<PAGE>
 
               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   FORM 10-Q
                                        

 [ X ]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                                        
             For the quarterly period ended     JUNE 30, 1998
                                            ----------------------

                                       OR
                                        
 [   ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                                        
             For the transition period from        to
                                             -----    -----

                        Commission File Number  0-22258

                                        
                              AVIVA PETROLEUM INC.
             (Exact name of registrant as specified in its charter)

TEXAS                                                     75-1432205
(State or other jurisdiction of                           (I.R.S. Employer
incorporation or organization)                            Identification Number)
 
8235 DOUGLAS AVENUE,                                      75225
SUITE 400, DALLAS, TEXAS                                  (Zip Code)
(Address of principal executive offices)

                                 (214) 691-3464
              (Registrant's telephone number, including area code)


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 
                                                    -------    -------

Number of shares of Common Stock, no par value, outstanding at June 30, 1998,
was 31,482,716 of which 10,336,835 shares of Common Stock were represented by
Depositary Shares.  Each Depositary Share represents five shares of Common Stock
held by a Depositary.
<PAGE>
 
PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.
-----------------------------

                     AVIVA PETROLEUM INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEET
                    (in thousands, except number of shares)
                                  (unaudited)
<TABLE>
<CAPTION>
 
                                                June 30,              December 31,
                                                  1998                   1997
                                              -----------             ------------
<S>                                          <C>                      <C>
ASSETS                                 
                                       
Current assets:                        
 Cash and cash equivalents                    $      197                $     690
 Accounts receivable                               1,466                    1,803
 Inventories                                         599                      602
 Prepaid expenses and other                           46                      203
                                                --------                 --------
   Total current assets                            2,308                    3,298
                                                --------                 --------
                                       
Property and equipment, at cost (note 3):                        
 Oil and gas properties                
  and equipment (full cost method)                61,442                   61,036
 Other                                               612                      606
                                                --------                 --------
                                                  62,054                   61,642
   Less accumulated depreciation, depletion            
     and amortization                            (55,740)                 (49,873)
                                                --------                 --------
                                                   6,314                   11,769
Other assets                                       1,509                    1,378
                                                --------                 --------
                                                $ 10,131                 $ 16,445
                                                ========                 ========
                                       
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
                                       
Current liabilities:                   
 Current portion of long term debt (note 4)     $     37                 $    480
 Accounts payable                                  2,752                    3,091
 Accrued liabilities                                 352                      356
                                                --------                 --------
   Total current liabilities                       3,141                    3,927
                                                --------                 --------
Long term debt, excluding              
 current portion (note 4)                          7,403                    7,210
Gas balancing obligations and other                1,568                    1,560
Stockholders' equity (deficit):
 Common stock, no par value, authorized                    
  348,500,000 shares;                  
   issued 31,482,716 shares                        1,574                    1,574
 Additional paid-in capital                       33,376                   33,376
 Accumulated deficit/*/                          (36,931)                 (31,202)
                                                --------                 --------
   Total stockholders' equity (deficit)           (1,981)                   3,748
Commitments and contingencies (note 6)
                                                --------                 --------
                                                $ 10,131                 $ 16,445
                                                ========                 ========
</TABLE> 
/*/Accumulated deficit of $70,057 was eliminated at December 31, 1992 in
   connection with a quasi-reorganization.

See accompanying notes to condensed consolidated financial statements.

                                       2
<PAGE>
 
                     AVIVA PETROLEUM INC. AND SUBSIDIARIES
                 Condensed Consolidated Statement of Operations
                     (in thousands, except per share data)
                                  (unaudited)
<TABLE>
<CAPTION>
 
 
                                                      Three Months Ended         Six Months Ended
                                                            June 30,                 June 30,
                                                         1998       1997          1998           1997
                                                      -------   --------       -------       --------
<S>                                                   <C>       <C>            <C>          <C>
Oil and gas sales                                     $   914   $  2,339       $ 2,060       $  5,553
                                                      -------   --------       -------       --------
                                                                                         
Expense:                                                                                 
 Production                                               716      1,096         1,515          2,198
 Depreciation, depletion and amortization                 503      1,490         1,174          3,285
 Write-down of oil and gas properties (note 3)          1,961     11,413         4,725         13,399
 General and administrative                               300        402           660            752
                                                      -------   --------       -------       --------
                                                                                         
   Total expense                                        3,480     14,401         8,074         19,634
                                                      -------   --------       -------       --------
                                                                                         
Other income (expense):                                                                  
 Interest and other income (expense), net (note 5)         26         67           771             91
 Interest expense                                        (155)      (162)         (320)          (328)
                                                      -------   --------       -------       --------
                                                                                         
   Total other income (expense)                          (129)       (95)          451           (237)
                                                      -------   --------       -------       --------
                                                                                         
Loss before income taxes                               (2,695)   (12,157)       (5,563)       (14,318)
                                                                                         
Income taxes (benefits)                                    69       (547)          166           (282)
                                                      -------   --------       -------       --------
                                                                                         
     Net loss                                         $(2,764)  $(11,610)      $(5,729)      $(14,036)
                                                      =======   ========       =======       ========
Weighted average common shares outstanding -
   basic and diluted                                   31,483     31,483        31,483         31,483
                                                      =======   ========       =======       ========

Basic and diluted net loss per common share             $(.09)     $(.37)        $(.18)         $(.45)
                                                      =======   ========       =======       ========
</TABLE> 
See accompanying notes to condensed consolidated financial statements.

