<PAGE>   1





                                   FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C.  20549


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

               For the quarterly period ended September 30, 1996

                                       OR

         [ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

         For the transition period from _____________ to ______________

                         Commission file number 0-16621

                          GARNET RESOURCES CORPORATION
             (Exact name of registrant as specified in its charter)
 
                      DELAWARE                             74-2421851
           (State or other jurisdiction of                (IRS Employer 
           incorporation or organization)              Identification No.)

           11011 RICHMOND, SUITE 650, HOUSTON, TEXAS        77042-6720
           (Address of principal executive offices)         (Zip Code)

       Registrant's telephone number, including area code  (713) 783-0010


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 November 14, 1996, 11,492,162 shares of Registrant's Common Stock, par
value $.01 per share, were outstanding.
<PAGE>   2
        GARNET RESOURCES CORPORATION (THE "REGISTRANT" OR THE "COMPANY")


                                   I N D E X


<TABLE>
<S>                                                                                  <C>
PART I  -    FINANCIAL INFORMATION                                                   PAGE
                                                                                     ----

         Item 1. Financial Statements

                   Consolidated Balance Sheets -
                    September 30, 1996 (unaudited)
                    and December 31, 1995                                              3-4

                   Consolidated Statements of
                    Operations for the Three Months and
                    Nine Months Ended September 30, 1996 and 1995
                    (unaudited)                                                          5

                   Condensed Consolidated Statements of
                    Cash Flows for the Nine Months Ended
                    September 30, 1996 and 1995 (unaudited)                              6

                   Notes to Condensed Consolidated Financial
                    Statements- September 30, 1996 (unaudited)                         7-12


         Item 2. Management's Discussion and Analysis of
                     Financial Condition and Results of
                     Operations                                                       12-14


PART II  -   OTHER INFORMATION

         Item 6. Exhibits and Reports on Form 8-K                                    15-16
</TABLE>





                                       2
<PAGE>   3
PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.


                 GARNET RESOURCES CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS         


<TABLE>
<CAPTION>
                                                          SEPTEMBER 30,      DECEMBER 31,
                 ASSETS                                       1996               1995         
                 ------                                   -------------     ------------     
                                                           (unaudited)
<S>                                                       <C>               <C>
CURRENT ASSETS:
     Cash and cash equivalents                            $  4,938,794      $  5,713,191
     Accounts receivable                                     1,945,735         2,302,712
     Inventories                                             1,060,160           986,532
     Prepaid expenses                                          213,277           249,454
                                                          ------------      ------------

           Total current assets                              8,157,966         9,251,889
                                                          ------------      ------------
NET ASSETS HELD FOR DISPOSITION                               -                  403,941
                                                          ------------      ------------
PROPERTY AND EQUIPMENT, at cost:
     Oil and gas properties
       (full-cost method)-
           Proved                                           53,663,750        46,044,011
           Unproved (excluded from
             amortization)                                   1,067,396         4,598,001
                                                          ------------      ------------
                                                            54,731,146        50,642,012
           Other equipment                                     144,331           137,343
                                                          ------------      ------------
                                                            54,875,477        50,779,355
           Less - Accumulated depreciation,
             depletion and amortization                    (16,009,191)      (11,384,135)
                                                          ------------      ------------
                                                            38,866,286        39,395,220
                                                          ------------      ------------
OTHER ASSETS                                                   736,721           907,978
                                                          ------------      ------------
                                                          $ 47,760,973      $ 49,959,028
                                                          ============      ============
</TABLE>





The accompanying notes are an integral part of these condensed consolidated
financial statements.





                                       3
<PAGE>   4
                 GARNET RESOURCES CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                                   Continued




<TABLE>
<CAPTION>
                                                          SEPTEMBER 30,     DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY                          1996             1995        
                                                          ------------      ------------
                                                           (unaudited)
<S>                                                       <C>               <C>
CURRENT LIABILITIES:
     Current portion of long-term debt                    $  3,348,228      $  4,043,758
     Accounts payable and accrued
      liabilities                                            1,903,706         2,418,270
                                                           -----------       -----------
           Total current liabilities                         5,251,934         6,462,028
                                                           -----------       -----------
LONG-TERM DEBT, net of current portion                      20,269,992        20,151,120
                                                           -----------       -----------
DEFERRED INCOME TAXES                                          918,287           640,919
                                                           -----------       -----------
OTHER LONG-TERM LIABILITIES                                    375,482           438,156
                                                           -----------       -----------
STOCKHOLDERS' EQUITY:
     Common stock, $.01 par value, 20,000,000
       shares authorized, 11,492,162 shares
       issued and outstanding as of September 30,
       1996 and December 31, 1995                              114,922           114,922
     Capital in excess of par value                         52,491,212        52,491,212
     Retained earnings (deficit)                           (31,660,856)      (30,339,329)
                                                           -----------       -----------
           Total stockholders' equity                       20,945,278        22,266,805
                                                           -----------       -----------
                                                           $47,760,973       $49,959,028
                                                           ===========       ===========
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.





