<PAGE>   1
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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
   
                                   FORM 10-Q/A

                                 Amendment No. 1
    
(Mark one)
[ X ]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                  For the quarterly period ended June 30, 1997

                                       OR

[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934 (NO FEE REQUIRED) 

              For the transition period from          to          
                                             --------   ----------
                         Commission file number 0-21335


                                 GARGOYLES, INC.
             (Exact name of registrant as specified in its charter)


        Washington                                   91-1247269
(State of Incorporation)               (I.R.S. Employer Identification Number)


                             5866 SOUTH 194TH STREET
                             KENT, WASHINGTON 98032
                                 (253) 872-6100
   (Address and telephone number of registrant's principal executive offices)


           Indicate by check mark whether the 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 
                                       -----  -----


As of June 30, 1997 there were 7,428,215 outstanding shares of the registrant's
common stock, no par value, which is the only class of common or voting stock of
the registrant.


--------------------------------------------------------------------------------


<PAGE>   2


                                 GARGOYLES, INC.
                              INDEX TO FORM 10-Q/A
                                 AMENDMENT NO. 1

<TABLE>
<CAPTION>
                                                                                                               PAGE(S)
                                                PART 1 - FINANCIAL INFORMATION
<S>                                                                                                              <C>
ITEM 1:               FINANCIAL STATEMENTS (UNAUDITED)
                        CONSOLIDATED BALANCE SHEETS.....................................................          1

                        CONSOLIDATED STATEMENTS OF OPERATIONS...........................................          2

                        CONSOLIDATED STATEMENTS OF CASH FLOWS...........................................          3

                        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS......................................          4 

ITEM 2:               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                          CONDITION AND RESULTS OF OPERATIONS...........................................          7

                                                 PART II - OTHER INFORMATION

ITEM 1:               LEGAL PROCEEDINGS.................................................................          12

ITEM 4:               SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............................          13

ITEM 6:               EXHIBITS AND REPORTS ON FORM 8-K..................................................          13
</TABLE>


<PAGE>   3


                         PART 1 - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                                 GARGOYLES, INC.
                           CONSOLIDATED BALANCE SHEETS

   
<TABLE>
<CAPTION>
                                                             June 30,     December 31,
                                                               1997          1996
                                                           ------------   ------------
                                                           (Unaudited)    
<S>                                                        <C>            <C>         
ASSETS                                                     
Current assets:
  Cash and cash equivalents                                $    390,432   $  4,382,048
  Trade receivables, less allowances for doubtful
    accounts of $359,105 and $172,600                        18,996,398      8,897,879
  Inventories                                                14,781,118      5,881,884
  Trade credits                                                 305,900        624,295
  Other current assets and prepaid expenses                   5,754,505      1,542,802
                                                           ------------   ------------
Total current assets                                         40,228,353     21,328,908
Property and equipment, net                                   3,752,052      2,811,935
Intangibles, net                                             20,103,499      2,961,110
Other assets                                                    447,709        160,262
                                                           ============   ============
Total assets                                               $ 64,531,613   $ 27,262,215
                                                           ============   ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                         $  8,841,717   $  3,380,895
  Accrued expenses and other current liabilities              5,580,370      2,347,738
  Current maturities of long-term debt                        3,480,000           --                       
                                                           ------------   ------------     
Total current liabilities                                    17,902,087      5,728,633
                                                           ------------   ------------
Long-term debt                                               23,737,606            -- 
                                                           ------------   ------------
Deferred license income                                         180,000        360,000
                                                           ------------   ------------
Minority interest                                               235,070        270,198
                                                           ------------   ------------

Commitments and contingencies

Shareholders' equity:
  Preferred stock, no par value, authorized shares --
     10,000,000, none issued                                       --              -- 
  Common stock, no par value, authorized shares --
     40,000,000, issued and outstanding --
     7,428,215 and 7,419,008                                 25,678,711     25,643,576
  Retained earnings (deficit)                                (3,201,861)    (4,740,192)
                                                           ------------   ------------
Total shareholders' equity                                   22,476,850     20,903,384
                                                           ------------   ------------

Total liabilities and shareholders' equity                 $ 64,531,613   $ 27,262,215
                                                           ============   ============
</TABLE>
    

                             See accompanying notes.


