action other than for reasonable expenses incurred at Ellen
Tracy's request.

     15.  Manufacturing Code of Conduct; Sublicensing; Third Party
          Manufacturers.

          (a)  Manufacturing Code of Conduct.  Licensee hereby agrees to 
comply with the Ellen Tracy Manufacturing Code of Conduct attached hereto as
Exhibit A and made a part hereof.

          (b)  Sublicensing. Licensee shall not have the right to sublicense
any of the rights granted to it under this Agreement except with Ellen Tracy's
prior written consent.

          (c)  Agreements with Third-Party Manufacturers. If Licensee at any
time desires to have Licensed Articles or components thereof manufactured by a
third party, Licensee shall, as a condition to the continuation of this
Agreement, notify Ellen Tracy of the name and address of such manufacturer and
Licensee shall ensure that any such third-party manufacturer complies with the
Ellen tracy Manufacturing Code of Conduct attached hereto as Exhibit A.

          (d)  Unauthorized Use by Third-Party Manufacturers.  If any
third-party manufacturer utilizes Licensed Properties for any unauthorized
purpose, Licensee shall cooperate fully in bringing such utilization to an
immediate halt.


                                      -20-


<PAGE>   21
     16.  Indemnification.

          (a)  By Licensee. License shall indemnify Ellen Tracy during and
after the Term against all claims, liabilities (including settlements entered
into in good faith with Licensee's consent, not to be unreasonably withheld)
and expenses (including reasonable attorneys' fees) arising out of Licensee's
activities hereunder or out of any defect (whether obvious or hidden and
whether or not present in any sample approved by Ellen Tracy) in any Licensed
Article or arising from personal injury or any infringement of any rights of
any other person by the manufacture, production, sale, distribution, possession
or use of Licensed Articles or their failure to comply with applicable laws,
regulations and standards. The parties indemnified hereunder shall include
Ellen Tracy, any parent company, subsidiary or affiliate of Ellen Tracy, and
their officers, directors, employees and agents. The indemnity shall not apply
to any claim or liability relating to any infringement of the copyright of a
third party caused by Licensee's utilization of the Licensed Properties in
accordance with provisions hereof.

          (b)  Prior Rights.  No warranty or indemnity is given with respect to
any liability or expense arising from any claim that use of the Licensed
Properties or the trademarks on or in connection with the Licensed Articles
hereunder or any packaging, advertising or promotional material infringes on any
trademark right of any third party or otherwise constitutes unfair competition
by reason of any prior rights acquired by such third party other than rights
acquired from Ellen Tracy. It is expressly agreed that it is Licensee's
responsibility or carry out such investigations as Licensee may deem appropriate
to establish that the Licensed Articles, packaging, promotional and advertising
material which are manufactured or created hereunder, including any use made of
the Licensed Properties therewith, do not infringe such right of any third
party, and Ellen Tracy shall not be liable to Licensee if such infringement
occurs.


                                      -21-

<PAGE>   22
        17.     Insurance. Licensee shall maintain in full force and effect at
all times while this Agreement is in effect and for three years thereafter
comprehensive general and commercial liability insurance, including broad form
contractual and products liability coverage waiving subrogation, with combined
single limits of no less than $3,000,000.00, with a deductible of no more than
$25,000 and naming as additional insured those indemnified in Section 16(a)
hereof. Licensee shall deliver to Ellen Tracy a certificate or certificates of
insurance evidencing satisfactory coverage and indicating that Ellen Tracy
shall receive written notice of cancellation, non-renewal or of any material
change in coverage at least thirty (30) days prior to the effective date
hereof. Licensee's insurance shall be carried by an insurer with a BEST rating
of B + V. Compliance herewith in no way limits Licensee's indemnity
obligations, except to the extent that Licensee's insurance company actually
pays Ellen Tracy amounts which Licensee would otherwise pay Ellen Tracy.
Licensee shall take all necessary steps to ensure that the insurer has no right
of subrogation against the Ellen Tracy.

        18.     Withdrawal of Licensed Material. Licensee agrees that Ellen
Tracy may, without obligation to Licensee other than to give Licensee written
notice thereof, withdraw from the scope of this Agreement any Licensed
Properties which within six months from the commencement of the Term of this
Agreement, is not being used on or in connection with Licensed Articles. Ellen
Tracy may also withdraw any Licensed Properties or Licensed Articles the use or
sale of which under this Agreement would infringe or reasonably be claimed to
infringe the rights, other than rights granted by Ellen Tracy, of a third
party, in which case Ellen Tracy's obligations to Licensee shall be limited to
the purchase at cost of Licensed Articles and other materials utilizing such
withdrawn Licensed Properties which cannot be sold or used.

