<PAGE>   1







                                   FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549




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

               For the quarterly period ended September 30, 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)

           DELAWARE                                         74-2421851
  (State or other jurisdiction of                         (IRS Employer
   incorporation or organization)                         Identification No.)

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

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



Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.

                   Yes    X       No
                       ------         ------

As of November 14, 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")
        ----------------------------------------------------------------
                                     INDEX


<TABLE>
<CAPTION>

PART I  -    FINANCIAL INFORMATION                                    PAGE
------                                                                ----
<S>                                                                  <C>                    
Item 1. Financial Statements

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

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

            Condensed Consolidated Statements of
            Cash Flows for Nine Months Ended
            September 30, 1997 and 1996 (unaudited)                      6

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


Item 2. Management's Discussion and Analysis of Financial 
            Condition and Results of Operations                      11-13


PART II  -   OTHER INFORMATION
-------
         Item 6. Exhibits and Reports on Form 8-K                    14-15

</TABLE>


                                       2

<PAGE>   3
PART I - FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS.
------------------------------

                 GARNET RESOURCES CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                      -----------------------------------
<TABLE>
<CAPTION>


                                               SEPTEMBER 30,      DECEMBER 31,
                                                  1997               1996                       
                                               -------------      ------------
      ASSETS                                    (unaudited)
      ------
<S>                                            <C>                <C>      
CURRENT ASSETS:   
     Cash and cash equivalents                 $  2,589,972       $  4,107,364
     Accounts receivable                          1,519,121          3,541,223
     Inventories                                    787,766            901,216
     Prepaid expenses                               192,296            132,199
                                               ------------       ------------
         Total current assets                     5,089,155          8,682,002
                                               ------------       ------------


PROPERTY AND EQUIPMENT, at cost:
     Oil and gas properties 
       (full-cost method)-
           Proved                                59,022,429         56,500,390
           Unproved (excluded from
            amortization)                           260,211            227,846
                                               ------------       ------------
                                                 59,282,640         56,728,236
         Other equipment                            134,408            132,083
                                               ------------       ------------
                                                 59,417,048         56,860,319
         Less - Accumulated depreciation,
          depletion and amortization            (36,655,645)       (17,698,898)
                                               ------------       ------------
                                                 22,761,403         39,161,421
                                               ------------       ------------
OTHER ASSETS                                        572,253            678,132
                                               ------------       ------------

                                               $ 28,422,811       $ 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>


                                                                                  SEPTEMBER 30,     DECEMBER 31,
                                                                                 --------------     ------------
                                                                                     1997               1996
<S>                                                                               <C>                <C>       
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:  
     Current portion of long-term debt                                           $  1,835,940       $  2,004,648
     Accounts payable and accrued
      liabilities                                                                   1,223,682          3,323,214
                                                                                 ------------       ------------

         Total current liabilities                                                  3,059,622          5,327,862
                                                                                 ------------       ------------

LONG-TERM DEBT, net of current portion                                             21,301,740         21,629,232
                                                                                 ------------       ------------

DEFERRED INCOME TAXES                                                                      --            979,499
                                                                                 ------------       ------------

OTHER LONG-TERM LIABILITIES                                                           292,257            378,054
                                                                                 ------------       ------------

STOCKHOLDERS' EQUITY:
     Common stock, $.01 par value, 75,000,000 shares authorized, 11,492,162
         shares issued and outstanding as of September 30, 1997 and 
         December 31, 1996                                                            114,923            114,922
     Capital in excess of par value                                                52,491,212         52,491,212
     Retained earnings (deficit)                                                  (48,836,943)       (32,399,226)
                                                                                 ------------       ------------

         Total stockholders' equity                                                 3,769,192         20,206,908
                                                                                 ------------       ------------

                                                                                 $ 28,422,811       $ 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                    NINE MONTHS ENDED
                                              SEPTEMBER 30,                         SEPTEMBER 30,
                                        1997               1996              1997                 1996
                                    ------------       ------------     --------------       --------------
<S>                                 <C>                <C>              <C>                  <C>
REVENUES:           
     Oil sales                      $  2,084,492       $  2,495,050     $    7,297,972       $    8,680,427
     Interest                             49,322             69,745            158,118              204,244
                                    ------------       ------------     --------------       --------------
                                       2,133,814          2,564,795          7,456,090            8,884,671
                                    ------------       ------------     --------------       --------------
COSTS AND EXPENSES:
     Production                          898,251            778,223          2,829,103            2,610,638
     Exploration                           6,100                 --              9,552                5,258
     Loss on net assets held
       for disposition                        --                 --                 --               46,777
     General and
       administrative                    378,609            140,158            944,424              481,831
     Interest                            600,860            554,074          1,746,077            1,644,722
     Depreciation, depletion
       and amortization                  541,850          1,065,649          4,741,622            4,622,126
     Write down of oil and
       gas properties                         --                 --         14,216,868                   --
     Foreign currency
       translation (gain) loss           (99,488)            39,514           (204,249)             (85,919)
                                    ------------       ------------     --------------       --------------
                                       2,326,182          2,577,618         24,283,397            9,325,433
                                    ------------       ------------     --------------       --------------
INCOME (LOSS) BEFORE
 INCOME TAXES                           (192,368)           (12,823)       (16,827,307)            (440,762)