                                       3
<PAGE>
 
                     AVIVA PETROLEUM INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (in thousands)
                                  (unaudited)


<TABLE>
<CAPTION>
                                                          Six Months Ended
                                                               June 30,
                                                          1998        1997
                                                          ----        ----
<S>                                                     <C>       <C>
Net loss                                                $(5,729)  $(14,036)
Adjustments to reconcile net loss to net cash
 provided by operating activities:
   Depreciation, depletion and amortization               1,174      3,285
   Write-down of oil and gas properties                   4,725     13,399
   Deferred foreign income taxes (benefits)                   -       (692)
   Changes in working capital and other                      95       (729)
                                                        -------   --------
 
     Net cash provided by operating activities              265      1,227
                                                        -------   --------
 
Cash flows from investing activities:
   Property and equipment expenditures                     (411)    (1,959)
   Proceeds from sale of assets                               -         19
   Other                                                    (95)         -
                                                        -------   --------
 
     Net cash used in investing activities                 (506)    (1,940)
                                                        -------   --------
 
Cash flows from financing activities -
  Principal payments on long term debt                     (250)      (150)
                                                        -------   --------
 
Effect of exchange rate changes on cash and
 cash equivalents                                            (2)       (23)
                                                        -------   --------
 
Net decrease in cash and cash equivalents                  (493)      (886)
Cash and cash equivalents at beginning of the period        690      2,041
                                                        -------   --------
 
Cash and cash equivalents at end of the period          $   197   $  1,155
                                                        =======   ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.

                                       4
<PAGE>
 
                     AVIVA PETROLEUM INC. AND SUBSIDIARIES
      CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
                    (in thousands, except number of shares)
                                  (unaudited)



<TABLE>
<CAPTION>
 
 
                                     Common Stock
                                 --------------------
                                                       Additional                    Total
                                    Number              Paid-in    Accumulated    Stockholders'
                                  of Shares    Amount   Capital      Deficit     Equity (Deficit)
                                 ------------  ------  ----------  ------------  ----------------
<S>                              <C>           <C>     <C>         <C>           <C>
Balances at December 31, 1997      31,482,716  $1,574  $   33,376  $   (31,202)  $         3,748
Net loss                                    -       -           -       (5,729)           (5,729)
                                 ------------  ------  ----------  -----------   --------------- 
Balances at June 30, 1998          31,482,716  $1,574  $   33,376  $   (36,931)  $        (1,981)
                                 ============  ======  ==========  ===========   ===============
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                       5
<PAGE>
 
                     AVIVA PETROLEUM INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)


1. General

   The condensed consolidated financial statements of Aviva Petroleum Inc. and
   subsidiaries (the "Company" or "Aviva") included herein have been prepared by
   the Company without audit, pursuant to the rules and regulations of the
   Securities and Exchange Commission. 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 contained herein are adequate to make the information
   presented not misleading. These condensed financial statements should be read
   in conjunction with the Company's prior audited yearly financial statements
   and the notes thereto, included in the Company's latest annual report on Form
   10-K.

   In the opinion of the Company, all adjustments, consisting of normal
   recurring accruals, necessary to present fairly the information in the
   accompanying financial statements have been included. The results of
   operations for such interim periods are not necessarily indicative of the
   results for the full year.

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

2. MERGER PLANS

   On June 24, 1998, the Company entered into a definitive agreement to merge
   with Garnet Resources Corporation ("Garnet"), a publicly traded international
   oil and gas exploration and production company. Garnet, through its 99.24%-
   owned subsidiary, Argosy Energy International ("Argosy"), is the co-owner
   (55%) and operator of the Colombian joint operations in which the Company has
   the remaining working interest (45%). Garnet also holds a carried working
   interest in an oil and gas Production Prospecting License in Papua New
   Guinea.

   The proposed arrangements include Aviva refinancing Argosy's outstanding debt
   to Chase Bank of Texas (approximately $6 million, net, at June 30, 1998)
   which is guaranteed by the U.S. Overseas Private Investment Corporation
   ("OPIC"), issuing approximately 1.1 million and 12.9 million new Aviva common
   shares to Garnet shareholders and Garnet debenture holders, respectively, and
   canceling Garnet's $15 million of 9.5% subordinated debentures due December
   21, 1998.

