<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 June 30, 1997

                                       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)

<TABLE>
<S>                                                   <S>
             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)
</TABLE>

       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 August 19, 1997, 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>
<CAPTION>
PART I  -    FINANCIAL INFORMATION                                                   PAGE
------                                                                               ----
<S>    <C>                                                                           <C> 
        Item 1. Financial Statements

                Consolidated Balance Sheets -
                 June 30, 1997 (unaudited)
                 and December 31, 1996                                                3-4

                Consolidated Statements of
                 Operations for the Three Months and
                 Six Months Ended June 30, 1997 and 1996
                 (unaudited)                                                           5

                Condensed Consolidated Statements of
                 Cash Flows for the Six Months Ended
                 June 30, 1997 and 1996 (unaudited)                                    6

                Notes to Condensed Consolidated Financial
                 Statements - June 30, 1997 (unaudited)                              7-11


        Item 2. Management's Discussion and Analysis of
                  Financial Condition and Results of
                  Operations                                                        11-14


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>
                                                     JUNE 30,           DECEMBER 31,      
                                                       1997                 1996     
                                                   -----------          -----------
                ASSETS                             (unaudited)
                ------
<S>                                                <C>                  <C>
CURRENT ASSETS:
   Cash and cash equivalents                       $ 3,064,936          $ 4,107,364
   Accounts receivable                               2,208,573            3,541,223
   Inventories                                         857,396              901,216
   Prepaid expenses                                    136,407              132,199
                                                   -----------          -----------
           Total current assets                      6,267,312            8,682,002
                                                   -----------          -----------
PROPERTY AND EQUIPMENT, at cost:
   Oil and gas properties
       (full-cost method)-
        Proved                                      58,535,122           56,500,390
        Unproved (excluded from
         amortization)                                 353,406              227,846
                                                   -----------          -----------
                                                    58,888,528           56,728,236
           Other equipment                             134,408              132,083
                                                   -----------          -----------
                                                    59,022,936           56,860,319
        Less - Accumulated depreciation,
         depletion and amortization                (36,113,809)         (17,698,898)
                                                   -----------          ----------- 
                                                    22,909,127           39,161,421
                                                   -----------          -----------
OTHER ASSETS                                           627,645              678,132
                                                   -----------          -----------
                                                   $29,804,084          $48,521,555
                                                   ===========          ===========
</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>
                                                      JUNE 30,           DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY                    1997                1996       
                                                     -----------         -----------
<S>                                                 <C>                 <C>    
CURRENT LIABILITIES:
    Current portion of long-term debt                $ 1,835,940         $ 2,004,648
    Accounts payable and accrued
     liabilities                                       2,267,281           3,323,214
                                                     -----------         -----------
         Total current liabilities                     4,103,221           5,327,862
                                                     -----------         -----------
LONG-TERM DEBT, net of current portion                21,301,740          21,629,232
                                                     -----------         -----------
DEFERRED INCOME TAXES                                     0                  979,499
                                                     -----------         -----------
OTHER LONG-TERM LIABILITIES                              265,906             378,054
                                                     -----------         -----------
STOCKHOLDERS' EQUITY:
    Common stock, $.01 par value, 75,000,000
         shares authorized, 11,492,162 shares
         issued and outstanding as of June 30,
         1997 and December 31, 1996                      114,922             114,922
    Capital in excess of par value                    52,491,212          52,491,212
    Retained earnings (deficit)                      (48,472,917)        (32,399,226)
                                                     -----------         -----------
         Total stockholders' equity                    4,133,217          20,206,908
                                                     -----------         -----------
                                                     $29,804,084         $48,521,555
                                                     ===========         ===========
</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                      Six Months Ended
                                                   June 30,                               June 30,
                                          1997                1996                  1997               1996
                                      ------------         -----------          ------------       ------------
<S>                                   <C>                  <C>                  <C>                <C>
REVENUES:
    Oil sales                         $  2,169,479         $ 3,288,288          $  5,213,480       $  6,185,377
    Interest                                39,037              63,811               108,796            134,499
                                      ------------         -----------          ------------       ------------
                                         2,208,516           3,352,099             5,322,276          6,319,876
                                      ------------         -----------          ------------       ------------
COSTS AND EXPENSES:
    Production                             987,076             964,360             1,930,852          1,832,415
    Exploration                              1,700               5,258                 3,452              5,258
    Loss on net assets held
      for disposition                          -                46,777                   -               46,777
    General and
      administrative                       360,907             186,993               565,815            341,673
    Interest                               560,086             545,343             1,145,217          1,090,648
    Depreciation, depletion
      and amortization                   2,107,199           1,949,174             4,199,772          3,556,477
    Write down of oil and
      gas properties                    10,705,135                 -              14,216,868                -
    Foreign currency
      translation (gain) loss              (24,675)            (30,161)             (104,761)          (125,433)
                                      ------------         -----------          ------------       ------------
                                        14,697,428           3,667,744            21,957,215          6,747,815
                                      ------------         -----------          ------------       ------------
INCOME (LOSS) BEFORE
 INCOME TAXES                          (12,488,912)           (315,645)          (16,634,939)          (427,939)

