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

                                  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 September 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 September 30, 1997 there were 7,437,191 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

                                                               PAGE(S)
                         PART 1 - FINANCIAL INFORMATION

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       7
              Condition and Results of Operations

                             PART II - OTHER INFORMATION

Item 1:   Legal Proceedings                                      12

Item 6:   Exhibits and Reports on Form 8-K                       12


<PAGE>   3
                         PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

                                 GARGOYLES, INC.
                           CONSOLIDATED BALANCE SHEETS

   
<TABLE>
<CAPTION>
                                                               September 30,       December 31,
                                                                    1997               1996
                                                               -------------       ------------
<S>                                                            <C>                 <C>         
ASSETS                                                                              (Unaudited)
Current assets:
  Cash and cash equivalents                                              $ -       $  4,382,048
  Trade receivables, less allowances for doubtful
    accounts of $355,864 and $172,600                             13,754,961          8,897,879
  Inventories                                                     15,323,763          5,881,884
  Other current assets and prepaid expenses                        5,097,607          2,167,097
                                                               -------------       ------------
Total current assets                                              34,176,331         21,328,908
Property and equipment, net                                        3,716,588          2,811,935
Intangibles, net                                                  20,148,640          2,961,110
Other assets                                                         676,110            160,262
                                                               -------------       ------------
Total assets                                                   $  58,717,669       $ 27,262,215
                                                               =============       ============

LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
  Accounts payable                                             $   6,625,680       $  3,380,895
  Accrued expenses and other current liabilities                   3,760,322          2,347,738
  Current maturities of long-term debt                             3,480,000                  -
                                                               -------------       ------------
Total current liabilities                                         13,866,002          5,728,633
                                                               -------------       ------------
Long-term debt                                                    23,252,330                  -
                                                               -------------       ------------
Deferred license income                                              546,000            360,000
                                                               -------------       ------------
Minority interest                                                    179,674            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 --
     7,437,191 and 7,419,008                                      25,711,782         25,643,576
  Retained earnings (deficit)                                     (4,838,119)        (4,740,192)
                                                               -------------       ------------
Total shareholders' equity                                        20,873,663         20,903,384
                                                               -------------       ------------

Total liabilities and shareholders' equity                     $  58,717,669       $ 27,262,215
                                                               =============       ============
</TABLE>
    

                             See accompanying notes.


                                       1
<PAGE>   4

                                              GARGOYLES, INC.
                                   CONSOLIDATED STATEMENTS OF OPERATIONS
                                                (Unaudited)

   
<TABLE>
<CAPTION>
                                                      Quarter Ended                         Nine Months Ended
                                                      September 30,                           September 30,
                                            ---------------------------------         ---------------------------------
                                                1997                 1996                 1997                 1996
                                            ------------         ------------         ------------         ------------
<S>                                         <C>                  <C>                  <C>                  <C>         

Net sales                                   $ 11,067,507         $  8,910,618         $ 35,132,072         $ 26,537,434

Cost of sales                                  3,850,298            3,737,704           12,646,067           11,123,889
                                            ------------         ------------         ------------         ------------

Gross profit                                   7,217,209            5,172,914           22,486,005           15,413,545

License income                                   115,000               93,000              446,736              386,609
                                            ------------         ------------         ------------         ------------

                                               7,332,209            5,265,914           22,932,741           15,800,154
                                            ------------         ------------         ------------         ------------

Operating expenses:
    Sales and marketing                        5,005,848            2,275,001           13,191,886            7,260,351
    General and administrative                 2,235,350            1,194,909            4,993,171            3,272,461
    Shipping and warehousing                   1,063,099              521,598            2,517,516            1,592,236
    Research and development                     318,149              320,044            1,082,305              652,702
    Stock compensation and IPO bonus                 -                305,000                  -              3,833,140
                                            ------------         ------------         ------------         ------------

Total operating expenses                       8,622,446            4,616,552           21,784,878           16,610,890
                                            ------------         ------------         ------------         ------------

Income (loss) from operations                 (1,290,237)             649,362            1,147,863             (810,736)
                                            ------------         ------------         ------------         ------------

Other income (expense):
    Interest, net                               (755,021)            (664,509)          (1,261,290)          (1,825,628)
    Other                                            -                   (282)                 -                    -
                                            ------------         ------------         ------------         ------------
Total other income (expense)                    (755,021)            (664,791)          (1,261,290)          (1,825,628)
                                            ------------         ------------         ------------         ------------

