<PAGE>   1
================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q


(Mark one)
[X]       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
          EXCHANGE ACT OF 1934

                  For the quarterly period ended March 31, 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 March 31, 1997 there were 7,420,683 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

<TABLE>
<CAPTION>
                                                                                                           PAGE(S)
                                                                                                           -------
                         PART I - FINANCIAL INFORMATION

Item 1:        Financial Statements  (Unaudited)

<S>            <C>                                                                                           <C>
               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................................................................   6


                         PART II - OTHER INFORMATION

Item 3:        Legal Proceedings..........................................................................   10

Item 6:        Exhibits and Reports on Form 8-K...........................................................   10
</TABLE>


<PAGE>   3
                                 PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                                 GARGOYLES, INC.
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>

                                                                          MARCH 31,             DECEMBER 31,
                                                                            1997                    1996
                                                                        ------------           ------------
ASSETS                                                                  (UNAUDITED)
Current assets:
<S>                                                                     <C>                    <C>         
  Cash and cash equivalents                                             $      1,100           $  4,382,048
  Trade receivables, less allowances for doubtful                                             
    accounts of $192,559 and $172,600                                     12,516,578              8,897,879
  Inventories                                                              9,238,919              5,881,884
  Trade credits                                                              217,253                624,295
  Other current assets and prepaid expenses                                5,216,148              1,542,802
                                                                        ------------           ------------
Total current assets                                                      27,189,998             21,328,908
Property and equipment, net                                                3,382,454              2,811,935
Intangibles, net                                                           2,902,721              2,961,110
Other assets                                                                 276,979                160,262
                                                                        ------------           ------------
Total assets                                                            $ 33,752,152           $ 27,262,215
                                                                        ============           ============
                                                                                              
                                                                                              
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:                                     
  Accounts payable                                                      $  4,351,668           $  3,380,895
  Accrued expenses and other current liabilities                           3,041,697              2,347,738
                                                                        ------------           ------------
Total current liabilities                                                  7,393,365              5,728,633
                                                                        ------------           ------------
Note payable to bank                                                       4,482,118                     --
                                                                        ------------           ------------
Deferred license income                                                      270,000                360,000
                                                                        ------------           ------------
Minority interest                                                            271,923                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 --                                                    
     7,420,683 and 7,419,008                                              25,649,405             25,643,576
  Retained earnings (deficit)                                             (4,314,659)            (4,740,192)
                                                                        ------------           ------------
Total shareholders' equity                                                21,334,746             20,903,384
                                                                        ------------           ------------
                                                                                              
Total liabilities and shareholders' equity                              $ 33,752,152           $ 27,262,215
                                                                        ============           ============
                                                                               
</TABLE>


                             See accompanying notes.


                                        1
<PAGE>   4
                                 GARGOYLES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                  THREE MONTHS ENDED MARCH 31,
                                              -----------------------------------
                                                  1997                   1996
                                              -----------             -----------
<S>                                           <C>                     <C>        
Net sales                                     $ 8,198,266             $ 6,994,293
                                                                      
Cost of sales                                   3,081,997               2,865,395
                                              -----------             -----------
                                                                      
Gross profit                                    5,116,269               4,128,898
                                                                      
License income                                    110,000                 160,946
                                              -----------             -----------
                                                                      
                                                5,226,269               4,289,844
                                              -----------             -----------
                                                                      
Operating expenses:                                                   
     Sales and marketing                        2,789,205               2,367,583
     General and administrative                 1,157,001                 968,934
     Shipping and warehousing                     409,030                 278,457
     Research and development                     365,291                 135,056
     Stock compensation                                --                  24,500
                                              -----------             -----------
                                                                      
Total operating expenses                        4,720,527               3,774,530
                                              -----------             -----------
                                                                      
Income from operations                            505,742                 515,314
                                              -----------             -----------
                                                                      