PROVISION FOR
  INCOME TAXES                           ( 307,494)            331,539              (561,249)           640,711
                                      ------------         -----------          ------------       ------------
NET LOSS                              $(12,181,418)        $  (647,184)         $(16,073,690)       $(1,068,650)
NET LOSS PER SHARE                    $      (1.06)        $      (.06)         $      (1.40)       $      (.09)
                                      ============         ===========          ============        ===========
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>   6
                 GARNET RESOURCES CORPORATION AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                  SIX MONTHS ENDED
                                                                      JUNE 30,                       
                                                         ---------------------------------
                                                             1997                  1996       
                                                         ------------          -----------
<S>                                                      <C>                   <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss                                             $(16,073,690)         $(1,068,650)
    Exploration costs                                           3,452                5,258
    Loss on net assets held for disposition                       -                 46,777
    Depreciation, depletion and amortization                4,199,772            3,556,477
    Write down of oil and gas properties                   14,216,868                  -
    Deferred income taxes                                    (979,499)             194,157
    Changes in components of working capital                  565,601             (959,641)
    Other                                                     119,668              115,530
                                                         ------------          ----------- 
         Net cash provided by operating activities          2,052,172            1,889,908
                                                         ------------          ----------- 
CASH FLOWS FROM INVESTING ACTIVITIES:
    Capital expenditures                                   (3,320,539)          (2,623,801)
    Proceeds from asset dispositions                              -                287,395
    (Increase) decrease in joint venture and
         contractor advances                                  795,375             (501,215)
    Acquisition of interests in Argosy Energy
         International, net of cash acquired                      -                    -
    Other                                                     (54,447)              91,896
                                                         ------------          ----------- 
         Net cash used for investing activities            (2,579,611)          (2,745,725)
                                                         ------------          ----------- 
CASH FLOWS FROM FINANCING ACTIVITIES:
    Repayments of debt                                       (496,200)            (561,769)
    Costs of debt issuances                                   (18,789)             (18,260)
                                                         ------------          ----------- 
         Net cash used for financing activities              (514,989)            (580,029)
                                                         ------------          ----------- 
NET DECREASE IN CASH AND CASH EQUIVALENTS                  (1,042,428)          (1,435,846)

CASH AND CASH EQUIVALENTS
  AT BEGINNING OF PERIOD                                    4,107,364            5,713,191
                                                         ------------          ----------- 
CASH AND CASH EQUIVALENTS AT END OF PERIOD               $  3,064,936         $  4,277,345
                                                         ============         ============

Supplemental disclosures of cash flow information:

 Cash paid for -
    Interest, net of amounts capitalized                 $  1,094,811         $    949,084
    Income taxes                                              324,726              327,932
</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
                                 JUNE 30, 1997                 
                                  (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,
1996.

(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 has a ten-year exploration period and a twenty two-year
production period expiring in 1997 and 2015 respectively.   At June 30, 1997,
the Santana Contract entitled 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").   Upon termination of the exploration period, a
partial relinquishment of the remaining contract area is required which shall
leave only the area surrounding the commercial fields plus a five kilometer
buffer zone.  Expenditure obligations required by the Santana Contract have
been met.  One development well, Linda No. 5 was completed in the second
quarter of 1997 and is currently on production.  The joint venture has plans to
drill one additional development well in 1998.   As of June 30, 1997, future
costs for additional drilling is estimated at $1.1 million, net to the
Company's interest.

         Argosy and its joint venture partner also have three additional
association contracts with Ecopetrol (the "Fragua Contract", the "Yuruyaco
Contract" and the "Aporte Putumayo Contract").  The joint venture has filed for
formal relinquishment of the Fragua and Aporte Putumayo Contracts, acceptance
of which is anticipated before year-end.  The Company has no further
expenditure obligations with respect to these contracts, except for costs
related to abandonment of old wells on the Aporte Putumayo Block.  Expenditure
obligations for the first two years of the Yuruyaco Contract have also been
satisfied with the acquisiiton of 50 kilometers of 2-D seismic over the area.
Interpretation of this data is in progress and a decision to maintain or drop
the contract must be made in November of this year.

          Argosy serves as the operator of the Colombian properties under joint
venture agreements. The Santana 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 remaining production
from


                                       7
<PAGE>   8
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 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 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
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.

