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 June 30, 1999

[ ] 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 June 30, 1999, there were 7,822,191 outstanding shares of the
registrant's common stock, no par value, which is the only class of common
stock of the registrant, and 10,000,000 outstanding shares of the registrant's
Series A preferred stock, which is the only series of preferred stock of the
registrant. Each share of preferred stock is convertible into 3.1600342 shares
of common stock, and each share of preferred stock is entitled to 3.1600342
votes.

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 ....................... 7

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

PART II - OTHER INFORMATION

Item 1: Legal Proceedings ......................................... 9

Item 2: Changes in Securities and Use of Proceeds ................. 9

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

Item 4: Submission of Matters to a Vote of Security Holders ....... 10

Item 5: Other Information ......................................... *

Item 6: Exhibits and Reports on Form 8-K .......................... 10

* Omitted as not applicable

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GARGOYLES, INC.
CONSOLIDATED BALANCE SHEETS

JUNE 30, DECEMBER 31,
1999 1998
----------- -------------
(UNAUDITED)

ASSETS
Current assets:
Cash and cash equivalents $ 378,183 $ 194,314
Trade receivables, net 5,480,969 2,251,226
Inventories, net 6,790,939 8,558,276
Other current assets and prepaid expenses 1,475,381 2,031,261
------------ ------------
Total current assets 14,125,472 13,035,077
Property and equipment, net 1,232,530 1,510,333
Intangibles, net 12,726,480 13,004,935
Other assets 271,659 457,599
------------ ------------
Total assets $28,356,141 $28,007,943
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,059,017 $ 5,923,196
Accrued expenses and other current
liabilities 5,039,700 7,130,212
Current portion of long-term debt 2,437,902 28,526,379
------------ ------------
Total current liabilities 11,536,619 41,579,787

Long-term debt, net of current portion 19,500,000 --

Deferred license income and other 568,708 600,000

Commitments and contingencies

SHAREHOLDERS' EQUITY:
Preferred stock, no par value, authorized
shares -- 10,000,000, issued and outstanding
-- 10,000,000 and none, respectively
Liquidation value $1.00 per share -- 9,700,000 --
Common stock, no par value, authorized
shares 40,000,000, issued and outstanding
-- 7,822,191 and 7,822,191, respectively 26,529,282 26,529,282
Accumulated deficit (39,478,467) (40,735,481)
Cumulative translation adjustment -- 34,356
------------ ------------
Total shareholders' equity (3,249,185) (14,171,843)
------------ ------------

Total liabilities and shareholders' equity $28,356,141 $28,007,943
============ ============

See accompanying notes to the Consolidated Financial Statements

GARGOYLES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------

Net sales $10,063,484 $13,175,741 $19,411,495 $24,654,260
Cost of sales 4,086,643 5,499,125 8,045,801 10,613,003
------------ ------------ ------------ ------------
Gross profit 5,976,841 7,676,616 11,365,694 14,041,257
License income 149,035 190,703 331,268 190,703
------------ ------------ ------------ ------------
6,125,876 7,867,319 11,696,962 14,231,960
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing 2,348,882 4,572,778 4,884,882 9,192,904
General and administrative 1,393,432 1,838,645 2,769,543 3,630,515
Shipping and warehousing 527,865 672,792 1,079,261 1,307,309
Provision for doubtful accounts 125,016 114,275 213,288 180,272
------------ ------------ ------------ ------------
Total operating expenses 4,395,195 7,198,489 8,946,973 14,311,000
------------ ------------ ------------ ------------
Income (loss) from operations 1,730,681 668,830 2,749,989 (79,040)
Interest income (expense) (636,616) (880,940) (1,424,266) (1,675,082)
------------ ------------ ------------ ------------
Income (loss) before income taxes 1,094,065 (212,110) 1,325,723 (1,754,122)
Income tax provision -- -- -- --
------------ ------------ ------------ ------------
Net income (loss) $ 1,094,065 $ (212,110) $ 1,325,723 $(1,754,122)
============ ============ ============ ============
Basic net income (loss) per share $ .13 $ (.03) $ .16 $ (.22)
============ ============ ============ ============
Diluted net income (loss) per share $ .06 $ (.03) $ .10 $ (.22)
============ ============ ============ ============

