<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      SEPTEMBER  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 September 30,
1998, was 31,882,716 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>
 
                                                                September 30,               December 31,
                                                                    1998                        1997
                                                                -------------               ------------
<S>                                                             <C>                         <C>
ASSETS
 
Current assets:
 Cash and cash equivalents                                       $        278               $        690
 Accounts receivable                                                    1,486                      1,803
 Inventories                                                              604                        602
 Prepaid expenses and other                                                30                        203
                                                                -------------               ------------
   Total current assets                                                 2,398                      3,298
                                                                -------------               ------------
 
Property and equipment, at cost (note 3):
 Oil and gas properties and equipment (full cost method)               61,069                     61,036
 Other                                                                    612                        606
                                                                -------------               ------------
                                                                       61,681                     61,642
   Less accumulated depreciation, depletion and amortization          (55,104)                   (49,873)
                                                                -------------               ------------
                                                                        6,577                     11,769
Other assets                                                            1,717                      1,378
                                                                -------------               ------------
                                                                $      10,692               $     16,445                
                                                                =============               ============
 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
Current liabilities:
 Current portion of long term debt (note 4)                     $       8,200               $        480 
 Accounts payable                                                       3,283                      3,091
 Accrued liabilities                                                      275                        356
                                                                -------------               ------------
   Total current liabilities                                           11,758                      3,927
                                                                -------------               ------------
 
Long term debt, excluding current portion (note 4)                         --                      7,210
Gas balancing obligations and other                                     1,579                      1,560
Stockholders' equity (deficit):
 Common stock, no par value, authorized 348,500,000 shares;
   issued 31,882,716 shares                                             1,594                      1,574
 Additional paid-in capital                                            33,405                     33,376 
 Accumulated deficit/*/                                               (37,644)                   (31,202)
                                                                -------------               ------------
   Total stockholders' equity (deficit)                                (2,645)                     3,748
 
Commitments and contingencies (note 6)
                                                                -------------               ------------
                                                                $      10,692               $     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  Nine Months Ended
                                                        September 30,      September 30,

                                                        1998      1997      1998       1997
                                                     -------   -------   -------   --------
<S>                                                  <C>        <C>      <C>       <C>
                                                                                   
Oil and gas sales                                    $   518   $ 2,249   $ 2,578   $  7,802
                                                     -------   -------   -------   --------
                                                                                   
Expense:                                                                           
 Production                                              707     1,027     2,222      3,225
 Depreciation, depletion and amortization                239     1,370     1,413      4,655
 Write-down of oil and gas properties (note 3)             -         -     4,725     13,399
 General and administrative                              222       311       882      1,063
                                                     -------   -------   -------   --------
                                                                                   
   Total expense                                       1,168     2,708     9,242     22,342
                                                     -------   -------   -------   --------
                                                                                   
Other income (expense):                                                            
 Interest and other income (expense), net (note 5)       165       (53)      936         38
 Interest expense                                       (168)     (170)     (488)      (498)
                                                     -------   -------   -------   --------
                                                                                   
   Total other income (expense):                          (3)     (223)      448       (460)
                                                     -------   -------   -------   --------
                                                                                   
Loss before income taxes                                (653)     (682)   (6,216)   (15,000)
                                                                                   
Income taxes (benefits)                                   60       124       226       (158)
                                                     -------   -------   -------   --------
                                                                                   
     Net loss                                        $  (713)  $  (806)  $(6,442)  $(14,842)
                                                     =======   =======   =======   ======== 
Weighted average common shares outstanding --                
 basic and diluted                                    31,726    31,483    31,565     31,483
                                                     =======   =======   =======   ========          

Basic and diluted net loss per common share          $  (.02)  $  (.03)  $  (.20)  $   (.47)
                                                     =======   =======   =======   ======== 
</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> 

                                                            Nine Months Ended
                                                              September 30,

                                                              1998       1997
                                                          --------  ---------
<S>                                                       <C>       <C>
Net loss                                                  $(6,442)  $(14,842)
Adjustments to reconcile net loss to net cash
 provided by operating activities:
 Depreciation, depletion and amortization                   1,413      4,655
 Write-down of oil and gas properties                       4,725     13,399
 Deferred foreign income tax benefits                           -       (692)
 Changes in working capital and other                         484     (1,291)
                                                          -------   --------
 
