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 September 30, 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
                                 (253) 796-2752
   (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,  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.



<PAGE>


                                 GARGOYLES, INC.
                               INDEX TO FORM 10-Q


                                                                        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
          Condition and Results of Operations ..........................     9

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

                             PART II - OTHER INFORMATION

Item 1: Legal Proceedings ................................................  14

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 ................................................  15

Item 6: Exhibits and Reports on Form 8-K .................................  15

* Omitted as not applicable



<PAGE>


                         PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                                 GARGOYLES, INC.
                           CONSOLIDATED BALANCE SHEETS


                                                    SEPTEMBER 30,   DECEMBER 31,
                                                        1998           1997
                                                    ------------   ------------
                                                     (UNAUDITED)
ASSETS
Current assets:
  Cash and cash equivalents .....................  $    588,635   $    892,176
  Trade receivables, net ........................     6,738,925      8,540,120
  Inventories, net ..............................     8,827,807     13,057,024
  Other current assets and prepaid expenses .....     2,132,148      1,792,124
                                                   ------------   ------------
Total current assets ............................    18,287,515     24,281,444
Property and equipment, net .....................     1,848,374      2,441,133
Intangibles, net ................................    12,448,458     21,232,817
Other assets ....................................       699,796        671,411
                                                   ------------   ------------
Total assets ....................................  $ 33,284,143   $ 48,626,805
                                                   ============    ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable ..............................  $  8,376,251   $  6,487,131
  Accrued expenses and other current liabilities .    2,350,664      6,402,287
  Current portion of long-term debt .............    28,844,095             --
                                                   ------------   ------------
Total current liabilities .......................    39,571,010     12,889,418

Long-term debt, net of current portion ..........            --     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 ...........................   (32,919,467)   (19,121,995)
  Cumulative translation adjustment .............        58,319        (12,954)
                                                   ------------   ------------
Total shareholders' equity ......................    (6,286,866)     6,576,833
                                                   ------------   ------------
Total liabilities and shareholders' equity ......  $ 33,284,143   $ 48,626,805
                                                   ============   ============

         See accompanying notes to the Consolidated Financial Statements



<PAGE>


                                 GARGOYLES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)


<TABLE>

                                                THREE MONTHS ENDED SEPTEMBER 30,  NINE MONTHS ENDED SEPTEMBER 30,
                                                --------------------------------  -------------------------------

                                                          1998         1997            1998            1997
                                                     ------------  ------------    ------------    ------------
<S>                                                 <C>           <C>             <C>             <C>

Net sales .........................................  $  9,062,934  $ 11,067,507    $ 33,717,194    $ 35,132,072
Cost of sales .....................................     3,702,757     4,570,383      14,315,760      14,112,870
                                                     ------------  ------------    ------------    ------------
Gross profit ......................................     5,360,177     6,497,124      19,401,434      21,019,202
License income ....................................        98,452       115,000         289,155         446,736
                                                     ------------  ------------    ------------    ------------
                                                        5,458,629     6,612,124      19,690,589      21,465,938
                                                     ------------  ------------    ------------    ------------
Operating expenses:
    Sales and marketing ...........................     2,921,467     5,005,848      11,698,157      13,191,886
    General and administrative ....................     1,614,982     2,179,994       5,245,497       4,830,085
    Shipping and warehousing ......................       443,200       343,014       1,750,509       1,050,713
    Research and development ......................       160,687       318,149         576,901       1,082,305
    Provision for Doubtful Accounts ...............       817,273        55,356         997,545         163,086
                                                    ------------    ------------    ------------    ------------
Total operating expenses ..........................     5,957,608     7,902,361      20,268,608      20,318,075
                                                    ------------    ------------    ------------    ------------
Income (loss) from operations .....................      (498,979)   (1,290,237)       (578,018)      1,147,863
Interest income (expense) .........................      (883,935)     (755,021)     (2,572,277)     (1,261,290)
Other income (expense) ............................   (10,660,271)  (10,647,010)
                                                     ------------  ------------    ------------    ------------
Income (loss) before income taxes .................   (12,043,185)   (2,045,258)    (13,797,305)       (113,427)
Income tax provision (benefit) ....................           --        409,000            --            15,500
                                                     ------------  ------------    ------------    ------------
Net income (loss) .................................  $(12,043,185) $ (1,636,258)   $(13,797,305)   $    (97,927)
                                                     ============  ============    ============    ============
Basic and diluted net income (loss) per share .....  $      (1.54) $      (0.22)   $      (1.77)   $      (0.01)
                                                     ============  ============    ============    ============
</TABLE>

         See accompanying notes to the Consolidated Financial Statements



<PAGE>


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

<TABLE>

                                                              NINE MONTHS ENDED SEPTEMBER 30,
                                                              -------------------------------
                                                           
                                                               1998                      1997
                                                           ------------              ------------
<S>                                                         <C>                      <C>
OPERATING ACTIVITIES
Net income (loss) ........................................ $(13,797,305)              $    (97,927)
 Adjustments to reconcile net income (loss) to net cash
   used in operating activities:
   Depreciation ..........................................      600,259                    782,200
   Amortization ..........................................    1,061,735                    528,566
   Deferred license income ...............................           --                    186,000
   Noncash restructuring expenses ........................    8,433,228
   Loss on disposition of The kindling Co. ...............    1,432,048

   Changes in assets and liabilities net of effects from
     business  acquisitions and dispositions:
        Accounts receivable ..............................    1,534,926
        Inventories ......................................    2,896,867                 (6,378,963)
        Other current assets and other assets ............     (662,206)                (2,854,591)
        Accounts payable, accrued expenses and other
          current liabilities ............................   (1,457,446)                   (52,293)
                                                           ------------               ------------
Net cash provided by (used in) operating activities ......       42,106                 (9,489,711)
                                                           ------------               ------------
INVESTING ACTIVITIES
Acquisition of property and equipment ....................     (100,461)                (1,437,844)
Purchase of Sungold ......................................           --                (11,892,871)
Purchase of Private Eyes .................................           --                 (8,362,158)

                                                           ------------               ------------
Net cash used in investing activities ....................     (100,461)               (21,692,873)

FINANCING ACTIVITIES
Proceeds from stock issuance .............................           --                     68,206
Net proceeds (repayment) from revolving line of credit ...     (316,459)                12,233,997
Net proceeds from issuance of long-term debt .............   14,620,000
Principal payments on long-term debt .....................     (121,667)
                                                           ------------               ------------
Net cash provided by (used in) financing activities ......     (316,459)                26,800,536
                                                           ------------               ------------
Effect of foreign currency translation on cash ...........       71,273                         --
                                                           ------------               ------------
Net decrease in cash .....................................     (303,541)                (4,382,048)
Cash and cash equivalents, beginning of period ...........      892,176                  4,382,048
                                                           ------------               ------------
Cash and cash equivalents, end of period ................. $    588,635               $         --
                                                           ============               ============
</TABLE>

        See accompanying notes to the Consolidated Financial Statements



<PAGE>


                                 GARGOYLES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 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 September 30, 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 periods ended September 30 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,
                                                      1998           1997
                                                 ------------    ------------
Materials ................................       $  4,582,660    $  7,119,328
Finished goods ..............................       4,722,715       7,909,147
   Reserves for excess, slow-moving and
      obsolete inventories ..................        (477,568)     (1,971,451)
                                                 ------------    ------------
           Inventories, net .................    $  8,827,807    $ 13,057,024
                                                 ============    ============


3. COMMITMENTS AND CONTINGENCIES

Lease Agreements

     In 1998,  the Company  negotiated  releases  from certain of its  operating
leases thereby decreasing its minimum future lease payments under  noncancelable
operating leases. The Company recognized  $260,000 of expense in connection with
the  termination  of these leases.  These expenses were included in other income
(expense) in the  consolidated  statements of  operations.  Minimum future lease
payments under noncancelable operating leases are as follows:

                                                 September 30,      December 31,
                                                      1998             1997
                                                   -----------     ------------
1998 .........................................     $   164,348       $1,381,397
1999 .........................................         668,923        1,304,276
2000 .........................................         445,209        1,101,755
2001 .........................................         283,277          949,370
2002 .........................................          94,572          700,000
Thereafter ...................................           7,881        3,500,000
                                                   -----------       ----------
                                                   $ 1,664,210       $8,936,798
                                                   ===========       ==========
<PAGE>

License Agreements

     In 1998 the  Company  negotiated  releases  from  certain of its  licensing
agreements.  Effective September 1, 1998, the Company and The Timberland company
agreed to  terminate  the License  Agreement  under  which the Company  sold and
distributed Timberland Eyewear. As a result of the termination,  the Company was
released from $3.4 million minimum future payments under the Timberland  license
agreement.  To terminate  the license,  the Company  paid a  termination  fee of
$255,000 to The Timberland  Company. On September 8, 1998, the Company and Ellen
Tracy,  Inc.  agreed to terminate the License  Agreement under which the Company
sells and distributes Ellen Tracy Eyewear.  As a result of the termination,  the
Company was released from $8.8 million  minimum future  payments under the Ellen
Tracy license  agreement.  Total minimum future payments under remaining license
agreements are as follows:

                                                 September 30,     December 31,
                                                      1998             1997
                                                   -----------     ------------
1998 .........................................     $   414,643       $2,896,322
1999 .........................................       2,088,514        4,551,639
2000 .........................................       2,198,223        5,729,473
2001 .........................................         540,344        2,827,844
2002 and thereafter...........................         533,785        2,828,785
                                                    ----------       ----------
                                                   $ 5,775,509      $18,834,063
                                                   ===========       ==========


4. LITIGATION

     The  Company  settled  two  lawsuits  involving  (i) claims by the  Company
against a third party related to alleged  infringement  of the  Company's  toric
curve  technology for which the Company  received a one-time  paid-up royalty of
$1.2 million and (ii) claims by a former employee  against the Company  alleging
wrongful  termination and  discrimination  under various laws, which the Company
settled  for an amount  which did not  materially  adversely  effect the Company
operations or financial  position.  The Company is also a party to various other
claims,  complaints and legal actions that have arisen in the ordinary course of
business  from time to time.  The Company  believes that the outcome of all such
legal proceedings,  in the aggregate, will not have a material adverse effect on
its financial position or the results of its operations.


