<PAGE>   1
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                                  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, 1998

                                       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
                                 (425) 921-3600
   (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, 1998, there were 7,837,191 outstanding shares of the
registrant's common stock, no par value, which is the only class of common or
voting stock of the registrant.

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<PAGE>   2

                                 GARGOYLES, INC.
                               INDEX TO FORM 10-Q

<TABLE>
<CAPTION>
                                                                             PAGE(S)
                                                                             -------
<S>       <C>                                                                <C>
                          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
              Condition and Results of Operations ..........................     7

Item 3:   Quantitative and Qualitative Disclosure about Market Risk ........     *

                             PART II - OTHER INFORMATION

Item 1:   Legal Proceedings ................................................    10

Item 2:   Changes in Securities and Use of Proceeds ........................     *

Item 3:   Defaults upon Senior Securities ..................................     *

Item 4:   Submission of Matters to a Vote of Security Holders ..............     *

Item 5:   Other Information ................................................    10

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

* Omitted as not applicable

<PAGE>   3
                         PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                                 GARGOYLES, INC.
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                 MARCH 31,          DECEMBER 31,
                                                                   1998                 1997
                                                               ------------         ------------
                                                                (UNAUDITED)
<S>                                                            <C>                  <C>         
ASSETS
Current assets:
  Cash and cash equivalents                                    $    703,841         $    892,176
  Trade receivables, net                                         10,186,610            8,540,120
  Inventories, net                                               12,312,610           13,057,024
  Other current assets and prepaid expenses                       2,285,337            1,792,124
                                                               ------------         ------------
Total current assets                                             25,488,398           24,281,444
Property and equipment, net                                       2,311,235            2,441,133
Intangibles, net                                                 20,996,184           21,232,817
Other assets                                                      1,341,186              671,411
                                                               ------------         ------------
Total assets                                                   $ 50,137,003         $ 48,626,805
                                                               ============         ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                             $  8,170,333         $  6,487,131
  Accrued expenses and other current liabilities                  5,168,840            6,402,287
  Current portion of long-term debt                               9,030,000                   --
                                                               ------------         ------------
Total current liabilities                                        22,369,173           12,889,418

Long-term debt, net of current portion                           21,893,413           29,160,554

Commitments and contingencies

Shareholders' equity:
  Preferred stock                                                        --                   --
  Common stock, no par value, authorized shares --
    40,000,000, issued and outstanding --
    7,837,191 and 7,437,191, respectively                        26,574,281           25,711,782
  Accumulated deficit                                           (20,664,169)         (19,121,995)
  Cumulative translation adjustment                                 (35,695)             (12,954)
                                                               ------------         ------------
Total shareholders' equity                                        5,874,417            6,576,833
                                                               ------------         ------------
Total liabilities and shareholders' equity                     $ 50,137,003         $ 48,626,805
                                                               ============         ============
</TABLE>

        See accompanying notes to the Consolidated Financial Statements


                                       1
<PAGE>   4

                                 GARGOYLES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED MARCH 31,
                                                     ---------------------------------
                                                         1998                 1997
                                                     ------------         ------------
<S>                                                  <C>                  <C>         
Net sales                                            $ 11,478,519         $  8,198,266
Cost of sales                                           5,113,878            3,198,379
                                                     ------------         ------------
Gross profit                                            6,364,641            4,999,887
License income                                                 --              110,000
                                                     ------------         ------------
                                                        6,364,641            5,109,887
                                                     ------------         ------------
Operating expenses:
    Sales and marketing                                 4,422,310            2,789,205
    General and administrative                          1,857,868            1,157,001
    Shipping and warehousing                              634,517              292,648
    Research and development                              197,818              365,291
                                                     ------------         ------------
Total operating expenses                                7,112,513            4,604,145
                                                     ------------         ------------
Income (loss) from operations                            (747,872)             505,742
Interest income (expense)                                (794,302)              26,791
                                                     ------------         ------------
Income (loss) before income taxes                      (1,542,174)             532,533
Income tax provision                                           --              107,000
                                                     ------------         ------------
Net income (loss)                                    $ (1,542,174)        $    425,533
                                                     ============         ============
Basic and diluted net income (loss) per share        $      (0.20)        $       0.06
                                                     ============         ============
</TABLE>