   Net cash provided by operating activities                  180      1,229
                                                          -------   --------
 
Cash flows from investing activities:
 Property and equipment expenditures                         (900)    (2,381)
 Proceeds from sale of assets                                   -         19
 Other                                                       (226)         -
                                                          -------   --------
 
   Net cash used in investing activities                   (1,126)    (2,362)
                                                          -------   --------
 
Cash flows from financing activities
 Proceeds from long term debt                                 760          -
 Principal payments on long term debt                        (250)      (225)
                                                          -------   --------
 
   Net cash provided by (used in) financing activities        510       (225)
                                                          -------   --------
 
Effect of exchange rate changes on cash and
 cash equivalents                                              24        (41)
                                                          -------   --------
 
Net decrease in cash and cash equivalents                    (412)    (1,399)
Cash and cash equivalents at beginning of the period          690      2,041
                                                          -------   --------
 
Cash and cash equivalents at end of the period            $   278   $    642
                                                          =======   ========
</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
Issuance of common stock pursuant
  to amendment of credit
  agreement (note 4)                    400,000      20          29            -                49
Net loss                                      -       -           -       (6,442)           (6,442)
                                     ----------  ------  ----------  -----------    --------------
 
Balances at September 30, 1998       31,882,716  $1,594  $   33,405  $   (37,644)   $       (2,645)
                                     ==========  ======  ==========  ===========    ==============
</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 nine months ended September 30, 1998 and
    1997.

2.  MERGER

    On October 28, 1998, the Company completed the merger of Garnet Resources
    Corporation ("Garnet") with one of the Company's subsidiaries. As a result
    of the merger, the Company now owns over 99% of the Colombian joint
    operations. Additionally, the Company now holds a 4% working interest
    convertible to a 2% carried interest in an oil and gas Petroleum Prospecting
    License in Papua New Guinea.

    The merger arrangements included Aviva refinancing Garnet's 99.24% owned
    subsidiary's outstanding debt to Chase Bank of Texas, N.A. ("Chase")
    (approximately $6.3 million, at September 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.
    (See note 4 for further details.)

                                       6
<PAGE>
 
                     AVIVA PETROLEUM INC. AND SUBSIDIARIES
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                            (UNAUDITED) (CONTINUED)
                                        
    The merger will be accounted for as a "purchase" of Garnet for financial
    accounting purposes with Aviva's subsidiary as the surviving entity. The
    purchase price of Garnet, approximately $10 million, consists of $2.3
    million related to the issuance of 14,036,987 shares of Aviva's common stock
    at $0.167 per share and the assumption of approximately $6.3 million of debt
    and $1.2 million of other liabilities.

    The following sets forth selected consolidated financial information for the
    Company on a pro forma basis for the nine months ended September 30, 1997
    and 1998 assuming the Garnet merger had occurred on January 1, 1997. The
    following selected pro forma combined financial information is based on the
    historical consolidated statements of operations of Aviva and Garnet as
    adjusted to give effect to the merger using the purchase method of
    accounting for business combinations. In addition, the following selected
    pro forma combined financial information gives effect to the purchase of
    Garnet debentures by Aviva pursuant to the Debenture Purchase Agreement, the
    borrowing by Aviva of $15 million pursuant to the Bank loans (as discussed
    in note 4) and the application of such funds to refinance Aviva's
    outstanding debt and the debt to Chase of a Garnet subsidiary (as discussed
    in note 4). The following selected pro forma combined financial information
    may not necessarily reflect the financial condition or results of operations
    of Aviva that would actually have resulted had the merger occurred as of the
    date and for the periods indicated or reflect the future results of
    operations of Aviva (in thousands, except per share amounts).
<TABLE>
<CAPTION>
                                                     1997      1998
                                                     ----      ----
<S>                                                <C>       <C>
 
    Revenues                                       $ 15,100  $  4,981
                                                   ========  ========
    Net loss                                       $(28,254) $(13,472)
                                                   ========  ========
    Basic and diluted net loss per common share    $   (.60) $   (.29)
                                                   ========  ========
</TABLE>

    The above pro forma net losses for the nine-month periods ended September
    30, 1997 and 1998, include combined historical charges for ceiling write-
    downs of oil and gas producing properties of $27,616,000 and $9,853,000,
    respectively. Had the effects of the purchase allocation to oil and gas
    producing properties been considered in the application of the ceiling
    tests, the write-downs would have been approximately $-0- and $4,473,000,
    for the nine-month periods ended September 30, 1997 and 1998, respectively.