                                       4
<PAGE>   5
                 GARNET RESOURCES CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS    
                                  (Unaudited)



<TABLE>
<CAPTION>
                                              THREE MONTHS ENDED                  NINE MONTHS ENDED
                                                 SEPTEMBER 30,                       SEPTEMBER 30,
                                             1996             1995               1996              1995
                                         -----------       -----------       -----------       -----------
<S>                                      <C>               <C>               <C>               <C>
REVENUES:                                
     Oil sales                           $ 2,495,050       $ 2,207,800       $ 8,680,427       $ 6,415,941
     Interest                                 69,745            24,670           204,244           180,218
                                         -----------       -----------       -----------       -----------
                                           2,564,795         2,232,470         8,884,671         6,596,159
                                         -----------       -----------       -----------       -----------
COSTS AND EXPENSES:
     Production                              778,223         1,000,342         2,610,638         2,698,769
     Exploration                                -                -                 5,258            16,204
     Loss on net assets held
       for disposition                          -                -                46,777             -
     General and
       administrative                        140,158           220,035           481,831         1,172,816
     Interest                                554,074           374,594         1,644,722         1,058,015
     Depreciation, depletion
       and amortization                    1,065,649         1,018,155         4,622,126         3,128,299
                                                                                        
     Foreign currency
       translation (gain) loss                39,514          (193,954)          (85,919)         (704,654)
                                         -----------       -----------       -----------       -----------
                                           2,577,618         2,419,172         9,325,433         7,369,449
                                         -----------       -----------       -----------       -----------
INCOME (LOSS) BEFORE
  INCOME TAXES                               (12,823)         (186,702)         (440,762)         (773,290)

PROVISION FOR
  INCOME TAXES                               240,054           212,466           880,765           621,844
                                         -----------       -----------       -----------       -----------
NET LOSS                                 $  (252,877)      $  (399,168)      $(1,321,527)      $(1,395,134)
                                         ===========       ===========       ===========       =========== 
NET LOSS PER SHARE                       $      (.02)      $      (.03)      $      (.11)      $      (.12)
                                         ===========       ===========       ===========       =========== 
WEIGHTED AVERAGE
SHARES OUTSTANDING                        11,492,162        11,492,162        11,492,162        11,391,441
                                         ===========       ===========       ===========       ===========
</TABLE>


The accompanying notes are an integral part of these condensed consolidated
financial statements.





                                       5
<PAGE>   6
                 GARNET RESOURCES CORPORATION AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                              NINE  MONTHS ENDED
                                                                 SEPTEMBER 30,
                                                          -----------------------------
                                                               1996              1995       
                                                           -----------       -----------
<S>                                                        <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss                                              $(1,321,527)      $(1,395,134)
     Exploration costs                                           5,258            16,204
     Loss on net assets held for disposition                    46,777             -
     Depreciation, depletion and amortization                4,622,126         3,128,299
     Deferred income taxes                                     277,368           354,635
     Changes in components of working capital                (105,241)       (1,184,280)
     Other                                                     173,768           264,613
                                                           -----------       -----------
           Net cash provided by operating activities         3,698,529         1,184,337
                                                           -----------       -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Capital expenditures                                   (4,247,864)       (7,702,595)
     Proceeds from asset dispositions                          287,395             -
     Decrease in joint venture
       and contractor advances                                   1,001           895,784
     Acquisition of interests in Argosy Energy
       International, net of cash acquired                       -               (92,621)
     Other                                                      90,714           112,166
                                                           -----------       -----------
           Net cash used for investing activities           (3,868,754)       (6,787,266)
                                                           -----------       -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Repayments of debt                                       (576,658)         (161,063)
     Costs of debt issuances                                   (27,514)          (57,285) 
                                                           -----------       -----------
           Net cash used for financing activities             (604,172)         (218,348)
                                                           -----------       -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS                     (774,397)       (5,821,277)

CASH AND CASH EQUIVALENTS
  AT BEGINNING OF PERIOD                                     5,713,191         7,990,605
                                                           -----------       -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                 $ 4,938,794       $ 2,169,328
                                                           ===========       ===========

Supplemental disclosures of cash flow information:

 Cash paid for -
     Interest, net of amounts capitalized                  $ 1,440,509      $    998,801
     Income taxes                                              237,283           370,241
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.