        See accompanying notes to the Consolidated Financial Statements


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

<TABLE>
<CAPTION>
                                                                   THREE MONTHS ENDED MARCH 31,
                                                                 ---------------------------------
                                                                     1998                 1997
                                                                 ------------         ------------
<S>                                                              <C>                  <C>         
OPERATING ACTIVITIES
Net income (loss)                                                $ (1,542,174)        $    425,533
  Adjustments to reconcile net income (loss) to net cash
    used in operating activities:
    Depreciation                                                      219,930              222,829
    Amortization                                                      352,173               58,389
    Deferred license income                                                --              (90,000)

    Changes in assets and liabilities net of effects from
      business acquisitions:
        Accounts receivable                                        (1,646,489)          (3,618,699)
        Inventories                                                   744,414           (3,357,035)
        Other current assets and other assets                        (616,029)          (3,383,021)
        Accounts payable, accrued expenses and other
          current liabilities                                         649,756            1,666,457
                                                                 ------------         ------------
Net cash used in operating activities                              (1,838,419)          (8,075,547)
                                                                 ------------         ------------
INVESTING ACTIVITIES
Acquisition of property and equipment                                 (90,034)            (793,348)

FINANCING ACTIVITIES
Proceeds from stock issuance                                               --                5,829
Net proceeds from issuance of long-term debt                        1,762,859            4,482,118
                                                                 ------------         ------------
Net cash provided by financing activities                           1,762,859            4,487,947
                                                                 ------------         ------------
Effect of foreign currency translation on cash                        (22,741)                  --
                                                                 ------------         ------------
Net decrease in cash                                                 (188,335)          (4,380,948)
Cash and cash equivalents, beginning of period                        892,176            4,382,048
                                                                 ------------         ------------
Cash and cash equivalents, end of period                         $    703,841         $      1,100
                                                                 ============         ============
</TABLE>

        See accompanying notes to the Consolidated Financial Statements


                                       3
<PAGE>   6

                                 GARGOYLES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 1998
                                   (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, 1998 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 1997 Annual Report on Form 10-K/A as filed with the Securities and
Exchange Commission.

        The Company's net sales are subject to seasonal variations. Accordingly,
the results of operations for the period ended March 31, 1998 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,
                                                         1998            1997
                                                     ------------    ------------
<S>                                                  <C>             <C>         
Materials ........................................   $  7,239,145    $  7,119,328
Finished goods ...................................      7,065,957       7,909,147
   Reserves for excess, slow-moving and
      obsolete inventories .......................     (1,992,492)     (1,971,451)
                                                     ------------    ------------
           Inventories, net ......................   $ 12,312,610    $ 13,057,024
                                                     ============    ============
</TABLE>

3.  COMMITMENTS AND CONTINGENCIES

        In 1998, the Company negotiated releases from certain of its operating
leases decreasing its minimum future lease payments under noncancelable
operating leases. Minimum future lease payments under noncancelable operating
leases are as follows:

<TABLE>
<CAPTION>
                                                    March 31,      December 31,
                                                      1998             1997
                                                   -----------     ------------
<S>                                                <C>               <C>       
1998 .........................................     $   345,471       $1,381,397
1999 .........................................         459,392        1,304,276
2000 .........................................         263,685        1,101,755
2001 .........................................         188,703          949,370
2002 .........................................              --          700,000
Thereafter ...................................              --        3,500,000
                                                   -----------       ----------
                                                   $ 1,369,913       $8,936,798
                                                   ===========       ==========
</TABLE>


                                       4
<PAGE>   7

        The Company is currently involved in two lawsuits involving (i) claims
by the Company against a third party related to alleged infringement of the
Company's toric curve technology and (ii) claims by a former employee against
the Company alleging wrongful termination and discrimination under various laws.
In the opinion of management, the ultimate resolution of such litigation will
not have a significant adverse effect on the Company's financial condition or
the results of its operations.

4.  INCOME TAXES

        The Company recorded no income tax benefit relating to the net loss for
the three-month period ended March 31, 1998, since a future benefit is 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.