5. ALLOWANCE FOR DOUBTFUL ACCOUNTS

     Trade  receivables are shown net of an allowance for doubtful  accounts and
sales returns.  In addition to the normal provision for doubtful  accounts,  the
Company  recognized a $750,000  additional  provision  during the quarter  ended
September  30,  1998.  The  additional  provision  was provided for the probable
write-off of  receivable  balances that are no longer  deemed  collectible.


6. 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, 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.


7. DEBT RESTRUCTURING

     In January 1998, the Company restructured its credit agreement (the "Credit
Agreement") with its primary lender.  The amended Credit Agreement  consisted 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  also prohibits the Company
from paying dividends to its shareholders.
<PAGE>

     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  by January 4, 1999.  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.

     The Credit  Agreement  was further  amended on March 31, 1998 to reschedule
principal payments and to revise financial  covenants.  The Credit Agreement was
further amended on August 13, 1998 to waive covenant  defaults  through July 31,
1998 and to revise  financial  covenants for periods  after August 1, 1998.  The
Credit Agreement was further amended on September 17, 1998 to bifurcate the term
loan  into a term loan of $13  million  and a term  loan of $3.47  million.  The
Credit  Agreement  was further  amended on November 2, 1998 (i) to increase  the
amount the Company  could  borrow under its  revolving  loan by  increasing  the
advance rate from 50% to 65% on the value of its eligible  inventory and (ii) to
delete the 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.


8. COMPREHENSIVE INCOME (LOSS)

     In 1997,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting Standards No. 130, "Reporting  Comprehensive Income," which
establishes   display   requirements  of   comprehensive   income  in  financial
statements.  The Company's total  comprehensive  income (loss) for the three and
nine month  periods of 1998 and 1997 was  ($11,988,773)  and  ($1,636,258),  and
($13,726,032) and ($97,927), respectively.


9. EARNINGS PER SHARE

The weighted-average number of common shares used in the calculation of earnings
per share for the three and nine month periods ended September 30, 1998 and 1997
is 7,837,191  and  7,431,523,  and 7,816,450 and  7,601,229,  respectively.  For
purposes of calculating diluted earnings per share for the three and nine months
ended  September  30,  1998 and 1987,  common  stock  equivalents  have not been
included as the effect would be antidilutive or would be immaterial.


10. RECLASSIFICATIONS

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


11. 1997 BUSINESS ACQUISITIONS

Sungold Acquisition

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

The acquisition was accounted for using the purchase method of accounting at the
date of acquisition.  Accordingly, the allocation of the purchase price of $11.7
million  was based on the fair  value of the  assets  acquired  and  liabilities
assumed.  Costs  in  excess  of the  fair  value  of  the  assets  acquired  and
liabilities  assumed are reflected as  intangibles,  a component of which is the
Stussy license  agreement,  which is being  amortized over the remaining term of
the license.
<PAGE>

Proforma  information for the nine months ended September 30, 1997, assuming the
Sungold acquisition had occurred at January 1, 1997, is as follows:

Sales .....................   $39,393,259
Gross profit ..............    24,852,943
Net income (loss) .........        46,435
Net income (loss) per share   $      0.01

Private Eyes Acquisition

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 the North American
distributor for Emmanuelle  Khanh Paris Eyewear and also distributes it own line
of prescription frames and eyewear accessories.

The acquisition was accounted for using the purchase method of accounting at the
date of  acquisition.  Accordingly,  the  allocation of the purchase price of $8
million  was based on the fair  value of the  assets  acquired  and  liabilities
assumed.  Costs  in  excess  of the  fair  value  of  the  assets  acquired  and
liabilities assumed were reflected as intangibles.

Proforma  information for the nine months ended September 30, 1997, assuming the
Private Eyes acquisition had occurred at January 1, 1997, is as follows:

Sales .....................   $43,531,324
Gross profit ..............    27,139,488
Net income (loss) .........        22,703
Net income (loss) per share   $      0.00

The  Company's  Ellen Tracy  Eyewear  business was unable to support the minimum
royalty and advertising  obligations under the Ellen Tracy license agreement. On
September  8,  1998,  the  Company  and Ellen  Tracy,  Inc.  mutually  agreed to
terminate  the  license.  As a result of the  license  termination,  the Company
recorded a charge to earnings of $8.6 million consisting of:

<TABLE>

     <S>                                                                         <C>
     Write-down of identifiable intangibles - Ellen Tracy License ..........     $1,040,000
     Impairment of long-lived assets (goodwill) based on the
          expected undiscounted cash flows of the Private Eyes division
          without the Ellen Tracy sales. Ellen Tracy product sales accounted
          for 84% of the total Private Eyes sales in 1997 ..................      7,164,000
     Write-off of deferred marketing costs and estimated sales
          returns and doubtful accounts associated with the termination
          of the Ellen Tracy license .......................................        405,000
                                                                                 ----------
                                                                                 $8,609,000
</TABLE>


Timberland Eyewear

     In May 1996,  the Company,  Douglas W. Lauer,  and The  Timberland  Company
formed  the  kindling  company,  a  California   corporation   ("Kindling"),   a
majority-owned  subsidiary of the Company, to develop and distribute  sunglasses
and  ophthalmic  frames  under the  Timberland  brand  name.  Concurrently  with
Kindling's formation, the Company and Kindling, jointly and severally,  acquired
an  exclusive,  world-wide  license  from  The  Timberland  Company  to use  the
Timberland trademark on eyewear. The Company contributed $1.2 million for its 70
percent interest in Kindling.  Kindling launched its Timberland sunglass line in
March 1997 and its Timberland  ophthalmic line in Europe in early 1998. Sales of
Timberland branded products totaled approximately 7.2 percent and 2.1 percent of
the  Company's  sales in 1997 and the first nine  months of 1998,  respectively.
Approximately  4.3  percent  of the  Company's  losses  in  1997  and an  amount
approximately  equal to the Company's  total  operating  loss for the first nine
months of 1998, respectively, were attributable to Kindling's operations.
<PAGE>

     Effective  September 1, 1998, Kindling sold substantially all of its assets
to Adventure  Optics,  LLC, a limited  liability  company  majority owned by REM
Optical  Company,  Inc. and by The Timberland  Company and Douglas W. Lauer. The
total  purchase  price for the  assets  was  $1,008,000  payable in cash and the
assumption of certain liabilities. The Company received $358,000 of the proceeds
from the sale in  partial  payment of an  intercompany  loan from  Gargoyles  to
Kindling.  As part of the  sale  transaction,  the  license  agreement  with The
Timberland Company was terminated.  $255,000 of the proceeds from the asset sale
were paid to Timberland  as a license  termination  fee. The Company  recorded a
charge to earnings of $1,432,000  as a result of the sale of  Kindling's  assets
and the termination of the Timberland license agreement.

London Office

     In late 1996 the Company  opened a sales and marketing  office in London to
manage its European sales efforts.  The Company's  London office was responsible
for approximately 2.9 percent and 2.4 percent of the Company's sales in 1997 and
the first  nine  months of 1998,  respectively.  A  significant  portion  of the
Company's  European sales were comprised of Timberland  branded products.  Costs
associated with the Company's European  operations totaled $2.4 million and $1.1
million in 1997 and the first nine  months of 1998,  respectively.  The  Company
closed  its  London  office  July 31,  1998.  As a result of the  London  office
closing, the Company recorded a charge to earnings of $373,000 consisting of the
non-cash write-off of start-up costs of $238,000 and severance and other closing
costs.


12. LIQUIDITY

     The Company incurred significant  operating losses in 1997 and for the nine
months  ended  September  30,  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.

     On October 22, 1998, the Company entered into an agreement in principal for
a  recapitalization  of  the  Company  with a New  York  investment  bank  which
specializes in transactions  with middle market companies with growth prospects.
The  proposed  transaction  contemplates  the sale by the  Company of equity and
subordinated  debt  securities  and  the  restructure  and  refinancing  of  the
Company's  current senior credit facility.  While the terms of the securities to
be issued remain subject to negotiation,  it is anticipated  that holders of the
Company's  presently  outstanding  common  stock  will hold less than 20% of the
Company's equity, on a fully diluted basis,  after the transaction is completed.
See  "Forward-Looking  Statements."  The transaction  will be completed with the
continued  cooperation of the Company's  current lender and is expected to close
in early 1999. Closing of the transaction is conditioned,  however,  on a number
of  factors  including  completion  of  review  of the  Company's  business  and
operations, finalizing placement of the securities, and the parties agreement on
the terms of definitive  documentation,  and there can be no assurance  that the
financing and recapitalization transaction will close when scheduled or at all.

<PAGE>

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
ability of the Company to complete its planned recapitalization transaction, the
continued   cooperation  of  the  Company's  bank  and  suppliers,   competitive
conditions in the sunglass industry,  the possibility of unanticipated  expenses
and  third-party  claims,  and 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  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,  Stussy EyeGear,  Anarchy Eyewear,  Angel
Eyewear,  Emmanuelle  Khanh Paris Eyewear,  Private Eyes and Tomichi  Studio,  a
women's fashion brand that was introduced in November 1998. Under the Emmanuelle
Khanh Paris  Eyewear and Private Eyes  brands,  the Company also offers lines of
ophthalmic frames.

