UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549
                                    FORM 10-Q

(Mark One)
 X       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
---
         EXCHANGE ACT OF 1934

For the quarterly period ended      March 31, 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      1-7179

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

           DELAWARE                                           63-0647939
(State or other jurisdiction of                           (I.R.S. Employer
 incorporation or organization)                          Identification No.)

           AMSOUTH-SONAT TOWER
           BIRMINGHAM, ALABAMA                                  35203
(Address of principal executive offices)                     (Zip Code)

Registrant's telephone number:                             (205) 325-3800


                                   NO CHANGE
(Former name, former address and former fiscal year, if changed since last 
report)


     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 _

     Indicate the number of shares  outstanding of each of the issuer's  classes
of common stock, as of the latest practicable date.

                         COMMON STOCK, $1.00 PAR VALUE:

                110,057,191 SHARES OUTSTANDING ON APRIL 30, 1998



<PAGE>


                           SONAT INC. AND SUBSIDIARIES

                                      INDEX

<TABLE>
<CAPTION>

                                                                                          Page No.

PART I.           Financial Information

                  Item 1.      Financial Statements

                               Condensed Consolidated Balance Sheets--
<S>                                                                                       <C>
                                   March 31, 1998 and December 31, 1997                    1

                               Condensed Consolidated Statements of Income--
                                   Three Months Ended March 31, 1998 and 1997              2

                               Condensed Consolidated Statements of Cash Flows--
                                   Three Months Ended March 31, 1998 and 1997              3

                               Notes to Condensed Consolidated Financial
                                   Statements                                              4 - 13


                  Item 2.      Management's Discussion and Analysis of Financial
                                   Condition and Results of Operations                    14 - 26

PART II.          Other Information


                  Item 4.      Submission of Matters to a Vote of Security Holders        27

                  Item 6.      Exhibits and Reports on Form 8-K                           28 - 29

</TABLE>



<PAGE>


                                                         
                          PART I. FINANCIAL INFORMATION
Item 1.  Financial Statements
                           SONAT INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                March 31,              December 31,
                                                                                  1998                     1997
                                                                                          (In Thousands)
                                                        ASSETS
Current Assets:
<S>                                                                               <C>                      <C>       
    Cash and cash equivalents                                                     $   13,393               $   27,278
    Restricted cash (Note 2)                                                           -                      115,956
    Accounts receivable                                                              491,925                  619,581
    Inventories                                                                       45,029                   65,161
    Income taxes                                                                      65,419                    1,985
    Gas imbalance receivables                                                         11,874                   16,644
    Assets from price risk management activities                                      68,079                   92,150
    Other                                                                             38,393                   42,052
                                                                                  ----------               ----------
       Total Current Assets                                                          734,112                  980,807
                                                                                  ----------               ----------

Investments in Unconsolidated Affiliates and Other                                   596,442                  553,618
                                                                                  ----------               ----------

Plant, Property and Equipment                                                      6,193,077                6,079,239
    Less accumulated depreciation, depletion
       and amortization                                                            3,048,822                3,096,541
                                                                                  ----------               ----------
                                                                                   3,144,255                2,982,698
                                                                                  ----------               ----------
Deferred Charges and Other:
    Assets from price risk management activities                                      14,033                    9,638
    Other                                                                            177,966                  192,048
                                                                                  ----------               ----------
                                                                                     191,999                  201,686
                                                                                  ----------               ----------

Total Assets                                                                      $4,666,808               $4,718,809
                                                                                  ==========               ==========

                                         LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
    Long-term debt due within one year                                            $    9,791               $   14,508
    Unsecured notes                                                                  663,718                  446,721
    Accounts payable                                                                 515,122                  615,322
    Accrued income taxes                                                              14,903                   18,274
    Accrued interest                                                                  40,799                   37,242
    Accrued long-term compensation (Note 2)                                            -                       73,799
    Gas imbalance payables                                                            11,189                   14,320
    Liabilities from price risk management activities                                 59,256                   85,398
    Other                                                                             43,523                   75,299
                                                                                  ----------               ----------
       Total Current Liabilities                                                   1,358,301                1,380,883
                                                                                  ----------               ----------

Long-Term Debt                                                                     1,106,600                1,237,734
                                                                                  ----------               ----------

Deferred Credits and Other:
    Deferred income taxes                                                            382,103                  298,681
    Liabilities from price risk management activities                                  9,427                    5,014
    Other                                                                            184,442                  182,507
                                                                                  ----------               ----------
                                                                                     575,972                  486,202
                                                                                  ----------               ----------
Commitments and Contingencies

Stockholders' Equity:
    Common stock and other capital                                                   169,103                  167,786
    Retained earnings                                                              1,519,411                1,511,085
                                                                                  ----------               ----------
                                                                                   1,688,514                1,678,871
    Less treasury stock                                                               62,579                   64,881
                                                                                  ----------               ----------
       Total Stockholders' Equity                                                  1,625,935                1,613,990
                                                                                  ----------               ----------

Total Liabilities and Stockholders' Equity                                        $4,666,808               $4,718,809
                                                                                  ==========               ==========
</TABLE>

                                                See accompanying notes.