See accompanying notes to the Consolidated Financial Statements

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

SIX MONTHS ENDED JUNE 30,
----------------------------------
1999 1998
------------ -------------

OPERATING ACTIVITIES
Net income (loss) $ 1,325,723 $(1,754,122)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation 338,858 426,593
Amortization 438,495 722,393
Deferred license income (100,000) --

Changes in assets and liabilities net of effects from
business acquisitions:
Accounts receivable (3,154,743) (2,149,736)
Inventories 1,599,120 1,657,588
Other current assets and other assets 298,690 (771,399)
Accounts payable, accrued expenses and other
current liabilities (3,871,170) (1,033,612)
------------ ------------
Net cash used in operating activities (3,125,027) (2,902,295)
------------ ------------
INVESTING ACTIVITIES
Acquisition of property and equipment (68,271) (70,013)
------------ ------------
Net cash used in investing activities (68,271) (70,013)
------------ ------------
FINANCING ACTIVITIES
Net proceeds from revolving credit facility 3,411,523 2,894,958
------------ ------------
Net cash provided by financing activities 3,411,523 2,894,958
------------ ------------
Effect of foreign currency translation on cash (34,356) (16,861)
------------ ------------
Net decrease in cash 183,869 (94,211)
Cash and cash equivalents, beginning of period 194,314 892,176
------------ ------------
Cash and cash equivalents, end of period $ 378,183 $ 797,965
============ ============

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Preferred stock issued in exchange for a decrease in debt $10,000,000 $ --
Common stock issued for other than cash $ -- $ 862,500
Common stock redemption $ -- $ 45,000

See accompanying notes to the Consolidated Financial Statements

GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(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 June 30, 1999 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 1998 Annual Report on Form 10-K/A, Amendment No. 2, 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 June 30, 1999 are not
necessarily indicative of the results that may be expected for the entire year.

2. INVENTORIES

Inventories consist of the following:

June 30, December 31,
1999 1998
------------ ------------

Materials $ 3,655,747 $ 4,204,151
Finished goods 3,799,391 4,934,896
Reserves for excess, slow-moving
and obsolete inventories (664,199) (580,771)
------------ ------------
Inventories, net $ 6,790,939 $ 8,558,276
============ ============

3. INCOME TAXES

The Company recorded no income tax benefit relating to the net loss for the
three-month and six-month periods ended June 30, 1998 since a future benefit
was not assured. In 1999 the Company utilized its net operating losses to
eliminate any provision for income taxes for the three and six months ended
June 30, 1999.

4. REFINANCING

1999 $ 100,000
2000 900,000
2001 1,500,000
2002 2,000,000
2003 2,000,000
2004 2,000,000
2005 2,000,000
------------
$ 9,500,000
============

Substantially all the assets of the Company are pledged as collateral for
the repayment of borrowings under the credit agreement. The credit agreement
also prohibits the Company from paying dividends to its common shareholders.

In exchange for $10 million of debt, the Company issued 10 million shares
of Gargoyles, Inc. Series A Preferred Stock to U.S. Bank. The bank's Series A
Preferred Stock is immediately convertible into 31,600,342 shares of Gargoyles,
Inc. Common Stock, or 79% of the authorized capital of the Company on a fully-
diluted basis. U.S. Bank's affiliate, U.S. Bankcorp, currently owns 400,000
shares of Gargoyles, Inc. common stock, or 1% of the authorized capital of the
Company, giving U.S. Bank and its affiliate beneficial ownership, in the
aggregate, of 80% of the authorized capital of Gargoyles on a fully-diluted
basis. The Series A Preferred Stock annually accrues a cumulative dividend
equal to the U.S. Bank reference rate plus 75 basis points.