         The Company's resulting net participation in revenues and costs for
the Santana 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%           27.3%             38.2%             27.3%
  After seven million barrels
   of accumulated production                 15.3%           19.1%             38.2%             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 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 also completed its seismic
obligations for the first two years of the Yuruyaco 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.


                                       8

<PAGE>   9
(3)  LONG-TERM DEBT-

       Long-term debt at June 30, 1997 and December 31, 1996 consisted of the
following:

<TABLE>
<CAPTION>
                                                                      1997                    1996       
                                                                  -----------             -----------
       <S>                                                        <C>                     <C>
       9 1/2% convertible subordinated debentures                 $15,000,000             $15,000,000
       Notes payable by Argosy to a U.S. bank                       8,137,680               8,633,880
                                                                  -----------             -----------

                                                                   23,137,680              23,633,880
       Less - Current portion                                      (1,835,940)             (2,004,648)
                                                                  -----------             ----------- 

                                                                  $21,301,740             $21,629,232
                                                                  ===========             ===========
</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 June 30, 1997, 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 October
1, 1998 subject to the termination of such waiver on October 31, 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 September 30, 1997
plus (ii) the number of net barrels of oil produced during the period from
April 1, 1996 through September 30, 1997 is greater than 5.0 to 1.  Such ratio
was 4.7 to 1 as of June 30, 1997.

         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 June 30, 1997
was 5.938%.  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.  As
of June 30, 1997, Argosy was not in compliance with the debt service coverage
ratios required under the finance agreement.  OPIC has waived compliance with
this requirement through July 1, 1998.


                                       9

<PAGE>   10

(4) STOCK OPTION PLANS-

         Garnet and a predecessor entity have adopted stock option plans (the
"Employees' Plans") pursuant to which an aggregate of 1,262,000 shares of
Garnet's common stock is currently authorized to be issued upon exercise of
options granted or to be 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 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.  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 generally 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 306,975 shares were
issuable as of June 30, 1997 upon exercise of options granted thereunder in
exchange, among other things, for the surrender of options previously granted
to such directors.  Directors 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 directors stock option must be paid in cash.

         As of March 31, 1997, an aggregate of 265,000 shares of Garnet common
stock were issuable upon exercise of options granted under the 1990 Directors
Stock Option Plan.  As the 1990 Directors Stock Option Plan expired on March 8,
1996, no further options may be issued thereunder.  As all outstanding options
under the 1990 Directors Stock Option Plan were surrendered on May 22, 1997 for
new options, no shares are issuable upon exercise of options granted under the
1990 Directors Stock Option Plan.

         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, 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                                                      (294,274)         2.87-  4.05
                                                                    ----------        ------------
</TABLE>


                                       10
<PAGE>   11
<TABLE>
<S>                                                                 <C>                 <C>
Options outstanding at December 31, 1996                            1,178,726           1.19- 13.83

Options cancelled                                                    (419,088)          1.19- 13.83
Options granted                                                       641,563           0.38-  0.56 
                                                                    ---------          ------------

Options outstanding at June 30, 1997                                1,401,201          $0.38-$ 2.50
                                                                    =========          ============
</TABLE>

         As of June 30, 1997, options for 958,477 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.

(5)  INCOME TAXES-

         The provisions for income taxes relate to the Colombian activities of
Argosy.  The Colombian deferred tax liability was eliminated due to a write
down of oil and gas properties in the first six months of 1997, totaling $14.2
million.  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, 1996, the Company had a regular tax net operating
loss carryforward and an alternative minimum tax loss carryforward of
approximately $30,200,000 and $29,800,000 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.

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

LIQUIDITY AND CAPITAL RESOURCES

         Since December 31, 1996, the Company has expended approximately
$3,300,000 for the acquisition, exploration and development of its oil and gas
properties.  Principal 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 ten year exploration period of the
Santana Contract, resulting in the discovery of four oil fields.  The Company
is completing the interpretation of additional seismic work performed on


                                       11
<PAGE>   12
the Santana Block in 1996 and, depending upon the results of the seismic
interpretation, may drill an additional exploratory well in 1998 on the Santana
Block, with estimated total costs to the Company of approximately $1,400,000.
The Company also plans to drill up to one additional development well on the
Santana Block in 1998.  The Company's share of the costs of drilling and
completing this well is expected to range from $1,000,000 to $1,200,000.  The
seismic programs required during the first two years of the Yuruyaco Contract
have also been completed.

         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.  The Company's share of such production is 15.3%; it also receives
an additional 28.4% of the production from one well until it recovers the
drilling and completion costs for that well allocable to Ecopetrol but paid by
the Company.