<PAGE>


                           SONAT INC. AND SUBSIDIARIES
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                              Three Months
                                                                                             Ended March 31,
                                                                                     1998                      1997
                                                                                          (In Thousands, Except
                                                                                            Per-Share Amounts)

<S>                                                                               <C>                      <C>       
Revenues                                                                          $1,108,885               $1,123,570
                                                                                  ----------               ----------

Costs and Expenses:
    Natural gas cost                                                                 763,483                  775,098
    Electric power cost                                                               65,191                   32,886
    Operating and maintenance                                                         40,480                   38,939
    Exploration cost                                                                  24,687                   32,557
    General and administrative                                                        38,934                   44,684
    Depreciation, depletion and amortization                                          87,548                   82,579
    Taxes, other than income                                                          13,605                    5,794
                                                                                  ----------               ----------
                                                                                   1,033,928                1,012,537
                                                                                  ----------               ----------

Operating Income                                                                      74,957                  111,033
                                                                                  ----------               ----------

Other Income (Loss), Net:
    Equity in earnings of
       unconsolidated affiliates                                                       9,653                   10,122
    Minority interest                                                                   (542)                    (872)
    Other income, net                                                                    712                    6,167
                                                                                  ----------               ----------
                                                                                       9,823                   15,417
                                                                                  ----------               ----------

Earnings Before Interest and Taxes                                                    84,780                  126,450
                                                                                  ----------               ----------

Interest:
    Interest income                                                                    2,200                    1,182
    Interest expense                                                                 (32,130)                 (24,853)
    Interest capitalized                                                               1,424                    2,043
                                                                                  ----------               ----------
                                                                                     (28,506)                 (21,628)
                                                                                  ----------               ----------

Income Before Income Taxes                                                            56,274                  104,822

Income Tax Expense                                                                    18,261                   34,956
                                                                                  ----------               ----------

Net Income                                                                        $   38,013               $   69,866
                                                                                  ==========               ==========

Earnings Per Share of Common Stock                                                $      .35               $      .63
                                                                                  ==========               ==========

Earnings Per Share of Common Stock-
    Assuming Dilution                                                             $      .34               $      .62
                                                                                  ==========               ==========

Weighted Average Shares Outstanding                                                  109,966                  110,387
                                                                                  ==========               ==========

Weighted Average Shares Outstanding-
    Assuming Dilution                                                                111,134                  112,057
                                                                                  ==========               ==========

Cash Dividends Paid Per Share                                                     $      .27               $      .27
                                                                                  ==========               ==========
</TABLE>



                             See accompanying notes.


<PAGE>


                           SONAT INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                           Three Months
                                                                                          Ended March 31,
                                                                                  1998                       1997
                                                                                          (In Thousands)
Cash Flows from Operating Activities:
<S>                                                                              <C>                      <C>        
    Net income                                                                   $    38,013              $    69,866
    Adjustments to reconcile net income to net
       cash provided by operating activities:
          Depreciation, depletion and amortization                                    87,548                   82,578
          Exploration cost                                                            24,687                   32,557
          Deferred income taxes                                                       83,422                   11,431
          Equity in earnings of unconsolidated
              affiliates, less distributions                                          (7,406)                 (10,117)
          Reserves for regulatory matters                                             (4,046)                     288
          Gas supply realignment costs                                                   353                    2,375
          Change in:
              Accounts receivable                                                    127,656                  207,759
              Inventories                                                             20,132                     (564)
              Accounts payable                                                      (100,200)                (138,737)
              Accrued interest and income taxes, net                                 (63,247)                  18,799
              Accrued long-term compensation                                         (73,799)                   1,135
              Other current assets and liabilities                                   (28,546)                   3,095
          Net change in restricted cash                                              115,956                    -
          Other, net                                                                   9,095                    7,414
                                                                                 -----------               ----------

              Net cash provided by operating activities                              229,618                  287,879
                                                                                 -----------               ----------

Cash Flows from Investing Activities:
    Plant, property and equipment additions                                         (251,435)                (209,567)
    Net proceeds from disposal of assets                                               1,109                    3,534
    Exploration costs, excluding lease write-offs                                    (13,830)                 (24,333)
    Investments in unconsolidated affiliates and
       other                                                                         (33,234)                    (241)
                                                                                 -----------              -----------

              Net cash used in investing activities                                 (297,390)                (230,607)
                                                                                 -----------              -----------

Cash Flows from Financing Activities:
    Proceeds from issuance of long-term debt                                         400,000                  450,000
    Payments of long-term debt                                                      (535,851)                (452,045)
    Changes in short-term borrowings                                                 216,997                  (17,630)
                                                                                 -----------              -----------
       Net changes in debt                                                            81,146                  (19,675)
    Dividends paid                                                                   (29,689)                 (23,248)
    Treasury stock purchases                                                            (100)                 (26,510)
    Other equity                                                                       2,530                    3,581
                                                                                 -----------              -----------

              Net cash provided by (used in)
                 financing activities                                                 53,887                  (65,852)
                                                                                 -----------              -----------

Net Decrease in Cash and Cash Equivalents                                            (13,885)                  (8,580)

Cash and Cash Equivalents at Beginning of Period                                      27,278                   48,009
                                                                                 -----------              -----------

Cash and Cash Equivalents at End of Period                                       $    13,393              $    39,429
                                                                                 ===========              ===========

Supplemental Disclosures of Cash Flow Information
Cash Paid for:
    Interest (net of amount capitalized)                                         $    25,187              $    21,112
    Income taxes paid, net                                                       $     2,129              $     7,769
</TABLE>


                             See accompanying notes.


<PAGE>


                           SONAT INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


1.       Basis of Presentation

         The accompanying  condensed  consolidated financial statements of Sonat
Inc. (Sonat) and its subsidiaries (the Company) have been prepared in accordance
with the  instructions  to Form 10-Q and include the  information  and footnotes
required by such  instructions.  In the opinion of management,  all  adjustments
including those of a normal  recurring  nature have been made that are necessary
for a fair presentation of the results for the interim periods presented herein.