After the refinancing and as of June 30, 1999, the Company had unused
sources of liquidity of $6.5 million, consisting of cash and cash equivalents
of $378,000 and borrowings available under its revolving loan of $6.1 million.

5. EARNINGS PER SHARE

The calculation of basic earnings per share is based on net income less
dividend requirements divided by weighted average common shares. The weighted-
average number of common shares used in the calculation of basic earnings per
share for the three and six month periods ended June 30, 1999 and 1998 is
7,822,191 and 7,837,191, and 7,822,191 and 7,806,079, respectively. The
calculation of diluted income per common share assumes the dilutive issuance of
convertible Series A Preferred Stock resulting in an increase in weighted
average common shares and an adjustment in income available for common
shareholders due to reduced dividend requirements. For purposes of calculating
diluted earnings per share, stock options have not been included as their
effect would be antidilutive. The weighted-average number of common shares
used in the calculation of diluted earnings per share for the three and six
month periods ended June 30, 1999 and 1998 is 18,355,638 and 7,837,191, and
13,088,915 and 7,806,079, respectively.

6. RECLASSIFICATIONS

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

7. LITIGATION

On November 18, December 4 and December 9, 1998, following a periodic
state tax audit, the State of Washington Department of Revenue assessed the
Company, in the aggregate, $475,830 plus interest in business and occupation
taxes and use taxes allegedly due and payable related to the Company's
operations during various periods between January 1, 1993 and June 30, 1997.
At issue in this matter is the Company's status as a "manufacturer" or
"wholesaler" as such terms are defined by the state of Washington's business
and occupation and use tax statutes and the percentage of business the Company
does in the state of Washington. The Company has retained counsel in this
matter and intends to appeal and to vigorously defend the Department's
assessment.

On May 11, 1998, Morris Rosenbloom & Co., Inc., filed an action against
the company in the Supreme Court of the State of New York for Wayne County,
under Index No. 44010. In the lawsuit, plaintiff alleges breach of contract
due to the Company's failure to accept a return of sunglasses under the terms
of a Repurchase Agreement between Morris Rosenbloom and the Company. Plaintiff
claims damages from the Company in excess of $500,000. The Company has
retained counsel to represent it in this matter and intends to defend
vigorously the plaintiff's claims.

The Company believes that the ultimate resolution of these matters will
not have a material adverse effect on its results of operations or financial
position.

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

FORWARD-LOOKING STATEMENTS

Certain statements within this report constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or industry results, to differ materially from
the anticipated results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, without limitation, the
factors discussed in the Company's Annual Report on Form 10-K/A, Amendment No.
2, 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, Tomichi Studio and Private Eyes.

The Company operates both directly and through three wholly owned
subsidiaries: H.S.C., Inc., a Washington corporation, Sungold Eyewear, Inc., a
Washington corporation, and Private Eyes Sunglass Corporation, also 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 Six Months
Ended Ended
June 30, June 30,
----------------- ----------------
1999 1998 1999 1998
------- ------ ------ ------

Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 40.6 41.7 41.4 43.0
------ ------ ------ ------
Gross profit 59.4 58.3 58.6 57.0
License income 1.5 1.4 1.7 .8
Operating expenses:
Sales and marketing 23.3 34.7 25.2 37.3
General and administrative 13.8 14.0 14.3 14.7
Shipping and warehousing 5.2 5.1 5.6 5.3
Provision for doubtful accounts 1.2 .9 1.1 .7
------ ------ ------ ------
Total operating expenses 43.7 54.6 46.1 58.0
------ ------ ------ ------
Income (loss) from operations 17.2 5.1 14.2 (0.3)
==== === ==== =====

THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998

NET SALES. Net sales decreased from $13.2 million for the quarter ended
June 30, 1998 to $10.1 million for the quarter ended June 30, 1998. This
decrease was primarily due to the disposition of various unprofitable
businesses during 1998, which included the sale of the Company's Timberland
Eyewear division, the termination of the Ellen Tracy License Agreement and the
closing of the Company's London office and to the Company's continuing focus on
profitable sales practices.