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 $32,000 for the nine months ended September 30, 1998 and
    $94,000 for the nine months ended September 30, 1997.

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

   Unevaluated oil and gas properties totaling $323,000 and $251,000 at
   September 30, 1998 and December 31, 1997, respectively, have been excluded
   from costs subject to depletion. The Company capitalized interest costs of
   $9,000 and $55,000 for the nine-month periods ended September 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                  Nine Months Ended
                                               September 30,                      September 30,
                                               (thousands)                        (thousands)
                                               1998            1997             1998                 1997
                                -------------------  --------------  -----------------  -----------------
<S>                             <C>                  <C>             <C>                <C>
               Colombia         $                -   $            -  $           3,355  $         11,413
               United States                     -                -              1,370             1,986
                                ------------------   --------------  -----------------  ----------------
                                             $   -   $            -  $           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 was 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
   (8.25% at September 30, 1998) plus 1% or, at the option of the Company, a
   fixed rate, based on the London Interbank Offered Rate ("LIBOR") plus 2.75%,
   for a portion or portions of the outstanding debt from time to time.

   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 would be 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 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

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

  existing working capital.  As compensation for making the new advance and
  entering into the new agreement, the Company issued to ING Capital 400,000 new
  shares of the Company's common stock.

  On October 28, 1998, concurrently with the consummation of the Garnet merger,
  Neo Energy, Inc., an indirect subsidiary of the Company, and the Company
  entered into a Restated Credit Agreement with ING Capital.  ING Capital, Chase
  and OPIC also entered into a Joint Finance and Intercreditor Agreement (the
  "Intercreditor Agreement") with the Company.  ING Capital agreed to loan Neo
  Energy, Inc. an additional $800,000, bringing the total outstanding balance
  due ING Capital to $9,000,000.  The outstanding balance due to Chase was paid
  down to $6,000,000 from the $6,350,000 balance owed by Garnet prior to the
  merger.  ING Capital and Chase will share on a 60/40 basis, respectively, all
  collateral.

  The ING Capital loan and the Chase loan (the "Bank Credit Facilities") are
  guaranteed by the Company and its material domestic subsidiaries.  Both loans
  are also secured by the Company's consolidated interest in the Santana
  contract and related assets in Colombia, a first mortgage on the United States
  oil and gas properties of the Company and its subsidiaries, a lien on accounts
  receivable of the Company and its subsidiaries, and a pledge of the capital
  stock of the Company's subsidiaries. The Chase loan is unconditionally
  guaranteed by OPIC.

  Borrowings under the ING Capital loan bear interest at LIBOR plus 3.0% per
  annum.  Borrowings under the Chase loan bear interest at the LIBOR rate plus
  0.6% per annum.  In addition, a guarantee fee of 2.4% per annum on the
  borrowings under the Chase loan guaranteed by OPIC will be payable to OPIC.

  Subsequent to consummation of the Garnet merger, Aviva issued to ING Capital
  800,000 shares of Aviva Common Stock and warrants to purchase 1,500,000 shares
  of Aviva Common Stock at an exercise price of $0.50 per share in payment of
  financial advisory fees.

  Borrowings under the Bank Credit Facilities are payable as follows: $50,000
  per month through March 1999, $5,700,000 in April 1999, and thereafter
  $281,250 per month until final maturity on December 31, 2001.  The terms of
  the combined loans, 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. Additionally, on or after
  April 1, 1999, the Company is required to maintain a minimum of $2.5 million
  of consolidated tangible net worth. As of September 30, 1998, the Company
  would not be in compliance with this tangible net worth covenant. Moreover,
  there can be no assurance that the Company will be able to comply with such
  covenant at April 1, 1999. The Company has, therefore, classified all long-
  term debt as current in the September 30, 1998 consolidated balance sheet.