         The 1997 period has been restated to reflect the Company's  merger with
Zilkha Energy  Company (see Note 2). Certain other amounts in the 1997 condensed
consolidated  financial  statements and notes have been  reclassified to conform
with the 1998 presentation.

         The  calculation  of diluted  earnings  per share  differs from that of
basic  earnings  per share due to the  denominator  for the diluted  calculation
including common stock  equivalents  applicable to outstanding  stock options of
1,168,000  and  1,670,000  for the three month  periods ended March 31, 1998 and
1997, respectively.

2.       Changes in Operations

         Business  Combination  - On  January  30,  1998,  following  a  special
shareholders'  meeting,  the Company  completed  the merger  with Zilkha  Energy
Company by exchanging  approximately  24.2 million  common shares for all of the
outstanding  shares  of Zilkha  Energy.  Zilkha  Energy  was a  privately  owned
exploration and production company.  Immediately thereafter Zilkha Energy's name
was changed to Sonat  Exploration  GOM Inc. It operates in the shallow waters of
the Gulf of Mexico where it has accumulated the industry's largest net leasehold
position in the shallow-water area.

         The merger constituted a tax-free reorganization and has been accounted
for as a pooling of interests  under APB No. 16.  Accordingly,  all prior period
condensed  consolidated  financial  statements,  notes and operational data have
been restated to include Sonat  Exploration  GOM as if it had always been a part
of Sonat.

         There were no  transactions  between  Sonat and Sonat  Exploration  GOM
prior to the combination.



<PAGE>


2.       Changes in Operations (Cont'd)

         The  following  are the  revenues  and net  income  for the  previously
separate  companies  and the  combined  amounts  presented  in  these  condensed
consolidated financial statements.

                                            Three Months
                                        Ended March 31, 1997
                                           (In Thousands)
Revenues
    Sonat Inc.                                 $1,072,143
    Sonat Exploration GOM                          51,427
       Combined                                $1,123,570

Net Income
    Sonat Inc.                                 $   66,846
    Sonat Exploration GOM                           3,020
                                               ----------
       Combined                                $   69,866
                                               ==========

         At December 31, 1997, Sonat  Exploration GOM had accrued $73.8 million,
which   represented   compensation  due  to  certain  employees  under  deferred
compensation  plans.  The liability was estimated based on the fair market value
of Sonat Exploration GOM as of December 31, 1997. The Company's  restricted cash
deposit  was used to settle this  liability  and certain  other  merger  related
expenses.

3.       Price Risk Management and Derivative Financial Instruments

         Through May 1997, the Company used  derivative  instruments  (commodity
futures  contracts,  options  and  price  swap  agreements)  solely to hedge its
commodity  price risk on natural gas, crude oil and  electricity.  In June 1997,
the Company also began using  derivative  instruments as a market maker (trading
activity) in natural gas.

         Natural gas, crude oil and electricity  futures contracts are traded on
the New York Mercantile  Exchange  (NYMEX).  Natural gas contracts are for fixed
units of 10,000 MMBtu and are available for up to 36 months in the future. Crude
oil  contracts  are for fixed units of 1,000 barrels and are available for up to
34 months in the future.  Electricity  contracts are for 736 megawatt  hours and
are available for up to 18 months in the future.

         Price swap  agreements  call for one party to make monthly  payments to
(or receive payments from) another party based upon the  differential  between a
fixed and a variable  price  (fixed-price  swap) or two variable  prices  (basis
swap) for a notional volume specified by the contract.

     Options  can be exchange  traded on the NYMEX or traded  over the  counter.
Exchange traded options give the owner the right, but not the obligation, to a

<PAGE>


3.       Price Risk Management and Derivative Financial Instruments (Cont'd)

futures  contract.  Over-the-counter  options give the owner the right, but not
the obligation, to buy or sell an
underlying commodity at a given price.

         At March  31,  1998,  the  Company  had  outstanding  energy  commodity
futures,  swaps and options. In the table below, buys of swaps represent payment
of fixed price and receipt of NYMEX or index and payment of NYMEX and receipt of
index. The notional volume and terms of these transactions are as follows:

                                       Notional Volume                 Maximum
Commodity                            Buy             Sell               Term
---------                            ---             ----               ----
Natural Gas (Tbtu)                  618.4            663.1            55 months
Electricity (Thousands of MWh)      221.6            204.8             2 months

Derivative Commodity Instruments Held or Issued for Trading Purposes

         The Company  maintains  active  trading  positions in energy  commodity
futures,  swap and option  contracts and limits its risk to changes in the value
of  its  outstanding   positions  through  the  use  of  Value-at-Risk   models,
establishment of offsetting positions, and limit and monitoring procedures.  The
trading   operation  also  enters  into  energy  commodity   purchase  and  sale
commitments.  These activities constitute its trading business and are essential
to provide  customers with market products at competitive  prices.  All of these
trading  positions are reported at fair value and recorded  under the heading of
Assets and  Liabilities  from  Price Risk  Management  Activities  (current  and
long-term)  in the Condensed  Consolidated  Balance  Sheets.  The change in fair
value is  recognized  in revenues as it occurs.  Fair value is subject to change
and reflects  management's  best estimate of market prices  considering  various
factors including closing exchange and over-the-counter  quotations,  time value
and  volatility  factors  underlying  the  commitments.  These market prices are
adjusted  to reflect  the  potential  impact of  liquidating  Sonat  Marketing's
position in an orderly  manner over a  reasonable  period of time under  present
market conditions.

         The  amounts   disclosed  in  the   following   table   represent   the
end-of-period fair value and the average fair value of the trading portfolio.