                                       1


<PAGE>   4


                                 GARGOYLES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)

   
<TABLE>
<CAPTION>
                                              Quarter Ended               Six Months Ended
                                                June 30,                     June 30,
                                      ---------------------------   ---------------------------
                                          1997           1996          1997           1996
                                      ------------   ------------   ------------   ------------
<S>                                   <C>            <C>            <C>            <C>         
Net sales                             $ 15,866,299   $ 10,632,523   $ 24,064,565   $ 17,626,816

Cost of sales                            5,713,772      4,520,790      8,795,769      7,386,185
                                      ------------   ------------   ------------   ------------

Gross profit                            10,152,527      6,111,733     15,268,796     10,240,631

License income                             221,736        132,663        331,736        293,609
                                      ------------   ------------   ------------   ------------

                                        10,374,263      6,244,396     15,600,532     10,534,240
                                      ------------   ------------   ------------   ------------

Operating expenses:
          Sales and marketing            5,396,833      2,617,767      8,186,038      4,985,350
          General and administrative     1,600,820      1,108,618      2,757,821      2,077,552
          Shipping and warehousing       1,045,387        792,181      1,454,417      1,070,638
          Research and development         398,865        197,602        764,156        332,658
          Stock compensation                   --       3,503,640            --       3,528,140
                                      ------------   ------------   ------------   ------------

Total operating expenses                 8,441,905      8,219,808     13,162,432     11,994,338
                                      ------------   ------------   ------------   ------------

Income (loss) from operations            1,932,358     (1,975,412)     2,438,100     (1,460,098)
                                      ------------   ------------   ------------   ------------

Other income (expense):
          Interest, net                   (533,060)      (631,747)      (506,269)    (1,161,119)
          Other                                --           2,148             --            282
                                      ------------   ------------   ------------   ------------
Total other income (expense)              (533,060)      (629,599)      (506,269)    (1,160,837)
                                      ------------   ------------   ------------   ------------

Income (loss) before income taxes        1,399,298     (2,605,011)     1,931,831     (2,620,935)

Income tax provision                       286,500            --         393,500            -- 
                                      ------------   ------------   ------------   ------------

Net income (loss)                     $  1,112,798   ($ 2,605,011)  $  1,538,331   ($ 2,620,935)
                                      ============   ============   ============   ============

Net income (loss) per share           $       0.14   ($      0.46)  $       0.20   ($      0.46)
                                      ============   ============   ============   ============

Weighted average common
          shares                         7,689,283      5,712,078      7,686,083      5,710,896
                                      ============   ============   ============   ============
</TABLE>
    

                             See accompanying notes.


                                       2


<PAGE>   5


                                 GARGOYLES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

   
<TABLE>
<CAPTION>
                                                                                 Six Months Ended June 30,
                                                                                ---------------------------
                                                                                    1997          1996
                                                                                ------------   ------------
<S>                                                                             <C>            <C>          
OPERATING ACTIVITIES
Net income (loss)                                                               $  1,538,331   ($ 2,620,935)
Adjustments to reconcile net income (loss)
  to net cash used in operating activities:
    Depreciation                                                                     466,080        208,306
    Amortization                                                                     195,158         57,346
    Deferred license income                                                         (180,000)       (90,000)
    Minority interest                                                                (35,128)             -
    Stock compensation                                                                     -      3,528,140
    Changes in assets and liabilities net of effects from purchase of Sungold,
        Private Eyes and Hobie:
           Accounts receivable                                                    (6,844,140)    (4,961,364)
           Inventories                                                            (5,836,318)       123,531
           Other current assets and other assets                                  (3,501,258)      (773,193)
           Accounts payable, accrued expenses and other
                current liabilities                                                3,802,433      1,871,189
                                                                                ------------   ------------
Net cash used in operating activities                                            (10,394,842)    (2,656,980)
                                                                                ------------   ------------

INVESTING ACTIVITIES
Acquisition of property and equipment                                             (1,163,376)      (398,450)
Purchase of Sungold                                                              (11,771,497)             -
Purchase of Private Eyes                                                          (7,914,642)             -
Purchase of Hobie                                                                          -     (3,974,900)
                                                                                ------------   ------------
Net cash used in investing activities                                            (20,849,515)    (4,373,350)
                                                                                ------------   ------------

FINANCING ACTIVITIES
Net proceeds  from issuance of long-term debt                                     14,620,000      5,260,000
Principal payments on long-term debt                                                 (60,833)      (386,332)
Net proceeds  under revolving line of credit                                      12,658,439      2,123,142
Proceeds from stock issuance                                                          35,135              -
Proceeds from warrant issuance                                                             -         56,000
                                                                                ------------   ------------
Net cash provided by financing activities                                         27,252,741      7,052,810
                                                                                ------------   ------------

Net increase (decrease) in cash and cash equivalents                              (3,991,616)        22,480

Cash and cash equivalents, beginning of period                                     4,382,048            900
                                                                                ------------   ------------

Cash and cash equivalents, end of period                                        $    390,432   $     23,380
                                                                                ============   ============
</TABLE>
    

                             See accompanying notes.



                                       3


<PAGE>   6


                                 GARGOYLES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1997
                                   (UNAUDITED)

1.  INTERIM FINANCIAL STATEMENTS

           The accompanying consolidated financial statements of Gargoyles, Inc.
and its subsidiaries ("Gargoyles" or the "Company") are unaudited and include,
in the opinion of management, all normal recurring adjustments necessary to
present fairly their consolidated financial position at June 30, 1997 and the
related consolidated results of operations and cash flows for the periods
presented. Certain information and footnote disclosure normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. These condensed consolidated
financial statements should be read in conjunction with the Company's audited
consolidated financial statements and the related notes thereto included in the
Company's Form 10-K filed with the Securities and Exchange Commission on March
31, 1997.
   