   The merger will be accounted for as a "purchase" of Garnet for financial
   accounting purposes. Accordingly, Aviva will be the surviving entity
   following the merger, which remains subject to various contingencies
   including approvals by ING (U.S.) Capital Corporation ("ING Capital"), OPIC,
   and shareholders of Aviva and Garnet. The proposed merger is also subject to
   execution and delivery of agreements for the proposed credit facility
   discussed in Note 6.

                                       6
<PAGE>
 
                     AVIVA PETROLEUM INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                            (UNAUDITED) (CONTINUED)
                                        
3.  PROPERTY AND EQUIPMENT

    Internal general and administrative costs directly associated with oil and
    gas property acquisition, exploration and development activities have been
    capitalized in accordance with the accounting policies of the Company. Such
    costs totaled $19,000 for the six months ended June 30, 1998 and $70,000 for
    the six months ended June 30, 1997.

    Unevaluated oil and gas properties totaling $282,000 and $251,000 at June
    30, 1998 and December 31, 1997, respectively, have been excluded from costs
    subject to depletion. The Company capitalized interest costs of $12,000 and
    $45,000 for the six-month periods ended June 30, 1998 and 1997,
    respectively, on these properties.

    The following table summarizes the write-down of the carrying amounts of the
    Company's oil and gas properties as a result of ceiling limitations on
    capitalized costs:

<TABLE>
<CAPTION>
 
                                    Three Months Ended        Six Months Ended
                                         June 30,                 June 30,
                                       (thousands)              (thousands)
                                    1998         1997         1998        1997
                                   ------      -------       ------     -------
              <S>                  <C>         <C>           <C>        <C>
               Colombia            $1,053      $11,413       $3,355     $11,413
               United States          908            -        1,370       1,986
                                   ------      -------       ------     -------
                                   $1,961      $11,413       $4,725     $13,399
                                   ======      =======       ======     =======
</TABLE>

    The 1998 write-downs were primarily due to lower oil and gas prices. A
    future decrease in the prices the Company receives for its oil and gas
    production or downward reserve adjustments could result in a further ceiling
    test write-down that is significant to the Company's operating results.

4.  LONG TERM DEBT

    On August 6, 1993, the Company entered into a credit agreement with ING
    Capital, secured by a mortgage on substantially all U.S. oil and gas assets,
    a pledge of Colombian assets and the stock of three subsidiaries, pursuant
    to which ING Capital agreed to loan to the Company up to $25 million,
    subject to an annually redetermined borrowing base which is predicated on
    the Company's U.S. and Colombian reserves. As of December 31, 1997, the
    borrowing base permitted, and the outstanding loan balance was, $7,690,000.
    The outstanding loan balance has been subject to interest at the prime rate,
    as defined (8.5% at June 30, 1998) plus 1% or, at the option of the Company,
    a fixed rate, based on the London Interbank Offered Rate, for a portion or
    portions of the outstanding debt from time to time. The terms of the loan,
    among other things, prohibit the Company from merging with another company
    or paying dividends, limit additional indebtedness, general and
    administrative expense, sales of assets and investments and require the
    maintenance of certain minimum financial ratios.

                                       7
<PAGE>
 
                     AVIVA PETROLEUM INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                            (UNAUDITED) (CONTINUED)

    In February 1998, the Company entered into an agreement with ING Capital
    pursuant to which the outstanding loan balance was paid down to $7,440,000
    from $7,690,000, the interest rate was increased to the prime rate, as
    defined, plus 1.5%, or at the option of the Company, a fixed rate based on
    LIBOR plus 3%, and the repayment schedule was amended to require monthly
    payments of 80% of defined monthly cash flows until October 1, 1999, at
    which time the remaining balance is due and payable. Additionally, ING
    Capital reduced to $2 million the minimum amount of consolidated tangible
    net worth that the Company is required to maintain.

    As of June 30, 1998, the borrowing base permitted, and the outstanding loan
    balance was, $7,440,000, but the Company was not in compliance with the
    above-referenced tangible net worth covenant. Accordingly, on August 6,
    1998, the Company entered into an agreement with ING Capital to further
    amend the credit facility in order to: (i) waive the Company's non-
    compliance with the tangible net worth covenant through July 1, 1999; (ii)
    require the Company to consummate the merger with Garnet on or before
    October 31, 1998; and (iii) provide to the Company a cash advance of
    $760,000 in order to supplement the Company's existing working capital. As
    compensation for making the new advance and entering into the new agreement,
    the Company will issue to ING Capital 400,000 new shares of the Company's
    common stock.

5.  INTEREST AND OTHER INCOME (EXPENSE)

    A summary of interest and other income (expense) follows:
<TABLE>
<CAPTION>
 
                                           Three Months Ended           Six Months Ended
                                                June 30,                    June 30,
                                               (thousands)                (thousands)
                                            1998        1997            1998         1997
                                           ------      ------          ------       ------
<S>                                        <C>        <C>             <C>         <C>
     Gain on settlement of litigation       $   -       $   -           $ 720        $   -
     Interest income                           20          39              45           82
     Foreign currency exchange loss             -          (8)             (2)         (29)
     Gain (loss) on sale of assets, net         -           -               -          (13)
     Other, net                                 6          36               8           51
                                           ------      ------          ------       ------
                                           $   26      $   67          $  771       $   91
                                           ======      ======          ======       ======
</TABLE>

    In January 1998, the Company realized a $720,000 gain on the settlement of
    litigation involving the administration of a take or pay contract
    settlement.