                               Fair Value                   Average Fair Value
                            (Carrying Amount)              for the Three Months
                              as of 3/31/98                    Ended 3/31/98
                                               (In Thousands)

Energy Commodity Trading:
    Assets                         $82,112                              $79,530
    Liabilities                     68,684                               66,946
===============================================================================

         Net trading gains for the first quarter of 1998 were $9.3 million.


<PAGE>

3.       Price Risk Management and Derivative Financial Instruments (Cont'd)

Derivative Commodity Instruments Held or Issued for Purposes Other Than Trading

         Derivative  positions taken  specifically to mitigate market price risk
associated with significant physical  transactions are accounted for using hedge
accounting provided they meet hedge accounting criteria. Under hedge accounting,
gains and losses from futures are deferred in the Condensed Consolidated Balance
Sheets in Deferred  Credits and Other and  recognized in earnings in conjunction
with  the  earnings   recognition   of  the   underlying   physical.   Each  net
payment/receipt  due or owed under the swap  agreement is recognized in earnings
during  the  period  to  which  the  payment/receipt  relates,  and  there is no
recognition  in the  Condensed  Consolidated  Balance  Sheets for changes in the
swap's  fair  value.  Gains or losses  resulting  from  settlement  of swaps are
amortized over their original terms.

         The derivative  instruments used to hedge commodity  transactions  have
historically  had high  correlation  with  commodity  prices and are expected to
continue to do so. In the event that correlation  falls below allowable  levels,
the gains or losses  associated  with the hedging  instruments  are  immediately
recognized to the extent that correlation is lost.

         Sonat Exploration's  production is hedged by entering into intercompany
swaps with Sonat Marketing. The exposure that Sonat Marketing assumes from Sonat
Exploration is then hedged by entering into derivative  instruments with outside
counterparties. Sonat Marketing and Sonat Power Marketing also hedge third-party
purchases and sales by entering into commodity futures,  swaps and options.  The
information  in the following  table  represents  the fair value of  outstanding
derivative positions as of March 31, 1998. Not included are the related physical
positions that these derivative positions hedge.

                                                        Fair Value
                                                      (In Thousands)
  Natural Gas                                            $(61,564)
  Electricity                                                (456)


         Deferred  amounts on open futures  positions  will mature over 1998 and
1999.



<PAGE>


3.       Price Risk Management and Derivative Financial Instruments (Cont'd)

Credit Risk from Derivative Activities

         NYMEX  traded  futures  are  guaranteed  by the NYMEX and have  nominal
credit risk. On all other  transactions  described above, the Company is exposed
to credit risk in the event of nonperformance by the counterparties. The Company
has established policies and procedures to evaluate potential counterparties for
creditworthiness   before  entering  into   over-the-counter   swap  and  option
agreements.  The credit risk resulting from in-the-money swaps is monitored on a
regular basis against  established  collateralization  limits. Due to changes in
market  conditions,  the market  value of swaps and options  and the  associated
credit exposure with the  counterparties  can change in relation to the Company.
At March 31, 1998,  the market  value of the  Company's  in-the-money  swaps and
options was $7.7 million,  and all counterparties were within collateral limits.
Reserves for credit risk are established as necessary.

4.       Unconsolidated Affiliates

         The following  table  presents the  components of equity in earnings of
unconsolidated affiliates:

                                                        Three Months
                                                       Ended March 31,
                                                 1998                   1997
                                                       (In Thousands)
Company's Share of Reported Earnings (Losses):

    Exploration and Production                     $  144               $   117
                                                   ------               -------

    Natural Gas Transmission:
       Citrus Corp.                                 4,511                 6,295
       Amortization of Citrus basis difference        346                   346
       Bear Creek Storage                           2,089                 2,708
       Destin Pipeline                              2,060                    13
       Other                                          (24)                  (25)
                                                   ------               -------
                                                    8,982                 9,337
                                                   ------               -------

    Energy Services                                   225                   292
                                                   ------               -------

    Other                                             302                   376
                                                   ------               -------

                                                   $9,653               $10,122
                                                   ======               =======



<PAGE>


4.       Unconsolidated Affiliates (Cont'd)

         Natural Gas  Transmission  Affiliates - Sonat owns 50 percent of Citrus
Corp., the parent company of Florida Gas Transmission Company.  Southern Natural
Gas Company  (Southern) owns a one-third  interest in Destin  Pipeline  Company,
L.L.C.  and a  subsidiary  of  Southern  owns 50 percent  of Bear Creek  Storage
Company, an underground gas storage company.

         The following is summarized income statement information for Citrus:

                                                    Three Months
                                                   Ended March 31,
                                               1998                  1997
                                                   (In Thousands)

    Revenues                                 $133,581              $170,763
    Expenses:
       Natural gas cost                        58,614                83,436
       Operating expenses                      23,987                22,446
       Depreciation and amortization           12,722                20,205
       Interest and other                      23,420                24,239
       Income taxes                             5,816                 7,847
                                             --------              --------

    Income Reported                          $  9,022              $ 12,590
                                             ========              ========

         The  following is  summarized  income  statement  information  for Bear
Creek.  No provision for income taxes has been  included  since its income taxes
are paid directly by the joint-venture participants.

                                                    Three Months
                                                   Ended March 31,
                                              1998                  1997
                                                   (In Thousands)

    Revenues                                 $9,029                $9,346
    Expenses:
       Operating expenses                     2,301                 1,241
       Depreciation                           1,359                 1,356
       Other expenses, net                    1,192                 1,333
                                             ------                ------

    Income Reported                          $4,177                $5,416
                                             ======                ======

     In April 1997, units of Shell Oil Company and Amoco Corporation joined with
Southern in the ownership of Destin  Pipeline,  a 1  billion-cubic-feet-per-day,
$313  million  pipeline  designed  to  transport  natural  gas  from  deep-water
development in the eastern Gulf of Mexico. Construction of the pipeline began in
December  1997,  and it is expected to be partially  completed and in service by
July 1998 and fully in service  by January  1999.  Destin's  earnings  primarily
relate to the allowance for funds used during  construction  capitalized  on its
pipeline.