  The Company is also required to maintain an escrow account of $250,000 until
  March 31, 1999.  On March 31, 1999 and thereafter, the escrow account must
  contain the total of the following for the next succeeding three-month period:
  (i) the amount of the minimum monthly principal payments (as defined in the
  loan documents), plus (ii) the interest payments due on the combined loans,
  plus (iii) the amount of all fees due under the loan documents and under the
  Intercreditor Agreement.

                                       9
<PAGE>
 
                     AVIVA PETROLEUM INC. AND SUBSIDIARIES
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                            (UNAUDITED) (CONTINUED)


5. INTEREST AND OTHER INCOME (EXPENSE)

   A summary of interest and other income (expense) follows (in thousands):
<TABLE>
<CAPTION>
 
                                                Three Months Ended        Nine Months Ended
                                                   September 30,             September 30,
                                                 1998        1997           1998      1997
                                                --------   --------       --------  --------
<S>                                             <C>        <C>            <C>       <C>
     Gain on settlement of litigation           $      -   $      -       $    720  $      -
     Interest income                                  21         35             66       117
     Foreign exchange gain (loss)                     26        (30)            24       (59)
     Gain (loss) on sale of assets, net                -          -              -       (13)
     Other, net                                      118        (58)           126        (7)
                                                --------   --------       --------  --------
                                                $    165   $    (53)      $    936  $     38
                                                ========   ========       ========  ========
</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

   The Company is engaged in ongoing operations on the Santana contract in
   Colombia. All Santana contract obligations have been met. The Company is,
   however, involved in various miscellaneous projects. As of September 30,
   1998, the estimated future costs of these projects is approximately $0.9
   million, including Garnet's share. 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 the concession agreement, result
   in the forfeiture of all or part of the Company's interest in this
   concession.

   Following the merger with Garnet, the only debt service requirements of the
   combined company relates to $15 million of indebtedness incurred pursuant to
   the Bank Credit Facilities (see note 4). The terms of the Bank Credit
   Facilities require payments of principal of $50,000 per month through March
   1999, $5,700,000 in April 1999, and thereafter $281,250 per month until final
   maturity at December 31, 2001. Borrowings under the ING Capital loan will
   bear interest at LIBOR plus 3.0% per annum. Borrowings under the Chase loan
   will bear interest at LIBOR plus 0.6% per annum. In addition, a guarantee fee
   of 2.4% per annum on the portion of the borrowings under the Chase loan
   guaranteed by OPIC will be payable to OPIC.

   Management has prepared an internal projection of the cash flow of the
   combined company that assumes (i) a continuation of the prices at which oil
   is being sold from its Colombian contract and the prices at which oil and gas
   are being sold from its United States offshore properties, (ii) a
   continuation of current interest rates and operating costs, (iii) production
   decline curves commensurate with those assumed by the independent engineers
   with respect to the oil and gas properties of the combined company, (iv) no
   other significant deviations from anticipated volumes of oil and gas
   production from its properties and (v) no significant interruptions in
   production of oil and gas from its properties. This cash flow projection
   indicates that the combined company would be able to meet its debt service
   obligations under the Bank

                                       10
<PAGE>
 
                     AVIVA PETROLEUM INC. AND SUBSIDIARIES
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                            (UNAUDITED) (CONTINUED)

  Credit Facilities (as well as its other normal operating expenditures) by
  application of internally generated funds through March 1999.  Management does
  not, however, project that, under such assumptions, the internal cash flow of
  the combined company will be sufficient to meet the principal payment due on
  April 1, 1999 under the Bank Credit Facilities.  In the past, ING Capital has
  amended or waived compliance with certain covenants and scheduled payments
  when Aviva has been unable to comply with them.  There can be no assurance,
  however, that it will continue to make similar concessions in the future.  In
  such circumstances, it will be necessary for the combined company to raise
  additional capital through equity issues or by sales of assets to retire the
  debt.  Based on the same assumptions used in connection with the internal
  projection of cash flow of the combined company and the further assumption
  that no reserves are added to those of the combined company, management has
  projected that the standardized measure of the discounted (at 10% per annum)
  net future cash flows applicable to proved oil and gas reserves of the
  combined company will be approximately $12.6 million at April 1, 1999.  There
  can be no assurance that the combined company will be able, through sales of
  equity or assets, to raise capital necessary to meet its debt service
  requirements under the Bank Credit Facilities on April 1, 1999 or at any time
  thereafter.