         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.
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. As
of June 30, 1997, 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 October 1, 1998 subject to the
termination of such waiver on October 31, 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 September 30, 1997 plus (ii) the number of
net barrels of oil produced during the period from April 1, 1996 through
September 30, 1997 is greater than 5.0 to 1.  Such ratio was 4.7 to 1 as of June
30, 1997.  If Garnet is unable to increase its net worth to the minimum required
by October 1, 1998 (or by October 31, 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, which will
otherwise mature in December 1998.  In February 1997, Garnet retained Rauscher
Pierce Refsnes, Inc. to assist Garnet in negotiating a transaction intended to
maximize shareholder value such as a merger, debt restructuring,
recapitalization and/or sale of assets (a "Restructuring Transaction").  If the
Company does not consummate a Restructuring Transaction prior to the maturity
date of the Debentures, in order to avoid non- compliance with its obligations
under the Debentures, the Company will be required to renegotiate the terms of
the Debentures to extend the maturity date so that the Debentures may be repaid
out of cash flow from operations over time. There can be no assurance that the
Company will be successful in consummating a Restructuring Transaction or in
renegotiating the terms of the Debentures. In addition, if the Company is
required to repay the Debentures out of cash flow, in the absence of significant
increases in reserves, production or oil prices, it may be necessary for the
Company to alter its planned exploration and development activities or take
other measures to improve its liquidity.

         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


                                       12

<PAGE>   13
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.

          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 consummate a Restructuring Transaction or to renegotiate the terms of
the Company's outstanding Debentures. 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 projects
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, 1997
                    compared with the same period in 1996            

         The Company reported net losses of $12,181,418 ($1.06 per share) and
$647,184 ($.06 per share) for the three months ended June 30, 1997 and 1996,
respectively.

         The decrease in oil and gas revenues was attributable to a continued
decline in the average sales price for the period of $3.67 per barrel.  The
company's net revenue interest also declined from 21.8% to 15.3% after June
1996 due to reaching cumulative production on the Santana Block of 7MM barrels.

<TABLE>
<CAPTION>
                                                THREE MONTHS ENDED         SIX MONTHS ENDED
                                                      JUNE 30,                 JUNE 30,
                                                  1997         1996          1997        1996 
                                                 ------       ------        ------      ------
         <S>                                     <C>          <C>              <C>     <C>
         Average oil sales (BOPD)                 1,439        1,786        1,550       1,786
         Average oil price per barrel            $16.56       $20.23       $18.58      $19.03
         Production costs per barrel             $ 7.54       $ 5.93       $ 6.88      $ 5.64
         Depreciation, depletion and
          amortization per barrel                 $16.06      $11.97       $14.94      $10.92
</TABLE>

          The net loss for the period increased by $10,700,000 due to a cost
center ceiling write down resulting from a continued decrease in world oil
prices and changes in proven reserve estimates at the end of the second quarter
compared to year end December 31, 1996.  The full cost ceiling write down
utilized post balance sheet data prices, which were higher than prices at June
30, 1997.  The balance sheet date price would result in an additional write down
of $3,600,000.  The increase in general and administrative expenses was due
primarily to temporary increases in home office personnel costs related to the
corporate financial officer's resignation. The provision for income taxes, all
of which relates to Colombian operations, was significantly lower due to
adjustments to deferred taxes as a result of a full cost ceiling write down of
oil and gas properties.


                                       13
<PAGE>   14
ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        The Annual Meeting of the Shareholders of the Company was held on May
22, 1997 pursuant to notice, at which the following persons were elected
directors of the Company to serve until the next annual meeting of the
shareholders or until their successors are elected and qualify:

<TABLE>
<CAPTION>
                                                                              Vote
                                                     For                     Withheld
                                                     ---                     --------
        <S>                                       <C>                        <C>
        Robert J. Cresci                          8,911,023                  578,314
        Douglas W. Fry                            8,912,023                  577,314
        Santiago Gonzalez                         8,912,023                  577,314
        Montague H. Hackett, Jr.                  8,927,423                  561,914
        Alastair Manson                           8,912,023                  577,314
        Wendell W. Robinson                       8,927,423                  561,914
</TABLE>

        In addition, the following proposals were approved by the shareholders:

        The proposal to adopt the 1997 Directors Stock Option Plan was passed
with 6,518,356 votes in favor, 2,661,727 votes against, and 100,965
abstentions.

        The proposal to adopt the amendment to the Company's Certificate of
Incorporation was passed with 8,056,371 votes in favor, 1,362,934 votes
against, and 70,032 abstentions.


                                       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 June 30, 1997.


                                       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:   August 19, 1997                  /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)


                                       17

<PAGE>   18
                               INDEX TO EXHIBITS


    EXHIBIT
    NUMBER                        DESCRIPTION
    -------                 -----------------------

      27                    Financial Data Schedule





                                       18