                                       6
<PAGE>   7
                 GARNET RESOURCES CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                              SEPTEMBER 30, 1996                 
                                  (Unaudited)


 (1)  FINANCIAL STATEMENT PRESENTATION-

         The condensed consolidated financial statements include the accounts
of Garnet Resources Corporation, a Delaware corporation ("Garnet"), and its
wholly owned subsidiaries. Garnet and its wholly owned subsidiaries are
collectively referred to as the "Company."  These financial statements have
been prepared by the Company without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission, and include all
adjustments (which consist solely of normal recurring adjustments) which, in
the opinion of management, are necessary for a fair presentation of financial
position and results of operations.  Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading.  It
is suggested that these condensed consolidated financial statements be read in
conjunction with the Company's prior audited consolidated financial statements
and the notes thereto.

(2)  COLOMBIAN OPERATIONS-

         Through its ownership of interests in Argosy Energy International, a
Utah limited partnership ("Argosy"), the Company has an indirect interest in a
risk sharing contract in Colombia (the "Santana Contract") with Empresa
Colombiana de Petroleos, the Colombian national oil company ("Ecopetrol").  The
Santana Contract currently entitles Argosy and its joint venture partner to
explore for oil and gas on approximately 86,000 acres located in the Putumayo
Region of Colombia (the "Santana Block"), and provides for a 10-year
exploration period expiring in 1997, subject to a requirement for additional
partial relinquishments in 1997, and for a production period expiring in 2015.
Argosy and its joint venture partner also have two association contracts (the
"Fragua Contract" and the "Yuruyaco Contract") with Ecopetrol.  The Fragua
Contract covers an area of approximately 32,000 acres contiguous to the
northern boundary of the Santana Block (the "Fragua Block"), while the Yuruyaco
Contract covers an area of approximately 39,000 acres contiguous to the eastern
boundaries of the Santana Block and the Fragua Block (the "Yuruyaco Block").
The 10-year exploration periods provided by the Fragua Contract and the
Yuruyaco Contract will expire in 2002 and 2005, respectively, and the 28-year
contract terms will expire in 2020 and 2023, respectively.  Argosy and its
joint venture partner also have the right until 2003 to explore for and produce
oil and gas from approximately 77,000 acres located in the Putumayo Region (the
"Aporte Putumayo Block") pursuant to other agreements with Ecopetrol.  Argosy
and its joint venture partner have notified Ecopetrol that they intend to
abandon the remaining wells and relinquish the Aporte Putumayo Block because
declining production rates have made continued operation of the wells
economically unattractive.

         Argosy serves as the operator of the Colombian properties under joint
venture agreements. The Santana Contract, the Fragua Contract and the Yuruyaco
Contract provide that Ecopetrol will receive a royalty equal to 20% of
production on behalf of the Colombian government and, in the event a discovery
is deemed commercially feasible, Ecopetrol will acquire a 50% interest in the





                                       7
<PAGE>   8
remaining production from the field, bear 50% of the development costs, and
reimburse the joint venture, from Ecopetrol's share of future production from
each well, for 50% of the joint venture's costs of successful exploratory wells
in the field.  After June 1996, when accumulated oil production from the
Santana Contract exceeded seven million barrels, Ecopetrol continues to bear
50% of development costs, but its interest in production revenues and operating
costs applicable to wells on the Santana Block increased to 65%. If a
commercial field on the Fragua Block produces in excess of 60 million barrels,
Ecopetrol's interest in production and costs will increase in 5% increments
from 50% to 70% as accumulated production from the field increases in 30
million barrel increments from 60 million barrels to 150 million barrels.  If a
commercial field on the Yuruyaco Block produces in excess of 60 million
barrels, Ecopetrol's interest in production and costs will range from 50% to
75%, based on annual measurements of profitability as defined in the Yuruyaco
Contract.  The joint venture paid all costs of the exploration program for the
Santana Block during the first two years of the contract and thereafter the
joint venture and Ecopetrol have been obligated to pay 70% and 30%,
respectively, of such exploration costs.  The joint venture bears all costs and
risks of exploration activities on the Fragua Block and the Yuruyaco Block,
subject to Ecopetrol's right to acquire a 50% interest in commercial
discoveries.  In the event a discovery is made and is not deemed by Ecopetrol
to be commercially feasible, the joint venture may continue to develop the
field at its own expense and will recover 200% of the costs thereof, at which
time Ecopetrol will acquire a 50% interest therein at no cost to Ecopetrol or
further reimbursement by Ecopetrol to Argosy.

         In March 1995 the Company increased its ownership in Argosy by
exchanging 366,625 shares of Garnet's common stock with a value of $3.00 per
share and cash totalling $142,703 for the partnership interests held by certain
of Argosy's limited partners.