           The quarter ended June 30, 1997 has been restated to reflect
adjustments relating to the timing of sales recognition and sales with right of
return, reducing net income and net income per share by $171,577 and $.03,
respectively.
    
           The Company's net sales are subject to seasonal variations.
Accordingly, the results of operations for the periods ended June 30, 1997 are
not necessarily indicative of the results that may be expected for the entire
year.

2.  INVENTORIES

           Inventories consist of the following:

   
<TABLE>
                                                                         June 30,    December 31,
                                                                           1997         1996
                                                                        -----------  -----------
<S>                                                                     <C>          <C>        
Raw materials........................................................   $ 6,148,561  $ 4,503,054

Finished goods .......................................................    8,632,557    1,378,830
                                                                        -----------  -----------
                                                                        $14,781,118  $ 5,881,884
                                                                        ===========  ===========
</TABLE>
    

3.  ACQUISITION OF SUNGOLD

           On April 11, 1997, the Company purchased substantially all the assets
and assumed certain liabilities of Sungold Enterprises, LTD., a New York
corporation ("Sungold"). Sungold manufactured two principal lines of premium
sunglasses, Stussy EyeGear, a young men's fashion brand licensed to Sungold by
Stussy, Inc., a leading designer of streetwear apparel and accessories, and
Anarchy Eyewear, a cutting-edge brand popular with alternative sports
enthusiasts age 15 to 25.

           The acquisition was accounted for using the purchase method of
accounting at the date of acquisition. Accordingly, the allocation of the
purchase price of $10,970,000 was based on the fair value of the assets acquired
and liabilities assumed. Costs in excess of the fair market value of assets
acquired and liabilities assumed are reflected as intangibles, the most
significant component of which is the Stussy license agreement, which is being
amortized over the remaining 15-year license term.


                                       4


<PAGE>   7

           Pro forma information, assuming the acquisition had occurred at the
beginning of the periods presented, is as follows:

   
<TABLE>
<CAPTION>
                                                               Six Months Ended June 30,
                                                               -------------------------
                                                                  1997           1996
                                                               -----------  ------------
<S>                                                            <C>          <C>         
Sales..........................................................$28,325,752  $ 26,479,433
Gross profit................................................... 17,635,734    15,761,391
Net income (loss) .............................................  1,682,694    (2,238,638)
Net income (loss) per share ...................................$       .22  $       (.39)
</TABLE>
    

4.  ACQUISITION OF PRIVATE EYES

           On May 14, 1997, the Company purchased substantially all the assets
and assumed certain liabilities of The Private Eyes Sunglass Corporation, a
Massachusetts corporation ("Private Eyes"). Private Eyes was the licensee for
Ellen Tracy eyewear which features a collection of high-quality, high-fashion
women's sunglasses, readers, optical frames and accessories in a variety of
designs ranging from traditional to fashion-forward. Private Eyes is also the
North American distributor for Emmanuelle Khanh Paris Eyewear and a manufacturer
of its own high-quality line of prescription frames and eyewear accessories.

           The acquisition was accounted for using the purchase method of
accounting at the date of acquisition. Accordingly, the allocation of the
purchase price of $6,500,000 was based on the fair value of the assets acquired
and liabilities assumed. Costs in excess of the fair market value of assets
acquired and liabilities assumed are reflected as intangibles, the most
significant component of which is the Ellen Tracy license agreement, which is
being amortized over the remaining 15-year license term.

           Pro forma information, assuming the acquisition had occurred at the
beginning of the periods presented, and reflecting the pro forma effect of the
Sungold acquisition, is as follows:

   
<TABLE>
<CAPTION>
                                                                Six Months Ended June 30,
                                                               --------------------------
                                                                  1997           1996
                                                               ------------  ------------
<S>                                                            <C>           <C>         
Sales .........................................................$ 32,463,817  $ 31,288,896
Gross profit...................................................  19,922,279    17,890,997
Net income (loss) .............................................   1,658,962    (2,415,131)
Net income (loss) per share ...................................$        .22  $       (.42)
</TABLE>
    

5.  COMMITMENTS AND CONTINGENCIES

           In January 1997, the Company entered into a three-year agreement with
International Speedway Corporation to become the title sponsor of a NASCAR Busch
Series race at Daytona, Florida, the Gargoyles 300. In a related agreement with
CBS Television Network, the Company entered into three-year agreement for
network broadcast coverage of the Gargoyles 300 race. Since that time, the
Company has terminated the agreements. Termination fees associated with these
agreements were $100,000 to each of International Speedway Corporation and CBS
Television Network.


