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 June 30, 1998

                                       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.)

       RR 2 Box 4400, Nacogdoches, Texas                    75961
     (Address of principal executive offices)            (Zip Code)

        Registrant's telephone number, including area code (409) 559-9959



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 August 14, 1998, 11,492,162 shares of Registrant's Common Stock, par value
$.01 per share, were outstanding.
<PAGE>

        GARNET RESOURCES CORPORATION (the "Registrant" or the "Company")


                                    I N D E X



PART I - FINANCIAL INFORMATION                                            Page

         Item 1. Financial Statements

                    Consolidated Balance Sheets -
                    June 30, 1998 (unaudited)
                    and December 31, 1997 ............................    3-4

                    Consolidated Statements of
                    Operations for the Three Months and
                    Six Months Ended June 30, 1998 and 1997
                    (unaudited) ......................................      5

                    Condensed Consolidated Statements of
                    Cash Flows for the Six Months Ended
                    June 30, 1998 and 1997  (unaudited) ..............      6

                    Notes to Condensed Consolidated Financial
                    Statements- June 30, 1998  (unaudited) ...........    7-15


         Item 2. Management's Discussion and Analysis of
                      Financial Condition and Results of
                      Operations .....................................    15-18


PART II - OTHER INFORMATION

         Item 6. Exhibits and Reports on Form 8-K ....................    19-20

                                       2
<PAGE>


PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements.


                  GARNET RESOURCES CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS


                                                      June 30,      December 31,
                                                       1998               1997
                                                 -----------------   -----------
        ASSETS                                     (unaudited)

CURRENT ASSETS:
         Cash and cash equivalents ...........    $    466,459     $    425,019
         Restricted cash balances ............         282,382        1,699,231
         Accounts receivable .................         774,573        1,476,485
         Inventories .........................         435,311          736,899
         Prepaid expenses ....................          88,759          108,577
                                                  ------------     ------------

                  Total current assets .......       2,047,484        4,446,211
                                                  ------------     ------------


PROPERTY AND EQUIPMENT, at cost:
     Oil and gas properties
          (full-cost method)-
           Proved ............................      60,265,519       59,317,097
           Unproved (excluded from
            amortization) ....................         286,279          263,908
                                                  ------------     ------------

                                                    60,551,798       59,581,005

         Other equipment .....................          62,155          134,598
                                                  ------------     ------------

                                                    60,613,953       59,715,603
         Less - Accumulated depreciation,
          depletion and amortization .........     (54,166,983)     (48,213,229)
                                                  ------------     ------------

                                                     6,446,970       11,502,374
                                                  ------------     ------------

OTHER ASSETS .................................         385,873          511,863
                                                  ------------     ------------

                                                  $  8,880,327     $ 16,460,448
                                                  ============     ============


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


                                       3
<PAGE>



                  GARNET RESOURCES CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                    Continued


                                                      June 30,      December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY                    1998             1997
                                                   -------------    -----------
                                                    (unaudited)
CURRENT LIABILITIES:
     Current portion of long-term debt ..........  $ 21,301,740    $ 22,641,480
     Accounts payable and accrued
      liabilities ...............................     1,766,620       1,123,104
                                                   ------------    ------------

         Total current liabilities ..............    23,068,360      23,764,584
                                                   ------------    ------------

LONG-TERM DEBT, net of current portion ..........           --              --
                                                   ------------    ------------

DEFERRED INCOME TAXES ...........................           --              --
                                                    ------------    ------------

OTHER LONG-TERM LIABILITIES .....................        274,113         279,200
                                                   ------------    ------------

STOCKHOLDERS' EQUITY:
     Common stock,  $.01 par value,  75,000,000
     shares  authorized, ........................     11,492,162
     shares issued and outstanding as of June 30,
     1998 and December 31, 1997 .................        114,922        114,922
     Capital in excess of par value .............     52,491,212     52,491,212
     Retained earnings (deficit) ................    (67,068,280)   (60,189,470)
                                                   ------------    ------------

         Total stockholders' equity .............    (14,462,146)  (  7,583,336)
                                                    ------------    ------------

                                                    $  8,880,327    $ 16,460,448
                                                    ============    ============


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

                                       4
<PAGE>
<TABLE>
<CAPTION>


                  GARNET RESOURCES CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)