5.  DEBT RESTRUCTURING

        In January 1998, the Company restructured its credit agreement (the
"Credit Agreement") with its primary lender. The amended Credit Agreement
consists of (i) a revolving loan commitment of up to $14 million, secured by the
assets of the Company, (ii) a term loan of $16.47 million, also secured by the
assets of the Company and (iii) an equipment loan of $3.9 million, secured by
the equipment of the Company, resulting in approximately $5 million additional
availability to the Company. The Credit Agreement was further amended on March
31, 1998 to reschedule principal payments and to revise financial covenants. The
revised Credit Agreement requires $8.8 million of principal payments due January
4, 1999, with all remaining outstanding debt due in April 1999. The Company
believes that it is unlikely it will be able to make such principal payments
when due, absent the Company obtaining additional financing through the sale of
equity or debt securities, but there can be no assurance that such financing
will be available on a timely basis, on favorable terms or at all. The
additional funds are subject to certain conditions and covenants, which include
minimum tangible net worth, working capital, net sales, and EBIDTA requirements,
as well as ratios relating to debt coverages. The Credit Agreement also
prohibits the Company from paying dividends to its shareholders.

        In consideration for the amendments to the Credit Agreement, the Company
issued 400,000 shares of the Company's common stock to an affiliate of its
lender and agreed to file a registration statement related to those shares with
the Securities and Exchange Commission. Subject to an amendment to the credit
agreement dated April 30, 1998, the Company's obligation to file the
registration statement was deferred until November 15, 1998. The shares were
valued at the time of issuance based on the market price of the Company's stock
on the date of issuance less an appropriate discount based on the nature of the
underlying stock and its marketability. The common stock was valued at $862,500
and was recorded as payment of $200,000 in bank fees that were due December 31,
1997 and $662,500 in debt issuance costs.

6.  COMPREHENSIVE INCOME (LOSS)

        In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which
establishes display 


                                       5
<PAGE>   8

requirements of comprehensive income in financial statements. The Company's
total comprehensive income (loss) for the first quarters of 1998 and 1997 was
($1,564,915) and $425,533, respectively.

7.  EARNINGS PER SHARE

The weighted-average number of common shares used in the calculation of basic
earnings per share for the quarters ended March 31, 1998 and 1997 is 7,774,969
and 7,429,239, respectively. The weighted-average number of common shares used
in the calculation of diluted earnings per share for the quarters ended March
31, 1998 and 1997 is 7,774,969 and 7,682,882, respectively. For purposes of
calculating diluted earnings per share in the first quarter of 1998, common
stock equivalents have not been included as the effect would be antidilutive.

8.  RECLASSIFICATIONS

        Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation.

9.  LIQUIDITY

        The Company incurred significant operating losses in 1997 and the first
quarter of 1998. The Company was unable to make a scheduled payment on its bank
debt in December 1997, and at the Company's request, its banking arrangements
were restructured in the first quarter of 1998. The Company also has had
difficulty paying suppliers on a timely basis, and has made arrangements with
certain suppliers to provide for payment schedules for past due amounts and to
provide letters of credit for a portion of the purchase price of future orders.

        The Company is exploring various options designed to maximize
shareholder value, including the possible sale of equity or convertible debt
securities to fund working capital and, in part, to finance the January 1999
loan payment, but there can be no assurance that such financing or other source
of funds will be available on a timely basis, on favorable terms or at all. In
addition, management is seeking to reduce expenses to levels that can be
sustained by operations. Failure of operations or expense reduction efforts to
meet the Company's expectations, unanticipated expenses, loss of continued
cooperation of the Company's key suppliers or the bank, third-party claims or
adverse developments in pending litigation could result in additional cash
requirements that could be difficult or impossible to satisfy and could require
the Company to further reduce its operating expenditures, to curtail operations,
or to dispose of operating assets to enable it to continue operations through
December 31, 1998.

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

FORWARD-LOOKING STATEMENTS

        Certain statements within this report constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or industry results, to differ materially from
the anticipated results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, without limitation, the
factors discussed in the Company's Annual Report, as amended, on Form 10-K/A
under factors discussed in connection with the forward-looking statements.
Forward-looking statements reflect management's views, estimates and opinions at
the date on which the statements are made. The Company undertakes no obligation
to update forward-looking statements to reflect changes in circumstances or
changes in the views, estimates or 


                                       6
<PAGE>   9

opinions of management that occur after the statements are made. Because of the
inherent uncertainty of forward-looking statements and because circumstances or
management's views, estimates and opinions may change, investors are cautioned
not to place undue reliance on forward-looking statements. Certain
forward-looking statements are identified with a cross reference to this
paragraph.