  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.  The Colombian army guards the
  Company's operations, however, there can be no assurance that the Company's
  operations will not be the target of guerrilla attacks in the future.  The
  Company estimates that the aggregate amount of damage resulting from the above
  referenced attack will approximate $2 million, including Garnet's share.  The
  Company expects such damage will be substantially covered by insurance.  There
  can be no assurance that such coverage will remain available or affordable.

  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.

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

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED 
SEPTEMBER 30, 1997
 
                                    United States      Colombia
                                    Oil       Gas         Oil       Total
                                 ---------  ---------  ---------  ---------
       (Thousands)
 
       Revenue - 1997            $     329  $     201  $   1,719  $   2,249
 
       Volume variance                (166)      (150)    (1,137)    (1,453)
 
       Price variance                  (59)        (8)      (190)      (257)
 
       Other                             -        (21)         -        (21)
                                 ---------  ---------  ---------  ---------
 
       Revenue - 1998            $     104  $      22  $     392  $     518
                                 =========  =========  =========  =========

Colombian oil volumes were 36,000 barrels in the third quarter of 1998, a
decrease of 70,000 barrels as compared to the third quarter of 1997. Such
decrease is due to a 47,000 barrel decrease resulting from production declines
and a 23,000 barrel decrease due to lost production caused by guerrilla attacks
in August that damaged oil processing and storage facilities and caused
production from various wells to be shut-in for periods ranging from 6 to 57
days.

U.S. oil volumes were 9,000 barrels in 1998, down approximately 9,000 barrels
from 1997.  Of such decrease, approximately 3,000 barrels was due to the
Company's Breton Sound 31 field being shut-in during the month of September due
to the drilling and completion of a saltwater disposal well and adverse weather,
approximately 5,000 barrels was due to the Company's Main Pass 41 field being
shut-in for approximately 70 days during the third quarter of 1998 due to
upgrading and modification of production and water treatment facilities and
adverse weather, and 1,000 barrels resulted from normal production declines.
U.S. gas volumes before gas balancing adjustments were 8,000 thousand cubic feet
(MCF) in 1998, down 57,000 MCF from 1997.  Of such decrease, approximately
31,000 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 13,000 MCF was
due to normal production declines.

Colombian oil prices averaged $10.90 per barrel during the third quarter of
1998.  The average price for the same period of 1997 was $16.19 per barrel.  The
Company's average U.S. oil price decreased to $11.45 per barrel in 1998, down
from $18.02 per barrel in 1997.  In 1998 prices have been lower than in the
third quarter of 1997 due to a dramatic decrease in world oil prices.  U.S. gas
prices averaged $2.14 per MCF in 1998 compared to $2.24 per MCF in 1997.

In addition to the above-mentioned variances, U.S. gas revenue decreased
approximately $21,000 as a result of gas balancing adjustments.

Operating costs decreased approximately 31%, or $320,000, 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.

                                       12
<PAGE>
 
Depreciation, depletion and amortization ("D D & A") decreased by 83%, or
$1,131,000, primarily due to a decrease in costs subject to amortization
resulting from property write-downs and lower levels of production.

General and administrative ("G & A") expenses declined $89,000 during the third
quarter of 1998 mainly due to a $28,000 decrease in legal fees and a $48,000
reduction in payroll.  These savings were partially offset by lower amounts of
capitalized G & A.

Income taxes were $64,000 lower in 1998 principally as a result of lower
presumptive income taxes in Colombia.

NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED 
SEPTEMBER 30, 1997
 
                                 United States    Colombia
                                  Oil      Gas       Oil      Total
                               ---------  ------  ---------  --------
       (Thousands)
 
       Revenue - 1997            $1,164   $ 621    $ 6,017   $ 7,802
 
       Volume variance             (464)   (396)    (2,919)   (3,779)
 
       Price variance              (245)    (46)    (1,117)   (1,408)
 
       Other                          -     (37)         -       (37)
                                 ------   -----    -------   -------
 
       Revenue - 1998            $  455   $ 142    $ 1,981   $ 2,578
                                 ======   =====    =======   =======
 
Colombian oil volumes were 174,000 barrels in the first nine months of 1998, a
decrease of 164,000 barrels as compared to the first nine months of 1997. Such
decrease is due to a 141,000 barrel decrease resulting from production declines
and a 23,000 barrel decrease due to lost production caused by guerrilla attacks
in August that damaged oil processing and storage facilities and caused
production from various wells to be shut-in for periods ranging from 6 to 57
days.