PROVISION FOR
  INCOME TAXES                           171,659            240,054           (389,590)             880,765
                                    ------------       ------------     --------------       --------------

NET LOSS                            $   (364,027)      $   (252,877)    $  (16,437,717)      $   (1,321,527)

NET LOSS PER SHARE                  $       (.03)      $       (.02)    $        (1.43)      $         (.11)
                                    ============       ============     ==============       ==============
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>

                                                              NINE  MONTHS ENDED
                                                                 SEPTEMBER 30,
                                                        ------------------------------
                                                            1997               1996
                                                        ------------       -----------
<S>                                                     <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:         
     Net loss                                           $(16,437,717)      $(1,321,527)
     Exploration costs                                         9,552             5,258
     Loss on net assets held for disposition                      --            46,777
     Depreciation, depletion and amortization              4,741,622         4,622,126
     Write down of oil and gas properties                 14,216,868                --
     Deferred income taxes                                  (979,499)          277,368
     Changes in components of working capital              1,024,450          (105,241)
     Other                                                   180,144           173,768
                                                        ------------       -----------

         Net cash provided by operating activities         2,755,420         3,698,529
                                                        ------------       -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Capital expenditures                                 (5,045,158)       (4,247,864)
     Proceeds from asset dispositions                             --           287,395
     (Increase) decrease in joint venture and
         contractor advances                               1,328,011             1,001
     Acquisition of interests in Argosy Energy
         International, net of cash acquired                      --                --
     Other                                                   (37,591)           90,714
                                                        ------------       -----------

         Net cash used for investing activities           (3,754,738)       (3,868,754)
                                                        ------------       -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Repayments of debt                                     (477,423)         (576,658)
     Costs of debt issuances                                 (40,651)          (27,514)
                                                        ------------       -----------

         Net cash used for financing activities             (518,074)         (604,172)
                                                        ------------       -----------

NET DECREASE IN CASH AND CASH EQUIVALENTS                 (1,517,392)         (774,397)

CASH AND CASH EQUIVALENTS
  AT BEGINNING OF PERIOD                                   4,107,364         5,713,191
                                                        ------------       -----------

CASH AND CASH EQUIVALENTS AT END OF PERIOD              $  2,589,972       $ 4,938,794
                                                        ============       ===========
Supplemental disclosures of cash flow information:

 Cash paid for -
     Interest, net of amounts capitalized               $  1,632,678       $ 1,440,509
     Income taxes                                            419,216           237,283

</TABLE>


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

                                       6


<PAGE>   7



                 GARNET RESOURCES CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 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. The exploration
period expired in July 1997, and required a partial relinquishment of the
remaining contract area leaving 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
may drill one additional well in 1998. As of September 30, 1997, future costs
for additional drilling are estimated at $1.0 to $1.2 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 all three of these contract areas, 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 which is estimated to be
$277,000 net to Garnet's interest. Expenditure obligations for the first two
years of the Yuruyaco Contract were satisfied with the acquisition of 50
kilometers of 2-D seismic over the area.

          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. After June 1996, when cumulative oil
production from the Santana Contract reached seven million barrels,


                                       7
<PAGE>   8
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%. 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 Company's resulting net participation in revenues and costs for
the Santana 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%
</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.

          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.

 (3)  LONG-TERM DEBT-

         Long-term debt at September 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




                                       8
<PAGE>   9



share. If the Company elects to prepay the Debentures under certain
circumstances, it will issue warrants under the same economic terms as the
Debentures. At the option of a holder, in the event of a change of control of
the Company, the Company will be required to prepay such holder's Debenture at
a 30% premium. The Debentures are secured by a pledge of all of the common
stock of Garnet's wholly owned subsidiary which serves as the general partner
of Argosy (see Note 2). Under the terms of an agreement with the holders of its
Debentures, Garnet has agreed that it will not pay dividends or make
distributions to the holders of its common stock. As of September 30, 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.

         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 September 30,
1997 was 5.875%. 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. Based on the Qualifying Oil Reserves Certificate issued May 15,
1997, the company is in compliance with the covenants and ratios required by
the OPIC Loan Agreements.


 (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
options become exercisable on each anniversary of the date of grant.


                                       9

<PAGE>   10


         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 September 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>   <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
                                                                      ----------            ------------

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 September 30, 1997                              1,401,201            $0.38-$ 2.50
                                                                      ==========            ============
</TABLE>


         As of September 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.