         The Company's resulting net participation in revenues and costs for
the Santana Contract, the Fragua Contract and the Yuruyaco Contract are as
follows:


<TABLE>
<CAPTION>
                                                 PRODUCTION    OPERATING         EXPLORATION     DEVELOPMENT
                                                  REVENUES       COSTS             COSTS            COSTS   
                                                ----------     --------          -----------     -----------
<S>                                              <C>            <C>                 <C>             <C>
Santana Contract:
  Before seven million barrels
   of accumulated production                     21.8%          27.2%               38.1%           27.2%
  After seven million barrels
   of accumulated production                     15.3%          19.1%               38.1%           27.2%

Fragua Contract:
  Before 60 million barrels
   of accumulated production                     21.8%          27.3%               54.6%           27.3%
  After 150 million barrels
   of accumulated production                     13.1%          16.4%               54.6%           27.3%

Yuruyaco Contract:
  Before 60 million barrels
   of accumulated production                     22.0%          27.5%               55.0%           27.5%
  After 60 million barrels of
   accumulated production at
   maximum profitability                         11.0%          13.8%               55.0%           27.5%
</TABLE>


         The joint venture has completed its seismic acquisition and drilling
obligations for the first nine years of the Santana Contract, resulting in the
discovery of four oil fields, all of which have





                                       8
<PAGE>   9
been declared commercial by Ecopetrol.  The joint venture has the right to
continue the exploration program through 1997 with an obligation to conduct
exploration programs to be approved by Ecopetrol.  The joint venture has also
completed its seismic obligations for the first two years of the Fragua
Contract, but no wells have yet been drilled on the Fragua Block.
        
          Under the terms of a contract with Ecopetrol, all oil produced from
the Santana Block is sold to Ecopetrol.  If Ecopetrol exports the oil, the
price paid is the export price received by Ecopetrol, adjusted for quality
differences, less a handling and commercialization fee of $.465 per barrel.  If
Ecopetrol does not export the oil, the price paid is based on quoted prices for
Colombia's Cano Limon crude oil, adjusted for quality differences, plus or
minus a sales value differential to be determined by independent analysis, less
Ecopetrol's cost to transport the crude to Cartagena and a handling and
commercialization fee of $.365 per barrel.  Under the terms of its contract
with Ecopetrol, 25% of all revenues from oil sold to Ecopetrol is paid in
Colombian pesos which may only be utilized in Colombia.  To date, Argosy has
experienced no difficulty in repatriating the remaining 75% of such payments
which are payable in United States dollars.

           As general partner, the Company's subsidiary is contingently liable
for any obligations of Argosy and may be contingently liable for claims
generally related to the conduct of Argosy's business.

 (3)  LONG-TERM DEBT-

       Long-term debt at September 30, 1996 and December 31, 1995 consisted of
the following:

<TABLE>
<CAPTION>
                                                                   1996                        1995       
                                                                -----------                 -----------
       <S>                                                      <C>                         <C>
       9 1/2% convertible subordinated debentures               $15,000,000                 $15,000,000
       Notes payable by Argosy to a U.S. bank                     8,618,220                   9,113,520
       Note payable by Argosy to a Colombian bank                    -                           81,359
                                                                -----------                 -----------
                                                                 23,618,220                  24,194,879
       Less - Current portion                                    (3,348,228)                 (4,043,758)
                                                                -----------                 -----------
                                                                $20,269,992                 $20,151,120
                                                                ===========                 ===========
</TABLE>

         In 1993 Garnet issued $15,000,000 of convertible subordinated
debentures (the "Debentures") due December 1998.  The Debentures bear interest
at 9 1/2% per annum payable quarterly and are convertible at the option of the
holders into Garnet common stock at $5.50 per share.  If the Company elects to
prepay the Debentures under certain circumstances, it will issue warrants under
the same economic terms as the Debentures.  At the option of a holder, in the
event of a change of control of the Company, the Company will be required to
prepay such holder's Debenture at a 30% premium.  The Debentures are secured by
a pledge of all of the common stock of Garnet's wholly owned subsidiary which
serves as the general partner of Argosy (see Note 2). Under the terms of an
agreement with the holders of its Debentures, Garnet has agreed that it will
not pay dividends or make distributions to the holders of its common stock.  As
of September 30, 1996, Garnet was not in compliance with the minimum net worth
required by the Debentures.  The Company has classified the Debentures as
long-term debt in the accompanying consolidated balance sheets because the
Debenture holders have waived compliance with this requirement through January
1,1998 subject to the termination of such waiver on April 30, 1997 if the ratio
of the





                                       9
<PAGE>   10
aggregate principal amount of outstanding Debentures to the sum of (i) the
number of net barrels of proved oil reserves as of March 31, 1997 plus (ii) the
number of net barrels of oil produced during the period from April 1, 1996
through March 31, 1997 is greater than 4.5 to 1.  Such ratio was 3.8 to 1 as of
September 30, 1996.