GROSS PROFIT. Gross profit decreased from $7.7 million for the quarter
ended June 30, 1998 to $6 million for the quarter ended June 30, 1999. The
decrease in gross profit in 1999 as compared to 1998 was due primarily to
reduced sales. As a percentage of net sales, gross profit increased to 59.4%
in the 1999 quarter from 58.3% in the 1998 quarter, primarily due to reduced
sales of excess inventory in 1999.

LICENSE INCOME. License income decreased to $149,000 for the quarter
ended June 30, 1999 compared to $191,000 for the quarter ended June 30, 1998.
License income in 1999 was the result of sales of product by a licensee and
amortization of license income over a 3-year period.

OPERATING EXPENSES. Operating expenses decreased to $4.4 million for the
quarter ended June 30, 1999 from $7.2 million for the quarter ended June 30,
1998. As a percentage of net sales, operating expenses decreased to 43.7% in
the 1999 quarter from 54.6% in the 1998 quarter. Sales and marketing expenses
decreased $2.2 million in the 1999 quarter, primarily as a result of the
disposition of various unprofitable businesses and cost reduction efforts. As
a percentage of net sales, sales and marketing expenses decreased to 23.3% in
the 1999 quarter from 34.7% in the 1998 quarter. General and administrative
expenses decreased $445,000 in the 1999 quarter. As a percentage of net sales,
general and administrative expenses decreased to 13.8% in the 1999 quarter from
14.0% in the 1998 quarter. Shipping and warehousing expenses decreased $145,000
in the 1999 quarter. As a percentage of net sales, shipping and warehousing
expenses increased to 5.2% in the 1999 quarter from 5.1% in the 1998 quarter.
Provision for doubtful accounts increased $11,000 in the 1999 quarter. As a
percentage of net sales, provision for doubtful accounts increased to 1.2% in
the 1999 quarter from .9% in the 1998 quarter. The decrease in total operating
expenses of $2.8 million is primarily the result of the disposition of various
unprofitable businesses and the Company's cost-cutting measures.

INCOME (LOSS) FROM OPERATIONS. The Company generated income from
operations of $1.7 million for the quarter ended June 30, 1999 compared to
income from operations of $669,000 for the quarter ended June 30, 1998. As a
percentage of net sales, income from operations increased to 17.2% in the 1999
quarter from 5.1% in the comparable 1998 period.

INTEREST INCOME (EXPENSE). Interest expense was $637,000 for the quarter
ended June 30, 1999 compared with interest expense of $881,000 for the quarter
ended June 30, 1998. The Company's outstanding borrowings were $21.9 million
at June 30, 1999 compared to $32.1 million at June 30, 1998.

INCOME TAX PROVISION (BENEFIT). The Company's income tax benefit was zero
for quarters ended June 30, 1999 and June 30, 1998. In 1999 the Company
utilized its net operating losses to eliminate any provision for income taxes,
and in 1998 an income tax benefit was not recorded since a future benefit was
not assured.

NET INCOME (LOSS). As a result of the items discussed above, the Company's
net income was $1.1 million or $.06 per diluted common share for the quarter
ended June 30, 1999 compared to a net loss of $212,000 or ($.03) per common
share for the quarter ended June 30, 1998.

SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998

NET SALES. Net sales decreased to $19.4 million for the six months ended
June 30, 1999 from $24.6 million for the six months ended June 30, 1998. This
decrease was primarily due to the disposition of various unprofitable
businesses during 1998, which included the sale of the Company's Timberland
Eyewear division, the termination of the Ellen Tracy License Agreement and the
closing of the Company's London office and to the Company's continuing focus on
profitable sales practices.