                                       5


<PAGE>   8


6.  GOLDEN BEAR LICENSING AGREEMENT

           Effective January 1, 1997, the Company entered into an agreement with
Golden Bear Golf, Inc. ("Golden Bear") to develop a line of specialty eyewear
for golfers. The Company and Golden Bear will jointly create and develop the
golfing eyewear. The Company will manufacture and distribute the product. The
agreement requires the Company, as licensee, to make quarterly royalty payments
based on a percentage of net sales, with certain annual minimum payments. The
agreement expires June 30, 2002, with an option to renew for an additional five
years.

7.  EARNINGS PER SHARE

           In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 128, Earnings Per Share,
which is required to be adopted on December 31, 1997. At that time, the Company
will be required to change the method currently used to compute earnings per
share and to restate all prior periods. Under the new requirements for
calculating basic (primary) earnings per share, the dilutive effect of stock
options will be excluded. The impact of Statement No. 128 on the calculation of
earnings per share is not material for the three month and six month periods
ended June 30, 1997 and 1996, respectively.

8.  INCOME TAXES

           The Company recorded no income tax benefit relating to the net loss
for the three month and six month periods ended June 30, 1996, since a future
benefit was not assured. In 1997, the difference from the federal statutory
income tax rate of 34% resulted from a decrease in the reserve against certain
tax assets.

9.  SUBSEQUENT EVENTS

Credit Agreement

           Effective July 15, 1997, the Company negotiated an amendment to its
credit agreement with a bank to (1) temporarily increase the revolving loan
commitment to $17 million, (2) modify the borrowing base and (3) modify certain
covenants. The Company may borrow up to $17 million for the period from July 15,
1997 through December 31, 1997. At all other times during the commitment period,
the revolving loan commitment may not exceed $15 million. During the commitment
period, the non-revolving equipment line of credit may not exceed $4 million.
The credit agreement is secured by the assets of the Company and its
subsidiaries. The credit agreement expires on June 30, 1999.

Lease agreement

           In July 1997, the Company entered into a ten year lease agreement
with Northwest Real Estate Carver, L.L.C., a Washington limited liability
company, for office and warehouse space located in Lynnwood, Washington. The
Company expects to consolidate its Washington operations into this new facility
in February 1998.


                                       6


<PAGE>   9


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

FORWARD-LOOKING STATEMENTS

           This report may contain forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, but are not limited to, those discussed in the section of the
Company's 1996 Annual Report on Form 10-K entitled "Business--Factors Affecting
Future Results and Regarding Forward-Looking Statements." Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements that may
be made to reflect events or circumstances after the date hereof or to reflect
the occurrences of unanticipated events.

GENERAL

           Gargoyles, Inc., under its Gargoyles Performance Eyewear brand,
designs, manufactures and markets a broad line of performance sunglasses that
combine innovative styling with its patented dual lens toric curve technology.
The Company also designs, manufactures and markets the Hobie sunglass line, a
leading line of polarized sunglasses under license from Hobie Designs, Inc. In
the first quarter 1997, the Company introduced the Timberland line, a line of
outdoor lifestyle-oriented sunglasses under license from the Timberland Company.
In addition, early in the second quarter of 1997, the Company completed its
acquisition of Sungold and Private Eyes. Sungold manufactures the Stussy and
Anarchy sunglass lines and Private Eyes manufactures the Ellen Tracy sunglass
line.

RESULTS OF OPERATIONS

           The following table sets forth results of operations, as a percentage
of net sales, for the periods indicated:

   
<TABLE>
<CAPTION>
                                  Three Months     Six Months
                                     Ended           Ended
                                    June 30,        June 30,
                                 -------------    -------------
                                  1997   1996     1997    1996
                                 -----   -----    -----   -----
<S>                              <C>     <C>      <C>     <C>   
Net sales ...................    100.0%  100.0%   100.0%  100.0%

Cost of sales ...............     36.0    42.5     36.6    41.9
                                 -----   -----    -----   -----
Gross profit ................     64.0    57.5     63.4    58.1
License income ..............      1.4     1.2      1.4     1.7
Operating expenses:
  Sales and marketing .......     34.0    24.6     34.0    28.3
  General and administrative      10.1    10.4     11.5    11.8
  Shipping and warehousing ..      6.6     7.5      6.0     6.0
  Research and development ..      2.5     1.9      3.2     1.9
  Stock compensation ........       --    33.0       --    20.0
                                 -----   -----    -----   -----
    Total operating expenses      53.2    77.4     54.7    68.0
                                 -----   -----    -----   -----
Income (loss) from operations     12.2%  (18.7%)   10.1%   (8.2%)
                                 =====   =====    =====   =====
</TABLE>
    

                                       7


<PAGE>   10
   

THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996

           Net sales. Net sales increased to $15.9 million for the quarter ended
June 30, 1997 from $10.6 million for the quarter ended June 30, 1996. This
increase was primarily the result of (i) increased sales to retail channels
other than sunglass specialty (ii) sales of Timberland eyewear, introduced in
March 1997 and (iii) sales from the Company's Sungold and Private Eyes
acquisition in the 1997 second quarter. Sales from these new brands totaled $6.3
million. These increases were partially offset by significantly lower sales to
Sunglass Hut, the Company's largest customer.