6.  COMMITMENTS AND CONTINGENCIES

    In the U.S., the Company is currently committed to the drilling of a
    saltwater disposal well at its Breton Sound 31 field facilities in order to
    comply with a state-wide prohibition against discharges of produced water to
    coastal waters offshore Louisiana. The cost to drill and equip such a well
    is estimated at $0.3 million, net to the Company's interest. Pursuant to a
    revised produced water termination schedule approved by the Louisiana
    Department of Environmental Quality, the Company has until September 1,
    1998, to cease discharges of produced water. If the Company is unable to
    complete the project and reinject the produced water by September 1, 1998,
    the Company will be required to curtail or even cease production from its
    Breton Sound leases. Additionally, the Company has recently completed
    upgrades to certain equipment at its

                                       8
<PAGE>
 
                     AVIVA PETROLEUM INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                            (UNAUDITED) (CONTINUED)
                                        

    Main Pass 41 field facilities, the remaining cost of which is expected to
    aggregate $0.2 million, net to the Company's interest.

    The Company, along with Argosy (referred to collectively as the "Co-
    owners"), is also engaged in ongoing operations on the Santana concession in
    Colombia. The contract obligations of the Santana concession have been met.
    The Co-owners may, however, initiate the recompletion of certain existing
    wells and various miscellaneous projects. The Company's share of the
    estimated future costs of these activities is approximately $0.3 million at
    June 30, 1998. Depending on the results of future exploration and
    development activities, substantial expenditures that have not been
    anticipated may be required. Failure by the Company to fund certain of these
    capital expenditures could, under either the concession agreement or joint
    operating agreement with Argosy, or both, result in the forfeiture of all or
    part of the Company's interest in this concession.

    In addition, the Company's ability to continue its Colombian development
    program is dependent upon the ability of Argosy to finance its portion of
    such costs and expenses. If Argosy cannot fund its obligations, the Company
    may be required to accept an assignment of Argosy's interest therein and
    assume those funding obligations. If, thereafter, the Company were to be
    unable to raise sufficient funds to meet such obligations, the Company's
    interests in the properties may be forfeited.

    In reports filed with the U.S. Securities and Exchange Commission, which are
    publicly available, Garnet has disclosed, among other things, that: (i)
    Argosy is no longer in compliance with certain covenants required by its
    finance agreement with Chase Bank of Texas which is guaranteed by the
    Overseas Private Investment Corporation and secured by Argosy's assets in
    Colombia; (ii) its management believes that Garnet's available working
    capital and cash flows from operations will not be sufficient to make its
    required debt principal and interest payments as they become due beginning
    March 31, 1998; and (iii) in the absence of a business transaction or a
    restructuring of Garnet's indebtedness, Garnet may seek protection from its
    creditors under the Federal Bankruptcy Code.

    As discussed in Note 2, the Company has entered into a definitive agreement
    to merge with Garnet. Pursuant to the merger plan, Garnet's $15 million of
    subordinated debentures will be canceled and Argosy's bank debt, along with
    Aviva's existing bank debt, will be refinanced through a proposed $15
    million credit facility that the Company has requested ING Capital to
    provide to the Company. In addition to refinancing the existing bank debt of
    Argosy and Aviva, this proposed new credit facility is expected to
    supplement the Company's working capital and, to the extent not funded by
    cash flow from operations, fund the Company's remaining estimated capital
    expenditures for 1998.

    Management of the Company is currently finalizing efforts to effectuate the
    merger, which efforts now require only execution and delivery of the
    proposed new credit facility with ING Capital. Additionally approval by the
    shareholders of Aviva and Garnet is required to consummate the merger. A
    Joint Proxy Statement will be provided to Shareholders for their review and
    voting at Shareholder Meetings expected to be held in late September.

                                       9
<PAGE>
 
                     AVIVA PETROLEUM INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                            (UNAUDITED) (CONTINUED)
                                        
    While management believes that the merger will be consummated substantially
    as planned, there can be no assurance that this will be the case. If the
    Company is unable to consummate the merger, then, in the absence of another
    business transaction or debt restructuring, Garnet may seek bankruptcy
    protection or other alternatives, any of which may have a material adverse
    effect on Aviva's consolidated financial condition. As indicated above, if
    Argosy cannot fund its obligations, the Company may be required to accept an
    assignment of Argosy's interest therein and assume those funding
    obligations. Aviva itself has experienced significant losses which have
    resulted in recurring noncompliance with the minimum consolidated tangible
    net worth covenant and its debt repayment schedule under its credit
    agreement with ING Capital. Moreover, failure to consummate the merger with
    Garnet on or before October 31, 1998, would be an event of default under the
    recently amended credit agreement (see note 4). Without the Garnet merger
    and the proposed new credit facility, management's current cash flow
    analysis does not indicate that the Company would be able to make the
    October 1, 1999 scheduled debt repayment under the existing ING Capital
    Credit Agreement. In the past, ING Capital has amended or waived compliance
    with these covenants when the Company has been unable to comply with them.
    There can be no assurance, however, that ING Capital will continue to make
    similar concessions in the future.