Other income (expense):                                               
     Interest, net                                 26,791                (529,372)
     Other                                             --                  (1,866)
                                              -----------             -----------
Total other income (expense)                       26,791                (531,238)
                                              -----------             -----------
                                                                      
Income (loss) before income taxes                 532,533                 (15,924)
                                                                      
Income tax provision                              107,000                      --
                                              -----------             -----------
                                                                      
Net income (loss)                             $   425,533             $   (15,924)
                                              ===========             ===========
                                                                      
Net income (loss) per share                   $      0.06             $     (0.00)
                                              ===========             ===========
                                                                      
                                                                      
Weighted average common shares                  7,682,882               5,709,714
                                              ===========             ===========
</TABLE>


                                                                  
                             See accompanying notes.

                                       2
<PAGE>   5
                                   GARGOYLES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)



<TABLE>
<CAPTION>
                                                                        THREE MONTHS ENDED MARCH 31,
                                                                        ----------------------------
                                                                            1997             1996
                                                                        -----------      -----------
OPERATING ACTIVITIES
<S>                                                                     <C>              <C>         
Net income (loss)                                                       $   425,533      $   (15,924)
Adjustments to reconcile net income (loss)
  to net cash used in operating activities:
    Depreciation                                                            222,829           88,039
    Amortization                                                             58,389           15,395
    Stock compensation                                                           --           24,500
    Deferred license income                                                 (90,000)         (45,000)
    Minority interest                                                         1,725               --
    Changes in assets and liabilities, net of effects from purchase
       of Hobie in 1996:
           Accounts receivable                                           (3,618,699)      (4,007,275)
           Inventories                                                   (3,357,035)         305,622
           Other current assets and other assets                         (3,383,021)        (401,610)
           Accounts payable, accrued expenses and other
                current liabilities                                       1,664,732          542,822
                                                                        -----------      -----------
Net cash used in operating activities                                    (8,075,547)      (3,493,431)
                                                                        -----------      -----------

INVESTING ACTIVITIES
Acquisition of property and equipment                                      (793,348)        (157,414)
Purchase of Hobie                                                                --       (3,974,900)
                                                                        -----------      -----------
Net cash used in investing activities                                      (793,348)      (4,132,314)
                                                                        -----------      -----------

FINANCING ACTIVITIES
Net proceeds (repayment) from issuance of note payable to bank
    and long-term debt                                                    4,482,118        7,865,196
Principal payments on long-term debt                                             --         (295,401)
Proceeds from warrant issuance                                                   --           56,000
Proceeds from stock issuance                                                  5,829               --
                                                                        -----------      -----------
Net cash provided by financing activities                                 4,487,947        7,625,795
                                                                        -----------      -----------

Net increase (decrease) in cash and cash equivalents                     (4,380,948)              50

Cash and cash equivalents, beginning of period                            4,382,048              900
                                                                        -----------      -----------
Cash and cash equivalents, end of period                                $     1,100      $       950
                                                                        ===========      ===========
</TABLE>

                            See accompanying notes.


                                       3
<PAGE>   6


                                 GARGOYLES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 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 the consolidated financial position at March 31, 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 Company's net sales are subject to seasonal variations.
Accordingly, the results of operations for the quarter ended March 31, 1997 are
not necessarily indicative of the results that may be expected for the entire
year.


2.  INVENTORIES

         Inventories consist of the following:

<TABLE>
<CAPTION>
                                March 31,         December 31,
                                  1997                1996
                               ----------         ----------
<S>                            <C>                <C>       
Raw materials                  $7,859,053         $4,503,054
Finished goods                  1,379,866          1,378,830
                               ----------         ----------
                               $9,238,919         $5,881,884
                               ==========         ==========
</TABLE>
                                             

3.  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. Under the terms of the
sponsorship agreement, over the three-year term of the agreement the Company
will be required to pay $1,050,000 plus a portion of the Company's license
income from the sale of Gargoyles 300 souvenirs. The Company has the right to
terminate the agreement upon the payment of a $100,000 termination fee. In a
related agreement with CBS Television Network, the Company has agreed to pay CBS
$850,000 over the three-year term of that agreement for network broadcast
coverage of the Gargoyles 300 race.