     During the quarter ended  September 30, 1998,  the Company  terminated  the
license under which it has sold its Ellen Tracy Eyewear line, sold the assets of
its partially owned subsidiary, the kindling company ("Kindling") and terminated
the license under which Kindling sold the Timberline  eyewear brand,  and closed
its London  office.  See Note 11 of Notes to Financial  Statements,  "Results of
Operations" and "Liquidity and Capital Resources."

     The  Company   operates  both  directly  and  through  three   wholly-owned
subsidiaries  and,  until  September  1, 1998,  through one  majority-controlled
subsidiary.  The  Company's  operating  subsidiaries  include:  H.S.C.,  Inc., a
Washington  corporation,  Sungold Eyewear, Inc., a Washington  corporation,  and
Private Eyes Sunglass Corporation, a Washington corporation.


RESULTS OF OPERATIONS

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

                                              Three Months         Nine Months
                                                 Ended                Ended
                                              September 30,       September 30,
                                              -------------       -------------
                                              1998     1997      1998      1997
                                             ------   ------    ------    ------
Net sales ...............................    100.0%   100.0%    100.0%    100.0%
Cost of sales ...........................     40.9     41.3      42.5      40.2
Gross profit ............................     59.1     58.7      57.5      59.8
License income ..........................      1.1      1.0        .9       1.3
Operating expenses:
  Sales and marketing ...................     32.2     45.2      34.7      37.5
  General and administrative ............     17.8     19.7      15.6      13.7
  Shipping and warehousing ..............      4.9      3.1       5.2       3.0
  Research and development ..............      1.8      2.9       1.7       3.1
  Provision for Doubtful Accounts              9.0       .5       3.0        .5
Total operating expenses ................     65.7     71.4      60.1      57.8
Income (loss) from operations ...........     (5.5)   (11.7)     (1.7)      3.3

<PAGE>

Three Months Ended September 30, 1998 
Compared To Three Months Ended September 30, 1997

     Net sales.  Net sales  decreased  from $11.1  million for the quarter ended
September  30, 1997 to $9.1 million for the quarter  ended  September  30, 1998.
This decrease of $2 million (18%) was primarily the result of decreases in sales
of the Company's Ellen Tracy and Timberland products and the Company's inability
to pay for certain purchases of inventory to fill orders.

     Gross  profit.  Gross  profit  decreased  from $6.5 million for the quarter
ended  September  30, 1997 to $5.4 million for the quarter  ended  September 30,
1998. Gross margin percentage was 59.1% in the 1998 quarter compared to 58.7% in
the 1997 quarter.

     License income.  License income  decreased to $98,000 for the quarter ended
September  30, 1998  compared to $115,000 for the quarter  ended  September  30,
1997.  License income represents  royalties  collected on product sold by others
that have been authorized to utilize the Gargoyles name or technology.

     Operating  expenses.  Operating  expenses  decreased  to $6 million for the
quarter  ended  September  30,  1998 from $7.9  million  for the  quarter  ended
September 30, 1997. As a percentage of net sales,  operating  expenses decreased
to 65.7% in the 1998 quarter from 71.4% in the 1997 quarter. Sales and marketing
expenses decreased $2.1 million in the 1998 quarter, as a result of cost cutting
efforts  and reduced  sales  levels.  As a  percentage  of net sales,  sales and
marketing expenses decreased to 32.2% in the 1998 quarter from 45.2% in the 1997
quarter.  General and  administrative  expenses  decreased  $565,000 in the 1998
quarter.  As a  percentage  of net sales,  general and  administrative  expenses
decreased to 17.8% in the 1998 quarter from 19.7% in the 1997 quarter.  Shipping
and warehousing expenses increased $100,000 in the 1998 quarter. As a percentage
of net sales,  shipping and warehousing  expenses  increased to 4.9% in the 1998
quarter  from  3.1% in the  1997  quarter.  Research  and  development  expenses
decreased  $157,000 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 1.8% in the 1998 quarter from 2.9% in the 1997
quarter.  Provision  for doubtful  accounts  increased to $817,273 for the three
month  period ended  September  30, 1998 from $55,356 for the three month period
ended September 30, 1997.  This increase was the result of a $750,000  provision
for the probable  write-off of  receivable  balances  that are no longer  deemed
collectible.  The  decrease  in total  operating  expenses  of $1.9  million  is
primarily  due to  the  reduction  in  operating  expenses  resulting  from  the
Company's  cost-cutting  measures,  reduced  sales levels and the closure of the
London office and disposition of the Timberland Eyewear operations.
<PAGE>

     Income (loss) from operations.  The Company realized a loss from operations
of $499,000 for the quarter  ended  September  30, 1998  compared to a loss from
operations of $1,290,000 for the quarter ended September 30, 1997.

     Interest income  (expense).  Interest  expense was $884,000 for the quarter
ended  September 30, 1998  compared  with  interest  expense of $755,000 for the
quarter  ended  September  30,  1997 as a result of  increased  interest-bearing
borrowings. The Company's outstanding borrowings were $28.8 million at September
30, 1998 compared to $26.7 million at September 30, 1997.

     Other  income  (expense).  The Company  recognized  other  expense of $10.6
million during the three months ended September 30, 1998, including (i) a charge
of $8.6 million related to write down of goodwill,  certain  intangible  assets,
deferred  marketing  costs and other assets  related to the  termination  of the
Ellen Tracy license agreement and related Ellen Tracy Eyewear  business,  (ii) a
charge to  earnings  of $1.4  million  resulting  from the sale of the assets of
Kindling and the  termination  of the Timberland  license  agreement and related
Timberland  Eyewear business,  (iii) a charge of $373,000 in connection with the
closing of the Company's London office, which includes charges for the write-off
of certain start-up expenses of $238,000 and estimated severance and other costs
incurred  in   connection   with  closing  the  office.   See   "Forward-Looking
Statements."

     Income tax provision  (benefit).  The Company's income tax benefit was zero
for the quarter  ended  September  30, 1998 compared to an income tax benefit of
$409,000 for the quarter ended September 30, 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 $12 million or ($1.54) per share for the  quarter  ended  September
30,  1998  compared  to a net loss of $1.6  million  or ($.22) per share for the
quarter ended September 30, 1997.


Nine Months Ended September 30, 1998 
Compared To Nine Months Ended September 30, 1997

     Net sales.  Net sales  decreased to $33.7 million for the nine months ended
September  30, 1998 from $35.1  million for the nine months ended  September 30,
1997. This decrease was primarily the result of decreased sales of the Company's
Gargoyles, Hobie and Timberland products that were partially offset by increased
sales of the Sungold and  Private  Eyes lines which were  acquired in the second
quarter of 1997.

     Gross profit.  Gross profit  decreased to $19.4 million for the nine months
ended  September  30, 1998 from $21 million for the nine months ended  September
30,  1997.  Gross  margin  decreased  to 57.5% in 1998 from  59.8% in 1997.  The
decrease in gross margin in 1998 was  primarily  attributable  to reduced  sales
levels and the liquidation of certain inventories in 1998 at discounted prices.

     License  income.  License income  decreased to $289,000 for the nine months
ended  September  30,  1998  compared  to  $447,000  for the nine  months  ended
September 30, 1997.  The decrease in license  income in 1998 was the result of a
decrease in sales of product by licensees.
<PAGE>

     Operating  expenses.  Operating  expenses,  as a  percentage  of net sales,
increased  to 60.1% in 1998 from  57.8% in 1997.  Sales and  marketing  expenses
decreased  $1.5  million in 1998 as compared  to the same  period in 1997.  As a
percentage of net sales,  sales and marketing expenses decreased to 34.7% in the
1998 period from 37.5% in the comparable 1997 period. General and administrative
expenses  increased  $415,000  million for the nine months ended  September  30,
1998,  primarily as a result of the second quarter 1997 Sungold and Private Eyes
acquisitions.  As a percentage of net sales, general and administrative expenses
increased to 15.6% in 1998 from 13.7% in 1997. Shipping and warehousing expenses
increased  $700,000 in 1998 as compared to the nine months ended  September  30,
1997. As a percentage of net sales,  shipping and warehousing expenses increased
to 5.2% in 1998 from 3.0% in 1997.  Research and development  expenses decreased
$505,000 in the nine months ended  September 30, 1998,  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 1998 from 3.1% in 1997.
Provision for doubtful accounts  increased to $997,545 for the nine month period
ended September 30, 1998 from $163,086 for the nine month period ended September
30,  1997.  This  increase  was the result of a $750,000  provision in the third
quarter of 1998 for the probable  write-off of  receivable  balances that are no
longer  deemed  collectible.

     Income (loss) from operations.  The Company incurred a loss from operations
of $578,000 for the nine months ended September 30, 1998 compared to income from
operations of $1,148,000 for the nine months ended September 30, 1997.

     Interest  income  (expense).  Interest  expense was $2,572,000 for the nine
months ended September 30, 1998 compared with interest expense of $1,261,000 for
the  nine  months   ended   September   30,  1997  as  a  result  of   increased
interest-bearing borrowings.