         In 1994 Argosy entered into a finance agreement with Overseas Private
Investment Corporation, an agency of the United States government ("OPIC"),
pursuant to which OPIC agreed to guarantee up to $9,200,000 in bank loans to
Argosy. The loans were funded in two stages of $4,400,000 in August 1994 and
$4,800,000 in October 1995.  The Company used these funds to drill development
wells and construct production facilities in Colombia.  OPIC's guaranty is
secured by Argosy's interest in the Santana Contract and related assets, as
well as the pledge of Garnet's direct and indirect interests in Argosy.  The
terms of the guaranty agreement also restrict Argosy's ability to make
distributions to its partners, including the Company, prior to the repayment of
the guaranteed loans.  The maximum term of the loans is not to exceed seven
years, and the principal amortization schedule is based on projected cash flows
from wells on the Santana Block.  The loans bear interest at the lender's
eurodollar deposit rate plus .25% per annum for periods of two, three or six
months as selected by Argosy.  The interest rate at September 30, 1996 was 5
13/16%.  In consideration for OPIC's guaranty, Argosy pays OPIC a guaranty fee
of 2.4% per annum on the outstanding balance of the loans guaranteed.
        
         In 1993 Argosy received a loan from a Colombian bank, which was
secured by receivables from Ecopetrol for well costs allocable to Ecopetrol but
paid by Argosy.  The loan bore interest at U.S. prime plus 2%, and was repaid
in varying amounts from Ecopetrol's share of production from the wells, with
the final installment paid in the third quarter of 1996.

(4) STOCK OPTION PLANS-

         Garnet and a predecessor entity have adopted stock option plans (the
"Employees' Plans") pursuant to which an aggregate of 1,483,000 shares of
Garnet's common stock is authorized to be issued upon exercise of options
granted to officers, employees, and certain other persons or entities who
perform substantial services for or on behalf of Garnet or its subsidiaries.

         The Stock Option and Compensation Committee of Garnet's Board of
Directors (the "Committee") is vested with sole and exclusive authority to
administer and interpret the Employees' Plans, to determine the terms upon
which options may be granted, to prescribe, amend and rescind such
interpretations and determinations and to grant options to directors.  Current
Committee members are not eligible to receive options under the Employees'
Plans.

         In addition, Garnet has adopted the 1990 Directors' Stock Option Plan
(the "Directors' Plan") pursuant to which an aggregate of 350,000 shares of
Garnet's common stock were issuable as of September 30, 1996 upon exercise of
options granted thereunder to directors who are not employees of the Company.
As the Directors' Plan expired in accordance with its terms on March 8, 1996,
no further options may be issued thereunder.

         Each option is exercisable for a period of 10 years and 30 days from
the date of grant.  The purchase price of shares issuable upon exercise of an
option may be paid in cash or by delivery of shares with a value equal to the
exercise price of the option.  The Committee has determined that the right to
exercise non-incentive options issued to employees vests over a period of four
years, so that 20% of the option becomes exercisable on each anniversary of the
date of grant.





                                       10
<PAGE>   11
Non-incentive options issued to directors and other eligible participants
generally are fully exercisable on and after the date of grant.

         The following is a summary of stock option activity in connection with
the Employees' Plans and the Directors' Plan:

<TABLE>
<CAPTION>
                                                                       Shares        Price Range
                                                                       ------        -----------
<S>                                                                 <C>              <C>
Options outstanding at December 31, 1993                             1,229,500       $2.50-$13.83
Options granted                                                        140,000          4.05  
                                                                     ---------       ------------
Options outstanding at December 31, 1994                             1,369,500       2.50-  13.83

Options granted                                                        618,000       2.50-   2.87
Options expired                                                       (658,398)      2.50-  13.83
                                                                     ---------       ------------
Options outstanding at December 31, 1995                             1,329,102       2.50-  13.83

Options granted                                                        480,000           1.19
Options cancelled                                                     (336,102)       4.00- 11.75
Options expired                                                        (45,000)       2.87-  4.05
                                                                     ---------       ------------
Options outstanding at September 30, 1996                            1,428,000       $ 1.19-$13.83
                                                                     =========       =============
</TABLE>

         As of September 30, 1996, options for 975,614 shares were exercisable.