                                                   Three Months Ended                Six Months Ended
                                                        June 30,                         June 30,
                                                  1998             1997             1998                 1997
                                            ---------------     -----------       ---------          -----------
REVENUES:
<S>                                           <C>               <C>               <C>               <C>         
     Oil sales ..........................     $    804,113      $  2,169,479      $  1,928,267      $  5,213,480
     Interest and other .................          109,105            39,037           166,683           108,796
                                                ------------      ------------      ------------      -------------
                                                   913,218         2,208,516         2,094,950          5,322,276
                                                ------------      ------------      ------------      -------------
COSTS AND EXPENSES:
     Production .........................          474,211           987,076         1,080,662         1,930,852
     Exploration ........................             (710)            1,700                50             3,452
     General and
      administrative ....................          278,768           360,907           561,089           565,815
     Interest ...........................          545,453           560,086         1,118,329         1,145,217
     Depreciation, depletion
      and amortization ..................          346,134         2,107,199           876,677         4,199,772
     Write down of oil and
      Gas properties ....................        1,645,468        10,705,135         5,127,167        14,216,868
     Foreign currency
      translation gain ..................           12,422           (24,675)          (17,015)         (104,761)
                                               ------------      ------------      ------------      -------------
                                                 3,301,746        14,697,428         8,746,959         21,957,215
                                               ------------      ------------      ------------      -------------
INCOME (LOSS) BEFORE
     INCOME TAXES .......................       (2,388,528)      (12,488,912)       (6,652,009)      (16,634,939)

PROVISION FOR
 INCOME TAXES ...........................          114,648          (307,494)          226,801          (561,249)
                                                ------------      ------------      ------------      -------------

NET LOSS ................................     $ (2,503,176)     $(12,181,418)     $ (6,878,810)      $(16,073,690)
                                                ============      ============      ============      =============

LOSS PER SHARE OF COMMON
STOCK (BASIC AND DILUTED) ...............     $       (.22)     $      (1.06)      $     (.60)       $      (1.40)
                                               ============      ============      ============      =============

WEIGHTED AVERAGE
SHARES OUTSTANDING ......................       11,492,162        11,492,162        11,492,162        11,492,162
                                              ============      ============      ============      =============
</TABLE>


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

                                       5
<PAGE>

                  GARNET RESOURCES CORPORATION AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)


                                                           Six Months Ended
                                                              June 30,
                                                        1998            1997
                                                     ----------      ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss ....................................   $ (6,878,810) $(16,073,690)
     Exploration costs ...........................             50         3,452
     Depreciation, depletion and amortization ....        876,677     4,199,772
     Write down of oil and gas properties ........      5,127,167    14,216,868
     Deferred income taxes .......................           --        (979,499)
     Changes in components of working capital ....      2,089,083       311,987
     Other .......................................        120,778       119,668
                                                     ------------  ------------

         Net cash provided by operating activities      1,334,945     1,798,558
                                                     ------------  ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Capital expenditures ........................     (1,119,254)   (3,320,539)
     (Increase) decrease in joint venture and
     contractor advances .........................       (239,891)      795,375
     Other .......................................         29,414       (54,447)
                                                     ------------  ------------

         Net cash used for investing activities ..     (1,329,731)   (2,579,611)
                                                     ------------  ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Short term borrowings .......................         36,226          --
     Cost of debt issuances ......................           --         (18,789)
     Repayments of debt ..........................           --        (496,200)
                                                     ------------  ------------

         Net cash (used) for provided by
          financing activities ...................         36,226      (514,989)
                                                     ------------  ------------

NET (DECREASE) INCREASE IN CASH
  AND CASH EQUIVALENTS ...........................         41,440    (1,296,042)

CASH AND CASH EQUIVALENTS
  AT BEGINNING OF PERIOD .........................        425,019     3,058,015
                                                     ------------  ------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD .......   $    466,459  $  1,761,973
                                                     ============  ============

Supplemental disclosures of cash flow information:
 Cash paid for -
     Interest, net of amounts capitalized ........   $    361,272  $  1,094,811
     Income taxes ................................         82,479       324,726



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


                                       6
<PAGE>


              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1998
                                   (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  audited  consolidated  financial  statements  and the  notes  thereto
included in its Form 10-K for the year ended December 31, 1997.

         Effective  January 1, 1998, the Company adopted  Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting  Comprehensive  Income".  SFAS
No. 130 establishes  standards for reporting and display of comprehensive income
in a full set of  general-purpose  financial  statements.  Comprehensive  income
includes net income and other comprehensive  income which is generally comprised
of  changes  in the fair  value  of  available-for-sale  marketable  securities,
foreign currency translation adjustments and adjustments to recognize additional
minimum pension liabilities.  The Company had no accumulated other comprehensive
income at December 31, 1997 and no other comprehensive income for the six months
ended June 30, 1998 and 1997.