GENERAL

        Gargoyles designs, assembles, markets and distributes a broad range of
sunglasses and eyewear products. The Company competes primarily in the premium
sunglass markets by offering a diverse line of products marketed under a number
of brands owned by the Company or licensed from third parties. The Company's
principal brands include Gargoyles Performance Eyewear, Gargoyles Protective
Eyewear, Hobie Polarized Sunglasses, Timberland Eyewear, Stussy Eyewear, Anarchy
Eyewear, Angel Eyewear, Ellen Tracy Eyewear, Emmanuelle Khanh Paris Eyewear, and
Private Eyes. Under the Ellen Tracy Eyewear, Emmanuelle Khanh Paris Eyewear,
Private Eyes and Timberland Eyewear brands, the Company also offers diverse
lines of ophthalmic frames.

        The Company operates both directly and through three wholly-owned
subsidiaries and one majority-controlled subsidiary. The Company's operating
subsidiaries include: H.S.C., Inc., a Washington corporation, Sungold Eyewear,
Inc., a Washington corporation, Private Eyes Sunglass Corporation, a Washington
corporation, and the kindling company, a California corporation.

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,
                                                     --------------------
                                                      1998          1997
                                                     ------        ------
<S>                                                  <C>           <C>   
     Net sales ...............................        100.0%        100.0%
     Cost of sales ...........................         44.5          39.0
     Gross profit ............................         55.5          61.0
     License income ..........................           --           1.3
     Operating expenses:
       Sales and marketing ...................         38.5          34.0
       General and administrative ............         16.2          14.1
       Shipping and warehousing ..............          5.6           3.6
       Research and development ..............          1.7           4.4
     Total operating expenses ................         62.0          56.1
     Income (loss) from operations ...........         (6.5)          6.2
</TABLE>

THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997

        Net sales. Net sales increased to $11.5 million for the quarter ended
March 31, 1998 from $8.2 million for the quarter ended March 31, 1997. This
increase was primarily the result of sales from the Company's Sungold and
Private Eyes acquisitions in the 1997 second quarter. Sales from these new
brands totaled $6.8 million in the first quarter of 1998.

        Gross profit. Gross profit increased to $6.4 million for the quarter
ended March 31, 1998 from $5.0 million for the quarter ended March 31, 1997.
Gross margin decreased to 55.5% in the 1998 quarter from 61.0% in the 1997
quarter. The decrease in gross margin in 1998 was 


                                       7
<PAGE>   10

primarily attributable to a liquidation of certain inventories in the first
quarter of 1998 at discounted prices.

        License income. License income decreased to zero for the quarter ended
March 31, 1998 compared to $110,000 for the quarter ended March 31, 1997.
License income in first quarter 1997 was the result of a one-time sale of
product by licensee.

        Operating expenses. Operating expenses increased to $7.1 million for the
quarter ended March 31, 1998 from $4.6 million for the quarter ended March 31,
1997. As a percentage of net sales, operating expenses increased to 62.0% in the
1998 quarter from 56.1% in the 1997 quarter. Sales and marketing expenses
increased $1.6 million in the 1998 quarter, primarily as a result of the Sungold
and Private Eyes acquisitions. As a percentage of net sales, sales and marketing
expenses increased to 38.5% in the 1998 quarter from 34.0% in the 1997 quarter.
General and administrative expenses increased $701,000 in the 1998 quarter,
primarily as a result of the Sungold and Private Eyes acquisitions. As a
percentage of net sales, general and administrative expenses increased to 16.2%
in the 1998 quarter from 14.1% in the 1997 quarter. Shipping and warehousing
expenses increased $342,000 in the 1998 quarter, primarily as a result of the
Sungold and Private Eyes acquisitions. As a percentage of net sales, shipping
and warehousing expenses increased to 5.6% in the 1998 quarter from 3.6% in the
1997 quarter. Research and development expenses decreased $167,000 in the 1998
quarter, primarily as a result of management's efforts to contain certain costs.
As a percentage of net sales, research and development expenses decreased to
1.7% in the 1998 quarter from 4.4% in the 1997 quarter. The increase in total
operating expenses of $7.1 million is the result of the Sungold and Private Eyes
acquisitions (which resulted in an increase in operating expenses of $7.4
million) which was partially offset by a $300,000 reduction in operating 
expenses resulting from the Company's cost-cutting measures.