GROSS PROFIT. Gross profit decreased to $11.4 million for the six months
ended June 30, 1999 from $14 million for the six months ended June 30, 1998.
The decrease in gross profit in 1999 as compared to 1998 was due primarily to
reduced sales. As a percentage of net sales, gross profit increased to 58.6%
in 1999 from 57.0% in 1998, primarily due to reduced sales of excess inventory
in 1999.

LICENSE INCOME. License income increased to $331,000 for the six months
ended June 30, 1999 compared to $191,000 for the six months ended June 30,
1998. License income in 1999 was the result of sales of product by a licensee
and amortization of license income over a 3-year period.

OPERATING EXPENSES. Operating expenses decreased to $8.9 million for the
six months ended June 30, 1999 from $14.3 million for the six months ended June
30, 1998. As a percentage of net sales, operating expenses decreased to 46.1%
in 1999 from 58% in 1998. Sales and marketing expenses decreased $4.3 million
in 1999 as compared to the same period in 1998. As a percentage of net sales,
sales and marketing expenses decreased to 25.2% in the 1999 period from 37.3%
in the comparable 1998 period. General and administrative expenses decreased
$861,000 for the six months ended June 30, 1999, primarily as a result of the
disposition of various unprofitable businesses and the Company's cost cutting
measures. As a percentage of net sales, general and administrative expenses
decreased to 14.3% in 1999 from 14.7% in 1998. Shipping and warehousing
expenses decreased $228,000 in 1999 as compared to the six months ended June
30, 1998. As a percentage of net sales, shipping and warehousing expenses
increased to 5.6% in 1999 from 5.3% in 1998. The decrease in total operating
expenses of $5.4 million is primarily the result of the disposition of various
unprofitable businesses and the Company's cost-cutting measures.

INCOME (LOSS) FROM OPERATIONS. The Company generated income from
operations of $2.7 million for the six months ended June 30, 1999 compared to a
loss from operations of $79,000 for the six months ended June 30, 1998.

INTEREST INCOME (EXPENSE). Interest expense was $1.4 million for the six
months ended June 30, 1999 compared with interest expense of $1.7 million for
the six months ended June 30, 1998.

INCOME TAX PROVISION (BENEFIT). The Company's income tax benefit was zero
for the six months ended June 30, 1999 and for the six months ended June 30,
1998. In 1999 the Company utilized its net operating losses to eliminate any
provision for income taxes, and in 1998 an income tax benefit was not recorded
since a future benefit was not assured.

NET INCOME (LOSS). As a result of the items discussed above, the Company's
net income was $1.3 million or $.10 per diluted common share for the six months
ended June 30, 1999 compared to a net loss of $1.7 million or ($.22) per
common share for the six months ended June 30, 1998.

LIQUIDITY AND CAPITAL RESOURCES

Historically, the Company has relied primarily on cash from operations,
borrowings and its initial public offering of common stock to finance its
operations. Cash used in the Company's operating activities totaled $3.1
million and $2.9 million for the six months ended June 30, 1999 and 1998,
respectively. The Company's cash used in operating activities increased in the
first six months of 1999 by $223,000 compared to the same period in 1998 due
primarily to (i) an increase in the early season buildup of accounts receivable
by $3.1 million, (ii) a decrease in net inventories by $1.6 million in the
first six months of 1999 compared to a $1.7 million decrease in inventories in
the same period of 1998 and (iii) net payments to vendors on accounts payable
and other payments in 1999 of $3.8 million compared to $1 million in the
comparable 1998 period. Cash used in the Company's investing activities, to
fund acquisitions of property and equipment, totaled $68,000 and $70,000 for
the six months ended June 30, 1999 and 1998, respectively. Cash provided by the
Company's financing activities, primarily proceeds from bank debt, totaled $3.4
million and $2.9 million for the six months ended June 30, 1999 and 1998,
respectively. As of June 30, 1999, the Company had unused sources of liquidity
of $6.5 million, consisting of cash and cash equivalents of $378,000 and
borrowings available under its revolving loan of $6.1 million.