Income (loss) before income taxes             (2,045,258)             (15,429)            (113,427)          (2,636,364)

Income tax provision (benefit)                  (409,000)                 -                (15,500)                 -
                                            ------------         ------------         ------------         ------------

Net income (loss)                           $ (1,636,258)        $    (15,429)        $    (97,927)        $ (2,636,364)
                                            ============         ============         ============         ============

Net income (loss) per share                 $      (0.22)        $      (0.00)        $      (0.01)        $      (0.46)
                                            ============         ============         ============         ============

Weighted average common
    shares                                     7,431,523            5,714,435            7,601,229            5,712,074
                                            ============         ============         ============         ============
</TABLE>
    

                             See accompanying notes.


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

   
<TABLE>
<CAPTION>
                                                               Nine Months Ended September 30,
                                                               ------------------------------
                                                                   1997               1996
                                                               ------------       -----------
<S>                                                            <C>                <C>         
OPERATING ACTIVITIES
Net income (loss)                                              $    (97,927)      $(2,636,364)
Adjustments to reconcile net income (loss)
  to net cash used in operating activities:
    Depreciation                                                    782,200           378,864
    Amortization                                                    528,566           146,728
    Deferred income                                                 186,000          (135,000)
    Minority interest                                               (90,524)                -
    Stock compensation                                                    -         3,528,140
    Changes in assets and liabilities net of effects from
      purchase of Sungold, Private Eyes and Hobie:
           Accounts receivable                                   (1,602,703)       (4,725,878)
           Inventories                                           (6,378,963)        1,324,365
           Other current assets and other assets                 (2,854,591)       (1,691,405)
           Accounts payable, accrued expenses and other
                current liabilities                                  38,231         2,577,510
                                                               ------------       -----------
Net cash used in operating activities                            (9,489,711)       (1,233,040)
                                                               ------------       -----------

INVESTING ACTIVITIES
Acquisition of property and equipment                            (1,437,844)         (881,954)
Purchase of Sungold                                             (11,892,871)                -
Purchase of Private Eyes                                         (8,362,158)                -
Purchase of Hobie                                                         -        (3,974,900)
                                                               ------------       -----------
Net cash used in investing activities                           (21,692,873)       (4,856,854)
                                                               ------------       -----------

FINANCING ACTIVITIES
Net proceeds  from issuance of long-term debt                    14,620,000         5,360,000
Principal payments on long-term debt                               (121,667)       (1,023,189)
Net proceeds  under revolving line of credit                     12,233,997         1,697,283
Proceeds from stock issuance                                         68,206                 -
Proceeds from warrant issuance                                            -            56,000
                                                               ------------       -----------
Net cash provided by financing activities                        26,800,536         6,090,094
                                                               ------------       -----------

Net increase (decrease) in cash and cash equivalents             (4,382,048)              200

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

Cash and cash equivalents, end of period                       $          -       $     1,100
                                                               ============       ===========
</TABLE>
    

                             See accompanying notes.


                                       3
<PAGE>   6

                                 GARGOYLES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 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 the consolidated financial position at September 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 Septemer 30, 1997 has been restated to reflect
adjustments relating to the timing of sales recognition and sales with a right
of return, increasing net loss and net loss per share by $265,923 and $.04,
respectively.
    
      The Company's net sales are subject to seasonal variations. Accordingly,
the results of operations for the periods ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the entire year.

2.    INVENTORIES

      Inventories consist of the following:

                                  September 30,       December 31,
                                      1997                 1996
                                  ------------        ------------
Raw materials ............        $  5,910,054        $  4,503,054
Finished goods ...........           9,413,709           1,378,830
                                  ------------        ------------
                                  $ 15,323,763        $  5,881,884
                                  ============        ============

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
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:
   
                                    Nine Months Ended September 30,
                                   --------------------------------
                                        1997                1996
                                   ------------        ------------
Sales ........................     $ 39,393,259        $ 37,986,310
Gross profit .................       24,852,943          19,833,261
Net income (loss) ............           46,435          (2,444,971)
Net income (loss) per share ..     $        .01        $       (.43)

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
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:

                                    Nine Months Ended September 30,
                                   --------------------------------
                                        1997               1996
                                   ------------        ------------
Sales ........................     $ 43,531,324        $ 44,765,310
Gross profit .................       27,139,488          22,947,261
Net income (loss) ............           22,703          (2,611,971)
Net income (loss) per share ..     $        .00        $       (.46)

    
5.    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.