     Income tax provision  (benefit).  The Company's income tax benefit was zero
for the nine months ended September 30, 1998 compared to an income tax provision
of $15,500 for the nine months ended  September 30, 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 $13.8  million  or  ($1.77)  per share  for the nine  months  ended
September 30, 1998 compared to a net loss of $98,000 or ($.01) per share for the
nine months ended September 30, 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 provided by the Company's operating activities totaled $42,000
for the nine  months  ended  September  30,  1998.  Cash  used in the  Company's
operating  activities  totaled $9.5 million for the nine months ended  September
30, 1997. The Company reduced the cash used in operating activities in the first
nine months of 1998 by $9.4 million compared to the first nine months of 1997 by
(i) reducing the buildup of accounts  receivable by $3.1 million,  (ii) reducing
net  inventories  by $2.9 million in the first nine months of 1998 compared to a
$6.3 million  increase in  inventories  in the first nine months of 1997,  (iii)
reducing  the  effect of  changes in other  assets  and  liabilities,  primarily

<PAGE>

through  a  decrease  in  expenditures  on  prepaid  advertising  costs and (iv)
repaying  $1.5  million in  accounts  payable  and  accrued  expenses in 1998 as
compared to repaying  $52,000 in  accounts  payable and accrued  expenses in the
similar period in 1997. Cash used in the Company's investing activities, to fund
acquisitions of property and equipment,  totaled $100,000 and $1,438,000 for the
nine months  ended  September  30,  1998 and 1997,  respectively.  The  purchase
acquisitions  of Sungold and Private Eyes required  $20.2 million of cash during
the nine months ended September 30, 1997.  Cash used in the Company's  financing
activities  to repay bank debt totaled  $316,000 for the nine month period ended
September  30,  1998.  Cash  provided  by the  Company's  financing  activities,
primarily  proceeds  from bank debt,  total $26.8 million for the same period in
1997. As of September 30, 1998,  the Company had unused  sources of liquidity of
$870,000,  consisting of cash and cash  equivalents  of $588,000 and  borrowings
available under its revolving loan of $282,000.

     In January 1998, the Company restructured its credit agreement (the "Credit
Agreement") with its primary lender.  The amended Credit Agreement  consisted 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  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  by January 4, 1999.  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.

     The Credit  Agreement  was further  amended on March 31, 1998 to reschedule
principal payments and to revise financial  covenants.  The Credit Agreement was
further amended on August 13, 1998 to waive covenant  defaults  through July 31,
1998 and to revise  financial  covenants for periods  after August 1, 1998.  The
Credit Agreement was further amended on September 17, 1998 to bifurcate the term
loan  into a term loan of $13  million  and a term  loan of $3.47  million.  The
Credit  Agreement  was further  amended on November 2, 1998 (i) to increase  the
amount the Company  could  borrow under its  revolving  loan by  increasing  the
advance rate from 50% to 65% on the value of its eligible  inventory and (ii) to
delete the 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.

     On October 22, 1998, the Company entered into an agreement in principal for
a  recapitalization  of  the  Company  with a New  York  investment  bank  which
specializes in transactions  with middle market companies with growth prospects.
The  proposed  transaction  contemplates  the sale by the  Company of equity and
subordinated  debt  securities  and  the  restructure  and  refinancing  of  the
Company's  current senior credit facility.  While the terms of the securities to
be issued remain subject to negotiation,  it is anticipated  that holders of the
Company's  presently  outstanding  common  stock  will hold less than 20% of the
Company's equity, on a fully diluted basis,  after the transaction is completed.
The  transaction  will  be  completed  with  the  continued  cooperation  of the
Company's current lender and is expected to close in early 1999.  Closing of the
transaction is conditioned, however, on a number of factors including completion
of review of the Company's business and operations,  finalizing placement of the
securities,  and the parties agreement on the terms of definitive documentation,
and  there  can  be  no  assurance  that  the  financing  and   recapitalization
transaction will close when scheduled or at all.
<PAGE>

     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 a termination of 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 $1.7
million at September  30, 1998.  The Company also has  negotiated  releases from
certain of its  licensing  agreements.  In September  1998,  the Company and The
Timberland  Company  agreed to terminate the License  Agreement  under which the
Company sold and distributed Timberland Eyewear. As a result of the termination,
the Company was released from $3.4 million  minimum  future  payments  under the
Timberland  license  agreement.  Also in September  1998,  the Company and Ellen
Tracy,  Inc.  agreed to terminate the License  Agreement under which the Company
sells and distributes Ellen Tracy Eyewear.  As a result of the termination,  the
Company was released from $8.8 million minimum future payments under the license
agreement.

     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.  The  Company's   operations  have  been  constrained
significantly  by cash  shortages,  which  have  resulted  in the  reduction  of
inventory  purchases and  impairment  of the  Company's  ability to order a full
inventory of products to fill orders and its ability to make timely  payments of
receivables.  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.   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.


                           PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     On November  22,  1996,  the Company  filed an action in the United  States
District Court for the District of Massachusetts,  under Case No.  996-12344RCL,
against Aearo Corporation, a Delaware corporation,  alleging infringement of the
Company's toric curve lens utility  patent.  On May 19, the Court ruled in favor
of the  Company  and  found  that  product  manufactured  by  Aearo  Corporation
infringes the Company's toric curve patent.  Following the Court's  ruling,  the
only  significant  issues  left for trial  included  the extent of damages to be
awarded to the Company  resulting from Aearo's patent  infringement  and whether
the Company's patent was validly issued. On October 20, 1998 the Company reached
a  settlement  agreement  with  Aearo  Corporation.   Under  the  terms  of  the
settlement,  all claims by and against the parties  were fully  released and the
Company  granted to Aearo  Corporation  a license to  continue  to make and sell
certain infringing product into certain markets in exchange for a one-time, lump
sum  royalty  of $1.2  million,  which was paid by Aearo upon  execution  of the
license agreement.
<PAGE>

     On October 8, 1998, the Company  reached a settlement and full release from
Michele J. Maulden and David B. Maulden in a lawsuit  filled against the Company
in the Superior Court of Washington,  for King County under Case No. 97-2-1877-1
KNT.  Payment  made by the  Company to settle this  dispute did not  materially,
adversely  effect  the  results of the  Company's  operations  or its  financial
position.

     There have been no material changes in other 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

     In July,  the Company  received  notice  from Nasdaq that a Nasdaq  Listing
Qualifications  Panel had  determined to delist the Company's  common stock from
the Nasdaq National Market for failure to meet Nasdaq's listing requirement with
respect to net  tangible  assets.  Delisting  was  effective  as of the close of
business July 13, 1998. The Company's common stock has continued to trade in the
Nasdaq over-the-counter market.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

Exhibit 10.1   Ninth  Amendment  to First  Amended and Restated  Credit 
               Agreement  dated  September  17, 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   Renewal Term Note I dated September 17, 1998, made by Gargoyles, 
               Inc. in favor of U.S. Bank National Association.

Exhibit 10.3   Renewal Term Note II dated September 17, 1998, made by Gargoyles,
               Inc. in favor of U.S. Bank National Association.

Exhibit 10.4   Tenth  Amendment  to First  Amended and  Restated  Credit 
               Agreement  dated  November 2, 1998,  by and between U.S.  Bank
               National  Association,  successor  by merger  to U.S.  Bank of
               Washington, National Association, and Gargoyles, Inc.

Exhibit 10.5   Letter  Agreement dated September 8, 1998,  between Ellen Tracy,
               Inc.  and   Gargoyles,   Inc.,   on  behalf  of  itself  and  its
               wholly-owned  subsidiary,  Gargoyles Acquisition  Corporation II,
               now known as Private Eyes Sunglass Corporation.

Exhibit 10.6   Guaranty dated September 8, 1998, made by Gargoyles, Inc. in
               favor of Ellen Tracy, Inc.

Exhibit 10.7   Termination and Release dated September 15, 1998, by and among 
               The Timberland Company, Gargoyles, Inc. and the kindling company.

Exhibit 10.8   License Agreement dated October 20, 1998, between Gargoyles, Inc.
               and Aearo Company.

Exhibit 27.1   Financial Data Schedule.

(b) REPORTS ON FORM 8-K

     Form 8-K with  respect to the sale of  substantially  all the assets of the
Company's subsidiary, the kindling company, and the termination of the Company's
license with The  Timberland  Company was filed with the Securities and Exchange
Commission on September 30, 1998.

     Form 8-K with respect to the Company reaching an agreement in principal for
a  recapitalization  of the Company was filed with the  Securities  and Exchange
Commission on November 5, 1998.

<PAGE>

                                   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)

November 13, 1998                  /s/ Leo Rosenberger
                                   -------------------

                                   Leo Rosenberger
                                   Chief Executive Officer, Chief
                                   Financial Officer and Treasurer

<PAGE>


                                  EXHIBIT INDEX

EXHIBIT
NUMBER         EXHIBIT DESCRIPTION

Exhibit 10.1   Ninth  Amendment  to First  Amended and Restated  Credit 
               Agreement  dated  September  17, 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   Renewal Term Note I dated September 17, 1998, made by Gargoyles, 
               Inc. in favor of U.S. Bank National Association.

Exhibit 10.3   Renewal Term Note II dated September 17, 1998, made by Gargoyles,
               Inc. in favor of U.S. Bank National Association.

Exhibit 10.4   Tenth  Amendment  to First  Amended and  Restated  Credit 
               Agreement  dated  November 2, 1998,  by and between U.S.  Bank
               National  Association,  successor  by merger  to U.S.  Bank of
               Washington, National Association, and Gargoyles, Inc.

Exhibit 10.5   Letter  Agreement dated September 8, 1998,  between Ellen Tracy,
               Inc.  and   Gargoyles,   Inc.,   on  behalf  of  itself  and  its
               wholly-owned  subsidiary,  Gargoyles Acquisition  Corporation II,
               now known as Private Eyes Sunglass Corporation.

Exhibit 10.6   Guaranty dated September 8, 1998, made by Gargoyles, Inc. in
               favor of Ellen Tracy, Inc.

Exhibit 10.7   Termination and Release dated September 15, 1998, by and among 
               The Timberland Company, Gargoyles, Inc. and the kindling company.

Exhibit 10.8   License Agreement dated October 20, 1998, between Gargoyles, Inc.
               and Aearo Company.