4.  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 


                                       4
<PAGE>   7

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.


5.  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 quarters ended March 31, 1997 and
March 31, 1996, respectively.


6.  INCOME TAXES

    The Company recorded no income tax benefit relating to the net loss for the
three months ended March 31, 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.


7.  SUBSEQUENT EVENTS

Credit Facility
         Effective April 7, 1997, the Company negotiated an amended Credit
Facility with a bank (the "Credit Facility") consisting of (i) a revolving $15.0
million operating facility for general short-term corporate purposes, (ii) a
$5.0 million fixed asset term loan and (iii) an $11.0 million acquisition term 
loan. The Credit Facility is secured by the assets of the Company and its
subsidiaries. The Credit Facility expires on June 30, 1999. Notes issued under
the fixed asset term loan have a five-year payment term.

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"). The acquisition will be accounted for using the
purchase method of accounting from the date of acquisition. Accordingly, the
allocation of the purchase price of $10,970,000 will be based on the fair value
of the assets acquired and liabilities assumed. Sungold manufactures 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 featuring styles that reflect everything from easy
California living to the grit of inner city culture, and Anarchy Eyewear, a
cutting-edge brand popular with alternative sports enthusiasts age 15 to 25.
Stussy EyeGear offers a number of products which are sold at suggested retail
prices ranging from $60 to $120. Anarchy Eyewear offers styles which reflect the
brand's "Altercation with the Norm" tag line and are sold at suggested retail
prices ranging from $40 to $70.

Acquisition of Private Eyes
         The Company has reached a preliminary agreement to acquire the assets
of The Private Eyes Sunglass Corporation, a Massachusetts corporation ("Private
Eyes"). The transaction is subject to several conditions to closing. If all
closing conditions are satisfied, the purchase transaction is expected to close
late in the second quarter of 1997. Private Eyes is 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. The collection reflects the
professional, self-assured and feminine look associated with the highly
successful Ellen Tracy line of women's clothing. 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.



                                       5
<PAGE>   8
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 of 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 Eyewear, which manufactures the Stussy and Anarchy
sunglass lines. The Company also offers a popular line of protective eyewear
focused primarily on the medical and dental market segments.

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 Ended
                                          March 31,
                                     -------------------
                                      1997         1996
                                     -------      ------
<S>                                  <C>          <C>    
Net sales ..................          100.0%       100.0%
Cost of sales ..............           37.6         41.0
                                      -----        -----
Gross profit ...............           62.4         59.0
License income .............            1.4          2.3
Operating expenses:                               
  Sales and marketing ......           34.0         33.9
  General and administrative           14.1         13.8
  Shipping and warehousing .            5.0          4.0
  Research and development .            4.5          1.9
  Stock compensation .......              -          0.3
                                      -----        -----
    Total operating expenses           57.6         53.9
                                      -----        -----
Income from operations .....            6.2%         7.4%
                                      =====        =====
</TABLE>

                                       6
<PAGE>   9



THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996

         Net sales. Net sales increased to $8.2 million for the quarter ended
March 31, 1997 from $7.0 million for the quarter ended March 31, 1996. This
increase was primarily the result of (i) new product introductions in the
Gargoyles and Hobie lines and (ii) sales of Timberland eyewear, introduced in
March 1997.

         Gross profit. Gross profit increased to $5.1 million for the quarter
ended March 31, 1997 from $4.1 million for the quarter ended March 31, 1996.
Gross margin increased to 62.4% in the 1997 quarter from 59.0% 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 27% of the
Company's net sales in the 1997 quarter from 41% in the 1996 quarter.