        Income (loss) from operations. The Company incurred a loss from
operations of $748,000 for the quarter ended March 31, 1998 compared to income
from operations of $506,000 for the quarter ended March 31, 1997.

        Interest income (expense). Interest income was $794,000 for the quarter
ended March 31, 1998 compared with interest income of $27,000 for the quarter 
ended March 31, 1997 as a result of increased interest-bearing borrowings and 
decreased interest-earning cash balances. The Company's outstanding borrowings 
were $30.9 million at March 31, 1998 compared to $4.5 million at March 31, 1997.

        Income tax provision (benefit). The Company's income tax benefit was
zero for the quarter ended March 31, 1998 compared to an income tax provision of
$107,000 for the quarter ended March 31, 1997. 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 $1.5 million or $.20 per share for the quarter ended
March 31, 1998 compared to a net income of $426,000 or $.06 per share for the
quarter ended March 31, 1997.

LIQUIDITY AND CAPITAL RESOURCES

        Historically, the Company has relied primarily on cash from operations,
borrowings and its initial public offering of common stock to finance its
operations. Cash used in the Company's operating activities totaled $1.8 million
and $8.1 million for the three months ended March 31, 1998 and 1997,
respectively. The Company reduced the cash used in operating activities in the
first quarter of 1998 by $6.3 million compared to the first quarter of 1997 by
(i) reducing the early-season buildup of accounts receivable by $2.0 million,
(ii) decreasing net inventories by $744,000 


                                       8
<PAGE>   11

in the first quarter of 1998 compared to a $3.4 million increase in inventories
in the first quarter of 1997 and (iii) reducing the effect of changes in other
assets and liabilities, primarily through a decrease in expenditures on prepaid
advertising costs. Cash used in the Company's investing activities, to fund
acquisitions of property and equipment, totaled $90,000 and $793,000 for the
three months ended March 31, 1998 and 1997, respectively. Cash provided by the
Company's financing activities, primarily proceeds from bank debt, totaled $1.8
million and $4.5 million for the three months ended March 31, 1998 and 1997,
respectively. As of March 31, 1998, the Company had unused sources of liquidity
of $2.6 million, consisting of cash and cash equivalents of $704,000 and
borrowings available under its revolving loan of $1.9 million.

        The Company has initiated certain cost reduction measures including the
consolidation of its office and warehouse space. During April 1998, the Company
vacated its Norwell, Massachusetts facility and negotiated a termination of the
Norwell lease, negotiated a termination of the lease for its warehouse facility
in Kent, Washington and negotiated an amendment to the lease for its Lynnwood, 
Washington facility, thereby decreasing minimum future lease payments under 
noncancelable operating leases from $8.9 million at December 31, 1997 to $1.4 
million at March 31, 1998.

        In January 1998, the Company restructured its credit agreement (the
"Credit Agreement") with its primary lender. The amended Credit Agreement
consists of (i) a revolving loan commitment of up to $14 million, secured by the
assets of the Company, (ii) a term loan of $16.47 million, also secured by the
assets of the Company and (iii) an equipment loan of $3.9 million, secured by
the equipment of the Company, resulting in approximately $5 million additional
availability to the Company, subject to certain collateral levels and covenants,
which include minimum tangible net worth, working capital, net sales, and EBIDTA
requirements, as well as ratios relating to debt coverages. The Credit Agreement
was further amended on March 31, 1998 to reschedule principal payments and to
revise financial covenants. The revised Credit Agreement requires $8.8 million
of principal payments due January 4, 1999, with all remaining outstanding debt
due April 1999. The Company believes that it is unlikely it will be able to make
such principal payments when due, absent the Company obtaining additional
financing.