<PAGE>


5.       Debt and Lines of Credit

         Long-Term Debt and Lines of Credit - Sonat has a bank revolving  credit
agreement  that provides for periodic  borrowings and repayments of up to $500.0
million through June 30, 2001.  Borrowings are supported by unsecured promissory
notes  that,  at the option of the  Company,  will bear  interest  at the banks'
prevailing prime or  international  lending rate, or such rates as the banks may
competitively  bid.  At  January 1, 1998,  there was an  outstanding  balance of
$130.0 million. During the first three months of 1998 $70.0 million was borrowed
and $200.0 million was repaid under the revolving credit agreement, resulting in
no amounts outstanding at March 31, 1998.

         In late January 1998, Sonat made two public offerings of Notes pursuant
to its shelf registration statement. In one offering,  Sonat issued $100 million
of 6 5/8 percent  Notes due  February 1, 2008,  at 99.531  percent to yield 6.69
percent. In the other offering, Sonat issued $100 million of 7 percent Notes due
February 1, 2018, at 99.787 percent to yield 7.02 percent. The net proceeds from
the  offerings  were used for  general  corporate  purposes,  including  capital
expenditures, working capital and repayment of debt.

     Unsecured  Notes - Loans under all short-term  credit  facilities are for a
duration of less than three months.

         In late  January  1998,  Sonat  completed  a new 364-day  $700  million
revolving  credit  facility with 20 banks.  In connection with this new facility
the Company terminated existing lines of credit providing for up to $200 million
of borrowings. At March 31, 1998, Sonat had short-term lines of credit of $700.0
million  available  through January 25, 1999.  Southern had a short-term line of
credit of $50.0 million available through May 26, 1998. Borrowings are available
for a  period  of not  more  than  364  days  and are in the  form of  unsecured
promissory  notes that bear  interest  at rates  based on the banks'  prevailing
prime, international or money-market lending rates. At March 31, 1998, Sonat had
$22.4 million outstanding at a rate of 6.31 percent. No amounts were outstanding
under Southern's agreement.

     Sonat had $639.5 million in commercial paper outstanding at an average rate
of 5.76 percent at March 31, 1998.



<PAGE>


6.       Rate Matters and Contingencies

         Periodically,  Southern and its subsidiaries  make general rate filings
with the Federal Energy Regulatory Commission (FERC) to provide for the recovery
of cost of service and a return on equity.  The FERC  normally  allows the filed
rates to become  effective,  subject to refund,  until it rules on the  approved
level of rates.  Southern and its subsidiaries provide reserves relating to such
amounts  collected  subject to refund,  as  appropriate,  and make  refunds upon
establishment  of the final  rates.  At March  31,  1998,  Southern's  rates are
established by a settlement  that was approved by FERC orders issued in 1995 and
1996. All of its customers are parties to the settlement.

7.       Comprehensive Income

         As of January 1, 1998,  the  Company  adopted  Statement  of  Financial
Accounting  Standards (SFAS) No. 130, Reporting  Comprehensive  Income. SFAS No.
130 establishes new rules for the reporting and display of comprehensive  income
and its components; however, the adoption of this Statement had no impact on the
Company's net income or shareholders'  equity.  SFAS No. 130 requires unrealized
gains or losses on the Company's available-for-sale securities to be included in
other comprehensive  income.  Comprehensive  income, net of related tax, for the
three-month periods ended March 31, 1998 and 1997 is as follows:

                                                    Three Months
                                                   Ended March 31,
                                             1998                  1997
                                                   (In Thousands)
Net Income                                 $38,013               $69,866
Unrealized Gains on Securities               1,265                 1,403
                                           -------               -------
Comprehensive Income                       $39,278               $71,269
                                           =======               =======

         Common stock and other  capital in the Condensed  Consolidated  Balance
Sheets includes $4.5 million at March 31, 1998, and $3.2 million at December 31,
1997, related to other  comprehensive  income,  which is comprised of unrealized
gains on securities.





<PAGE>


8.       Segment Information

         As of January 1, 1998,  the Company  adopted SFAS No. 131,  Disclosures
about  Segments  of  an  Enterprise  and  Related  Information.   SFAS  No.  131
establishes  standards for the way public  enterprises are to report information
about  operating  segments  in annual  financial  statements  and  requires  the
reporting of selected  information about operating segments in interim financial
reports  issued to  shareholders.  SFAS No. 131 also  establishes  standards for
related  disclosures  about  products and services,  geographic  areas and major
customers.  The Company had  previously  modified its  definition of segments to
conform to the approach required by SFAS No. 131.