On June 1, 1999, Gargoyles completed a transaction with its lender, U.S.
Bank National Association, for the restructure of its credit facility with the
bank and a recapitalization of the company. As a result of the refinancing,
the company's indebtedness to U.S. Bank was decreased by $10 million, and the
balance of the loans were restructured into $19.5 million of term loans with
maturity dates of June 1, 2005, and a commitment for a $9 million revolving
loan. No principal payments are due under $3 million of the term loans until
their maturity date; principal payments under $7.5 million of the term loans
are based on a percentage of excess cash as defined in the credit agreement;
and annual principal payments under the remaining $9.5 million term loan are
$100,000, $900,000 and $1.5 million in years one, two and three of the loan and
are $2 million per year for the balance of the loan term. Substantially all
the assets of the Company are pledged as collateral for the repayment of
borrowings under the credit agreement. The credit agreement also prohibits the
Company from paying dividends to its common shareholders.

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.

THE YEAR 2000

As the Year 2000 approaches, there are uncertainties concerning whether
computer systems and electronic equipment with date functions will properly
recognize date-sensitive information when the year changes to 2000. Systems
that do not properly recognize such information could generate erroneous data
or fail. Due to the Company's reliance on its management information systems,
failure of these systems for any reasons, including Year 2000 noncompliance,
could affect the Company's operations. Management believes, however, that the
Year 2000 does not pose a significant operational problem for the Company.

The Company has established a Year 2000 contingency plan which is being
addressed by a team of internal staff and outside consultants. The team's
activities are designed to ensure that there is no adverse effect on the
Company's core business operations and that transactions with customers,
suppliers, and financial institutions are fully supported. The Company is well
under way with these efforts, which are scheduled to be completed by September
1, 1999. The Company has completed its assessment of its systems in its Kent,
Washington facilities and in its Farmingdale, New York facility.

The Company has initiated and has substantially completed discussions with
its key vendors and customers to assess whether those parties have appropriate
plans to remediate Year 2000 issues where their systems interface with the
Company's systems or otherwise impact its operations. Management believes that
the Company bears little exposure to risk of Year 2000 non-compliance by third
parties.

The Company has determined that it will need to modify or replace certain
portions of its computer hardware and software and of its telephone and voice-
mail hardware and software so that its computer, telephone and communications
systems will function properly with respect to dates in the year 2000 and
beyond. The Company has completed the upgrade of its enterprise-wide
information system, time clocks, electronic mail, voice mail and telephone
systems, at a cost of less than $60,000. Work continues on upgrades of its
personal computer software systems and upgrades to its electronic data entry
systems. The Company estimates the total cost of its system upgrades required
for Year 2000 compliance will not exceed $100,000.

In view of the subtlety of the problem and the unfamiliarity with the
scope of the problems by many in the business community, there can be no
assurance that the Company, or its critical vendors or customers, will not
encounter some form of computer or service failures at or after midnight on
December 31, 1999 which could result in disruption of the Company's business,
perhaps materially so, to the Company's detriment.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On May 11, 1998, Morris Rosenbloom & Co., Inc, filed an action
against the Company in the Supreme Court of the State of New York for Wayne
County, under Index No. 44010. In the lawsuit, plaintiff alleges breach of
contract due to the Company's failure to accept a return of sunglasses under
the terms of a Repurchase Agreement between Morris Rosenbloom and the Company.
Plaintiff claims damages from the Company in excess of $500,000. The Company
has retained counsel to represent it in this matter and intends to defend
vigorously the plaintiff's claims.