           Gross profit. Gross profit increased to $10.2 million for the quarter
ended June 30, 1997 from $6.1 million for the quarter ended June 30, 1996. Gross
margin increased to 64.0% in the 1997 quarter from 57.5% in the 1996 quarter.
The increase in gross margin in 1997 was attributable, in part, to achieving
cost efficiencies in the production process and improvements in pricing due to
the growth and popularity of the Company's brands. In addition, the gross margin
improvement was attributable to reduced purchases by Sunglass Hut, which
receives higher volume discounts than the Company's other accounts. The
Company's sales to Sunglass Hut decreased to approximately 11% of the Company's
net sales in the 1997 quarter from 34% in the 1996 quarter.

           License income. License income increased to $222,000 for the quarter
ended June 30, 1997 from $133,000 for the quarter ended June 30, 1996. This
increase was the result of an increase in the sales of licensed product.

           Operating expenses. Operating expenses increased to $8.4 million for
the quarter ended June 30, 1997 from $8.2 million for the quarter ended June 30,
1996. As a percentage of net sales, operating expenses decreased to 53.2% in the
1997 quarter from 77.4% in the 1996 quarter. Sales and marketing expenses
increased $2.8 million in the 1997 quarter, primarily as a result of the Sungold
and Private Eyes acquisitions and increased marketing expenditures to support
the Company's channel diversification strategy. As a percentage of net sales,
sales and marketing expenses increased to 34.0% in the 1997 quarter from 24.6%
in the 1996 quarter. General and administrative expenses increased $492,000 in
the 1997 quarter, primarily as a result of the Sungold and Private Eyes
acquisitions. As a percentage of net sales, general and administrative expenses
decreased to 10.1% in the 1997 quarter from 10.4% in the 1996 quarter. Shipping
and warehousing expenses increased $253,000 in the 1997 quarter, primarily as a
result of increased sales. As a percentage of net sales, shipping and
warehousing expenses decreased to 6.6% in the 1997 quarter from 7.5% in the 1996
quarter. Research and development expenses increased $201,000 in the 1997
quarter, primarily as a result of the Sungold and Private Eyes acquisitions, the
expansion of the Gargoyles and Hobie lines in 1997 and new Timberland products.
As a percentage of net sales, research and development expenses were 2.5% and
1.9% in the second quarters of 1997 and 1996, respectively. Operating expenses
for the quarter ended June 30, 1996 included a nonrecurring, noncash stock
compensation charge associated with a non-qualified stock option granted to an
officer of the Company.

           Income from operations. The Company's income from operations
increased to $1.9 million for the quarter ended June 30, 1997 from a loss of
($2.0) million for the quarter ended June 30, 1996. As a percentage of net
sales, income from operations increased to 12.2% in the second quarter of 1997
from a loss of (18.7%) in the second quarter of 1996. Adjusted for the
nonrecurring, noncash stock compensation charge in the second quarter of 1996,
income from operations for the second quarter 1996 would have been $1.5 million
or 14.3% of net sales.

    
                                       8


<PAGE>   11
   

           Interest expense. Interest expense decreased to $533,000 for the
quarter ended June 30, 1997 from $632,000 for the quarter ended June 30, 1996.
The decrease resulted from the Company's use of the net proceeds from its
initial public offering in October 1996 to pay off outstanding debt during the
fourth quarter of 1996. During the first half of 1997, the Company has borrowed
$20 million to finance the acquisitions of Sungold and Private Eyes, and has
borrowed $7 million to support its seasonal cash flow needs.

           Income tax provision. The Company's income tax provision was $286,500
for the quarter ended June 30, 1997 compared to an income tax benefit of zero
for the quarter ended June 30, 1996. Differences from the federal statutory
income tax rate of 34% resulted in 1997 from decreases in the reserve against
certain tax assets and in 1996 from increases in the reserve against certain tax
assets.

           Net income. As a result of the items discussed above, the Company's
net income was $1.1 million or $.14 per share for the quarter ended June 30,
1997 compared to a net loss of ($2.6) million or ($.46) per share for the
quarter ended June 30, 1996.

SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996

           Net sales. Net sales increased to $24.1 million for the six months
ended June 30, 1997 from $17.6 million for the six months ended June 30, 1996.
This increase was primarily the result of (i) increased sales to retail channels
other than sunglass specialty, (ii) sales of Timberland eyewear, introduced in
March 1997 (iii) and sales from the Company's Sungold and Private Eyes
acquisitions in the 1997 second quarter. Sales from these new brands totaled
$6.3 million. These increases were partially offset by significantly lower sales
to Sunglass Hut, the Company's largest customer.