(2)  Merger plans-

                  The  Company  and Aviva  Petroleum  Inc.  ("Aviva")  signed an
Agreement and Plan of Merger dated June 24, 1998 (the "Merger Agreement"). Under
the terms of the Merger  Agreement,  Aviva will form a wholly  owned  subsidiary
which will merge with and into the  Company.  The  Company  will become a wholly
owned  subsidiary of Aviva upon the  consummation  of the merger.  The Company's
stockholders  will receive  approximately  1.1 million shares of common stock of
Aviva.  The Merger  Agreement  also  provides  for the  refinancing  of Garnet's
outstanding  debt (the "Chase Loan") to Chase Bank of Texas  ("Chase")  which is
guaranteed by the Overseas Private Investment Corporation ("OPIC"), an agency of
the United States  Government,  and the issuance of  approximately  12.9 million
shares of Aviva common stock to the holders of the Company's $15 million dollars
of 9 1/2%  subordinated  debentures  (the  "Debentures")  in exchange  for those
debentures.

         The Company's  stockholders  will receive one (1) share of Aviva common
stock for each ten (10)  shares of  Garnet's  common  stock that they hold.  The
Company's  stockholders holding less than 1,000 registrant's shares or who would
receive  fractional shares of Aviva common stock after the exchange will receive
cash in the amount of $0.02 for each share of the  Company's  common stock held.
The Company's stockholders entitled to receive Aviva common stock will be issued
one Aviva  depositary  share for each five (5) shares of Aviva common stock that
they receive as a result of the merger. The Aviva depositary shares trade on the
American Stock Exchange under the symbol "AVV".
<PAGE>

Completion of the merger  transaction  is planned to take place during the third
quarter  of this year and is  subject to  various  contingencies  including  the
execution of a Definitive  Credit Agreement and the approval of the transactions
contemplated by the Merger  Agreement by the stockholders of Aviva and Garnet. A
Joint Proxy  Statement was filed with the Securities and Exchange  Commission on
Form S-4 on June 29, 1998 and will be sent to the stockholders of both companies
when it has been declared effective by the Securities and Exchange Commission.

(3)   Liquidity and Capital Resources-

         The  Company is highly  leveraged  with  $21,301,740  in  current  debt
consisting  of (i) the  Debentures  due  December  21, 1998 and (ii)  $6,350,000
($6,301,740 net to Garnet) in principal  outstanding  under the Chase Loan to an
indirect subsidiary of Garnet,  Argosy Energy International  ("Argosy"),  a Utah
limited partnership.  Based on Argosy's first quarter 1998 financial statements,
Argosy has determined that it is no longer in compliance with certain  covenants
required by the finance agreement  governing the Chase Loan. In the absence of a
waiver of such  covenants,  either  OPIC,  Chase or both would have the right to
call a default  under the Chase  Loan,  accelerate  payment  of all  outstanding
amounts due thereunder and realize upon the collateral  securing the Chase Loan.
Although Argosy may apply for a waiver,  given the Company's  financial position
and negative working capital balance at June 30, 1998, no assurance can be given
that such  waiver  will be  granted or  continued.  Under the terms of the Chase
Loan,  75% of the  proceeds  from  Argosy's  oil  sales,  which are paid in U.S.
dollars are deposited into an escrow account with Chase to secure payment of the
Chase Loan.  Argosy is  required  to  maintain a minimum  balance in such escrow
account equal to six months of interest,  principal and other fees due under the
Chase Loan. The escrow  account  minimum  required  balance at June 15, 1998 was
$1,700,000 and the total account balance was $2,100,000.  As previously  stated,
Argosy was unable to pay the scheduled Chase Loan  principal,  interest and fees
due  June 15,  1998  from  its  operating  account.  Chase  and OPIC  therefore,
exercised  their right to withdraw  such amounts  totaling  $1,600,000  from the
escrow account and released $200,000 to Argosy, leaving a balance of $300,000 in
the account.  U. S. dollar  revenues  continue to be  deposited  into the escrow
account in an effort to bring the balance up to the required  minimum as soon as
possible.  Release of additional  funds to Argosy will be at the sole discretion
of OPIC and Chase.  No assurance can be given that OPIC will release  additional
amounts sufficient to fund the Company's operations.