U.S. oil volumes were 36,000 barrels in 1998, down approximately 24,000 barrels
from 1997.  Of such decrease, approximately 3,000 barrels was due to the
Company's Breton Sound 31 field being shut-in during the month of September due
to the drilling and completion of a saltwater disposal well and adverse weather,
approximately 13,000 barrels was due to the Company's Main Pass 41 field being
shut-in for approximately 155 days during the first nine months of 1998 due to
upgrading and modification of production and water treatment facilities and
adverse weather, and 8,000 barrels resulted from normal production declines.
U.S. gas volumes before gas balancing adjustments were 44,000 MCF in 1998, down
161,000 MCF from 1997.  Of such decrease, approximately 61,000 MCF was due to
the aforementioned shut-in of the Main Pass 41 field and 38,000 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 62,000 MCF was due to production
declines.

Colombian oil prices averaged $11.40 per barrel during the first nine months of
1998.  The average price for the same period of 1997 was $17.83 per barrel.  The
Company's average U.S. oil price decreased to $12.61 per barrel in 1998, down
from $19.38 per barrel in 1997.  In 1998 prices have been lower than in the
first nine months of 1997 due to a dramatic decrease in world oil prices.  U.S.
gas prices averaged $2.11 per MCF in 1998 compared to $2.24 per MCF in 1997.

                                       13
<PAGE>
 
In addition to the above-mentioned variances, U.S. gas revenue decreased
approximately $37,000 as a result of gas balancing adjustments.

Operating costs decreased approximately 31%, or $1,003,000, 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.

D D & A decreased by 70%, or $3,242,000, 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 $181,000 mainly due to an $81,000 decrease in legal fees
and a $137,000 reduction in payroll.  These savings were partially offset by
lower amounts of capitalized G & A.

Interest and other income increased during the first nine months 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 $384,000 higher in 1998 principally as a result of Colombian
deferred tax benefits recorded in the second quarter of 1997, partially offset
by lower presumptive income taxes in 1998.  The deferred tax benefits in 1997
resulted from the write-down of the carrying amount of the Company's Colombian
oil properties.

YEAR 2000

The Year 2000 problem is the inability of a meaningful proportion of the world's
computers, software applications and embedded semiconductor chips to cope with
the change of the year from 1999 to 2000.  This issue can be traced to the
infancy of computing, when computer data and programs were designed to save
memory space by truncating the date field to just six digits (two for the day,
two for the month and two for the year).   Such information applications
automatically assume that the two-digit year field represents a year within the
20th century.  As a result of this, systems could fail to operate or fail to
produce correct results.

The Year 2000 problem affects computers, software applications, and related
equipment used, operated or maintained by the Company.  Accordingly, the Company
is currently assessing the potential impact of, and the costs of remediating,
the Year 2000 problem for its internal systems and on facilities and equipment.
The Company's business is substantially dependent upon the operations of
computer systems, and as such, the Company has established a committee made up
of leaders from the operational areas of the Company.  The committee has the
involvement of senior management and its objectives are high priority.

The Company is in the process of identifying the computers, software
applications, and related equipment used in connection with its operations that
must be modified, upgraded or replaced to minimize the possibility of a material
disruption of its business.  The Company has commenced the process of modifying,
upgrading and replacing systems which have already been assessed as adversely
affected by the Year 2000 problem, and expects to complete this process by the
end of the third quarter of 1999.

                                       14
<PAGE>
 
In addition to computers and related systems, the operation of office equipment,
such as fax machines, copiers, telephone switches, security systems and other
common devices may be affected by the Year 2000 problem.  The Company is
currently assessing the potential effect of, and costs of remediating, the Year
2000 problem on its office systems and equipment. The Company has initiated
communications with third party suppliers of computers, software, and other
equipment used, operated or maintained by the Company to identify and, to the
extent possible, to resolve issues involving the Year 2000 problem.  However,
the Company has limited or no control over the actions of these third party
suppliers.  Thus, while the company expects that it will be able to resolve any
significant Year 2000 problems with these systems, there can be no assurance
that these suppliers will resolve any or all Year 2000 problems with these
systems before the occurrence of a material disruption to the business of the
Company.  Any failure of these third parties to timely resolve Year 2000
problems with their systems could have a material adverse effect on the
Company's business, financial condition, and results of operations.