    Activities of the Company with respect to the exploration, development and
    production of oil and natural gas are subject to stringent foreign, federal,
    state and local environmental laws and regulations including the Oil
    Pollution Act of 1990 ("OPA 90"), the Outer Continental Shelf Lands Act, the
    Federal Water Pollution Control Act, the Resource Conservation and Recovery
    Act, and the Comprehensive Environmental Response, Compensation, and
    Liability Act. Such laws and regulations have increased the cost of
    planning, designing, drilling, operating and abandoning wells. In most
    instances, the statutory and regulatory requirements relate to air and water
    pollution control procedures and the handling and disposal of drilling and
    production wastes. Risks of substantial costs and liabilities are inherent
    in oil and gas operations and there can be no assurance that significant
    costs and liabilities, including civil or criminal penalties for violations
    of environmental laws and regulations, will not be incurred. Moreover, it is
    possible that other developments, such as stricter environmental laws and
    regulations or claims for damages to property or persons resulting from the
    Company's operations, could result in substantial costs and liabilities. For
    additional discussions on the applicability of environmental laws and
    regulations and other risks that may affect the Company's operations, see
    the Company's latest annual report on Form 10-K.

    The Company is involved in certain litigation involving its oil and gas
    activities, but unrelated to environmental contamination issues. Management
    of the Company believes that these litigation matters will not have any
    material adverse effect on the Company's financial condition or results of
    operations.

7.  SUBSEQUENT EVENT

    On August 3, 1998, leftist Colombian guerrillas launched a wave of bombing
    attacks across Colombia. These attacks coincide with the change of Colombian
    presidents and could be a show of force prior to the beginning of formal
    peace negotiations with the new president.

                                       10
<PAGE>
 
                     AVIVA PETROLEUM INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                            (UNAUDITED) (CONTINUED)
                                        
    As a result of one such attack, the Company's oil processing and storage
    facilities at the Mary field were damaged, along with minor damage incurred
    at the Linda facilities. While it is still too early to accurately assess
    the cost of repairs, the Company does not believe that the property damage
    will exceed insurance limits.

    As of August 7, 1998, the Company's Colombian oil production has been
    suspended for approximately five days. The Company estimates that production
    from the Linda and Toroyaco fields will resume within two to three days.
    Production from the Mary and Miraflor fields, however, may be suspended or
    significantly curtailed for at least a few weeks, and possibly longer
    depending on the extent of the damage.

                                       11
<PAGE>
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        ----------------------------------------------------------------------- 
OF OPERATIONS.
-------------

RESULTS OF OPERATIONS
---------------------

THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
-----------------------------------------------------------------------------

<TABLE>
<CAPTION>
 
                                United States          Colombia
                               Oil        Gas        Oil       Total
                            --------   --------   --------   --------
<S>                          <C>       <C>         <C>       <C>
       (Thousands)                                        
                                                          
       Revenue - 1997          $ 376       $174     $1,789     $2,339
                                                             
       Volume variance          (111)       (80)      (754)      (945)
                                                             
       Price variance            (87)       (18)      (372)      (477)
                                                             
       Other                       -         (3)         -         (3)
                            --------   --------   --------   --------
                                                            
       Revenue - 1998       $    178   $     73   $    663   $    914
                            ========   ========   ========   ========
</TABLE>

Colombian oil volumes were 62,000 barrels in the second quarter of 1998, a
decrease of 46,000 barrels as compared to the second quarter of 1997. Such
decrease is due to a 51,000 barrel decrease resulting from production declines,
partially offset by a 5,000 barrel increase resulting from the completion of a
development well in June 1997.

U.S. oil volumes were 15,000 barrels in 1998, down approximately 6,000 barrels
from 1997.  Of such decrease, approximately 2,000 barrels was due to the
Company's Main Pass 41 field being shut-in for approximately 22 days during the
second quarter of 1998 due to equipment failures and 4,000 barrels resulted from
normal production declines.  U.S. gas volumes before gas balancing adjustments
were 22,000 thousand cubic feet (MCF) in 1998, down 43,000 MCF from 1997.  Of
such decrease, approximately 14,000 MCF was due to the aforementioned shut-in of
the Main Pass 41 field and 13,000 MCF was due to the suspension of production of
one of the wells at Main Pass 41 beginning in the first quarter of 1998.  The
remaining 16,000 MCF was due to normal production declines.

The above-referenced equipment failures at the Company's Main Pass 41 field
necessitated upgrading and additional modification of production and water
treatment facilities.  As of August 7, 1998, this field had been shut-in an
additional 23 days since July 1, 1998, in order to complete the project.