         The Company was unable to pay  interest  to the  debenture  holders due
March 31 and June 30, 1998.  The Company's  financial  forecasts  indicate that,
assuming no changes in its capital structure, working capital and cash flow from
operations,  the  Company  will  not be  able  to pay  Debentures  interest  due
September  30, 1998,  or pay  principal and interest due under the Chase Loan on
December 15, 1998 and maintain the minimum  balance in the escrow  account.  The
Company also does not expect working capital and cash flow from operations to be
sufficient  to repay the  principal  amount of the  Debentures  at  maturity  or
earlier if the debenture  holders call a default as a result of the  non-payment
of  interest.   The  Company  must  complete  a  restructuring   transaction  or
renegotiate  the terms of the Debentures in order to avoid  non-compliance  with
its obligations to pay the Debentures. As a result, management believes there is
substantial doubt about the Company's ability to continue as a going concern. In
the  absence of a  business  transaction  or a  restructuring  of the  Company's
indebtedness,  the  Company may seek  protection  from its  creditors  under the
Federal Bankruptcy Code.
<PAGE>

(4)  Colombian operations-

         Through  its  ownership  of  interests  in 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 Neo to
explore for oil and gas on  approximately  52,000 acres  located in the Putumayo
Region of Colombia (the "Santana  Block").  The contract provided for a ten-year
exploration  period that expired in 1997 and for a production period expiring in
2015.  Argosy and Neo also had 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").  Work obligations under these
two contracts have been met and  applications to relinquish the areas were filed
with  Ecopetrol.  The  relinquishment  of the Fragua  Contract has been formally
accepted by Ecopetrol and the application to relinquish the Yuruyaco Contract is
under  consideration.  Argosy and Neo 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 Neo notified Ecopetrol in 1994 that they intend to abandon
the remaining wells and relinquish the Aporte  Putumayo Block because  declining
production   rates  made   continued   operation   of  the  wells   economically
unattractive. Ecopetrol is presently in discussion with another company desirous
of  contracting  with  Ecopetrol  for a new contract  area that will include the
Aporte Putumayo Block.  Depending on the terms of this new contract, the Company
may still be obligated to pay its share of the abandonment costs estimated to be
approximately $220,000.

          Argosy serves as the operator of the Colombian  properties under joint
venture agreements.  The Santana Contract provides 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  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.  In  June  1996,  cumulative  oil
production from the Santana Contract  exceeded seven million barrels.  Under the
terms of the Santana  Contract,  Ecopetrol  continued 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 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 65% interest therein at no cost
to Ecopetrol or further reimbursement by Ecopetrol to Argosy.

         The Company's resulting net participation in revenues and costs for the
Santana Contract is as follows:

<PAGE>




                             Production  Operating    Exploration   Development
                              Revenues     Costs         Costs          Costs

 After seven million barrels
   of accumulated production    15.3%       19.1%        38.2%           27.3%

         The joint venture has completed  its seismic  acquisition  and drilling
obligations  for  the  ten-year  exploration  period  of the  Santana  Contract,
resulting in the  discovery of four oil fields,  all of which have been declared
commercial by Ecopetrol.  The joint venture has the right to continue to explore
for additional oil and gas deposits on the remaining acreage in the block, which
is held under the commercial production provisions of the Santana Contract.

          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 $.515 per barrel. If
Ecopetrol does not export the oil, the price paid is based on the price received
from Ecopetrol's  Cartagena  refinery,  adjusted for quality  differences,  less
Ecopetrol's  cost to  transport  the  crude  to  Cartagena  and a  handling  and
commercialization  fee of $.415 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.


(5)  Exploration licenses in Papua New Guinea-

         Garnet PNG  Corporation  ("Garnet  PNG"), a wholly owned  subsidiary of
Garnet,  owned a 6% interest  (the "PPL-181  Interest) in Petroleum  Prospecting
License No. 181 ("PPL-181")  which covered  952,000 acres (the "PPL-181  Area").
Garnet  PNG  also  held a 7.73%  interest  in an  adjoining  license,  Petroleum
Prospecting License No. 174, on which an exploratory dry hole was drilled in the
first quarter of 1996.  This license was surrendered on April 25, 1997. In 1986,
oil was  discovered  approximately  10 miles  from the  northern  border  of the
PPL-181 Area in an adjoining license area.

         Under the  terms of an  agreement  pertaining  to  PPL-181,  Occidental
International  Exploration and Production Company ("Occidental") agreed to drill
and complete at its cost,  a test well on the PPL-181  Area by  September  1997.
PPL-181 was owned by Occidental  (88%),  Garnet PNG (6%) and Niugini Energy Pty.
Limited (6%). The test well, Turama-1, was drilled in the first quarter of 1997,
reaching a total depth of 9,652 feet. The well  encountered  the objective sands
in the  Jurassic-Cretaceous  Imburu  formation,  but  evaluations of samples and
electric logs indicated that the sands were water bearing;  therefore,  the well
was abandoned as a dry hole.
<PAGE>