Exhibit 27.1   Financial Data Schedule.
[{"type": "10-Q", "sequence": "1", "description": "QUARTERLY REPORT", "secsgml_size_bytes": 63832}]
{"company-data": {"conformed-name": "GARGOYLES INC", "cik": "0001016278", "assigned-sic": "3851", "irs-number": "911247269", "state-of-incorporation": "WA", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "10-Q", "act": "34", "file-number": "000-21335", "film-number": "98749418"}, "business-address": {"street1": "5866 SOUTH 194TH STREET", "city": "KENT", "state": "WA", "zip": "98032", "phone": "4259213600"}, "mail-address": {"street1": "5866 SOUTH 194TH STREET", "city": "KENT", "state": "WA", "zip": "98032"}}
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 September 30, 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
                                 (253) 796-2752
   (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,  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.
GARGOYLES, INC.
                               INDEX TO FORM 10-Q

                                                                        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
          Condition and Results of Operations ..........................     9

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

                             PART II - OTHER INFORMATION

Item 1: Legal Proceedings ................................................  14

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 ................................................  15

Item 6: Exhibits and Reports on Form 8-K .................................  15

* Omitted as not applicable
PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                                 GARGOYLES, INC.
                           CONSOLIDATED BALANCE SHEETS

                                                    SEPTEMBER 30,   DECEMBER 31,
                                                        1998           1997
                                                    ------------   ------------
                                                     (UNAUDITED)
ASSETS
Current assets:
  Cash and cash equivalents .....................  $    588,635   $    892,176
  Trade receivables, net ........................     6,738,925      8,540,120
  Inventories, net ..............................     8,827,807     13,057,024
  Other current assets and prepaid expenses .....     2,132,148      1,792,124
                                                   ------------   ------------
Total current assets ............................    18,287,515     24,281,444
Property and equipment, net .....................     1,848,374      2,441,133
Intangibles, net ................................    12,448,458     21,232,817
Other assets ....................................       699,796        671,411
                                                   ------------   ------------
Total assets ....................................  $ 33,284,143   $ 48,626,805
                                                   ============    ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable ..............................  $  8,376,251   $  6,487,131
  Accrued expenses and other current liabilities .    2,350,664      6,402,287
  Current portion of long-term debt .............    28,844,095             --
                                                   ------------   ------------
Total current liabilities .......................    39,571,010     12,889,418

Long-term debt, net of current portion ..........            --     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 ...........................   (32,919,467)   (19,121,995)
  Cumulative translation adjustment .............        58,319        (12,954)
                                                   ------------   ------------
Total shareholders' equity ......................    (6,286,866)     6,576,833
                                                   ------------   ------------
Total liabilities and shareholders' equity ......  $ 33,284,143   $ 48,626,805
                                                   ============   ============

         See accompanying notes to the Consolidated Financial Statements
GARGOYLES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

                                                THREE MONTHS ENDED SEPTEMBER 30,  NINE MONTHS ENDED SEPTEMBER 30,
                                                --------------------------------  -------------------------------

                                                          1998         1997            1998            1997
                                                     ------------  ------------    ------------    ------------
Net sales .........................................  $  9,062,934  $ 11,067,507    $ 33,717,194    $ 35,132,072
Cost of sales .....................................     3,702,757     4,570,383      14,315,760      14,112,870
                                                     ------------  ------------    ------------    ------------
Gross profit ......................................     5,360,177     6,497,124      19,401,434      21,019,202
License income ....................................        98,452       115,000         289,155         446,736
                                                     ------------  ------------    ------------    ------------
                                                        5,458,629     6,612,124      19,690,589      21,465,938
                                                     ------------  ------------    ------------    ------------
Operating expenses:
    Sales and marketing ...........................     2,921,467     5,005,848      11,698,157      13,191,886
    General and administrative ....................     1,614,982     2,179,994       5,245,497       4,830,085
    Shipping and warehousing ......................       443,200       343,014       1,750,509       1,050,713
    Research and development ......................       160,687       318,149         576,901       1,082,305
    Provision for Doubtful Accounts ...............       817,273        55,356         997,545         163,086
                                                    ------------    ------------    ------------    ------------
Total operating expenses ..........................     5,957,608     7,902,361      20,268,608      20,318,075
                                                    ------------    ------------    ------------    ------------
Income (loss) from operations .....................      (498,979)   (1,290,237)       (578,018)      1,147,863
Interest income (expense) .........................      (883,935)     (755,021)     (2,572,277)     (1,261,290)
Other income (expense) ............................   (10,660,271)  (10,647,010)
                                                     ------------  ------------    ------------    ------------
Income (loss) before income taxes .................   (12,043,185)   (2,045,258)    (13,797,305)       (113,427)
Income tax provision (benefit) ....................           --        409,000            --            15,500
                                                     ------------  ------------    ------------    ------------
Net income (loss) .................................  $(12,043,185) $ (1,636,258)   $(13,797,305)   $    (97,927)
                                                     ============  ============    ============    ============
Basic and diluted net income (loss) per share .....  $      (1.54) $      (0.22)   $      (1.77)   $      (0.01)
                                                     ============  ============    ============    ============
See accompanying notes to the Consolidated Financial Statements
GARGOYLES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

                                                              NINE MONTHS ENDED SEPTEMBER 30,
                                                              -------------------------------
                                                           
                                                               1998                      1997
                                                           ------------              ------------
OPERATING ACTIVITIES
Net income (loss) ........................................ $(13,797,305)              $    (97,927)
 Adjustments to reconcile net income (loss) to net cash
   used in operating activities:
   Depreciation ..........................................      600,259                    782,200
   Amortization ..........................................    1,061,735                    528,566
   Deferred license income ...............................           --                    186,000
   Noncash restructuring expenses ........................    8,433,228
   Loss on disposition of The kindling Co. ...............    1,432,048

   Changes in assets and liabilities net of effects from
     business  acquisitions and dispositions:
        Accounts receivable ..............................    1,534,926
        Inventories ......................................    2,896,867                 (6,378,963)
        Other current assets and other assets ............     (662,206)                (2,854,591)
        Accounts payable, accrued expenses and other
          current liabilities ............................   (1,457,446)                   (52,293)
                                                           ------------               ------------
Net cash provided by (used in) operating activities ......       42,106                 (9,489,711)
                                                           ------------               ------------
INVESTING ACTIVITIES
Acquisition of property and equipment ....................     (100,461)                (1,437,844)
Purchase of Sungold ......................................           --                (11,892,871)
Purchase of Private Eyes .................................           --                 (8,362,158)

                                                           ------------               ------------
Net cash used in investing activities ....................     (100,461)               (21,692,873)

FINANCING ACTIVITIES
Proceeds from stock issuance .............................           --                     68,206
Net proceeds (repayment) from revolving line of credit ...     (316,459)                12,233,997
Net proceeds from issuance of long-term debt .............   14,620,000
Principal payments on long-term debt .....................     (121,667)
                                                           ------------               ------------
Net cash provided by (used in) financing activities ......     (316,459)                26,800,536
                                                           ------------               ------------
Effect of foreign currency translation on cash ...........       71,273                         --
                                                           ------------               ------------
Net decrease in cash .....................................     (303,541)                (4,382,048)
Cash and cash equivalents, beginning of period ...........      892,176                  4,382,048
                                                           ------------               ------------
Cash and cash equivalents, end of period ................. $    588,635               $         --
                                                           ============               ============
See accompanying notes to the Consolidated Financial Statements
GARGOYLES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 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 September 30, 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 periods ended September 30 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,
                                                      1998           1997
                                                 ------------    ------------
Materials ................................       $  4,582,660    $  7,119,328
Finished goods ..............................       4,722,715       7,909,147
   Reserves for excess, slow-moving and
      obsolete inventories ..................        (477,568)     (1,971,451)
                                                 ------------    ------------
           Inventories, net .................    $  8,827,807    $ 13,057,024
                                                 ============    ============

3. COMMITMENTS AND CONTINGENCIES

Lease Agreements

     In 1998,  the Company  negotiated  releases  from certain of its  operating
leases thereby decreasing its minimum future lease payments under  noncancelable
operating leases. The Company recognized  $260,000 of expense in connection with
the  termination  of these leases.  These expenses were included in other income
(expense) in the  consolidated  statements of  operations.  Minimum future lease
payments under noncancelable operating leases are as follows:

                                                 September 30,      December 31,
                                                      1998             1997
                                                   -----------     ------------
1998 .........................................     $   164,348       $1,381,397
1999 .........................................         668,923        1,304,276
2000 .........................................         445,209        1,101,755
2001 .........................................         283,277          949,370
2002 .........................................          94,572          700,000
Thereafter ...................................           7,881        3,500,000
                                                   -----------       ----------
                                                   $ 1,664,210       $8,936,798
                                                   ===========       ==========
License Agreements

     In 1998 the  Company  negotiated  releases  from  certain of its  licensing
agreements.  Effective September 1, 1998, the Company and The Timberland company
agreed to  terminate  the License  Agreement  under  which the Company  sold and
distributed Timberland Eyewear. As a result of the termination,  the Company was
released from $3.4 million minimum future payments under the Timberland  license
agreement.  To terminate  the license,  the Company  paid a  termination  fee of
$255,000 to The Timberland  Company. On September 8, 1998, the Company and Ellen
Tracy,  Inc.  agreed to terminate the License  Agreement under which the Company
sells and distributes Ellen Tracy Eyewear.  As a result of the termination,  the
Company was released from $8.8 million  minimum future  payments under the Ellen
Tracy license  agreement.  Total minimum future payments under remaining license
agreements are as follows:

                                                 September 30,     December 31,
                                                      1998             1997
                                                   -----------     ------------
1998 .........................................     $   414,643       $2,896,322
1999 .........................................       2,088,514        4,551,639
2000 .........................................       2,198,223        5,729,473
2001 .........................................         540,344        2,827,844
2002 and thereafter...........................         533,785        2,828,785
                                                    ----------       ----------
                                                   $ 5,775,509      $18,834,063
                                                   ===========       ==========

4. LITIGATION

     The  Company  settled  two  lawsuits  involving  (i) claims by the  Company
against a third party related to alleged  infringement  of the  Company's  toric
curve  technology for which the Company  received a one-time  paid-up royalty of
$1.2 million and (ii) claims by a former employee  against the Company  alleging
wrongful  termination and  discrimination  under various laws, which the Company
settled  for an amount  which did not  materially  adversely  effect the Company
operations or financial  position.  The Company is also a party to various other
claims,  complaints and legal actions that have arisen in the ordinary course of
business  from time to time.  The Company  believes that the outcome of all such
legal proceedings,  in the aggregate, will not have a material adverse effect on
its financial position or the results of its operations.