         In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 123, a new standard
for accounting for stock-based compensation.  This standard established a
fair-value based method of accounting for stock options awarded after December
31, 1995 and encourages companies to adopt SFAS No.  123 in place of the
existing accounting method, which requires expense recognition only in
situations where stock compensation plans award intrinsic value to recipients
at the date of grant.  Companies that do not follow SFAS No. 123 for accounting
purposes must make annual pro forma disclosures of its effects.  Adoption of
the standard is required in 1996, although earlier implementation is permitted.
The Company does not intend to adopt SFAS No. 123 for accounting purposes;
however it will make annual pro forma disclosures of its effects commencing in
1996.

(5)  INCOME TAXES-

         The provisions for income taxes relate to the Colombian activities of
Argosy.  No United States deferred taxes were provided because the tax bases of
the Company's assets exceed the financial statement bases, resulting in a
deferred tax asset which the Company has determined is not presently
realizable.

           As of December 31, 1995, the Company had a regular tax net operating
loss carryforward and an alternative minimum tax loss carryforward of
approximately $26,500,000 and $26,100,000 respectively.  These loss
carryforwards will expire beginning in 2001 if not utilized to reduce U.S.
income taxes otherwise payable in future years, and are limited as to
utilization because of the occurrences of "ownership changes" (as defined in
Section 382 of the Internal Revenue Code of





                                       11
<PAGE>   12
1986, as amended) in 1991 and earlier years.  Such loss carryforwards also
exclude regular tax net operating loss carryforwards aggregating approximately
$4,500,000 attributable to certain of Garnet's subsidiaries, which can be used
in certain circumstances to offset taxable income generated by such
subsidiaries.

(6)  ACQUISITION OF RGO ENERGY INC. AND RGO PARTNERS, LTD.-

         In 1991, in transactions accounted for as purchases, Garnet acquired
RGO Energy Inc. and RGO Partners, Ltd., two privately-owned entities (referred
to collectively herein as "the RGO Entities").  At the date of acquisition,
approximately 60% of the assets of the RGO Entities was comprised of cash, with
the balance being primarily working, royalty and mineral interests in producing
and undeveloped oil and gas properties in the United States.  All of the
working, royalty and mineral interests acquired in the mergers were sold in
1993 and 1996.  Because management intended to sell such assets when the market
conditions were suitable, these assets are reflected as "Net assets held for
disposition" in the accompanying consolidated balance sheet as of December 31,
1995.

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

LIQUIDITY AND CAPITAL RESOURCES

         Since December 31, 1995, the Company has expended approximately
$4,100,000 for the acquisition, exploration and development of its oil and gas
properties.  Such expenditures include approximately $3,900,000 for exploration
and development activities on the Santana Block in Colombia, and approximately
$200,000 for exploration and related costs in Papua New Guinea.

         Funding for these activities was provided primarily by cash flow from
operations and by available cash balances.  The Company has no significant
lines of credit.

         Argosy and its joint venture partner have completed the seismic
acquisition and drilling obligations for the first nine years of the Santana
Contract, resulting in the discovery of four oil fields.  The joint venture has
the right to continue the exploration program through 1997 with an obligation
to conduct exploration programs to be approved by Ecopetrol. The Company plans
to perform additional seismic work on the Santana Block during 1996 and 1997,
with estimated total costs to the Company of $700,000. The seismic programs
required during the first two years of the Fragua Contract have also been
completed.  Additional seismic surveys may be conducted in 1997 on the Fragua
Block and Yuruyaco Block, for which the Company's share of the costs is
estimated to be $500,000.
        
         The Toroyaco and Linda fields, the first two fields discovered on the
Santana Block, began producing in 1992.  The Mary and Miraflor fields, the last
two fields discovered, were declared commercial by Ecopetrol in 1993.
Production from the four fields is presently approximately 10,000 barrels of
oil per day.  Through June 1996, the Company's share of such production was
21.8%; it also received an additional 21.8% of the production from certain
wells until the drilling and completion costs for those wells allocable to
Ecopetrol but paid by the Company have been recovered.  After June 1996, when
accumulated production from the Santana Block exceeded seven million barrels of
oil, the Company's share of production decreased to 15.3% and the percentage of
production applicable to the Ecopetrol recovery increased to 28.3%.  The
Company





                                       12
<PAGE>   13
plans to drill at least three additional development wells in the Toroyaco and
Linda fields in 1996 and 1997, one of which was in progress as of September 30,
1996.  The Company's share of the costs of drilling and completing each of the
wells in these fields is expected to range from $950,000 to $1,100,000.

         As described herein, the Company's operations are primarily located
outside the United States.  Although certain of such operations are conducted
in foreign currencies, the Company considers the U.S. dollar to be the
functional currency in most of the countries in which it operates. In addition,
the Company has no significant operations in countries with highly inflationary
economies.  As a result, the Company's foreign currency transaction gains and
losses have not been significant.  Exchange controls exist for the repatriation
of funds from Colombia and Papua New Guinea. The Company believes that the
continuing viability of its operations in these countries will not be affected
by such restrictions.