                                       5
<PAGE>   8
6.    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 nine-month periods ended September
30, 1997 and 1996, respectively.

7.    INCOME TAXES

      The Company recorded no income tax benefit relating to the net loss for
the three-month and nine-month periods ended September 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.

8.    SUBSEQUENT EVENTS

      On October 16, 1997, the Company announced plans to close its facility in
Norwell, Massachusetts by the end of 1997 and consolidate operations performed
there into its new facility in Lynnwood, Washington. The Norwell facility was
home to The Private Eyes Sunglass Company. Gargoyles will also consolidate
operations in three current facilities located in Kent, Washington into its new
facility in Lynnwood in early 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 designs, manufactures and markets a broad line of performance
sunglasses and protective eyewear which 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 acquisitions of Sungold, which
includes the Stussy and Anarchy sunglass lines, and Private Eyes, which includes
the Ellen Tracy, Emmanuelle Khanh and Private Eyes sunglass, eyewear and
accessories lines.

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                    Nine Months
                                                     Ended                           Ended
                                                  September 30,                  September 30,
                                             ----------------------          ---------------------
                                              1997            1996            1997           1996
                                             ------          ------          ------         ------
<S>                                          <C>             <C>             <C>            <C>   
Net sales ............................       100.0%          100.0%          100.0%         100.0%
Cost of sales ........................        34.8            41.9            36.0           41.9
                                             ------          ------          ------         ------
Gross profit .........................        65.2            58.1            64.0           58.1
License income .......................         1.0             1.0             1.3            1.4
Operating expenses:
  Sales and marketing ................        45.2            25.5            37.5           27.4
  General and administrative .........        20.2            13.4            14.2           12.3
  Shipping and warehousing ...........         9.6             5.9             7.2            6.0
  Research and development ...........         2.9             3.6             3.1            2.5
  Stock compensation and IPO bonus ...          -              3.4              -            14.4
                                             ------          ------          ------         ------
    Total operating expenses .........        77.9            51.8            62.0           62.6
                                             ------          ------          ------         ------
Income (loss) from operations ........       (11.7%)           7.3%            3.3%          (3.1%)
                                             ======          ======          ======         ======
</TABLE>
    

                                       7
<PAGE>   10
   
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996

      Net sales. Net sales increased to $11.1 million for the quarter ended
September 30, 1997 from $8.9 million for the quarter ended September 30, 1996.
This increase was primarily the result of sales from the Company's Sungold and
Private Eyes acquisitions in the 1997 second quarter and sales of Timberland
eyewear, introduced in March 1997. Sales from these new brands totaled $5.9
million. These increases were partially offset by significantly lower sales to
Sunglass Hut, the Company's largest customer. The Company's sales to Sunglass
Hut decreased to approximately 23% of net sales in the 1997 quarter from 37% of
net sales in the 1996 quarter.

      Gross profit. Gross profit increased to $7.2 million for the quarter ended
September 30, 1997 from $5.2 million for the quarter ended September 30, 1996.
Gross margin increased to 65.2% in the 1997 quarter from 58.1% 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.

      License income. License income increased to $115,000 for the quarter ended
September 30, 1997 from $93,000 for the quarter ended September 30, 1996. This
increase was the result of an increase in the sales of licensed product.