5. ALLOWANCE FOR DOUBTFUL ACCOUNTS

     Trade  receivables are shown net of an allowance for doubtful  accounts and
sales returns.  In addition to the normal provision for doubtful  accounts,  the
Company  recognized a $750,000  additional  provision  during the quarter  ended
September  30,  1998.  The  additional  provision  was provided for the probable
write-off of  receivable  balances that are no longer  deemed  collectible.

6. 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, 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.

7. DEBT RESTRUCTURING

     In January 1998, the Company restructured its credit agreement (the "Credit
Agreement") with its primary lender.  The amended Credit Agreement  consisted 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  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  by January 4, 1999.  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.

     The Credit  Agreement  was further  amended on March 31, 1998 to reschedule
principal payments and to revise financial  covenants.  The Credit Agreement was
further amended on August 13, 1998 to waive covenant  defaults  through July 31,
1998 and to revise  financial  covenants for periods  after August 1, 1998.  The
Credit Agreement was further amended on September 17, 1998 to bifurcate the term
loan  into a term loan of $13  million  and a term  loan of $3.47  million.  The
Credit  Agreement  was further  amended on November 2, 1998 (i) to increase  the
amount the Company  could  borrow under its  revolving  loan by  increasing  the
advance rate from 50% to 65% on the value of its eligible  inventory and (ii) to
delete the 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.

8. COMPREHENSIVE INCOME (LOSS)

     In 1997,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting Standards No. 130, "Reporting  Comprehensive Income," which
establishes   display   requirements  of   comprehensive   income  in  financial
statements.  The Company's total  comprehensive  income (loss) for the three and
nine month  periods of 1998 and 1997 was  ($11,988,773)  and  ($1,636,258),  and
($13,726,032) and ($97,927), respectively.

9. EARNINGS PER SHARE

The weighted-average number of common shares used in the calculation of earnings
per share for the three and nine month periods ended September 30, 1998 and 1997
is 7,837,191  and  7,431,523,  and 7,816,450 and  7,601,229,  respectively.  For
purposes of calculating diluted earnings per share for the three and nine months
ended  September  30,  1998 and 1987,  common  stock  equivalents  have not been
included as the effect would be antidilutive or would be immaterial.

10. RECLASSIFICATIONS

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

11. 1997 BUSINESS ACQUISITIONS

Sungold Acquisition

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

The acquisition was accounted for using the purchase method of accounting at the
date of acquisition.  Accordingly, the allocation of the purchase price of $11.7
million  was based on the fair  value of the  assets  acquired  and  liabilities
assumed.  Costs  in  excess  of the  fair  value  of  the  assets  acquired  and
liabilities  assumed are reflected as  intangibles,  a component of which is the
Stussy license  agreement,  which is being  amortized over the remaining term of
the license.
Proforma  information for the nine months ended September 30, 1997, assuming the
Sungold acquisition had occurred at January 1, 1997, is as follows:

Sales .....................   $39,393,259
Gross profit ..............    24,852,943
Net income (loss) .........        46,435
Net income (loss) per share   $      0.01

Private Eyes Acquisition

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 the North American
distributor for Emmanuelle  Khanh Paris Eyewear and also distributes it own line
of prescription frames and eyewear accessories.

The acquisition was accounted for using the purchase method of accounting at the
date of  acquisition.  Accordingly,  the  allocation of the purchase price of $8
million  was based on the fair  value of the  assets  acquired  and  liabilities
assumed.  Costs  in  excess  of the  fair  value  of  the  assets  acquired  and
liabilities assumed were reflected as intangibles.

Proforma  information for the nine months ended September 30, 1997, assuming the
Private Eyes acquisition had occurred at January 1, 1997, is as follows:

Sales .....................   $43,531,324
Gross profit ..............    27,139,488
Net income (loss) .........        22,703
Net income (loss) per share   $      0.00

The  Company's  Ellen Tracy  Eyewear  business was unable to support the minimum
royalty and advertising  obligations under the Ellen Tracy license agreement. On
September  8,  1998,  the  Company  and Ellen  Tracy,  Inc.  mutually  agreed to
terminate  the  license.  As a result of the  license  termination,  the Company
recorded a charge to earnings of $8.6 million consisting of:
Write-down of identifiable intangibles - Ellen Tracy License ..........     $1,040,000
     Impairment of long-lived assets (goodwill) based on the
          expected undiscounted cash flows of the Private Eyes division
          without the Ellen Tracy sales. Ellen Tracy product sales accounted
          for 84% of the total Private Eyes sales in 1997 ..................      7,164,000
     Write-off of deferred marketing costs and estimated sales
          returns and doubtful accounts associated with the termination
          of the Ellen Tracy license .......................................        405,000
                                                                                 ----------
                                                                                 $8,609,000
Timberland Eyewear

     In May 1996,  the Company,  Douglas W. Lauer,  and The  Timberland  Company
formed  the  kindling  company,  a  California   corporation   ("Kindling"),   a
majority-owned  subsidiary of the Company, to develop and distribute  sunglasses
and  ophthalmic  frames  under the  Timberland  brand  name.  Concurrently  with
Kindling's formation, the Company and Kindling, jointly and severally,  acquired
an  exclusive,  world-wide  license  from  The  Timberland  Company  to use  the
Timberland trademark on eyewear. The Company contributed $1.2 million for its 70
percent interest in Kindling.  Kindling launched its Timberland sunglass line in
March 1997 and its Timberland  ophthalmic line in Europe in early 1998. Sales of
Timberland branded products totaled approximately 7.2 percent and 2.1 percent of
the  Company's  sales in 1997 and the first nine  months of 1998,  respectively.
Approximately  4.3  percent  of the  Company's  losses  in  1997  and an  amount
approximately  equal to the Company's  total  operating  loss for the first nine
months of 1998, respectively, were attributable to Kindling's operations.
Effective  September 1, 1998, Kindling sold substantially all of its assets
to Adventure  Optics,  LLC, a limited  liability  company  majority owned by REM
Optical  Company,  Inc. and by The Timberland  Company and Douglas W. Lauer. The
total  purchase  price for the  assets  was  $1,008,000  payable in cash and the
assumption of certain liabilities. The Company received $358,000 of the proceeds
from the sale in  partial  payment of an  intercompany  loan from  Gargoyles  to
Kindling.  As part of the  sale  transaction,  the  license  agreement  with The
Timberland Company was terminated.  $255,000 of the proceeds from the asset sale
were paid to Timberland  as a license  termination  fee. The Company  recorded a
charge to earnings of $1,432,000  as a result of the sale of  Kindling's  assets
and the termination of the Timberland license agreement.

London Office

     In late 1996 the Company  opened a sales and marketing  office in London to
manage its European sales efforts.  The Company's  London office was responsible
for approximately 2.9 percent and 2.4 percent of the Company's sales in 1997 and
the first  nine  months of 1998,  respectively.  A  significant  portion  of the
Company's  European sales were comprised of Timberland  branded products.  Costs
associated with the Company's European  operations totaled $2.4 million and $1.1
million in 1997 and the first nine  months of 1998,  respectively.  The  Company
closed  its  London  office  July 31,  1998.  As a result of the  London  office
closing, the Company recorded a charge to earnings of $373,000 consisting of the
non-cash write-off of start-up costs of $238,000 and severance and other closing
costs.

12. LIQUIDITY

     The Company incurred significant  operating losses in 1997 and for the nine
months  ended  September  30,  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.

     On October 22, 1998, the Company entered into an agreement in principal for
a  recapitalization  of  the  Company  with a New  York  investment  bank  which
specializes in transactions  with middle market companies with growth prospects.
The  proposed  transaction  contemplates  the sale by the  Company of equity and
subordinated  debt  securities  and  the  restructure  and  refinancing  of  the
Company's  current senior credit facility.  While the terms of the securities to
be issued remain subject to negotiation,  it is anticipated  that holders of the
Company's  presently  outstanding  common  stock  will hold less than 20% of the
Company's equity, on a fully diluted basis,  after the transaction is completed.
See  "Forward-Looking  Statements."  The transaction  will be completed with the
continued  cooperation of the Company's  current lender and is expected to close
in early 1999. Closing of the transaction is conditioned,  however,  on a number
of  factors  including  completion  of  review  of the  Company's  business  and
operations, finalizing placement of the securities, and the parties agreement on
the terms of definitive  documentation,  and there can be no assurance  that the
financing and recapitalization transaction will close when scheduled or at all.
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
ability of the Company to complete its planned recapitalization transaction, the
continued   cooperation  of  the  Company's  bank  and  suppliers,   competitive
conditions in the sunglass industry,  the possibility of unanticipated  expenses
and  third-party  claims,  and 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  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,  Stussy EyeGear,  Anarchy Eyewear,  Angel
Eyewear,  Emmanuelle  Khanh Paris Eyewear,  Private Eyes and Tomichi  Studio,  a
women's fashion brand that was introduced in November 1998. Under the Emmanuelle
Khanh Paris  Eyewear and Private Eyes  brands,  the Company also offers lines of
ophthalmic frames.