         It is anticipated that the Company's foreign exploration and
development activities will require substantial amounts of capital.  To finance
its planned exploration and development activities, the Company intends to
utilize its existing working capital and cash flow from production in Colombia.
In 1995 the Company also identified and implemented more than $1.5 million in
annual reductions of U.S. and Colombian general and administrative expenses and
production costs.  The Company may also consider entering into arrangements
whereby certain costs of exploration will be paid by others to earn an interest
in the properties.

         The working capital of the Company was approximately $2,910,000 as of
September 30, 1996. The Company's working capital has been reduced to reflect
approximately $3,350,000 in principal payments presently due on the
OPIC-guaranteed debt in 1996 and 1997.  Because the principal amortization
schedule is based on projected cash flows from developed oil reserves, the
Company expects to reschedule a significant portion of such payments to later
years as development activities are conducted on the Santana Block.  However,
if  the Company is unable to reschedule such payments because of the timing of
development drilling, changes in oil prices, or other reasons, it may be
necessary for the Company to alter its planned exploration and development
activities or take other measures to improve its liquidity.  As of September
30, 1996, Garnet was not in compliance with the minimum net worth covenant
required by the Debentures. The Debenture holders have waived compliance with
this requirement through January 1, 1998 subject to the termination of such
waiver on April 30, 1997 if the ratio of the aggregate principal amount of
outstanding Debentures to the sum of (i) the number of net barrels of proved
oil reserves as of March 31, 1997 plus (ii) the number of net barrels of oil
produced during the period from April 1, 1996 through March 31, 1997 is greater
than 4.5 to 1.   Such ratio was 3.8 to 1 as of September 30, 1996.   If Garnet
is unable to increase its net worth to the minimum required by January 1, 1998
(or by April 30, 1997 if the waiver is terminated as a result of the failure to
maintain the aforementioned ratio), it will be necessary to extend the waiver
or renegotiate the terms of the debt.

         The present environment for financing the acquisition of oil and gas
properties or the ongoing obligations of an oil and gas business is uncertain
due, in part, to the substantial instability in oil and gas prices in recent
years and to the volatility of financial markets.  There can be no assurance
that the additional financing which may be necessary to fund the Company's
operations and obligations will be available on economically acceptable terms.
In addition, the Company's ability to continue its exploration and development
programs may be dependent upon its joint venture partners financing their
portion of such costs and expenses.  There can be no assurance that the
Company's partners will contribute, or be in a position to contribute, their
costs and





                                       13
<PAGE>   14
expenses of the joint venture programs.  If the Company's partners cannot
finance their obligations to the joint ventures, the Company may be required to
accept an assignment of the partners' interests therein and assume their
financing obligations.  If sufficient funds cannot be raised to meet the
Company's obligations in connection with its properties, the interests in such
properties might be sold or forfeited.

         The foregoing discussion contains, in addition to historical
information, forward-looking statements.  The forward-looking statements were
prepared on the basis of certain assumptions which relate, among other things,
to costs expected to be incurred in the development of the Company's
properties, the receipt of environmental and other necessary administrative
permits required for such development, future oil prices, future production
rates, the ability to reschedule principal payments on the Company's
OPIC-guaranteed debt, and the ability to renegotiate the terms of the Company's
outstanding Debentures if the Company is unsuccessful in increasing its net
worth.  Even if the assumptions on which the projections are based prove
accurate and appropriate, the actual results of the Company's operations in the
future may vary widely from the financial projections due to unforeseen
engineering, mechanical or technological difficulties in drilling or working
over wells, regional political issues, general economic conditions, increased
competition, changes in government regulation or intervention in the oil and
gas industry, and other risks described in the Company's filings with the
Securities and Exchange Commission.  Accordingly, the actual results of
the Company's operations in the future may vary widely from the forward-looking
statements included herein.

RESULTS OF OPERATIONS

             THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996
                    COMPARED WITH THE SAME PERIODS IN 1995          

         The Company reported net losses of $252,877 ($.02 per share) and
$399,168 ($.03 per share) for the three months ended September 30, 1996 and
1995, respectively, and $1,321,527 ($.11 per share) and $1,395,134 ($.12 per
share) for the nine months ended September 30, 1996 and 1995, respectively.