      Operating expenses. Operating expenses increased to $8.6 million for the
quarter ended September 30, 1997 from $4.6 million for the quarter ended
September 30, 1996. As a percentage of net sales, operating expenses increased
to 77.9% in the 1997 quarter from 51.8% in the 1996 quarter. Sales and marketing
expenses increased $2.7 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 45.2% in the 1997 quarter
from 25.5% in the 1996 quarter. General and administrative expenses increased
$1.0 million 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 increased to 20.2% in the 1997 quarter from 13.4% in the
1996 quarter. Shipping and warehousing expenses increased $542,000 in the 1997
quarter, primarily as a result of the Sungold and Private Eyes acquisitions. As
a percentage of net sales, shipping and warehousing expenses increased to 9.6%
in the 1997 quarter from 5.9% in the 1996 quarter. Research and development
expenses remained consistent at $320,000 in the 1997 quarter. As a percentage of
net sales, research and development expenses decreased to 2.9% in the 1997
quarter from 3.6% in the 1996 quarter. Costs of operating the Company's Norwell
facility in the third quarter of 1997, including payroll and rent, were
approximately $600,000. As a result of the Norwell facility closure, scheduled
for the end of the year 1997, the Company expects that a majority of these costs
will be eliminated or dramatically reduced in future periods. Operating expenses
for the quarter ended September 30, 1996 included a nonrecurring compensation
charge associated with the Company's initial public offering. See
"Forward-Looking Statements."

      Income from operations. The Company's loss from operations was ($1.3)
million for the quarter ended September 30, 1997 compared to income from
operations of $649,000 for the quarter ended September 30, 1996. As a percentage
of net sales, income (loss) from operations decreased to (11.7%) in the third
quarter of 1997 from 7.3% in the third quarter of 1996.

      Interest expense. Interest expense increased to $755,000 for the quarter
ended September 30, 1997 from $665,000 for the quarter ended September 30, 1996.
During 1997, the Company borrowed $20 million to finance the acquisitions of
Sungold and Private Eyes, and $7 million to support its seasonal cash flow
needs.
    

                                       8
<PAGE>   11
   
      Income tax provision (benefit). The Company's income tax benefit was
($409,000) for the quarter ended September 30, 1997 compared to an income tax
benefit of zero for the quarter ended September 30, 1996. Differences from the
federal statutory income tax rate of 34% resulted from changes in the reserve
against certain tax assets.

      Net income (loss). As a result of the items discussed above, the Company's
net loss was ($1.6) million or ($.22) per share for the quarter ended September
30, 1997 compared to a net loss of ($15,000) or ($.00) per share for the quarter
ended September 30, 1996.

NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996

      Net sales. Net sales increased to $35.1 million for the nine months ended
September 30, 1997 from $26.5 million for the nine months ended September 30,
1996. This increase was primarily the result of (i) increased sales to retail
channels other than sunglass specialty, (ii) sales from the Company's Sungold
and Private Eyes acquisitions in the 1997 second quarter (iii) and sales of
Timberland eyewear, introduced in March 1997. Sales from these new brands
totaled $12.8 million. These increases were partially offset by significantly
lower sales to Sunglass Hut, the Company's largest customer. The Company's sales
to Sunglass Hut decreased to approximately 20% of net sales for the nine months
ended September 30, 1997 from 37% of net sales for the nine months ended
September 30, 1996.

      Gross profit. Gross profit increased to $22.5 million for the nine months
ended September 30, 1997 from $15.4 million for the nine months ended September
30, 1996. Gross margin increased to 64.0% in the 1997 period from 58.1% in the
1996 period. 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.

      License income. License income increased to $447,000 for the nine months
ended September 30, 1997 from $387,000 for the nine months ended September 30,
1996. This increase was the result of an increase in the sales of licensed
product.

      Operating expenses. Operating expenses increased to $21.8 million for the
nine months ended September 30, 1997 from $16.6 million for the nine months
ended September 30, 1996. As a percentage of net sales, operating expenses
decreased to 62.0% in the 1997 period from 62.6% in the 1996 period. Sales and
marketing expenses increased $5.9 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 37.5% in the
1997 period from 27.4% in the 1996 period. General and administrative expenses
increased $1.7 million 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 increased to 14.2% in the 1997 period from 12.3% in
the 1996 period. Shipping and warehousing expenses increased $925,000 in the
1997 period, primarily as a result of the acquisitions of Sungold and Private
Eyes. As a percentage of net sales, shipping and warehousing expenses increased
to 7.2% in the 1997 period from 6.0% in the 1996 period. Research and
development expenses increased $430,000 in the 1997 period, primarily as a
result of the 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 3.1% in the 1997 period from 2.5%
in the 1996 period. Costs of operating the Company's Norwell facility in the
third quarter of 1997, including payroll and rent, were approximately $600,000.
As a result of the Norwell facility closure, scheduled for the end of the year
1997, the Company expects that a majority of these 

    
                                       9
<PAGE>   12
costs will be eliminated or dramatically reduced in future periods. Stock
compensation and IPO bonus for the period ended September 30, 1996 included a
nonrecurring, noncash stock compensation charge associated with a non-qualified
stock option granted to an officer of the Company and a nonrecurring
compensation charge associated with the Company's initial public offering. See
"Forward-Looking Statements."
   