Colombian oil prices averaged $10.61 per barrel during the second quarter of
1998.  The average price for the same period of 1997 was $16.56 per barrel.  The
Company's average U.S. oil price decreased to $12.25 per barrel in 1998, down
from $18.24 per barrel in 1997.  In 1998 prices have been lower than in the
second quarter of 1997 due to a dramatic decrease in world oil prices.  U.S. gas
prices averaged $1.93 per MCF in 1998 compared to $1.97 per MCF in 1997.

In addition to the above-mentioned variances, U.S. gas revenue decreased
approximately $3,000 as a result of gas balancing adjustments.

Operating costs decreased approximately 35%, or $380,000, primarily due to lower
operating costs in Colombia.  Such decreases have resulted mainly from the
elimination of the production tax on the

                                       12
<PAGE>
 
majority of the Company's Colombian production and lower pipeline tariffs
resulting from lower volumes.

Depreciation, depletion and amortization decreased by 66%, or $987,000,
primarily due to a decrease in costs subject to amortization resulting from
property write-downs and lower levels of production.

The Company recorded write-downs of $1,053,000 and $908,000 to the carrying
amounts of its Colombian and U.S. oil and gas properties, respectively, as a
result of ceiling test limitations on capitalized costs at June 30, 1998.

General and administrative ("G & A") expenses declined $102,000 during the
second quarter of 1998 mainly due to a $72,000 decrease in legal and consulting
fees and a $53,000 reduction in payroll.  These savings were partially offset by
lower amounts of capitalized G & A.

Income taxes were $616,000 higher in 1998 principally as a result of Colombian
deferred tax benefits recorded in the second quarter of 1997.  Such deferred tax
benefits in 1997 resulted from the write-down of the carrying amount of the
Company's Colombian oil properties.

SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
-------------------------------------------------------------------------

<TABLE>
<CAPTION>
 
 
                                  United States        Colombia
                                   Oil     Gas       Oil      Total
                                  -----   -----    -------   -------
<S>                            <C>      <C>      <C>        <C>
       (Thousands)
 
       Revenue - 1997             $ 835   $ 420    $ 4,298   $ 5,553
 
       Volume variance             (294)   (243)    (1,736)   (2,273)
 
       Price variance              (189)    (42)      (972)   (1,203)
 
       Other                          -     (17)         -       (17)
                                  -----   -----    -------   -------
 
       Revenue - 1998             $ 352   $ 118    $ 1,590   $ 2,060
                                  =====   =====    =======   =======
 
</TABLE>

Colombian oil volumes were 138,000 barrels in the first half of 1998, a decrease
of 93,000 barrels as compared to the first half of 1997. Such decrease is due to
a 106,000 barrel decrease resulting from production declines, partially offset
by a 13,000 barrel increase resulting from the completion of a development well
in June 1997.

U.S. oil volumes were 27,000 barrels in 1998, down approximately 15,000 barrels
from 1997.  Of such decrease, approximately 7,000 barrels was due to the
Company's Main Pass 41 field being shut-in for approximately 85 days during the
first half of 1998 due to equipment failures and 8,000 barrels resulted from
normal production declines.  U.S. gas volumes before gas balancing adjustments
were 36,000 MCF in 1998, down 103,000 MCF from 1997.  Of such decrease,
approximately 54,000 MCF was due to the aforementioned shut-in of the Main Pass
41 field and 25,000 MCF was due to the suspension of production of one of the
wells at Main Pass 41 beginning in the first quarter of 1998.  The remaining
24,000 MCF was due to production declines.

The above-referenced equipment failures at the Company's Main Pass 41 field
necessitated upgrading and additional modification of production and water
treatment facilities.  As of August 7, 1998, this field had been shut-in an
additional 23 days since July 1, 1998, in order to complete the project.

                                       13
<PAGE>
 
Colombian oil prices averaged $11.53 per barrel during the first half of 1998.
The average price for the same period of 1997 was $18.58 per barrel.  The
Company's average U.S. oil price decreased to $13.00 per barrel in 1998, down
from $19.97 per barrel in 1997.  In 1998 prices have been lower than in the
first half of 1997 due to a dramatic decrease in world oil prices.  U.S. gas
prices averaged $2.10 per MCF in 1998 compared to $2.23 per MCF in 1997.

In addition to the above-mentioned variances, U.S. gas revenue decreased
approximately $17,000 as a result of gas balancing adjustments.

Operating costs decreased approximately 31%, or $683,000, primarily due to lower
operating costs in Colombia.  Such decreases have resulted mainly from the
elimination of the production tax on the majority of the Company's Colombian
production and lower pipeline tariffs resulting from lower volumes.

Depreciation, depletion and amortization decreased by 64%, or $2,111,000,
primarily due to a decrease in costs subject to amortization resulting from
property write-downs and lower levels of production.