         Increases in 1996 in oil and gas revenues and depreciation, depletion
and amortization primarily reflect higher oil prices and production from new
wells and fracture stimulation treatments on existing wells in Colombia.  The
effect of these increases was partially offset in the third quarter of 1996 by
the contractual reduction in the Company's percentage share of production. The
Company's comparative average daily sales volumes in barrels of oil per day
("BOPD"), average sales prices and costs per barrel in Colombia for such
periods were as follows:

<TABLE>
<CAPTION>
                                                          THREE MONTHS ENDED             NINE MONTHS ENDED
                                                            SEPTEMBER 30,                   SEPTEMBER 30,
                                                          1996          1995              1996        1995
                                                         ------        ------            ------      ------
         <S>                                             <C>           <C>               <C>         <C>
         Average oil sales (BOPD)                         1,401         1,486             1,657       1,434
         Average oil price per barrel                    $19.36        $16.15            $19.12      $16.38
         Production costs per barrel                     $ 6.04        $ 7.32            $ 5.75      $ 6.89
         Depreciation, depletion and
          amortization per barrel                        $ 8.24        $ 7.42            $10.16      $ 7.96
</TABLE>

         General and administrative expenses and production costs per barrel
decreased as a result of the aforementioned cost reduction program, as well as
charges incurred in 1995 in connection with management changes. The increase in
1996 in interest expense, net of amounts capitalized, is attributable primarily
to the OPIC-guaranteed loan received in October 1995, and decreases in costs
attributable to assets eligible for interest capitalization. The provision for
income taxes, all of which relates to Colombian operations, was higher because
of increases in the Colombian presumptive income tax resulting from a higher
tax rate effective January 1, 1996 and ongoing capital expenditures related to
productive assets.





                                       14
<PAGE>   15

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

        (A)  EXHIBITS

<TABLE>
<CAPTION>
             ITEM                                                            EXHIBIT
              NO.                   ITEM TITLE                                 NO.
             ----        ----------------------------------------            -----
             <S>         <C>                                                 <C> 

              (2)        Plan of acquisition, reorganization,
                         arrangement, liquidation or succession:
                         Not Applicable

              (3)        Articles of Incorporation and By-Laws:
                         Not Applicable

              (4)        Instruments defining the rights of
                         security holders, including indentures:
                         Not Applicable

             (10)        Material contracts:  Not Applicable

             (11)        Statement regarding computation of per
                         share earnings is not required because
                         the relevant computations can be clearly
                         determined from the material contained
                         in the Financial Statements included
                         herein.

             (15)        Letter re unaudited interim financial
                         information:  Not Applicable

             (18)        Letter re change in accounting principles:
                         Not Applicable

             (19)        Report furnished to security holders:
                         Not Applicable

             (22)        Published report regarding matters
                         submitted to vote of security holders:
                         Not Applicable

             (23)        Consents of experts and counsel:
                         Not Applicable

             (24)         Power of attorney:  Not Applicable

             (27)         Financial Data Schedule.                           27
                          

             (99)        Additional Exhibits:  Not Applicable
</TABLE>




                                       15
<PAGE>   16
        (B)  REPORTS ON FORM 8-K

             No Reports on Form 8-K were filed by Registrant during the three
months ended September 30, 1996.





                                       16
<PAGE>   17
                                   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 thereunto duly authorized.

                                        GARNET RESOURCES CORPORATION



Date:  November 14, 1996                /s/ W. Kirk Bosche'
                                        ------------------------------------
                                        W. Kirk Bosche',
                                        Vice President and Treasurer
                                        (As both a duly authorized
                                        officer of Registrant and as
                                        principal financial officer
                                        of Registrant)





                                       17
<PAGE>   18

                               INDEX TO EXHIBITS


<TABLE>
<CAPTION>
             ITEM                                                                      EXHIBIT
              NO.                  ITEM TITLE                                            NO.
             ----        ----------------------------------------                       -----
             <S>         <C>                                                           <C>
              (2)        Plan of acquisition, reorganization,
                         arrangement, liquidation or succession:
                         Not Applicable

              (3)        Articles of Incorporation and By-Laws:
                         Not Applicable

              (4)        Instruments defining the rights of
                         security holders, including indentures:
                         Not Applicable

             (10)        Material contracts:  Not Applicable

             (11)        Statement regarding computation of per
                         share earnings is not required because
                         the relevant computations can be clearly
                         determined from the material contained
                         in the Financial Statements included
                         herein.

             (15)        Letter re unaudited interim financial
                         information:  Not Applicable

             (18)        Letter re change in accounting principles:
                         Not Applicable

             (19)        Report furnished to security holders:
                         Not Applicable

             (22)        Published report regarding matters
                         submitted to vote of security holders:
                         Not Applicable

             (23)        Consents of experts and counsel:
                         Not Applicable

             (24)         Power of attorney:  Not Applicable

             (27)         Financial Data Schedule.                                     27

             (99)        Additional Exhibits:  Not Applicable

</TABLE>



                                       18