        The Company has had difficulty paying suppliers on a timely basis, and
has made arrangements with certain suppliers to provide for payment schedules
for past due amounts and to provide letters of credit for a portion of the
purchase price of future orders. Failure of operations or expense reduction
efforts to meet the Company's expectations, unanticipated expenses, loss of
continued cooperation of the Company's key suppliers or the bank, third-party
claims or adverse developments in pending litigation could result in additional
cash requirements that could be difficult or impossible to satisfy and could
require the Company to further reduce its operating expenditures, to curtail
operations, or to dispose of operating assets to enable it to continue
operations. The Company is exploring various options designed to maximize
shareholder value, including the possible sale of equity or convertible debt
securities to fund working capital and, in part, to finance the January 1999
loan payment, but there can be no assurance that such financing will be
available on a timely basis, on favorable terms or at all. See "Forward-Looking
Statements."

SEASONALITY

        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. See "Forward-Looking
Statements." The Company experiences higher accounts receivable during March
through September as a result of higher sales during this period. 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.


                                       9
<PAGE>   12

                           PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

        There have been no material changes in legal proceedings reported in the
Company's 1997 Annual Report, as amended, on Form 10-K/A Amendment No. 1 filed 
with the Securities and Exchange Commission on April 15, 1998.

ITEM 5. OTHER INFORMATION

        The Company's Common Stock is presently quoted on the Nasdaq National
Market. The Company's net tangible assets, calculated as of December 31, 1997,
do not meet the requirements for continued listing on either the Nasdaq
National Market or the Nasdaq SmallCap Market. Failure to satisfy the net
tangible asset requirement may result in delisting of the Common Stock from
Nasdaq, trading could continue in the over-the-counter market, but investors
might find it more difficult to trade in the Common Stock or to obtain accurate
information concerning market prices and bid and asked quotations of Common
Stock. The Company has been notified by Nasdaq that it does not satisfy
Nasdaq's standards for continued inclusion of its Common Stock in the Nasdaq
system as the result of a deficiency in net tangible assets, and that Nasdaq
intends to terminate the quotation of the Company's Common Stock. The Company
has requested a hearing to seek Nasdaq's approval for continued quotation of
the Common Stock, but a hearing has not yet been scheduled. The Company is
seeking to obtain financing or to restructure its debt in a manner which will
result in compliance with Nasdaq requirements. There can be no assurance,
however, that the Company will be successful in these efforts. If these efforts
are not successful prior to the Nasdaq hearing, the Company intends to seek
additional time to achieve compliance with Nasdaq's requirements, but there can
be no assurance that additional time will be granted.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

<TABLE>
    <S>            <C>
    Exhibit 10.1   Seventh Amendment to First Amended and Restated Credit
                   Agreement dated April 30, 1998 by and between U.S. Bank
                   National Association, successor by merger to U.S. Bank of
                   Washington, National Association, and Gargoyles, Inc.

    Exhibit 10.2   Amendment Number Three to that certain lease dated July 18,
                   1997, between Northwest Real Estate--Carver, L.L.C., as
                   lessor, and Gargoyles, Inc., as lessee.

    Exhibit 10.3   Lease Termination Agreement made as of the 13th day of
                   April, 1998, by and between Ronald Gordon, Trustee of A.E.P.
                   Realty Trust, as Landlord, and Private Eyes Sunglass
                   Corporation, as Tenant.

    Exhibit 27.1   Financial Data Schedule
</TABLE>

(b) REPORTS ON FORM 8-K

        Form 8-K with respect to the Company's 1997 financial performance was 
filed with the Securities and Exchange Commission on April 3, 1998.


                                       10
<PAGE>   13

                                   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

                                        11
<PAGE>   14
                                        EXHIBIT INDEX

EXHIBIT 
NUMBER             EXHIBIT DESCRIPTION

Exhibit 10.1       Seventh Amendment to First Amended and Restated Credit
                   Agreement dated April 30, 1998 by and between U.S. Bank
                   National Association, successor by merger to U.S. Bank of
                   Washington, National Association, and Gargoyles, Inc.

Exhibit 10.2       Amendment Number Three to that certain lease dated July 18,
                   1997, between Northwest Real Estate--Carver, L.L.C., as
                   lessor, and Gargoyles, Inc., as lessee.

Exhibit 10.3       Lease Termination Agreement made as of the 13th day of
                   April, 1998, by and between Ronald Gordon, Trustee of 
                   A.E.P. Realty Trust, as Landlord, and Private Eyes 
                   Sunglass Corporation, as Tenant.

Exhibit 27.1       Financial Data Schedule