The Company recorded write-downs of $3,355,000 and $1,370,000 to the carrying
amounts of its Colombian and U.S. oil and gas properties, respectively, as a
result of ceiling test limitations on capitalized costs during 1998.

G & A expenses declined $92,000 mainly due to a $73,000 decrease in legal and
consulting fees and an $86,000 reduction in payroll. These savings were
partially offset by lower amounts of capitalized G & A.

Interest and other income increased during the first half of 1998 as the Company
realized a $720,000 gain on the settlement of litigation involving the
administration of a take or pay contract settlement.

Income taxes were $448,000 higher in 1998 principally as a result of Colombian
deferred tax benefits recorded in the second quarter of 1997.  Such deferred tax
benefits in 1997 resulted from the write-down of the carrying amount of the
Company's Colombian oil properties.

YEAR 2000
---------

Based on a preliminary study, the Company expects to spend an aggregate of
approximately $100,000 in 1998 and 1999 to modify its computer information
systems enabling proper processing of transactions relating to the year 2000 and
beyond.  The Company continues to evaluate appropriate courses of corrective
action, including replacement of certain systems whose associated costs would be
recorded as assets and amortized.  Accordingly, the Company does not expect that
amounts required to be expensed over the next two years will have a material
effect on its financial position or results of operations.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

Since December 31, 1997, costs incurred in oil and gas property acquisition,
exploration and development activities by the Company totaled $411,000.  Of such
amount, $242,000 was incurred in Colombia and $169,000 was incurred in the U.S.
These activities were funded primarily by cash provided by operating activities.

                                       14
<PAGE>
 
In the U.S., the Company is currently committed to the drilling of a saltwater
disposal well at its Breton Sound 31 field facilities in order to comply with a
state-wide prohibition against discharges of produced water to coastal waters
offshore Louisiana.  The cost to drill and equip such a well is estimated at
$0.3 million, net to the Company's interest. Pursuant to a revised produced
water termination schedule approved by the Louisiana Department of Environmental
Quality, the Company has until September 1, 1998, to cease discharges of
produced water.  If the Company is unable to complete the project and reinject
the produced water by September 1, 1998, the Company will be required to curtail
or even cease production from its Breton Sound leases.  Additionally, the
Company has recently completed upgrades to certain equipment at its Main Pass 41
field facilities, the remaining cost of which is expected to aggregate $0.2
million, net to the Company's interest.

The Company, along with Argosy (referred to collectively as the "Co-owners"), is
also engaged in ongoing operations on the Santana concession in Colombia.  The
contract obligations of the Santana concession have been met.  The Co-owners
may, however, initiate the recompletion of certain existing wells and various
miscellaneous projects.  The Company's share of the estimated future costs of
these development activities is approximately $0.3 million at June 30, 1998.
Depending on the results of future exploration and development activities,
substantial expenditures that have not been anticipated may be required.
Failure by the Company to fund certain of these capital expenditures could,
under either the concession agreement or joint operating agreement with Argosy,
or both, result in the forfeiture of all or part of the Company's interest in
this concession.

In addition, the Company's ability to continue its Colombian development program
is dependent upon the ability of Argosy to finance its portion of such costs and
expenses.  If Argosy cannot fund its obligations, the Company may be required to
accept an assignment of Argosy's interest therein and assume those funding
obligations.  If, thereafter, the Company were to be unable to raise sufficient
funds to meet such obligations, the Company's interests in the properties may be
forfeited.

In reports filed with the U.S. Securities and Exchange Commission, which are
publicly available, Garnet has disclosed, among other things, that: (i) Argosy
is no longer in compliance with certain covenants required by its finance
agreement with Chase Bank of Texas which is guaranteed by the Overseas Private
Investment Corporation and secured by Argosy's assets in Colombia; (ii) its
management believes that Garnet's available working capital and cash flows from
operations will not be sufficient to make its required debt principal and
interest payments as they become due beginning March 31, 1998; and (iii) in the
absence of a business transaction or a restructuring of Garnet's indebtedness,
Garnet may seek protection from its creditors under the Federal Bankruptcy Code.

As discussed in Note 2 of the condensed consolidated financial statements, the
Company has entered into a definitive agreement to merge with Garnet. Pursuant
to the merger plan, Garnet's $15 million of subordinated debentures will be
canceled and Argosy's bank debt, along with Aviva's existing bank debt, will be
refinanced through a proposed $15 million credit facility that the Company has
requested ING Capital to provide to the Company.  In addition to refinancing the
existing bank debt of Argosy and Aviva, this proposed new credit facility is
expected to supplement the Company's working capital and, to the extent not
funded by cash flow from operations, fund the Company's remaining estimated
capital expenditures for 1998.

Management of the Company is currently finalizing efforts to effectuate the
merger, which efforts now require only execution and delivery of the proposed
new credit facility with ING Capital.  Additionally, approval by the
shareholders of Aviva and Garnet is required to consummate the merger.  A Joint
Proxy Statement will be provided to Shareholders for their review and voting at
Shareholder Meetings expected to be held in late September.