         In an agreement dated November 24, 1997,  among Occidental Kanau Ltd. ,
Occidental  of  Papua  New  Guinea  Ltd.   ("Occidental  PNG"),  Santos  Niugini
Exploration  Pty.  Limited  ("Santos"),  Niugini  Energy,  Inc. and Garnet PNG ,
Garnet PNG agreed to  exchange  its 6%  interest  (the  "PPL-181  Interest")  in
PPL-181 for a 4% interest  in a newly  applied for but not yet issued  petroleum
prospecting   license  (New  PPL")  covering  the  PPL-181  Area  and  Petroleum
Prospecting  License No. 158 ("PPL-158")  held by Occidental PNG and Santos.  On
April 28, 1998,  the Minister for  Petroleum  and Energy for the  Government  of
Papua New Guinea agreed in writing to the  relinquishment of PPL-181and  PPL-158
and to the  issuance  of the  New  PPL to be  designated  Petroleum  Prospecting
License No. 206  ("PPL-206).  It is  anticipated  that  PPL-206 will be formally
issued during the third quarter of this year.

         Upon  presentation  of a tax clearance  certificate  evidencing  Garnet
PNG's  compliance with the relevant  provisions of Papua New Guinea's income tax
laws, profits,  dividends and certain other payments, if any, up to an amount of
500,000 kina  (approximately  $ 224,000)  per year may be fully  remitted out of
Papua  New  Guinea.  Amounts  in excess of  500,000  kina may also be  remitted,
subject to clearance from the Bank of Papua New Guinea.


 (6)  Long-term debt-

 Long-term  debt at June  30,  1998  and  December  31,  1997  consisted  of the
following:

                                                  1998                    1997
                                              -------------          ----------

 9 1/2% convertible subordinated debentures    $15,000,000          $15,000,000
 Notes payable by Argosy to a U.S. bank          6,301,740            7,641,480
                                              -------------        -------------

                                               21,301,740            22,641,480
 Less - Current portion                       (21,301,740)          (22,641,480)
                                              ------------          ------------

                                            $        -            $         -
                                           ===================       ===========

         In  1993,  Garnet  issued   $15,000,000  of  convertible   subordinated
debentures  (the  "Debentures")  due  December  21, 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.  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.  The
Debentures  mature  December 21, 1998;  therefore,  the entire  balance has been
classified as current in the accompanying consolidated balance sheet. As of June
30, 1998,  Garnet was not in compliance  with the minimum net worth  required by
the Debentures and did not pay the quarterly  interest  payment due March 31 and
June 30, 1998.  Additionally,  the Company does not expect  working  capital and
cash flow from operations to be sufficient to repay the principal  amount of the
debentures at maturity,  therefore the Company must  consummate a  restructuring
transaction prior to their maturity date in order to avoid  non-compliance  with
its  obligations  to pay the  Debentures.  If no  restructuring  transaction  is
consummated  the  Company  will be  required  to  re-negotiate  the terms of the
debentures.  In the absence of a business  transaction or a restructuring of the
Company's indebtedness, the Company may seek protection from its creditors under
the Federal Bankruptcy Code.
<PAGE>

         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 complete the  construction  of its 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 March 31, 1998
was 6.125%.  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. Argosy
is no longer in  compliance  with  certain  covenants  required  by the  finance
agreement governing the Chase Loan.

 (7) Stock option plans-

         Garnet has adopted stock option plans (the "Employee  Plans")  pursuant
to which an aggregate of 1,473,000 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  performing  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.

         The employee stock options are generally 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.

         On May 22, 1997,  Garnet adopted the 1997 Directors'  Stock Option Plan
(the "1997 Directors' Plan") pursuant to which an aggregate of 470,000 shares of
Garnet's  common  stock is  authorized  to be issued  upon  exercise  of options
granted to non-employee  directors.  An aggregate of 122,950 shares was issuable
as of June 30, 1998 upon  exercise of options  granted  thereunder  in exchange,
among other things,  for the surrender of 265,000 options  previously granted to
such directors under the 1990  Directors'  Stock Option Plan that has since been
terminated.  Director's  stock options are  exercisable  for a period of 5 years
from the date of grant. The purchase price of shares issuable upon exercise of a
director's stock option must be paid in cash.
<PAGE>

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

Options outstanding at December 31, 1995    1,329,102    $2.50-$13.83

Options granted                               480,000    4.00 - 11.75
Options expired                              (630,376)   2.87 -  4.05
                                            -----------   -----------

Options outstanding at December 31, 1996    1,178,726    1.19 - 13.83

Options granted                               698,956    0.38 -  0.56
Options cancelled                            (451,080)   4.00 - 11.75
Options expired                               (85,372)   2.87 -  4.05
                                             ----------   ------------

Options outstanding at December 31, 1997    1,341,230    0.38 -- 2.50

Options expired                              (568,171)   0.38 -- 0.56
                                             -----------  ------------

Options outstanding at June 30, 1998          773,059   $0.38 - $0.56
                                             =========  =============

         As of June 30, 1998, options for 486,458 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  was
required in 1996, although earlier implementation was permitted. The Company did
not adopt SFAS No. 123 for accounting purposes;  however it will make annual pro
forma disclosures of its effects.