           Gross profit. Gross profit increased to $15.3 million for the six
months ended June 30, 1997 from $10.2 million for the six months ended June 30,
1996. Gross margin increased to 63.4% in the 1997 period from 58.1% in the 1996
period. The increase in gross margin in 1997 was attributable, in part, to
improvements in pricing due to the growth and popularity of the Company's
brands. In addition, the gross margin improvement was attributable to reduced
purchases by Sunglass Hut, which receives higher volume discounts than the
Company's other accounts. The Company's sales to Sunglass Hut decreased to
approximately 15% of the Company's net sales in 1997 from 37% in 1996.

           License income. License income increased to $332,000 for the six
months ended June 30, 1997 from $294,000 for the six months ended June 30, 1996.
This increase was the result of an increase in the licensed related product
sales.

           Operating expenses. Operating expenses increased to $13.2 million for
the six months ended June 30, 1997 from $12.0 million for the six months ended
June 30, 1996. As a percentage of net sales, operating expenses decreased to
54.7% in the 1997 period from 68.0% in the 1996 period. Sales and marketing
expenses increased $3.2 million in the 1997 period, primarily as a result of the
acquisitions of Sungold and Private Eyes and increased marketing expenditures to
support the Company's channel diversification strategy. As a percentage of net
sales, sales and marketing expense increased to 34.0% in the 1997 period from
28.3% in the 1996 period. General and administrative expenses increased $680,000
in the 1997 period, primarily as a result of the acquisitions of Sungold and
Private Eyes. As a percentage of net sales, general and administrative expenses
decreased to 11.5% in the 1997 period from 11.8% in the 1996 period. Shipping
and warehousing expenses increased $384,000 in the 1997 period, primarily as a
result of increased sales. As a percentage of net sales, shipping and
warehousing expenses remained consistent at 6.0% in the 1997 and 1996 periods.
Research and development expenses increased $431,000 in the 1997 period,
primarily as a result of the 

    
                                       9


<PAGE>   12
   

acquisitions of Sungold and Private Eyes, expanding the Gargoyles and Hobie
lines and new Timberland products. As a percentage of net sales, research and
development expenses increased to 3.2% in the 1997 period from 1.9% in the 1996
period. Stock compensation expense for the period ended June 30, 1996 included a
nonrecurring, noncash stock compensation charge associated with a non-qualified
stock option granted to an officer of the Company.

           Income from operations. The Company's income from operations
increased to $2.4 million for the six months ended June 30, 1997 from a loss of
($1.5) million for the six months ended June 30, 1996. As a percentage of net
sales, income from operations increased to 10.1% in the 1997 period from a loss
of (8.2%) in the 1996 period. Adjusted for the nonrecurring, noncash stock
compensation charge in the second quarter of 1996, income from operations would
have been $2.1 million or 11.8% of net sales.
                                                                         
           Interest expense. Net interest expense decreased to $506,000 for the
six months ended June 30, 1997 from $1.2 million for the six months ended June
30, 1996. The decrease resulted from the Company's use of the net proceeds from
its initial public offering in October 1996 to pay off outstanding debt during
the fourth quarter of 1996. During the first half of 1997, the Company has
borrowed $20 million to finance the acquisitions of Sungold and Private Eyes,
and has borrowed $7 million to support its seasonal cash flow needs.

           Income tax provision. The Company's income tax provision was $394,000
for the six months ended June 30, 1997 compared to an income tax benefit of zero
for the six months ended June 30, 1996. Differences from the federal statutory
income tax rate of 34% resulted in 1997 from decreases in the reserve against
certain tax assets and in 1996 from increases in the reserve against certain tax
assets.

           Net income. As a result of the items discussed above, the Company's
net income was $1.5 million or $.20 per share for the six months ended June 30,
1997 compared to a net loss of ($2.6) million or ($.46) per share for the six
months ended June 30, 1996.
    

LIQUIDITY AND CAPITAL RESOURCES

           Historically, the Company has relied primarily on cash from
operations and borrowings to finance its operations. Cash used in the Company's
operating activities, primarily to fund the growth in accounts receivable and
inventories, totaled $10.4 million and $2.7 million for the six months ended
June 30, 1997 and 1996, respectively. Cash used in the Company's investing
activities, primarily to fund acquisitions and capital expenditures, totaled
$20.8 million and $4.4 million for the six months ended June 30, 1997 and 1996,
respectively. Cash provided by the Company's financing activities, primarily
proceeds from bank debt totaled $27.3 million and $7.1 million for the six
months ended June 30, 1997 and 1996, respectively. As of June 30, 1997, the
Company had working capital of $22.5 million.