                                       15
<PAGE>
 
While management believes that the merger will be consummated substantially as
planned, there can be no assurance that this will be the case.  If the Company
is unable to consummate the merger, then, in the absence of another business
transaction or debt restructuring, Garnet may seek bankruptcy protection or
other alternatives, any of which may have a material adverse effect on Aviva's
consolidated financial condition.  As indicated above, if Argosy cannot fund its
obligations, the Company may be required to accept an assignment of Argosy's
interest therein and assume those funding obligations.  Aviva itself has
experienced significant losses which have resulted in recurring noncompliance
with the minimum consolidated tangible net worth covenant and its debt repayment
schedule under its credit agreement with ING Capital.  Moreover, failure to
consummate the merger with Garnet on or before October 31, 1998, would be an
event of default under the recently amended credit agreement (see note 4).
Without the Garnet merger and the proposed new credit facility, management's
current cash flow analysis does not indicate that the Company would be able to
make the October 1, 1999 scheduled debt repayment under the existing ING Capital
Credit Agreement.  In the past, ING Capital has amended or waived compliance
with these covenants when the Company has been unable to comply with them.
There can be no assurance, however, that ING Capital will continue to make
similar concessions in the future.

On August 3, 1998, leftist Colombian guerrillas inflicted damage on the
Company's oil processing and storage facilities at the Mary field, and to a
lesser extent, at the Linda facilities. While it is still too early to
accurately assess the cost of repairs,  the Company does not believe that the
property damage will exceed insurance limits.  As more fully discussed in Note 7
of the condensed consolidated financial statements, the Company's Colombian
production has been temporarily suspended.

With the exception of historical information, the matters discussed in this
quarterly report contain forward-looking statements that involve risks and
uncertainties.  Although the Company believes that its expectations are based on
reasonable assumptions, it can give no assurance that its goals will be
achieved.  Important factors that could cause actual results to differ
materially from those in the forward-looking statements herein include, among
other things, general economic conditions, volatility of oil and gas prices, the
impact of possible geopolitical occurrences world-wide and in Colombia,
imprecision of reserve estimates, changes in laws and regulations, unforeseen
engineering and mechanical or technological difficulties in drilling, working-
over and operating wells during the periods covered by the forward-looking
statements, as well as other factors described in the Company's annual report on
Form 10-K.

NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------

The Company is assessing the reporting and disclosure requirements of SFAS No. 
131, Disclosures about Segments of an Enterprise and Related Information.  This 
statement requires a public business enterprise to report financial and 
descriptive information about its reportable operating segments.  The statement 
is effective for financial statements for periods beginning after December 15, 
1997, but is not required for interim financial statements in the initial year 
of its application.  The Company will adopt the provisions of SFAS No. 131 in 
its December 31, 1998 consolidated financial statements.

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

                                       16
<PAGE>
 
PART II - OTHER INFORMATION

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

a) Exhibits
-----------

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

2.2  Debenture Purchase Agreement dated as of June 24, 1998, between Aviva
     Petroleum Inc. and the Holders of the Debentures named therein (filed as
     exhibit 2.2 to the Registration Statement on Form S-4, File No. 333-58061,
     and incorporated herein by reference).

10.1 Amendment to the ING Capital Credit Agreement dated August 6, 1998.

27.1 Financial Data Schedule.

b) Reports on Form 8-K
----------------------

The Company filed the following Current Reports on Form 8-K during and
subsequent to the end of the second quarter:

Date of 8-K         Description of 8-K
-----------         ------------------

April 17, 1998      Submitted a copy of the Company's Press Release dated April
                    17, 1998 announcing the merger plans between Aviva Petroleum
                    Inc. and Garnet Resources Corporation.

June 24, 1998       Submitted a copy of the Company's Press Release dated June
                    24, 1998, announcing the signing of the merger agreement
                    between Aviva Petroleum Inc. and Garnet Resources
                    Corporation.

                                       17
<PAGE>
                                  SIGNATURES
                                  ----------

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

                                         AVIVA PETROLEUM INC.



Date:  August 11, 1998                   /s/ Ronald Suttill
                                         -------------------------------------
                                         Ronald Suttill
                                         President and Chief Executive Officer
 



                                         /s/  James L. Busby
                                         -------------------------------------
                                         James L. Busby
                                         Treasurer and Secretary
                                         (Chief Accounting Officer)

                                       18
<PAGE>
 
                               INDEX TO EXHIBITS

                                        
Exhibit
Number    Description of Exhibit
------    ----------------------

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

  *2.2    Debenture Purchase Agreement dated as of June 24, 1998, between Aviva
          Petroleum Inc. and the Holders of the Debentures named therein (filed
          as exhibit 2.2 to the Registration Statement on Form S-4, File No.
          333-58061, and incorporated herein by reference).

**10.1    Amendment to the ING Capital Credit Agreement dated August 6, 1998.
 
**27.1    Financial Data Schedule.

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

                                       19