(8)  Income taxes-

         The  provisions  for income  taxes and deferred  income  taxes  payable
relate to the Colombian  activities of Argosy.  No 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,  1997,  the  Company had a regular U. S. tax net
operating loss carryforward and an alternative  minimum tax loss carryforward of
approximately   $30,900,000   and  $   30,600,000   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 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.
<PAGE>

(9) Subsequent event-

         On August 3, 1998,  leftist  guerrilla  groups  launched a nation  wide
offensive in Colombia.  As a result of one attack,  the Company's oil production
and  storage  facilities  at the Mary field were  damaged  and minor  damage was
inflicted on the Linda  facilities.  While it is too early to accurately  assess
the cost of repairs,  the Company  does not  believe  the  property  damage will
exceed insurance limits.

         As of August 10, 1998, the Company's oil production  from the Linda and
Toroyaco fields had been restored. Production from the Mary and Miraflor fields,
however, may be suspended or significantly  curtailed for at least several weeks
and possibly longer depending on the extent of damage and availability of repair
crews.


(10) Capital Stock: Net Income (Loss) Per Common Share-

A  reconciliation  of the  components of basic and diluted net income (loss) per
common  share for the three months and six months ended June 30,1998 and 1997 is
presented in the table below (in thousands, except per share amounts):

                                 Three Months Ended        Six Months Ended
                                       June 30,               June 30,
                                   1998       1997           1998      1997
                                   -----     -----          -----      ----
Basic net income (loss) per share:

Net income (loss)                  $ (2,503)   $(12,181)   $ (6,879)   $(16,074)
Less: Preferred stock
         Dividends                      --          --          --          --

Earnings (loss) available
To common shareholders             $ (2,503)   $(12,181)   $ (6,879)   $(16,074)

Weighted average shares of
common stock outstanding(1)          11,492      11,492      11,492      11,492

Basic net income (loss)
Per share                          $   (.22)   $  (1.06)   $   (.60)   $  (1.40)

Diluted net income (loss) per share:

Weighted average shares of
common stock outstanding (1)          11,492      11,492      11,492      11,492

Effect of dilutive securities:
    Restricted stock (2) (3)             0           0           0           0
    Preferred stock, warrants
    and stock options (2) (3)            0           0           0           0

Average shares of common
Stock outstanding including
dilutive securities                   11,492      11,492      11,492      11,492

Diluted net income (loss)
Per share                          $   (.22)   $  (1.06)   $   (.60)   $  (1.40)


(1)   Includes shares issued and outstanding plus vested restricted stock.
(2)   Calculated   using  the  treasury   stock   method,   including   unearned
      compensation of restricted stock as proceeds.
(3)   Amounts are not included in the  computation  of diluted net income (loss)
      per share because to do so would have been antidilutive.
<PAGE>


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

 Liquidity and Capital Resources

         The  Company is highly  leveraged  with  $21,301,740  in  current  debt
consisting of (i) the  Debentures  ($15,000,000)  due December 21, 1998 and (ii)
$6,350,000  ($6,301,740 net to Garnet) in principal  outstanding under the Chase
Loan to Argosy.  Based on Argosy's  year-end  financial  statements,  Argosy has
determined that it is no longer in compliance with certain covenants required by
the finance  agreement  governing  the Chase Loan. In the absence of a waiver of
such  covenants,  either  OPIC or Chase  would  have the right to call a default
under  the  Chase  Loan,  accelerate  payment  of all  outstanding  amounts  due
thereunder  and realize upon the  collateral  securing the Chase Loan.  Although
Argosy  may apply  for a waiver,  given the  Company's  financial  position  and
negative  working  capital  balance at June 30, 1998,  no assurance can be given
that such  waiver  will be  granted or  continued.  Under the terms of the Chase
Loan,  the 75% of  proceeds  from  Argosy's  oil  sales,  which are paid in U.S.
dollars are deposited into an escrow account with Chase to secure payment of the
Chase Loan.  Argosy is  required  to  maintain a minimum  balance in such escrow
account equal to six months of interest,  principal and other fees due under the
Chase Loan. The escrow account minimum  required  balance at June 15th, 1998 was
$1,700,000 and the total account balance was $2,100,000.  As previously  stated,
Argosy was unable to pay the scheduled Chase Loan  principal,  interest and fees
due June  15th,  1998 from its  operating  accounts.  Chase and OPIC  therefore,
exercised  their right to withdraw  such amounts  totaling $ 1,600,000  from the
escrow account and released $ 200,000 to Argosy,  leaving a balance of $ 300,000
in the  account.  Revenues in U. S. dollar  continue  to be  deposited  into the
escrow  account  to bring the  balance  up to the  required  minimum  as soon as
possible.  Release of additional  funds to Argosy will be at the sole discretion
of OPIC and Chase.  No  assurance  can be given that OPIC and Chase will release
additional amounts sufficient to fund the Company's operations.