        19.     Termination. Without prejudice to any other right or remedy
available to Ellen Tracy:


                                      -22-
<PAGE>   23
          (a)  Default; Breach. If Licensee fails to manufacture, sell and
distribute the Licensed Articles or to furnish statements and pay Actual
Royalties and Guaranteed Minimum Royalties as herein provided, or if Licensee
breaches the terms of this Agreement, including, without limitation, the terms
of Section 5 and Section 11 hereof, and if any such failure is not corrected
within 30 days after Ellen Tracy sends Licensee written notice setting forth
the nature of the failure and/or breach, Ellen Tracy shall have the right at
any time to terminate this Agreement by giving Licensee a written notice of
termination.

          (b)  Immediate Termination. Ellen Tracy shall have the right at any
time to terminate this Agreement forthwith by giving Licensee written notice
thereof if:

               (i)   Licensee delivers to any customer without Ellen Tracy's
written authorization merchandise containing representations of Licensed
Properties or other material the copyright or other proprietary rights to which
are owned by Ellen Tracy other than Licensed Articles listed herein and
approved in accordance with Sections 8(b), 8(c) and 8(d);

               (ii)  Licensee delivers Licensed Articles outside the Territory
or knowingly sells Licensed Articles to a third party for delivery outside the
Territory unless pursuant to a written distribution permission or separate
written license agreements with Ellen Tracy or any subsidiary of Ellen Tracy.

               (iii) a breach occurs which is of the same nature, and which
violates the same provision of this Agreement, as a breach of which Ellen Tracy
has previously given Licensee two (2) written notices;

               (iv)  Licensee breaches any material term of any other license
agreement between Ellen Tracy and Licensee, and Ellen Tracy terminates such
agreement for cause;



                                      -23-
<PAGE>   24
               (v)   Licensee shall make assignment for the benefit of
creditors, or files a petition in bankruptcy, or is adjudged bankrupt, or
becomes insolvent, or is placed in the hands of a receiver, or if the
equivalent of any such proceedings or acts occurs, though known by some other
name or term; or

               (vi)  Licensee is not permitted or is unable to operate its
business in the usual manner, or is not permitted, or is unable to provide
Ellen Tracy with assurance satisfactory to Ellen Tracy that Licensee will so
operate its business, as debtor in possession or its equivalent, or is not
permitted, or is unable to otherwise meet its obligations under this Agreement
or to provide Ellen Tracy with assurance satisfactory to Ellen Tracy that
Licensee will meet such obligations.

          (c)  Termination by Licensee. If Ellen Tracy makes an assignment for
the benefit of creditors or files a petition in bankruptcy or is adjudged
bankrupt or becomes insolvent or is placed in the hands of a receiver, or if
the equivalent of any such proceedings or acts occurs, though known by some
other name or term, Licensee shall have the right to terminate this Agreement
on notice to Ellen Tracy.

     20.  Rights and Obligations Upon Expiration or Termination.

          (a)  Sell-Off Period. Upon the expiration or termination of this
Agreement, all rights herein granted to Licensee shall revert to Ellen Tracy,
and Ellen Tracy shall be entitled to retain all Actual Royalties and Guaranteed
Minimum Royalties and other things of value paid or delivered to Ellen Tracy.
Licensee agrees that from the expiration or termination of this Agreement
Licensee shall neither manufacture nor have manufactured for Licensee any
Licensed Articles, that Licensee will deliver to Ellen Tracy any and all
artwork which may have been used or created by Licensee in connection with this
Agreement, that Licensee will at Ellen Tracy's option either sell to Ellen
Tracy at cost or destroy or efface any molds, plates and other items used to
reproduce 



                                      -24-
<PAGE>   25
Licensed Properties and that, subject as hereinafter provided, Licensee will
cease selling Licensed Articles. If Licensee has any unsold Licensed Articles in
inventory on the expiration or termination date, Licensee shall provide Ellen
Tracy with a full statement of the kinds and numbers of such unsold Licensed
Articles and shall thereupon, but only if such statement has been provided to
Ellen Tracy and if Licensee has fully complied with the terms of this Agreement
including the payment of all Actual Royalties and Guaranteed Minimum Royalties
due, have the right for a limited period of 120 days from such expiration or
earlier termination date to sell off and deliver such Licensed Articles or, at
the option of Ellen Tracy resell such Licensed Articles to Ellen Tracy at cost.
Licensee shall furnish Ellen Tracy with statements covering such sales and pay
Ellen Tracy Actual Royalties in respect of such sales. Except as otherwise
agreed by the parties in writing, any inventory of Licensed Articles in
Licensee's possession or control after the expiration or termination hereof and
of any sell-off period granted hereunder shall be destroyed or all Licensed
Properties removed or obliterated therefrom.