     During the quarter ended  September 30, 1998,  the Company  terminated  the
license under which it has sold its Ellen Tracy Eyewear line, sold the assets of
its partially owned subsidiary, the kindling company ("Kindling") and terminated
the license under which Kindling sold the Timberline  eyewear brand,  and closed
its London  office.  See Note 11 of Notes to Financial  Statements,  "Results of
Operations" and "Liquidity and Capital Resources."

     The  Company   operates  both  directly  and  through  three   wholly-owned
subsidiaries  and,  until  September  1, 1998,  through one  majority-controlled
subsidiary.  The  Company's  operating  subsidiaries  include:  H.S.C.,  Inc., a
Washington  corporation,  Sungold Eyewear, Inc., a Washington  corporation,  and
Private Eyes Sunglass Corporation, a Washington corporation.

RESULTS OF OPERATIONS

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

                                              Three Months         Nine Months
                                                 Ended                Ended
                                              September 30,       September 30,
                                              -------------       -------------
                                              1998     1997      1998      1997
                                             ------   ------    ------    ------
Net sales ...............................    100.0%   100.0%    100.0%    100.0%
Cost of sales ...........................     40.9     41.3      42.5      40.2
Gross profit ............................     59.1     58.7      57.5      59.8
License income ..........................      1.1      1.0        .9       1.3
Operating expenses:
  Sales and marketing ...................     32.2     45.2      34.7      37.5
  General and administrative ............     17.8     19.7      15.6      13.7
  Shipping and warehousing ..............      4.9      3.1       5.2       3.0
  Research and development ..............      1.8      2.9       1.7       3.1
  Provision for Doubtful Accounts              9.0       .5       3.0        .5
Total operating expenses ................     65.7     71.4      60.1      57.8
Income (loss) from operations ...........     (5.5)   (11.7)     (1.7)      3.3
Three Months Ended September 30, 1998 
Compared To Three Months Ended September 30, 1997

     Net sales.  Net sales  decreased  from $11.1  million for the quarter ended
September  30, 1997 to $9.1 million for the quarter  ended  September  30, 1998.
This decrease of $2 million (18%) was primarily the result of decreases in sales
of the Company's Ellen Tracy and Timberland products and the Company's inability
to pay for certain purchases of inventory to fill orders.

     Gross  profit.  Gross  profit  decreased  from $6.5 million for the quarter
ended  September  30, 1997 to $5.4 million for the quarter  ended  September 30,
1998. Gross margin percentage was 59.1% in the 1998 quarter compared to 58.7% in
the 1997 quarter.

     License income.  License income  decreased to $98,000 for the quarter ended
September  30, 1998  compared to $115,000 for the quarter  ended  September  30,
1997.  License income represents  royalties  collected on product sold by others
that have been authorized to utilize the Gargoyles name or technology.

     Operating  expenses.  Operating  expenses  decreased  to $6 million for the
quarter  ended  September  30,  1998 from $7.9  million  for the  quarter  ended
September 30, 1997. As a percentage of net sales,  operating  expenses decreased
to 65.7% in the 1998 quarter from 71.4% in the 1997 quarter. Sales and marketing
expenses decreased $2.1 million in the 1998 quarter, as a result of cost cutting
efforts  and reduced  sales  levels.  As a  percentage  of net sales,  sales and
marketing expenses decreased to 32.2% in the 1998 quarter from 45.2% in the 1997
quarter.  General and  administrative  expenses  decreased  $565,000 in the 1998
quarter.  As a  percentage  of net sales,  general and  administrative  expenses
decreased to 17.8% in the 1998 quarter from 19.7% in the 1997 quarter.  Shipping
and warehousing expenses increased $100,000 in the 1998 quarter. As a percentage
of net sales,  shipping and warehousing  expenses  increased to 4.9% in the 1998
quarter  from  3.1% in the  1997  quarter.  Research  and  development  expenses
decreased  $157,000 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 1.8% in the 1998 quarter from 2.9% in the 1997
quarter.  Provision  for doubtful  accounts  increased to $817,273 for the three
month  period ended  September  30, 1998 from $55,356 for the three month period
ended September 30, 1997.  This increase was the result of a $750,000  provision
for the probable  write-off of  receivable  balances  that are no longer  deemed
collectible.  The  decrease  in total  operating  expenses  of $1.9  million  is
primarily  due to  the  reduction  in  operating  expenses  resulting  from  the
Company's  cost-cutting  measures,  reduced  sales levels and the closure of the
London office and disposition of the Timberland Eyewear operations.
Income (loss) from operations.  The Company realized a loss from operations
of $499,000 for the quarter  ended  September  30, 1998  compared to a loss from
operations of $1,290,000 for the quarter ended September 30, 1997.

     Interest income  (expense).  Interest  expense was $884,000 for the quarter
ended  September 30, 1998  compared  with  interest  expense of $755,000 for the
quarter  ended  September  30,  1997 as a result of  increased  interest-bearing
borrowings. The Company's outstanding borrowings were $28.8 million at September
30, 1998 compared to $26.7 million at September 30, 1997.

     Other  income  (expense).  The Company  recognized  other  expense of $10.6
million during the three months ended September 30, 1998, including (i) a charge
of $8.6 million related to write down of goodwill,  certain  intangible  assets,
deferred  marketing  costs and other assets  related to the  termination  of the
Ellen Tracy license agreement and related Ellen Tracy Eyewear  business,  (ii) a
charge to  earnings  of $1.4  million  resulting  from the sale of the assets of
Kindling and the  termination  of the Timberland  license  agreement and related
Timberland  Eyewear business,  (iii) a charge of $373,000 in connection with the
closing of the Company's London office, which includes charges for the write-off
of certain start-up expenses of $238,000 and estimated severance and other costs
incurred  in   connection   with  closing  the  office.   See   "Forward-Looking
Statements."

     Income tax provision  (benefit).  The Company's income tax benefit was zero
for the quarter  ended  September  30, 1998 compared to an income tax benefit of
$409,000 for the quarter ended September 30, 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 $12 million or ($1.54) per share for the  quarter  ended  September
30,  1998  compared  to a net loss of $1.6  million  or ($.22) per share for the
quarter ended September 30, 1997.

Nine Months Ended September 30, 1998 
Compared To Nine Months Ended September 30, 1997

     Net sales.  Net sales  decreased to $33.7 million for the nine months ended
September  30, 1998 from $35.1  million for the nine months ended  September 30,
1997. This decrease was primarily the result of decreased sales of the Company's
Gargoyles, Hobie and Timberland products that were partially offset by increased
sales of the Sungold and  Private  Eyes lines which were  acquired in the second
quarter of 1997.

     Gross profit.  Gross profit  decreased to $19.4 million for the nine months
ended  September  30, 1998 from $21 million for the nine months ended  September
30,  1997.  Gross  margin  decreased  to 57.5% in 1998 from  59.8% in 1997.  The
decrease in gross margin in 1998 was  primarily  attributable  to reduced  sales
levels and the liquidation of certain inventories in 1998 at discounted prices.

     License  income.  License income  decreased to $289,000 for the nine months
ended  September  30,  1998  compared  to  $447,000  for the nine  months  ended
September 30, 1997.  The decrease in license  income in 1998 was the result of a
decrease in sales of product by licensees.
Operating  expenses.  Operating  expenses,  as a  percentage  of net sales,
increased  to 60.1% in 1998 from  57.8% in 1997.  Sales and  marketing  expenses
decreased  $1.5  million in 1998 as compared  to the same  period in 1997.  As a
percentage of net sales,  sales and marketing expenses decreased to 34.7% in the
1998 period from 37.5% in the comparable 1997 period. General and administrative
expenses  increased  $415,000  million for the nine months ended  September  30,
1998,  primarily as a result of the second quarter 1997 Sungold and Private Eyes
acquisitions.  As a percentage of net sales, general and administrative expenses
increased to 15.6% in 1998 from 13.7% in 1997. Shipping and warehousing expenses
increased  $700,000 in 1998 as compared to the nine months ended  September  30,
1997. As a percentage of net sales,  shipping and warehousing expenses increased
to 5.2% in 1998 from 3.0% in 1997.  Research and development  expenses decreased
$505,000 in the nine months ended  September 30, 1998,  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 1998 from 3.1% in 1997.
Provision for doubtful accounts  increased to $997,545 for the nine month period
ended September 30, 1998 from $163,086 for the nine month period ended September
30,  1997.  This  increase  was the result of a $750,000  provision in the third
quarter of 1998 for the probable  write-off of  receivable  balances that are no
longer  deemed  collectible.

     Income (loss) from operations.  The Company incurred a loss from operations
of $578,000 for the nine months ended September 30, 1998 compared to income from
operations of $1,148,000 for the nine months ended September 30, 1997.

     Interest  income  (expense).  Interest  expense was $2,572,000 for the nine
months ended September 30, 1998 compared with interest expense of $1,261,000 for
the  nine  months   ended   September   30,  1997  as  a  result  of   increased
interest-bearing borrowings.