         The Company was unable to pay the interest to the debenture holders due
March 31 and June 30, 1998 and the Company's  financial forecasts indicate that,
assuming no changes in its capital structure, working capital and cash flow from
operations, the Company will not be able to pay Debenture interest due September
30, 1998 or pay  principal and interest due under the Chase Loan on December 15,
1998 and maintain the minimum  balance in the escrow  account.  The Company also
does not expect working  capital and cash flow from  operations to be sufficient
to repay the  principal  amount of the  Debentures at maturity or earlier if the
Debenture holders call a default as a result of the non-payment of interest. The
Company must complete a  restructuring  transaction or renegotiate  the terms of
the Debentures in order to avoid  non-compliance with its obligations to pay the
Debentures.  As a result,  management  believes there is substantial doubt about
the  Company's  ability to  continue  as a going  concern.  In the  absence of a
business  transaction  or a  restructuring  of the Company's  indebtedness,  the
Company may seek  protection  from its  creditors  under the Federal  Bankruptcy
Code.

         In view of its operating  losses and financial  condition,  the Company
initiated  further cost  containment  programs in 1997 and 1998  including a 28%
reduction in its Colombian  personnel and the termination of all U.S.  personnel
other than Douglas W. Fry, the Chief Executive  Officer,  and Edgar L. Dyes, the
Chief  Financial  Officer  and the closing of the  Company  executive  office in
Houston.  The Company also  engaged  Rauscher  Pierce  Refsnes,  Inc.  (now Dain
Rauscher) as a financial advisor to provide assistance in negotiating a business
combination  or a  debt  restructuring  transaction  to  address  the  Company's
liquidity  issues.  Although  the  Company  engaged  in  comprehensive  efforts,
including extensive  negotiations with two separate candidates,  the Company was
not  successful  in  concluding a  transaction.  The Company,  on June 24, 1998,
executed a definitive  merger  agreement to effect a business  combination  (see
Note 2), although no assurance can be given that the merger will be consummated.

         It is anticipated  that any future foreign  exploration and development
activities will require substantial amounts of capital. If the Company is unable
to conclude a business  combination  or a debt  restructuring  transaction,  the
Company  will not have the  resources  to finance  any  further  exploration  or
development activity. Accordingly, there can be no assurance that any additional
exploration  or  development  activities  will be  conducted,  other  than those
activities  required to deplete the  Company's  existing  proved  reserves.  The
present  environment  for  financing 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.  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
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.
<PAGE>

         On August 3,  1998,  Colombian  leftist  guerrilla  groups  launched  a
nationwide  series of attacks.  As a result of one  attack,  the  Company's  oil
production  and  storage  facilities  at the Mary field were  damaged  and minor
damage  was  inflicted  on  the  Linda  facilities.  While  it is too  early  to
accurately assess the cost of repairs, the Company does not believe the property
damage will exceed  insurance  limits.  As of August 10, 1998, the Company's oil
production  from the Linda  and  Toroyaco  fields  had been  restored,  however,
production from the Mary and Miraflor  fields may be suspended or  significantly
curtailed for at least several weeks and possibly longer depending on the extent
of damage and availability of repair crews.

         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.

         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,  and the
ability to conclude a business combination or a debt restructuring  transaction.
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  herein.  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 six months ended June 30, 1998
                      compared with the same period in 1997

         The  Company  reported  net losses of  $2,503,176  ($.22 per share) and
$12,181,418 ($1.06 per share) for the three months ended June 30, 1998 and 1997,
respectively and $6,878,810  ($.60 per share) and $16,073,690  ($1.40 per share)
for the six months ended June 30, 1998 and 1997 respectively.