      Income from operations. The Company's income from operations increased to
$1.1 million for the nine months ended September 30, 1997 from a loss of
($811,000) for the nine months ended September 30, 1996. As a percentage of net
sales, income from operations increased to 3.3% in the 1997 period from a loss
of (3.1%) in the 1996 period. Adjusted for the nonrecurring, noncash stock
compensation and IPO bonus in the 1996 period, income from operations would have
been $3.0 million or 11.4% of net sales.

      Interest expense. Net interest expense decreased to $1.3 million for the
nine months ended September 30, 1997 from $1.8 million for the nine months ended
September 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 borrowed $20 million to finance the acquisitions of Sungold and Private
Eyes, and $7 million to support its seasonal cash flow needs.

      Income tax provision (benefit). The Company's income tax benefit was
$16,000 for the nine months ended September 30, 1997 compared to an income tax
benefit of zero for the nine months ended September 30, 1996. Differences from
the federal statutory income tax rate of 34% resulted from changes in the
reserve against certain tax assets.

      Net income (loss). As a result of the items discussed above, the Company's
net loss was ($97,927) or $.01 per share for the nine months ended September
30, 1997 compared to a net loss of ($2.6) million or ($.46) per share for the
nine months ended September 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 $9.5 million and $1.2 million for the nine months ended September 30,
1997 and 1996, respectively. Cash used in the Company's investing activities,
primarily to fund acquisitions and capital expenditures, totaled $21.7 million
and $4.9 million for the nine months ended September 30, 1997 and 1996,
respectively. Cash provided by the Company's financing activities, primarily
proceeds from bank debt, totaled $26.8 million and $6.1 million for the nine
months ended September 30, 1997 and 1996, respectively. As of September 30,
1997, the Company had working capital of $20.3 million.

      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 nine months
ended September 30, 1997, totaled $1.4 million. The Company expects total
capital expenditures for 1997 to approximate $1.8 million. See "Forward-Looking
Statements."


                                       10
<PAGE>   13
      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. The Company
may borrow up to $17.0 million under its Credit Facility which is secured by the
assets of the Company and its subsidiaries. At September 30, 1997, the Company
has $12.2 million outstanding on its Credit Facility. 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     Jun 30    Sep 30     Mar 31    Jun 30    Sep 30     Dec 31
                         ------     ------    ------     ------    ------    ------     ------
<S>                      <C>       <C>        <C>       <C>        <C>       <C>        <C> 
Net sales.......          $8.2      $15.9      $11.1     $7.0       $10.6     $8.9       $6.6
Gross profit....           5.1       10.2        7.2      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. Due to 
the Company's inventory levels at September 30,1997, the Company anticipates 
decreasing its inventory during the fourth quarter of 1997. 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

        See legal proceedings reported in the Company's June 30, 1997 Form 10-Q
filed with the Securities and Exchange Commission on August 14, 1997.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

Exhibit 10.1   Amendment Number One to Lease Agreement dated September 25,
               1997, between Northwest Real Estate Carver, L.L.C., and 
               Gargoyles, Inc. (Filed in the Company's September 30, 1997 
               Form 10-Q filed with the Securities and Exchange Commission on 
               November 14, 1997.)
Exhibit 11.1   Computation of Earnings Per Share
Exhibit 27.1   Financial Data Schedule

(b) REPORTS ON FORM 8-K
        No reports have been filed during the quarter ended September 30, 1997.





                                   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

    
                                       12
<PAGE>   15


                                 EXHIBIT INDEX
                                 
EXHIBIT
NUMBER         EXHIBIT DESCRIPTION

Exhibit 10.1   Amendment Number One to Lease Agreement dated September 25,
               1997, between Northwest Real Estate Carver, L.L.C., and 
               Gargoyles, Inc. (Filed in the Company's September 30, 1997 
               Form 10-Q filed with the Securities and Exchange Commission on 
               November 14, 1997.)
Exhibit 11.1   Computation of Earnings Per Share
Exhibit 27.1   Financial Data Schedule