Because the Company's assessment is not complete, it is unable to accurately
predict the total cost to the Company of completing any required modifications,
upgrades, or replacements of its systems or equipment.  The Company does not,
however, believe that such total cost will exceed $0.2 million, including
Garnet's share.  The Company expects to identify and resolve all Year 2000
problems that could materially adversely affect its business operations.
However, management believes that it is not possible to determine with complete
certainty that all Year 2000 problems affecting the Company, its purchasers or
its suppliers have been identified or corrected.  The number of devices that
could be affected and the interactions among these devices are simply too
numerous.  In addition, no one can accurately predict how many Year 2000
problem-related failures will occur or the severity, duration, or financial
consequences of these perhaps inevitable failures.  As a result, management
expects that the Company will likely suffer the following consequences: (i) a
significant number of operational inconveniences and inefficiencies for the
Company, its purchasers and its suppliers will divert management's time and
attention and financial and human resources from its ordinary business
activities; (ii) a few serious system failures that will require significant
effort by the Company, its purchasers or its suppliers to prevent or alleviate
material business disruptions; (iii) several routine business disputes and
claims due to Year 2000 problems that will be resolved in the ordinary course of
business; and (iv) possible business disputes alleging that the Company failed
to comply with the terms of its contracts or industry standards of performance,
some of which could result in litigation.

The Company will develop contingency plans to be implemented if its efforts to
identify and correct Year 2000 problems affecting its operational systems and
equipment are not effective.  The Company plans to complete its contingency
plans by the end of the first quarter of 1999.  Depending on the systems
affected, any contingency plans developed by the Company, if implemented, could
have a material adverse effect on the Company's financial condition and results
of operations.

The discussion of the Company's efforts, and management's expectations, relating
to Year 2000 compliance are forward-looking statements.  The Company's ability
to achieve Year 2000 compliance and the level of incremental costs associated
therewith, could be adversely impacted by, among other things, the availability
and cost of programming and testing resources, vendors' ability to modify
proprietary software, and unanticipated problems identified in the ongoing
compliance review.

LIQUIDITY AND CAPITAL RESOURCES

Since December 31, 1997, costs incurred in oil and gas property acquisition,
exploration and development activities by the Company totaled $893,000.  Of such
amount, $297,000 was incurred in Colombia and $596,000 was incurred in the U.S.
These activities were funded primarily by cash provided by financing and
operating activities.

                                       15
<PAGE>
 
The Company is engaged in ongoing operations on the Santana contract in
Colombia.  All Santana contract obligations have been met.  The Company is,
however, involved in various miscellaneous projects.  As of September 30, 1998,
the estimated future costs of these projects is approximately $0.9 million,
including Garnet's share. 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 the concession agreement, result in the forfeiture of
all or part of the Company's interest in this concession.

Following the merger with Garnet, the only debt service requirements of the
combined company relates to $15 million of indebtedness incurred pursuant to the
Bank Credit Facilities (see note 4).  The terms of the Bank Credit Facilities
require payments of principal of $50,000 per month through March 1999,
$5,700,000 in April 1999, and thereafter $281,250 per month until final maturity
at December 31, 2001.  Borrowings under the ING Capital loan will bear interest
at LIBOR plus 3.0% per annum.  Borrowings under the Chase loan will bear
interest at LIBOR plus 0.6% per annum.  In addition, a guarantee fee of 2.4% per
annum on the portion of the borrowings under the Chase loan guaranteed by OPIC
will be payable to OPIC.