         Oil and gas revenues continued to decline due to dramatically lower oil
prices and declining  production  rates.  Lost revenues were partially offset by
decreased  production expenses related to the expiration of Colombian production
taxes and lower transportation,  handling and commercialization  costs. Also the
company instituted major cost reduction programs at all levels of operations and
administration. 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:
<PAGE>

                                       Three Months Ended    Six Months Ended
                                              June 30,              June 30,
                                       1998        1997       1998        1997
                                      ------      -----       ----        ----

Average oil sales (BOPD)                 833        1,439       924      1,550
Average oil price per barrel          $10.61  $     16.56    $ 11.53   $18.58
Production costs per barrel           $ 6.26  $      7.54    $  6.46   $ 6.88
Depreciation, depletion and
 amortization per barrel              $ 4.58   $    16.06    $  5.22   $14.94

         Net  operating  losses for the three month period  ending June 30, 1998
increased from $858,000 to $2,503,000 as a result of a $1,645,000  write down of
oil and gas properties  attributable to lower oil prices used in the calculation
of future net revenues.  The Company's exploration and production activities are
accounted for under the full cost method.  Under this method,  all  acquisition,
exploration and development  costs,  including  certain related  employee costs,
incurred  for the  purpose of finding oil and gas are  capitalized.  Capitalized
costs  are  limited  to the sum of the  present  value of  future  net  revenues
discounted  at 10% related to estimated  production  of proved  reserves and the
lower of cost or  estimated  fair value of  unevaluated  properties.  If the net
capitalized  costs of oil and gas properties in a cost center,  exceed an amount
equal to the sum of the present  value of  estimated  future net  revenues  from
proved oil and gas reserves in the cost center plus the costs of properties  not
being amortized, both adjusted for income tax effects, such excess is charged to
expense.  Corporate  general  and  administrative  expenses  decreased  by  23 %
compared to the same period in 1997 due to personnel  reductions  and  austerity
measures taken in the last quarter of 1997 and the first half of 1998.  Interest
expenses  declined  because of scheduled  repayments of debt.  The provision for
income taxes, all of which relates to Colombian operations,  remained low due to
revisions in Colombian  presumptive  income  calculations for tax purposes.  The
corporate  tax rate in Colombia is  currently 35 % and is applied to the greater
of taxable or presumptive income.

Year 2000

         The Company is currently  utilizing  accounting  software in the United
States that is year 2000 compliant.  Argosy Energy International,  the Company's
subsidiary  in Colombia,  must upgrade it's systems  however.  An  evaluation of
alternative  solutions to the year 2000 problem is complete and a new management
information  and  accounting  software  package has been selected to upgrade the
system. Installation, conversion and implementation should take about six months
and is estimated to cost approximately $ 48,000.

New Accounting Pronouncements

The Company is assessing the reporting and disclosure  requirements  of SFAS No.
131, Disclosures about Segments of an Enterprise and Related  Information.  This
statement  requires  a  public  business  enterprise  to  report  financial  and
descriptive  information about its reportable operating segments.  The statement
is effective for financial  statements for periods  beginning after December 15,
1997, but is not required for interim  financial  statements in the initial year
of its application. The Company will adopt the provisions of SFAS No. 131 in its
December 1998 consolidated financial statements.


         The Company is also assessing the reporting and disclosure requirements
of SFAS No. 133,  Accounting for Derivative  Instruments and Hedging Activities.
This statement  establishes  accounting  and reporting  standards for derivative
instruments  and hedging  activities.  The  statement is effective for financial
statements for fiscal years beginning after June 15, 1999. The Company  believes
SFAS No.  133 will not have a material  impact on its  financial  statements  or
accounting  policies.  The Company will adopt the  provisions of SFAS No. 133 in
the first quarter of the year 2000.
<PAGE>


Item 6. Exhibits and Reports on Form 8-K.
         (a)  Exhibits

  Item                                                                   Exhibit
   No.                           Item Title                                No.

  (2)         Agreement and Plan of Merger dated June 24, 1998,
              by and among Aviva Petroleum Inc., Aviva Merger Inc.
              and Garnet Resources Corporation (filed as exhibit 2.1
              to Aviva Petroleum Inc. Registration Statement on Form
              S-4, File No. 333-58061, and incorporated herein by
              reference).                                                  *2.1


 (27)          Financial Data Schedule.                                   **27.1

         ------------
                           *  Previously Filed
              ** Filed Herewith



<PAGE>



         (b)  Reports on Form 8-K

The  Company  filed  a From 8K on June  30,  1998.  The  Form 8K  describes  the
definitive  agreement  pursuant  to which a  wholly  owned  subsidiary  of Aviva
Petroleum Inc. will be merged with and into the Company.
<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 thereunto duly authorized.


                                                    GARNET RESOURCES CORPORATION
Date:    August 14, 1998                            /s/ Edgar L. Dyes
                                                   -----------------
                                                    Edgar L. Dyes,
                                                    Vice President and Treasurer
                                                    (As both a duly authorized
                                                    officer of Registrant and as
                                                    principal financial officer
                                                    of Registrant