          (b)  Final Quarter. During the three-month period immediately
preceding the expiration of the Contract Term (if the Agreement is not
renewed)  or the Renewal Period (hereinafter, the "Final Quarter"), Licensee
shall not have on hand (i) an inventory of Licensed Articles in excess of the
inventory of such Licensed Articles in its possession during the three-month
period immediately preceding the Final Quarter, or (ii) an inventory of uncut
piece goods or unfinished Licensed Articles greater than Licensee shall be able
to manufacture into finished Licensed Articles and sell in accordance with the
terms of this Agreement during the Final Quarter. The intent of this provision
is to facilitate the orderly disposition of Licensee's inventory of Licensed
Articles upon expiration of this Agreement.



                                      -25-

<PAGE>   26
     21.  Other Fashion Designer; Competing Products. During the Term, Licensee
shall not enter into a license agreement with any other competing fashion
designers in the bridge market for the manufacture, sale or distribution of
articles similar to the Licensed Articles without the prior written consent of
Ellen Tracy. Licensee covenants and agrees that during the Term it shall not
enter into any licensing contract or renewal or undertaking for the manufacture
and distribution in the Territory of products that are identical to or not
noticeably distinguishable from the Licensed Articles or marketed in such
manner as to be confused with the Licensed Articles.

     22.  Representations, Warranties and Covenants.

          (a)  By Ellen Tracy. Ellen Tracy hereby represents and warrants that
it has full right, power and authority to enter into this Agreement and to
perform all of its obligations hereunder and that it is the beneficial owner of
the Licensed Properties and the trademark registrations therefor.

          (b)  By Licensee. Licensee hereby represents and warrants that it has
full right, power and authority to enter into this Agreement and to perform all
of its obligations hereunder. Licensee covenants and agrees to comply with all
laws, rules, regulations, ordinances and treaties relating to the manufacture,
distribution and sale of the Licensed Articles throughout the Licensed
Territory as contemplated hereby.

     23.  Waivers. A waiver by either party at any time of a breach of any
provision of this Agreement shall not apply to any breach of any other
provision of this Agreement or imply that a breach of the same provision at any
other time has been or will be waived or that this Agreement has been in any
way amended, nor shall any failure by either party to object to conduct of the
other be deemed to waive such party's right to claim that a repetition of such
conduct is a breach hereof.



                                      -26-

<PAGE>   27


     24.   Purchase of Licensed Articles by Ellen Tracy. If Ellen Tracy wishes
to purchase Licensed Articles, Licensee agrees to sell such Licensed Articles to
Ellen Tracy or any subsidiary of Ellen Tracy at as low a price as Licensee
charges for similar quantities sold to regular customers and to pay Ellen Tracy
Actual Royalties on any such sales.

     25.   Non-Assignability. Licensee shall not voluntarily or by operation
of law assign, sub-license, encumber or otherwise dispose of all or any part of
its interest in this Agreement without Ellen Tracy's prior written consent which
shall not be unreasonably withheld. Any attempted assignment, sub-license,
encumbrance or other disposal without such consent shall be void and shall
constitute a material default and breach of this Agreement.

     26.  Relationship. This Agreement does not provide for a joint venture,
partnership, agency or employment relationship between the Ellen Tracy and
Licensee.

     27.  Headings. Headings of paragraphs herein are for convenience of
reference only and are without substantive significance.

     28.  Modifications or Extensions of this Agreement. Except as otherwise
provided herein, this Agreement can only be extended or modified by a writing
signed by both parties.

     29.  Notices. All notices and statements required hereunder shall be in
writing and shall be sent by hand delivery, prepaid telex, cable or telecopy,
or by registered or certified mail (postage prepaid and return receipt
requested) or by reputable overnight courier or express mail to the addresses
set forth below unless notification of a change of address is given in writing.
Notice shall be deemed effective when so personally delivered, telexed, cabled
or telecopied, or if mailed, two business days following the date the notice is
mailed (one business day in the case of express mail or overnight courier
services).