The Company believes that the ultimate resolution of these matters
will not have a material adverse effect on its results of operations or
financial position.

Since June 1999, the Company has settled all suits filed or claims
made by the Company's creditors related to past due amounts which arose in the
ordinary course of the Company's business. Except for the two matters
discussed above, there are currently no collection suits pending against the
Company that have not be paid or settled.

ITEM 2. CHANGES IN SECURITIES

On June 1, 1999, Gargoyles completed a transaction with its lender,
U.S. Bank National Association, for the restructure of its credit facility with
the bank and a recapitalization of the Company. In exchange for $10 million of
debt, the Company issued 10 million shares of Gargoyles, Inc. Series A
Preferred Stock to U.S. Bank. The bank's Series A Preferred Stock is
immediately convertible into 31,600,342 shares of Gargoyles, Inc. Common Stock,
or 79% of the authorized capital of the Company on a fully-diluted basis. U.S.
Bank's affiliate, U.S. Bankcorp, currently owns 400,000 shares of Gargoyles,
Inc. common stock, or 1% of the authorized capital of the Company, giving U.S.
Bank and its affiliate beneficial ownership, in the aggregate, of 80% of the
authorized capital of Gargoyles on a fully-diluted basis. The Series A
Preferred Stock annually accrues a cumulative dividend equal to the U.S. Bank
reference rate plus 75 basis points. The Series A Preferred Stock was issued
by Gargoyles to U.S. Bank in a transaction not involving a public offering
under Section 4(2) of the Securities Act of 1933.

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

The Company held its annual meeting of shareholders on June 29, 1999.
At the annual meeting, Class 1, 2 and 3 Directors were up for election. The
following summarizes all matters voted on at the meeting:

ELECTION OF DIRECTORS FOR WITHHELD
--------------------- ----------- --------

Class 1 Director: Elected to serve
until the 2001 annual meeting

William C. Thompson, Jr. 36,030,850 24,887

Class 2 Director: Elected to serve
until the 2002 annual meeting

Daniel C. Regis 36,030,850 24,887

Class 3 Director: Elected to serve
until the 2000 annual meeting

Paul S. Shipman 36,017,490 38,247

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

Exhibit 10.1 Amendment to Employment Agreement dated June 1, 1999, between
Gargoyles, Inc. and Leo Rosenberger.

Exhibit 10.2 Second Amendment to Employment Agreement, Separation and
Release dated July 27, 1999 between Sungold Eyewear, Inc. and
Sheldon Goldman.

Exhibit 10.3 Second Amendment to Royalty Agreement, Termination and
Release dated July 17, 1999 between Sungold Eyewear, Inc. and
Sungold Enterprises, Ltd.

Exhibit 11.1 Statement Regarding Computation of Per Share Earnings

Exhibit 27.1 Financial Data Schedule

(b) REPORTS ON FORM 8-K

Form 8-K with respect to the Company's refinancing transaction
with the Company's lender, U.S. Bank, was filed with the Securities and
Exchange Commission on June 7, 1999.

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)

August 13, 1999 /s/ Leo Rosenberger
-------------------------------
Leo Rosenberger
Chief Executive Officer, Chief
Financial Officer and Treasurer

EXHIBIT INDEX

EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------------ -------------------------------------------------------------
Exhibit 10.1 Amendment to Employment Agreement dated June 1, 1999, between
Gargoyles, Inc. and Leo Rosenberger.

Exhibit 10.2 Second Amendment to Employment Agreement, Separation and
Release dated July 27, 1999 between Sungold Eyewear, Inc. and
Sheldon Goldman.

Exhibit 10.3 Second Amendment to Royalty Agreement, Termination and
Release dated July 17, 1999 between Sungold Eyewear, Inc. and
Sungold Enterprises, Ltd.

Exhibit 11.1 Statement Regarding Computation of Per Share Earnings

Exhibit 27.1 Financial Data Schedule