           Effective July 15, 1997, the Company negotiated an amendment to its
credit agreement with a bank to (1) temporarily increase the revolving loan
commitment to $17 million (2) modify the borrowing base and (3) modify certain
covenants. The Company may borrow up to $17 million for the period from July 15,
1997 through December 31, 1997. At all other times during the commitment period,
the revolving loan commitment may not exceed $15 million. During the commitment
period, the non-revolving equipment line of credit may not exceed $4 million.
The credit agreement, which expires on June 30, 1999, is secured by the assets
of the Company and its subsidiaries.


                                       10


<PAGE>   13

           The Company regularly evaluates acquisitions, investments and other
business opportunities and the cash expenditures related to such activities and
to unanticipated expenses which could create a need for additional financing.
There can be no assurance, however, that if required such financing would be
available on acceptable terms or at all.

           The Company's capital expenditures traditionally have included
optical molds and production and office equipment. Expenditures for the six
months ended June 30, 1997, totaled $1.2 million. The Company expects total
capital expenditures for 1997 to approximate $1.8 million. See "Forward-Looking
Statements."

           The Company presently believes that cash flow from operations and
available borrowings under its Credit Facility will be sufficient to meet its
operating needs and capital expenditures for the foreseeable future. See
"Forward-Looking Statements."

SEASONALITY

           The following table sets forth certain unaudited quarterly data for
the periods show:

   
<TABLE>
<CAPTION>
             1997 Quarter Ended          1996 Quarter Ended
                (in millions)               (in millions)
              -----------------  ----------------------------------
              Mar. 31   June 30  Mar. 31  June 30  Sept.30  Dec. 31
              --------  -------  -------  -------  -------  -------
<S>           <C>       <C>      <C>      <C>      <C>      <C>    
Net sales ..  $   8.2   $  15.9  $   7.0  $  10.6  $   8.9  $   6.6
Gross profit      5.1      10.2      4.1      6.1      5.2      4.0
</TABLE>
    

           The Company's net sales generally have been higher in the period from
March to September, the period during which sunglass demands are highest. As a
result, operating income is typically lower in the first and fourth quarters as
fixed operating costs are spread over lower sales volume. In anticipation of
seasonal increases in demand, the Company typically builds inventories in the
first and fourth quarters, when net sales have historically been lower. The
Company also experiences higher accounts receivable during March through
September as a result of higher sales during this period. To date, this increase
in accounts receivable has not had a significant effect on the Company's
liquidity due to the Company's ability to borrow against these receivables under
its credit facilities. There can, however, be no assurance that this will
continue to be the case. See "Forward-Looking Statements." The Company's
quarterly results of operations have fluctuated in the past and may continue to
fluctuate as a result of a number of factors, including seasonal cycles, the
timing of new product introductions, the timing of orders by the Company's
customers, the mix of product sales and the effects of weather conditions on
consumer purchases. See "Forward-Looking Statements."


                                       11


<PAGE>   14


                           PART II - OTHER INFORMATION
   
ITEM 1.  LEGAL PROCEEDINGS
    
           The Company was a party to a lawsuit filed on February 24, 1997, by
adidas America, Inc. ("Adidas") in the United States District Court for the
District of Oregon under Case Number CV-P7-239-JE, in which Adidas claimed
amounts in excess of $603,950 from the Company related to shipments of Adidas
product to Axcent Sports, Inc., a corporation which distributed Adidas bicycling
products from its headquarters in Boulder, Colorado. Defense of this lawsuit had
been tendered by the Company to Trillium Corporation ("Trillium") and the
Company's President, Douglas B. Hauff, pursuant to the terms of an indemnity
agreement. The lawsuit has been settled, and a settlement agreement was executed
by all parties to the litigation on July 14, 1997. Under the terms of the
settlement agreement, (i) Adidas released all claims against all defendants and
agreed to dismiss the lawsuit with prejudice, (ii) Trillium and Mr. Hauff,
jointly and severally, agreed to pay to Adidas the sum of $200,000, and (iii)
Adidas, the Company and defendant Conquest Sports, Inc. each assigned to
Trillium and Mr. Hauff their rights and claims against Axcent. The resolution of
this matter did not result in a charge to the Company in excess of amounts
reserved.

           On July 31, 1997, Michele J. Maulden and David B. Maulden, wife and
husband and their marital community, filed a lawsuit against the Company in the
Superior Court of Washington, for King County under Case No. 97-2-18776-1 KNT.
Ms Maulden is a former employee of the Company. In the lawsuit, Plaintiffs
allege wrongful termination, intentional and negligent infliction of emotional
distress and discrimination under various Washington laws and seek unspecified
amounts in damages. The Company has retained counsel to investigate the
allegations and intends to defend vigorously the employee's claim. Although this
matter is in its early stages, the Company presently believes the employee's
claims are not supported by the facts and circumstances of the employee's
employment or termination. The Company believes that the ultimate resolution of
this matter will not have a material adverse effect on its results of operations
or financial position. See "Forward-Looking Statements."