                                      -27-
<PAGE>   28
     All Quarterly Statements and Payments to:

          Ellen Tracy Inc.
          165 Polito Avenue
          Lyndhurst, New Jersey 07071
          Attention: Mr. Yoram Arieven

     All other notices to Ellen Tracy to:

          Ellen Tracy Inc.
          575 Seventh Avenue
          New York, New York 10018
          Attention: Mr. Howard Rosenberger

     If to Licensee, to:

          Gargoyles, Inc.
          5866 South 194th Street
          Kent, Washington 98032
          Attention: Mr. Douglas B. Hauff

     30.  Entire Agreement. This Agreement contains the entire agreement
between the parties concerning the subject matter hereof and supersedes any
pre-existing agreement and any oral or written communications between the
parties.

     31.  Choice of Law and Forum. This Agreement shall be deemed to be entered
into in New York and shall be governed and interpreted according to the laws of
the State of New York. Any legal actions pertaining to this Agreement shall be
commenced within the State of New York. The prevailing party shall be entitled
to recover reasonable attorney's fees and costs incurred therein.

     32.  Force Majeure. Neither party shall be responsible for failure to
perform hereunder or for any loss or damage (including indirect of
consequential damage) due to causes beyond its reasonable control, including,
without limitation, governmental requirements, inability to obtain required
export licenses, work stoppages, fire, civil disobedience, embargo, war,
riots, rebellions,


                                      -28-
<PAGE>   29
earthquakes, strikes, floods, water and the elements, inability to secure
equipment, raw materials or transport, acts of God or similar occurrences.

     IN WITNESS WHEREOF, the parties hereunto have signed this Agreement as of
the date first written above.


                                        ELLEN TRACY INC.

                                        By: /s/ HOWARD ROSENBERGER
                                           ----------------------------
                                        Title: Vice President


                                        GARGOYLES, INC.

                                        By: /s/ DOUGLAS B. HAUFF
                                           ----------------------------
                                        Title: President/CEO



                                      -29-
<PAGE>   30
                                   SCHEDULE A

                              Licensed Properties

Trademark
---------

"Ellen Tracy"

"Linda Allard"

"Linda Allard for Ellen Tracy"

"Company Ellen Tracy"

<PAGE>   31

                                   SCHEDULE B

                               Licensed Articles

- Eyeglasses

- Sunglasses

- Readers

- Optical Frames

- Eyewear Cases, including without limitation, soft cases and hard cases

- Eyewear Accessories, including without limitation, eyewear cords and chains

<PAGE>   32

                                   SCHEDULE C

                             List of Retail Stores

Retail Stores
-------------

Saks
Nieman Marcus
Nordstrom
Dillards
Lord & Taylor
Bloomingdales
Macy's-East
Macy's-West
Dayton Hudson/Marshall Field
Robinson/May
Parisian
Richs
Filenes
Jacobsons, MI
Famous Barr
Kaufmans
Foleys
<PAGE>   33
                                   Exhibit A

                                  ELLEN TRACY

                   MANUFACTURING CODE OF CONDUCT - LICENSEES


     1.   No merchandise manufactured by licensees of Ellen Tracy
("Merchandise") or third party manufacturers or sublicensees of such licensees
shall be produced through the use of forced or child labor. Forced labor is any
work not performed voluntarily but rather under threat of criminal punishment,
such as prison labor. Child labor is any work performed by a child under the age
permitted by the laws, rules, regulations or other requirements of the county
where Merchandise is produced. All of Ellen Tracy's licensees and such
licensees' sublicensees, third party manufacturers, suppliers and contractors
must comply with all laws applicable to the country in which Merchandise is
manufactured.

     2.   Facilities used to manufacture Merchandise must be in compliance with
all laws, rules, regulations or other requirements regarding worker safety.

     3.   Ellen Tracy reserves the right to investigate any potential violation
of law and, at its discretion, to suspend, discontinue or terminate its
relationship with any licensee for its failure (or the failure of its
sublicensees, manufacturers, suppliers and contractors) to comply with any laws
applicable to Merchandise produced in such country, whether the United States or
any other country. Ellen Tracy also reserves the right to demand that a licensee
institute monitoring programs necessary to ensure compliance with applicable
laws as a condition to the continuance or resumption, as the case may be of
business dealings with that licensee.