         License income. License income decreased to $110,000 for the quarter
ended March 31, 1997 from $161,000 for the quarter ended March 31, 1996. This
decrease is the result of a decline in license related product sales.

         Operating expenses. Operating expenses increased to $4.7 million for
the quarter ended March 31, 1997 from $3.8 million for the quarter ended March
31, 1996. As a percentage of net sales, operating expenses increased to 57.6% in
the 1997 quarter from 53.9% in the 1996 quarter. Sales and marketing expenses
increased $422,000 in the 1997 quarter, primarily as a result of increased
marketing expenditures. As a percentage of net sales, sales and marketing
expenses remained consistent at approximately 34% in the first quarters of 1997
and 1996. General and administrative expenses increased $188,000 in the 1997
quarter, as the Company continued to add personnel and the infrastructure
necessary to support its growth. As a percentage of net sales, general and
administrative expenses remained consistent at approximately 14% in the first
quarters of 1997 and 1996. Shipping and warehousing expenses increased $131,000
in the 1997 quarter, primarily as a result of increased net sales and the
addition of the infrastructure necessary to support the Company's growth. As a
percentage of net sales, shipping and warehousing expenses increased to 5% in
the 1997 quarter from 4% in the 1996 quarter. Research and development expenses
increased $230,000 in the 1997 quarter, primarily as a result of expanding the
Gargoyles and Hobie lines and in anticipation of the launch of Timberland
products in March 1997. As a percentage of net sales, research and development
expenses increased to 4.5% in the first quarter of 1997 from 1.9% in the first
quarter of 1996.

         Income from operations. The Company's income from operations decreased
to $506,000 for the quarter ended March 31, 1997 from $515,000 for the quarter
ended March 31, 1996. As a percentage of net sales, income from operations
decreased to 6.2% in the first quarter of 1997 from 7.4% in the first quarter of
1996. This decrease was the result of the Company's increased operating
expenses, which was only partially offset by net sales growth and gross margin
improvement.

         Interest income (expense). Net interest income improved to $27,000 for
the quarter ended March 31, 1997 from interest expense of ($529,000) for the
quarter ended March 31, 1996. This improvement 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 and its investment of the
remaining cash balances.


                                       7
<PAGE>   10

         Income tax provision. The Company's income tax provision was $107,000
for the quarter ended March 31, 1997 compared to an income tax benefit of zero
for the quarter ended March 31, 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 $426,000 or $.06 per share for the quarter ended March 31, 1997
compared to a net loss of ($16,000) or ($.00) per share for the quarter ended
March 31, 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 $8.1 million and $3.5 million for the quarters ended March 31, 1997 and
1996, respectively. Cash used in the Company's investing activities, primarily
to fund capital expenditures, and in 1996 to fund the Hobie Acquisition, totaled
$793,000 and $4.1 million for the quarters ended March 31, 1997 and 1996,
respectively. Cash provided by the Company's financing activities, primarily
proceeds from bank debt totaled $4.5 million and $7.6 million for the quarters
ended March 31, 1997 and 1996, respectively. As of March 31, 1997, the Company
had working capital of $19.8 million.

         Effective April 7, 1997, the Company negotiated an amended credit
facility with a bank (the "Credit Facility") consisting of (i) a revolving $15.0
million operating facility for general short-term corporate purposes, (ii) a 
$5.0 million fixed asset term loan and (iii) an $11.0 million acquisition term 
loan.  The Credit Facility is secured by the assets of the Company and its
subsidiaries. The Credit Facility expires on June 30, 1999. Notes issued under
the fixed asset term loan have a five-year payment term.

         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 three months
ended March 31, 1997 totaled $793,000. The Company expects total capital
expenditures for 1997 to approximate $1.6 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."