     Income tax provision  (benefit).  The Company's income tax benefit was zero
for the nine months ended September 30, 1998 compared to an income tax provision
of $15,500 for the nine months ended  September 30, 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 $13.8  million  or  ($1.77)  per share  for the nine  months  ended
September 30, 1998 compared to a net loss of $98,000 or ($.01) per share for the
nine months ended September 30, 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 provided by the Company's operating activities totaled $42,000
for the nine  months  ended  September  30,  1998.  Cash  used in the  Company's
operating  activities  totaled $9.5 million for the nine months ended  September
30, 1997. The Company reduced the cash used in operating activities in the first
nine months of 1998 by $9.4 million compared to the first nine months of 1997 by
(i) reducing the buildup of accounts  receivable by $3.1 million,  (ii) reducing
net  inventories  by $2.9 million in the first nine months of 1998 compared to a
$6.3 million  increase in  inventories  in the first nine months of 1997,  (iii)
reducing  the  effect of  changes in other  assets  and  liabilities,  primarily
through  a  decrease  in  expenditures  on  prepaid  advertising  costs and (iv)
repaying  $1.5  million in  accounts  payable  and  accrued  expenses in 1998 as
compared to repaying  $52,000 in  accounts  payable and accrued  expenses in the
similar period in 1997. Cash used in the Company's investing activities, to fund
acquisitions of property and equipment,  totaled $100,000 and $1,438,000 for the
nine months  ended  September  30,  1998 and 1997,  respectively.  The  purchase
acquisitions  of Sungold and Private Eyes required  $20.2 million of cash during
the nine months ended September 30, 1997.  Cash used in the Company's  financing
activities  to repay bank debt totaled  $316,000 for the nine month period ended
September  30,  1998.  Cash  provided  by the  Company's  financing  activities,
primarily  proceeds  from bank debt,  total $26.8 million for the same period in
1997. As of September 30, 1998,  the Company had unused  sources of liquidity of
$870,000,  consisting of cash and cash  equivalents  of $588,000 and  borrowings
available under its revolving loan of $282,000.

     In January 1998, the Company restructured its credit agreement (the "Credit
Agreement") with its primary lender.  The amended Credit Agreement  consisted 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  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  by January 4, 1999.  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.

     The Credit  Agreement  was further  amended on March 31, 1998 to reschedule
principal payments and to revise financial  covenants.  The Credit Agreement was
further amended on August 13, 1998 to waive covenant  defaults  through July 31,
1998 and to revise  financial  covenants for periods  after August 1, 1998.  The
Credit Agreement was further amended on September 17, 1998 to bifurcate the term
loan  into a term loan of $13  million  and a term  loan of $3.47  million.  The
Credit  Agreement  was further  amended on November 2, 1998 (i) to increase  the
amount the Company  could  borrow under its  revolving  loan by  increasing  the
advance rate from 50% to 65% on the value of its eligible  inventory and (ii) to
delete the 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.

     On October 22, 1998, the Company entered into an agreement in principal for
a  recapitalization  of  the  Company  with a New  York  investment  bank  which
specializes in transactions  with middle market companies with growth prospects.
The  proposed  transaction  contemplates  the sale by the  Company of equity and
subordinated  debt  securities  and  the  restructure  and  refinancing  of  the
Company's  current senior credit facility.  While the terms of the securities to
be issued remain subject to negotiation,  it is anticipated  that holders of the
Company's  presently  outstanding  common  stock  will hold less than 20% of the
Company's equity, on a fully diluted basis,  after the transaction is completed.
The  transaction  will  be  completed  with  the  continued  cooperation  of the
Company's current lender and is expected to close in early 1999.  Closing of the
transaction is conditioned, however, on a number of factors including completion
of review of the Company's business and operations,  finalizing placement of the
securities,  and the parties agreement on the terms of definitive documentation,
and  there  can  be  no  assurance  that  the  financing  and   recapitalization
transaction will close when scheduled or at all.
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 a termination of 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 $1.7
million at September  30, 1998.  The Company also has  negotiated  releases from
certain of its  licensing  agreements.  In September  1998,  the Company and The
Timberland  Company  agreed to terminate the License  Agreement  under which the
Company sold and distributed Timberland Eyewear. As a result of the termination,
the Company was released from $3.4 million  minimum  future  payments  under the
Timberland  license  agreement.  Also in September  1998,  the Company and Ellen
Tracy,  Inc.  agreed to terminate the License  Agreement under which the Company
sells and distributes Ellen Tracy Eyewear.  As a result of the termination,  the
Company was released from $8.8 million minimum future payments under the license
agreement.

     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.  The  Company's   operations  have  been  constrained
significantly  by cash  shortages,  which  have  resulted  in the  reduction  of
inventory  purchases and  impairment  of the  Company's  ability to order a full
inventory of products to fill orders and its ability to make timely  payments of
receivables.  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.   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.

                           PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     On November  22,  1996,  the Company  filed an action in the United  States
District Court for the District of Massachusetts,  under Case No.  996-12344RCL,
against Aearo Corporation, a Delaware corporation,  alleging infringement of the
Company's toric curve lens utility  patent.  On May 19, the Court ruled in favor
of the  Company  and  found  that  product  manufactured  by  Aearo  Corporation
infringes the Company's toric curve patent.  Following the Court's  ruling,  the
only  significant  issues  left for trial  included  the extent of damages to be
awarded to the Company  resulting from Aearo's patent  infringement  and whether
the Company's patent was validly issued. On October 20, 1998 the Company reached
a  settlement  agreement  with  Aearo  Corporation.   Under  the  terms  of  the
settlement,  all claims by and against the parties  were fully  released and the
Company  granted to Aearo  Corporation  a license to  continue  to make and sell
certain infringing product into certain markets in exchange for a one-time, lump
sum  royalty  of $1.2  million,  which was paid by Aearo upon  execution  of the
license agreement.
On October 8, 1998, the Company  reached a settlement and full release from
Michele J. Maulden and David B. Maulden in a lawsuit  filled against the Company
in the Superior Court of Washington,  for King County under Case No. 97-2-1877-1
KNT.  Payment  made by the  Company to settle this  dispute did not  materially,
adversely  effect  the  results of the  Company's  operations  or its  financial
position.

     There have been no material changes in other 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

     In July,  the Company  received  notice  from Nasdaq that a Nasdaq  Listing
Qualifications  Panel had  determined to delist the Company's  common stock from
the Nasdaq National Market for failure to meet Nasdaq's listing requirement with
respect to net  tangible  assets.  Delisting  was  effective  as of the close of
business July 13, 1998. The Company's common stock has continued to trade in the
Nasdaq over-the-counter market.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

Exhibit 10.1   Ninth  Amendment  to First  Amended and Restated  Credit 
               Agreement  dated  September  17, 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   Renewal Term Note I dated September 17, 1998, made by Gargoyles, 
               Inc. in favor of U.S. Bank National Association.

Exhibit 10.3   Renewal Term Note II dated September 17, 1998, made by Gargoyles,
               Inc. in favor of U.S. Bank National Association.

Exhibit 10.4   Tenth  Amendment  to First  Amended and  Restated  Credit 
               Agreement  dated  November 2, 1998,  by and between U.S.  Bank
               National  Association,  successor  by merger  to U.S.  Bank of
               Washington, National Association, and Gargoyles, Inc.

Exhibit 10.5   Letter  Agreement dated September 8, 1998,  between Ellen Tracy,
               Inc.  and   Gargoyles,   Inc.,   on  behalf  of  itself  and  its
               wholly-owned  subsidiary,  Gargoyles Acquisition  Corporation II,
               now known as Private Eyes Sunglass Corporation.

Exhibit 10.6   Guaranty dated September 8, 1998, made by Gargoyles, Inc. in
               favor of Ellen Tracy, Inc.

Exhibit 10.7   Termination and Release dated September 15, 1998, by and among 
               The Timberland Company, Gargoyles, Inc. and the kindling company.

Exhibit 10.8   License Agreement dated October 20, 1998, between Gargoyles, Inc.
               and Aearo Company.

Exhibit 27.1   Financial Data Schedule.

(b) REPORTS ON FORM 8-K

     Form 8-K with  respect to the sale of  substantially  all the assets of the
Company's subsidiary, the kindling company, and the termination of the Company's
license with The  Timberland  Company was filed with the Securities and Exchange
Commission on September 30, 1998.

     Form 8-K with respect to the Company reaching an agreement in principal for
a  recapitalization  of the Company was filed with the  Securities  and Exchange
Commission on November 5, 1998.
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)

November 13, 1998                  /s/ Leo Rosenberger
                                   -------------------

                                   Leo Rosenberger
                                   Chief Executive Officer, Chief
                                   Financial Officer and Treasurer
EXHIBIT INDEX

EXHIBIT
NUMBER         EXHIBIT DESCRIPTION

Exhibit 10.1   Ninth  Amendment  to First  Amended and Restated  Credit 
               Agreement  dated  September  17, 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   Renewal Term Note I dated September 17, 1998, made by Gargoyles, 
               Inc. in favor of U.S. Bank National Association.

Exhibit 10.3   Renewal Term Note II dated September 17, 1998, made by Gargoyles,
               Inc. in favor of U.S. Bank National Association.

Exhibit 10.4   Tenth  Amendment  to First  Amended and  Restated  Credit 
               Agreement  dated  November 2, 1998,  by and between U.S.  Bank
               National  Association,  successor  by merger  to U.S.  Bank of
               Washington, National Association, and Gargoyles, Inc.

Exhibit 10.5   Letter  Agreement dated September 8, 1998,  between Ellen Tracy,
               Inc.  and   Gargoyles,   Inc.,   on  behalf  of  itself  and  its
               wholly-owned  subsidiary,  Gargoyles Acquisition  Corporation II,
               now known as Private Eyes Sunglass Corporation.

Exhibit 10.6   Guaranty dated September 8, 1998, made by Gargoyles, Inc. in
               favor of Ellen Tracy, Inc.

Exhibit 10.7   Termination and Release dated September 15, 1998, by and among 
               The Timberland Company, Gargoyles, Inc. and the kindling company.

Exhibit 10.8   License Agreement dated October 20, 1998, between Gargoyles, Inc.
               and Aearo Company.

Exhibit 27.1   Financial Data Schedule.