           On November 22, 1996, the Company filed an action in the United
States District Court for the District of Massachusetts, under Case No.
96-12344RLC, against AEARO Corp., a Delaware corporation, alleging infringement
of the Company's toric curve lens patents in connection with a line of
protective eyewear being manufactured and sold by AEARO. AEARO has denied the
Company's allegations. The case is expected to be tried in November, 1997. The
Company's protective eyewear is currently sold primarily in the health-care
market and has recently been introduced in the industrial market. The Company
understands that AEARO's protective eyewear products are currently being sold
primarily in the industrial markets and have recently been introduced in the
health-care market. AEARO's protective eyewear products are currently sold at
prices significantly lower than the prices for the Company's protective eyewear
products. Because of AEARO's lower prices and its established distribution
network, if the Company loses its lawsuit against AEARO, the Company may not be
able to compete with AEARO's protective eyewear products. Net sales attributable
to the Company's protective eyewear division for the six months ended June 30,
1997, were $710,872 or 2.9% of net sales for that period.


                                       12


<PAGE>   15


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

           The Company held its annual meeting of shareholders on May 22, 1997.
At the annual meeting and in accordance with the Company's Articles of
Incorporation, the Company established three classes of Directors and elected
six directors. The following summarizes all matters voted on at the meeting:


<TABLE>
<CAPTION>
           Election of Directors                              For       Abstain
                                                            ---------   -------
           <S>                                              <C>          <C>   
           Class 3 Directors:  Elected to serve until
             the 2000 annual meeting

                     Erik J. Anderson                       7,071,122    16,625
                     Douglas B. Hauff                       7,071,066    16,681

           Class 2 Directors:  Elected to serve until
             the 1999 annual meeting

                     Paul Shipman                           7,071,422    16,325
                     William D. Ruckelshaus                 7,071,422    15,325

           Class 1 Directors:  Elected to serve until
             the 1998 annual meeting

                     Walter F. Walker                       7,071,422    16,325
                     Timothy C. Potts                       7,071,122    16,625
</TABLE>


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

   
<TABLE>
(A) EXHIBITS
<S>                  <C>     
Exhibit 10.1         Second Amended and Restated Credit Agreement dated July
                     15, 1997, between U.S. Bank of Washington, National 
                     Association, and Gargoyles, Inc. (Filed in the Company's 
                     June 30, 1997 Form 10-Q filed with the Securities and 
                     Exchange Commission on August 14, 1997.)
Exhibit 10.2         Lease agreement dated July 22, 1997, between Northwest
                     Real Estate Carver, L.L.C., and Gargoyles, Inc. (Filed in 
                     the Company's June 30, 1997 Form 10-Q filed with the 
                     Securities and Exchange Commission on August 14, 1997.)
Exhibit 11.1         Computation of Earnings Per Share
Exhibit 27.1         Financial Data Schedule
</TABLE>
    

(B) REPORTS ON FORM 8-K

           Form 8-K with respect to the Company's acquisition of Sungold
Enterprises, LTD., was filed with the Securities and Exchange Commission on
April 28, 1997.

           Form 8-K with respect to the Company's acquisition of The Private
Eyes Sunglass Corporation, was filed with the Securities and Exchange Commission
on May 28, 1997.

           Form 8-K/A with respect to the Company's acquisition of Sungold
Enterprises, LTD., was filed with the Securities and Exchange Commission on June
26, 1997.

           Form 8-K/A with respect to the Company's acquisition of The Private
Eyes Sunglass Corporation, was filed with the Securities and Exchange Commission
on July 28, 1997.


                                       13

<PAGE>   16


                                   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 hereunto duly authorized.

   
                                         Gargoyles, Inc.
                                        (Registrant)



May 15, 1998                                 /s/ Leo Rosenberger
                                        -------------------------------------
                                                 Leo Rosenberger
                                               Chief Executive Officer,
                                        Chief Financial Officer and Treasurer
                                                


                                       14


<PAGE>   17
                              EXHIBIT INDEX


EXHIBIT
NUMBER               EXHIBIT DESCRIPTION
     
Exhibit 10.1         Second Amended and Restated Credit Agreement dated 
                     July 15, 1997, between U.S. Bank of Washington, National 
                     Association, and Gargoyles, Inc. (Filed in the Company's
                     June 30, 1997 Form 10-Q filed with the Securities and 
                     Exchange Commission on August 14, 1997.)
Exhibit 10.2         Lease agreement dated July 22, 1997, between Northwest 
                     Real Estate Carver, L.L.C., and Gargoyles, Inc. (Filed in 
                     the Company's June 30, 1997 Form 10-Q filed with the 
                     Securities and Exchange Commission on August 14, 1997.)
Exhibit 11.1         Computation of Earnings Per Share
Exhibit 27.1         Financial Data Schedule