                                      10

<PAGE>   11



(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
$5,100,000 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 the
Santana Block in 1996 and, depending upon the results of the seismic
interpretation, may drill one additional 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 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 8,000 barrels of oil per day. The Company's share of such
production is 15.3%.

         The Company expects to fund its operations, including its exploration
and development activities, from cash flow from operations and working capital.
Under the terms of an escrow agreement executed in connection with the OPIC
loan, the Company's revenues from its Colombian properties which are payable in
U.S. Dollars (75% of such revenues) are paid into an escrow account at Texas
Commerce Bank. On the 15th day of each month, an amount in excess of the
aggregate of all principal, interest and fees payable to OPIC over the
succeeding six months is disbursed to the Company from the escrow account while
the remaining amount is held to secure the payment of amounts due OPIC. As a
principal payment of $1,350,000 is due under the OPIC loan on June 15, 1998,
the amount to be held in the escrow account will increase on December 15, 1997
until such payment is made. Based on its current production and the current oil
price, the Company believes that the 25% of Colombian revenues payable in pesos
together with the amounts expected to be released from the escrow account will
be sufficient to fund its operating expenses and the interest payments on its
Debentures. If the Company incurs unexpected substantial expenses or if its



                                      11


<PAGE>   12



revenues from production decrease, the Company may be required to curtail its
operations or apply to OPIC for a release of funds from the escrow account. In
such event, no assurance can be made that OPIC would agree to amend the terms
of the escrow account.

         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"). As 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, the Company must consummate a
Restructuring Transaction prior to their maturity date in order to avoid
non-compliance with its obligations under the Debentures. If no restructuring
transaction is consummated 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.

         As of September 30, 1997, Garnet was not in compliance with the
minimum net worth covenant required by the Debentures. Although the Debenture
holders have waived compliance with this requirement through October 1, 1998,
if Garnet is unable to increase its net worth to the minimum required by such
date, it will be necessary to extend the waiver or renegotiate the terms of the
debt, which will otherwise mature in December 1998.

         The Company intends to use its existing working capital and cash flow
from production in Colombia, to the extent available, to finance its planned
exploration and development activities. Any additional exploration and
development activities will require substantial amounts of additional capital.
The Company may also consider entering into arrangements whereby certain costs
of exploration are paid by others to earn an interest in the properties. The
present environment for financing the acquisition of oil and gas properties or
the ongoing obligations of an oil and gas business is uncertain due, in part,
to the substantial instability in oil and gas prices in recent years and to the
volatility of financial markets. There can be no assurance that the additional
financing which may be necessary to fund the Company's operations and
obligations will be available on economically acceptable terms. In addition,
the Company's ability to continue its exploration and development programs may
be dependent upon its joint venture partners financing their portion of such
costs and expenses. There can be no assurance that the Company's partners will
contribute, or be in a position to contribute, their costs and 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.

         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.



                                      12


<PAGE>   13


         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 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 NINE MONTHS ENDED SEPTEMBER 30, 1997
                     COMPARED WITH THE SAME PERIODS IN 1996
             -----------------------------------------------------

         The Company reported net losses of $364,027 ($.03 per share) and  
$252,877 ($.02 per share) for the three months ended September 30, 1997 and 
1996, respectively.

         Oil and gas revenues decreased by 411,000 for the third quarter
compared to the same period in 1996. The decrease was mostly attributable to
lower average crude oil sales prices.

<TABLE>
<CAPTION>

                                                   THREE MONTHS ENDED             NINE MONTHS ENDED
                                                      SEPTEMBER 30,                  SEPTEMBER 30,
                                                    1997        1996               1997         1996
                                                   ------       -----             ------       -----

<S>                                                <C>          <C>               <C>          <C>  
         Average oil sales (BOPD)                   1,411        1,401             1,503        1,657
         Average oil price per barrel              $16.05       $19.36            $17.78       $19.12
         Production costs per barrel               $ 6.92       $ 6.04            $ 6.89       $ 5.75
         Depreciation, depletion and 
           amortization per barrel                 $ 4.15       $ 8.24            $11.53       $10.16  
</TABLE>

         The company experienced an increased net loss compared to the same
period in 1996 due to lower sales revenues, higher producing costs and reduced
reimbursements of administrative costs from joint venture partners. As a result
of full cost accounting rules, the company was required to write down its oil
and gas properties by $14.2 million in the first six months of 1997. The full
cost ceiling test for the current period using post balance sheet oil prices
for the calculation of future net revenues resulted in no additional write
down.



                                      13



<PAGE>   14
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>



                                      14
<PAGE>   15




(b)  REPORTS ON FORM 8-K

              No Reports on Form 8-K were filed by Registrant during the three
months ended September 30, 1997.



                                      15


<PAGE>   16
                                   SIGNATURES
                                   ----------

         Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                   GARNET RESOURCES CORPORATION


Date:  November 14, 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)





                                      16