         The Company's  consolidated  financial statements reflect operations in
three segments:  Exploration and Production, Natural Gas Transmission and Energy
Services.
<TABLE>
<CAPTION>

                                                                          Three Months Ended March 31, 1998
                                      Exploration            Natural
                                          and                  Gas             Energy
                                      Production          Transmission        Services         Other            Total
                                                                       (In Thousands)
Revenues from
<S>                                      <C>                  <C>              <C>            <C>            <C>       
    External Customers                   $79,839              $92,288          $936,755       $     3        $1,108,885

Intersegment Revenues                     82,064               13,214              -           12,373           107,651

Earnings Before
    Interest and Taxes                    13,037               68,915               836         1,992            84,780
                                         ==============================================================================


                                                                          Three Months Ended March 31, 1997
                                      Exploration            Natural
                                          and                  Gas             Energy
                                      Production          Transmission        Services         Other            Total
                                                                       (In Thousands)
Revenues from
    External Customers                  $ 91,272              $72,607          $959,684        $    7        $1,123,570

Intersegment Revenues                    114,357               26,559              -            8,889           149,805

Earnings Before
    Interest and Taxes                    62,902               60,104               924         2,520           126,450
                                        ===============================================================================
</TABLE>




<PAGE>


8.       Segment Information (Cont'd)

                                                       Three Months
                                                      Ended March 31,
                                                1998                  1997
                                                       (In Thousands)
Total Earnings Before Interest and Taxes
    for Reportable Segments                   $ 84,780              $126,450
Interest Income                                  2,200                 1,182
Interest Expense                               (32,130)              (24,853)
Interest Capitalized                             1,424                 2,043
                                              --------              --------

Income Before Income Taxes                    $ 56,274              $104,822
                                              ========              ========

9.       Subsequent Event

         Sonat  Exploration  Company  Restructuring  - On April  23,  1998,  the
Company   announced  a  restructuring   of  Sonat   Exploration   Company.   The
restructuring will include significant property sales and certain cost reduction
activities.  Oil and natural gas  properties  having  approximately  500 billion
cubic  feet  of  natural  gas  equivalent   reserves  and  daily  production  of
approximately 200 million cubic feet of natural gas equivalent will be sold. The
volumes represent approximately 19 percent of the Company's total proven oil and
natural  gas  reserves  and  approximately  24  percent  of  its  current  daily
production.  Although  the timing of the  property  sales will  depend on market
conditions,  the Company  expects the sales will be  completed by the end of the
third  quarter  of  1998  with  proceeds  used  to pay  down  debt.  Based  on a
preliminary  estimate of sales  proceeds and estimates of certain  restructuring
expenses,  the Company expects to take an after-tax charge of approximately $250
million  to $275  million in the second  quarter of 1998,  substantially  all of
which will be non-cash.






<PAGE>



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

RESULTS OF OPERATIONS

     Business segment operating results for Sonat Inc. and its subsidiaries (the
Company) are presented in the table below.

                                                 Three Months
                                                Ended March 31,
                                         1998                      1997
                                                 (In Millions)
Earnings Before Interest and Taxes:
    Exploration and production           $13.0                   $ 62.9
    Natural gas transmission              68.9                     60.1
    Energy services                         .8                       .9
    Other                                  2.1                      2.6
                                         -----                   ------

                                         $84.8                   $126.5
                                         =====                   ======

EXPLORATION AND PRODUCTION

         The  Company  is engaged in the  exploration  for and the  acquisition,
development  and  production of oil and natural gas in the United States through
Sonat Exploration Company. Most of Sonat Exploration's natural gas production is
sold to Sonat Marketing Company L.P. (Sonat Marketing),  the Company's affiliate
operating in the Energy Services segment.

     On January 30, 1998,  the Company  completed  its merger with Zilkha Energy
Company  for $1.3  billion  (see Note 2 of the Notes to  Condensed  Consolidated
Financial Statements).

         Following  the merger  with  Zilkha  Energy,  the  Company  undertook a
comprehensive  review of its exploration and production  business to improve its
overall financial performance.  This effort was recently completed,  and a major
restructuring program was announced on April 23, 1998. The restructuring program
includes the following steps.

         Oil and gas  properties  having  approximately  500 billion  cubic feet
(Bcf) of  proven  natural  gas  equivalent  reserves  and  daily  production  of
approximately  200 million cubic feet (MMcf) of natural gas  equivalent  will be
sold.  These volumes  represent  approximately 19 percent of the Company's total
proven oil and natural gas reserves and  approximately 24 percent of its current
daily  production.  The  divestiture  will include all of the  Company's  Austin
Chalk,  Arkoma Basin and substantially all onshore Gulf Coast properties as well
as various properties from other business units. No significant  properties from
the  Zilkha  Energy  merger or in the  Cotton  Valley  Pinnacle  Reef  Trend are
included in the divestiture  program.  Although the exact timing of the property
sales will  depend on market  conditions,  it is expected  that the  divestiture
program will be substantially  completed by the end of the third quarter of 1998
with the proceeds used to pay down debt.
<PAGE>

         Sonat  Exploration  will  consolidate  its business units from seven to
three.  This action,  together  with related staff  reductions,  will reduce its
workforce by approximately 220 people, or approximately  one-fourth of the Sonat
Exploration  workforce,  including those currently employed by Sonat Exploration
GOM Inc., the former Zilkha Energy.

         Based on a preliminary  estimate of sales proceeds from the divestiture
program and the costs related to the restructuring,  the Company expects to take
an after-tax charge of approximately  $250 million to $275 million in the second
quarter of 1998, substantially all of which will be non-cash.

         The steps being taken will  significantly  improve Sonat  Exploration's
financial  performance.  General  and  administrative  and  operating  costs are
expected to be reduced by approximately  $55 million on an annual basis.  Annual
interest  expense is expected to be reduced by $20 million or more. In addition,
the per-unit  amortization  rate is expected to decline from a current $1.01 per
thousand cubic feet (Mcf) of natural gas equivalent to about $.75 per Mcf, as of
April 1, 1998.  These actions are not expected to result in a material change to
Sonat's debt to capitalization ratio.