Management has prepared an internal projection of the cash flow of the combined
company that assumes (i) a continuation of the prices at which oil is being sold
from its Colombian association contract and the prices at which oil and gas are
being sold from its United States offshore properties, (ii) a continuation of
current interest rates and operating costs, (iii) production decline curves
commensurate with those assumed by the independent engineers with respect to the
oil and gas properties of the combined company, (iv) no other significant
deviations from anticipated volumes of oil and gas production from its
properties and (v) no significant interruptions in production of oil and gas
from its properties.  This cash flow projection indicates that the combined
company would be able to meet its debt service obligations under the Bank Credit
Facilities (as well as its other normal operating expenditures) by application
of internally generated funds through March 1999.  Management does not, however,
project that, under such assumptions, the internal cash flow of the combined
company will be sufficient to meet the principal payment due on April 1, 1999
under the Bank Credit Facilities.  In the past, ING Capital has amended or
waived compliance with certain covenants and scheduled payments when Aviva has
been unable to comply with them.  There can be no assurance, however, that it
will continue to make similar concessions in the future.  In such circumstances,
it will be necessary for the combined company to raise additional capital
through equity issues or by sales of assets to retire the debt.  Based on the
same assumptions used in connection with the internal projection of cash flow of
the combined company and the further assumption that no reserves are added to
those of the combined company, management has projected that the standardized
measure of the discounted (at 10% per annum) net future cash flows applicable to
proved oil and gas reserves of the combined company will be approximately $12.6
million at April 1, 1999.  There can be no assurance that the combined company
will be able, through sales of equity or assets, to raise capital necessary to
meet its debt service requirements under the Bank Credit Facilities on April 1,
1999 or at any time thereafter.

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.

                                       16
<PAGE>
 
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.

                                       17
<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 (filed
      as exhibit 10.1 to the Company's quarterly report on Form 10-Q for the
      quarter ended June 30, 1998, File No. 0-22258, and incorporated herein by
      reference).

10.2  Restated Credit Agreement dated as of October 28, 1998, between Neo
      Energy, Inc., Aviva Petroleum Inc. and ING (U.S.) Capital Corporation
      (filed as exhibit 99.1 to the Company's Form 8-K dated October 28, 1998,
      File No. 0-22258, and incorporated herein by reference).

10.3  Joint Finance and Intercreditor Agreement dated as of October 28, 1998,
      between Neo Energy, Inc., Aviva Petroleum Inc., ING (U.S.) Capital
      Corporation, Aviva America, Inc., Aviva Operating Company, Aviva Delaware
      Inc., Garnet Resources Corporation, Argosy Energy Incorporated, Argosy
      Energy International, Garnet PNG Corporation, the Overseas Private
      Investment Corporation, Chase Bank of Texas, N.A. and ING (U.S.) Capital
      Corporation as collateral agent for the creditors (filed as exhibit 99.2
      to the Company's Form 8-K dated October 28, 1998, File No. 0-22258, and
      incorporated herein by reference).

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 third quarter:

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

October 2, 1998     Submitted a description of the resignation of James E.
                    Tracey, a director of the Company, along with his
                    resignation letter (including its antecedents).

October 28, 1998    Submitted a description of the merger with Garnet Resources
                    Corporation that was completed on October 28, 1998.  Also
                    submitted a summary of the new bank credit facilities signed
                    on October 28, 1998.

                                       18
<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:  November 13, 1998                 /s/ Ronald Suttill
                                         ---------------------------------------
                                         Ronald Suttill
                                         President and Chief Executive Officer
 



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

                                       19
<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
          (filed as exhibit 10.1 to the Company's quarterly report on Form 10-Q
          for the quarter ended June 30, 1998, File No. 0-22258, and
          incorporated herein by reference).

 *10.2    Restated Credit Agreement dated as of October 28, 1998, between Neo
          Energy, Inc., Aviva Petroleum Inc. and ING (U.S.) Capital Corporation
          (filed as exhibit 99.1 to the Company's Form 8-K dated October 28,
          1998, File No. 0-22258, and incorporated herein by reference).

 *10.3    Joint Finance and Intercreditor Agreement dated as of October 28,
          1998, between Neo Energy, Inc., Aviva Petroleum Inc., ING (U.S.)
          Capital Corporation, Aviva America, Inc., Aviva Operating Company,
          Aviva Delaware Inc., Garnet Resources Corporation, Argosy Energy
          Incorporated, Argosy Energy International, Garnet PNG Corporation, the
          Overseas Private Investment Corporation, Chase Bank of Texas, N.A. and
          ING (U.S.) Capital Corporation as collateral agent for the creditors
          (filed as exhibit 99.2 to the Company's Form 8-K dated October 28,
          1998, File No. 0-22258, and incorporated herein by reference).

 
**27.1    Financial Data Schedule.


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

                                       20