                                       8
<PAGE>   11



SEASONALITY

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

<TABLE>
<CAPTION>
                      1997 Quarter Ended                  1996 Quarter Ended
                         (in millions)                       (in millions)
                      ------------------    --------------------------------------------------
                           March 31         March 31    June 30    September 30    December 31
                          ---------         --------    -------    ------------    -----------
<S>                         <C>               <C>       <C>            <C>             <C>
Net sales..........         $8.2              $7.0      $10.6          $8.9            6.6
Gross profit......           5.1               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 purchases 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."




                                       9
<PAGE>   12



                           PART II - OTHER INFORMATION

ITEM 3. LEGAL PROCEEDINGS

         The Company advanced funds to Axcent Sports, Inc. ("Axcent"), a
corporation of record in the state of Washington, which had operations in
Boulder, Colorado, that distributed bicycling products produced by adidas
America, Inc. ("Adidas"). On February 24, 1997, Adidas filed a lawsuit in the
United States District Court for the District of Oregon under Case Number
CV-P7-239-JE. In this lawsuit, Adidas claims $603,905 plus prejudgment interest
and incidental damages against the Company, Axcent, and Conquest for product
shipped to Axcent by Adidas and for product ordered by Axcent and held in Adidas
warehouse facilities. Adidas claims that the Company is liable to it on the
theory that Axcent was a division of the Company. Adidas also asserts claims
against the Company based on piercing of the corporate form of Axcent and based
on promoter liability, alleging that the Company failed to adequately capitalize
and/or incorporate Axcent. The Company denies the allegations of Adidas and
intends to defend vigorously the claims of Adidas against the Company. Trillium
Corporation ("Trillium") and the Company's President, Douglas B. Hauff, jointly
and severally and on an unlimited basis, have agreed to indemnify, defend and
hold harmless the Company from and against all losses, liabilities,
deficiencies, claims and expenses (including but not limited to, costs of
defense and reasonable attorneys' fees) incurred by the Company arising from the
lawsuit. The Company has tendered defense of the Adidas lawsuit to Trillium and
Mr. Hauff, and they have accepted such defense. The parties have reached a
settlement of this matter and are currently drafting settlement documents. The
Company believes that the settlement and ultimate resolution of this matter will
not result in a charge to the Company in excess of amounts reserved. See
"Forward-Looking Statements."

         In March 1997, the Company terminated an employee, and at the time of
termination, the Company offered the employee a severance package. The employee
has rejected the severance package and has proposed an alternative severance
package totaling $850,000, alleging, among other things, wrongful termination,
and discrimination in violation of applicable law. The employee has not yet,
however, filed suit against the Company. 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 and the Company's
investigation is not complete, the Company presently believes the employee's
damage claim is excessive and is not supported by the facts and circumstances of
the employee's employment and termination. The Company believes that the
ultimate resolution of the matter will not have a material adverse effect on its
results of operations or financial position. See "Forward-Looking Statements."

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A)  EXHIBITS

<TABLE>
<CAPTION>
<S>               <C>    
Exhibit 10.1      First Amended and Restated Credit Agreement dated April
                  7, 1997, between U.S. Bank of Washington, National Association,
                  and Gargoyles, Inc.
Exhibit 11.1      Computation of Earnings Per Share
Exhibit 27.1      Financial Data Schedule
</TABLE>


(B)  REPORTS ON FORM 8-K
         No reports have been filed during the quarter ended March 31, 1997.


                                       10
<PAGE>   13



                                    SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                     Gargoyles, Inc.
                                     (Registrant)



May 15, 1997                                     /s/ Steven R. Kingma
                                     ------------------------------------------
                                                   Steven R. Kingma
                                       Vice-President, Chief Financial Officer
                                               Secretary and Treasurer






                                       11
<PAGE>   14
                                EXHIBIT INDEX

Exhibit No. 
-----------

   10.1          First Amended and Restated Credit Agreement dated April 7, 
                 1997, between U.S. Bank of Washington, National Association,
                 and Gargoyles, Inc.

   11.1          Computation of Earnings Per Share

   27.1          Financial Data Schedule