         In March 1998, Sonat Exploration was the apparent  successful bidder on
five tracts in the Central  Gulf of Mexico Lease Sale 169.  Sonat  Exploration's
net share of the high bids is $12.7  million.  While  three of the tracts are in
shallow  water  areas,  two of  the  tracts  are  in  deep  water,  an  emerging
exploratory  area for the  Company.  Sonat  Exploration  will have a 100 percent
working  interest in four of the tracts and a 25 percent  interest in one of the
deep-water tracts. The bids are subject to review and evaluation by the Minerals
Management  Service  before  being  finally  awarded.  So far this  year,  Sonat
Exploration has drilled four  exploratory  wells in the Gulf of Mexico with a 50
percent success rate.



<PAGE>


EXPLORATION AND PRODUCTION OPERATIONS
                                                     Three Months
                                                    Ended March 31,
                                             1998                      1997
                                                     (In Millions)
Revenues:
    Sales to others                          $ 79.8                   $ 91.3
    Intersegment sales                         82.1                    114.3
                                             ------                   ------
       Total Revenues                         161.9                    205.6
                                             ------                   ------

Costs and Expenses:
    Operating and maintenance                  19.4                     19.3
    Exploration cost                           24.7                     32.5
    General and administrative                 18.2                     17.6
    Depreciation, depletion and
       amortization                            79.4                     68.3
    Taxes and other                             7.3                      7.1
                                             ------                   ------
                                              149.0                    144.8
                                             ------                   ------
Operating Income                               12.9                     60.8
Other Income                                     .1                      2.1
                                             ------                   ------

Earnings Before Interest and Taxes           $ 13.0                   $ 62.9
                                             ======                   ======


Net Sales Volumes:
    Gas (Bcf)                                    63                       66
    Oil and condensate (MBbls)                1,950                    1,394
    Natural gas liquids (MBbls)                 584                      383
----------------------------------------------------------------------------

Average Sales Prices:
    Gas ($/Mcf)                              $ 2.01                   $ 2.53
    Oil and condensate ($/Bbl)                14.76                    21.91
    Natural gas liquids ($/Bbl)                9.73                    16.75
----------------------------------------------------------------------------


First Quarter 1998 to First Quarter 1997 Analysis

         Earnings  before  interest and taxes  (EBIT)  decreased  $49.9  million
primarily due to lower revenues  resulting from lower gas and oil and condensate
prices and lower natural gas  production.  Average  realized  natural gas prices
decreased  21 percent  to $2.01 per Mcf in the first  quarter of 1998 from $2.53
per Mcf in the  first  quarter  of  1997.  Realized  oil and  condensate  prices
decreased  33 percent to an average of $14.76 per barrel  from $21.91 per barrel
in the first quarter of 1997. Natural gas production declined five percent.
Higher oil and condensate production slightly offset these unfavorable factors.

         Costs and expenses were  slightly  higher in the first quarter of 1998,
primarily  due  to  higher  depreciation,  depletion  and  amortization  expense
reflecting  a higher  amortization  rate ($1.01 for the 1998 period  compared to
$.89 for the 1997 period).  The higher rate was primarily  attributable  to high
cost  areas  that are  included  in the  Company's  disposal  plans.  The higher
depreciation,  depletion and amortization  expense was partially offset by lower
exploration  expense as a result of lower seismic and lease  write-off  expenses
compared with the same period in 1997.
<PAGE>

         Other income was lower for the first three  months of 1998  compared to
the  first  three  months  of 1997 due to gains on the  disposal  of  marketable
securities in March 1997.

Hedging Activities

         Sonat Exploration,  through Sonat Marketing,  uses derivative financial
instruments to manage the risks  associated  with price  volatility for both its
natural  gas  production  and its oil  production,  which  it  sells in the spot
market.  (See  Market  Risk and Note 3 of the  Notes to  Condensed  Consolidated
Financial  Statements.)  Gains or  losses  experienced  on  Sonat  Exploration's
hedging transactions offset the changes in revenue recognized on the sale of the
commodity.  Natural gas  revenues  increased by $1.2 million and were reduced by
$17.2 million in the 1998 and 1997 periods, respectively, as a result of hedging
activities.  There were no oil hedging activities  reflected in the 1998 period.
Hedging activities reduced oil revenues by $.9 million in the 1997 period.

         A  portion  of Sonat  Exploration's  future  gas  production  is hedged
through the year 2001. Sonat Exploration's hedged gas production is as follows:

                                                   Weighted
                                                    Average
                          Volumes                    Price
                           (Bcf)                   (per Mcf)
Remainder of 1998          44.8                      $2.15
1999                       62.5                      $2.13
2000                       42.2                      $2.16
2001                        4.4                      $2.30
----------------------------------------------------------
                          153.9                      $2.15
==========================================================


NATURAL GAS TRANSMISSION

         The Company is engaged in the natural gas transmission business through
Southern Natural Gas Company and its subsidiaries (Southern) and Citrus Corp. (a
50   percent-owned   company).   Southern  and  Citrus  are  actively   pursuing
opportunities to expand their pipeline systems in their traditional market areas
and to connect new gas supplies.

         In April 1997, units of Shell Oil Company and Amoco Corporation  joined
with  Southern  in  the  ownership  of  Destin  Pipeline  Company,  L.L.C.,  a 1
billion-cubic-feet-per-day,  $313 million pipeline designed to transport natural
gas  from  deep-water  areas  in the  eastern  Gulf of  Mexico.  Southern  has a
one-third interest in this pipeline.  Shell and Amoco have made substantial firm
transportation  commitments  to this  pipeline.  Three other  shippers have also
dedicated their  production from certain leases in the eastern Gulf of Mexico to
Destin for  transportation  and discussions are under way with other prospective
shippers.  Construction  of the  pipeline  began  in  December  1997,  and it is
expected  to be  partially  completed  and in  service by July 1998 and fully in
service by January  1999.  In  February  1998 Destin  filed for  Federal  Energy
Regulatory   Commission   (FERC)   approval  to  extend  its   pipeline   system
approximately  14  miles to  transport  additional  gas  reserves  committed  to
Destin's system.  This extension,  which will cost approximately $19 million, is
expected to be in service in late 1998, subject to FERC approval.
<PAGE>

         Southern is moving  forward on three  expansions to eastern  Tennessee,
northern  Alabama,  and central  Alabama that have a total filed capital cost of
$126 million.  The North Alabama expansion,  which received FERC approval in May
1997, is now  anticipated to go in service in the fall of 1999,  subject to FERC
approval of an  application  that Southern  filed in February 1998 to change the
route of the pipeline as it crosses the Wheeler National  Wildlife  Refuge.  The
122-mile  expansion will provide 76  million-cubic-feet-per-day  capacity to the
participating  customers.  A second  expansion  to serve  customers  in  eastern
Tennessee  received  FERC  approval  in April 1998 and is  anticipated  to go in
service in November 1998. Southern has firm transportation  commitments totaling
65  million  cubic  feet of  natural  gas  per day  from  customers  in  eastern
Tennessee,  Georgia and Alabama  related to this  expansion.  The  expansion  in
central Alabama  received FERC approval in March 1998 and is also expected to go
in service in the fourth quarter of 1998. This expansion will provide 34 million
cubic feet per day of firm transportation to Alabama Power Company and two other
customers.

         In December  1997,  an  affiliate of AGL  Resources,  Inc. and Southern
formed a new  entity,  Etowah  LNG  Company,  L.L.C.  (Etowah  LNG),  to jointly
construct,  own and operate a new liquefied natural gas peaking facility in Polk
County,  Georgia. Under the agreement,  AGL Resources and Southern each will own
50 percent of Etowah LNG,  which will be  regulated  by the FERC.  The  proposed
plant  will  connect  directly  into  AGL  Resources'   principal   natural  gas
distribution  subsidiary,  Atlanta Gas Light Company,  and Southern's  pipeline.
Etowah LNG will provide natural gas storage and peaking  services to Atlanta Gas
Light and other Southeastern  customers.  Peaking services provide  supplemental
gas supplies on days when demand is highest,  typically  during the winter.  The
new facility will cost approximately $90 million with 300 million cubic feet per
day of  deliverability  capacity.  Affiliates of AGL  Resources  will manage the
construction   of  the   facility   and  operate  it.   Southern   will  provide
administrative  services.  Etowah LNG filed a certificate  application  with the
FERC in April 1998. Subject to receiving timely FERC approval, construction will
begin in early  1999 in order to provide  peaking  services  during the  2001-02
winter heating season.



<PAGE>


SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
                                                       Three Months
                                                      Ended March 31,
                                               1998                      1997
                                                       (In Millions)
Revenues:
    Market transportation and storage         $ 83.5                   $ 83.2
    Supply transportation                       11.6                     10.5
    Other                                       10.4                      5.4
                                              ------                   ------
       Total Revenues                          105.5                     99.1
                                              ------                   ------

Costs and Expenses:
    Operating and maintenance                   19.6                     17.6
    General and administrative                  15.5                     18.0
    Depreciation and amortization                5.5                     11.7
    Taxes, other than income                     5.3                      5.2
                                              ------                   ------
                                                45.9                     52.5
                                              ------                   ------
Operating Income                                59.6                     46.6
                                              ------                   ------
Other Income:
    Equity in earnings of
       unconsolidated affiliates                 4.1                      2.7
    Other                                         .7                      4.0
                                              ------                   ------
                                                 4.8                      6.7
                                              ------                   ------

Earnings Before Interest and Taxes            $ 64.4                   $ 53.3
                                              ======                   ======

                                                   (Billion Cubic Feet)
Volumes:
    Market transportation                        185                      170
    Supply transportation                         95                       80
                                              ------                   ------
       Total Volumes                             280                      250
                                              ======                   ======

    Transition gas sales                           3                       18
                                              ======                   ======


CITRUS CORP.
                                                       Three Months
                                                      Ended March 31,
                                               1998                      1997
                                                       (In Millions)
Equity in Earnings of
    Citrus Corp.                                $4.9                     $6.6
                                                ====                     ====

                                                   (Billion Cubic Feet)
Florida Gas Volumes (100%):
    Market transportation                         95                       98
    Supply transportation                          7                        7
                                               -----                     ----
       Total Volumes                             102                      105
                                               =====                     ====



<PAGE>

First Quarter 1998 to First Quarter 1997 Analysis

         Southern  Natural  Gas - EBIT for the first  quarter of 1998  increased
$11.1 million  compared  with the prior year.  The increase was due to increased
revenue from expansions,  improved  operations at Sea Robin Pipeline Company and
other  quarter-to-quarter  variances discussed below.  Partially  offsetting the
increase was lower other income in 1998.

         Supply  transportation  revenues  increased  due  to  an  expansion  at
Southern and higher volumes at Sea Robin.  Other revenue was up primarily due to
a reversal of certain  reserves  relating to Southern's  obligation to indemnify
certain parties in connection with take-or-pay  settlements  entered into in the
1980's. Operation and maintenance expense increased primarily due to higher fuel
expense.  General and  administrative  expense decreased  primarily due to lower
stock-based  compensation and employee benefit  expenses.  Depreciation  expense
decreased  primarily  due to an  adjustment  of salvage  value on certain  fixed
assets.

         Equity in earnings of unconsolidated  affiliates  increased in 1998 due
to earnings of Destin Pipeline, primarily resulting from the allowance for funds
used during construction (AFUDC)  capitalized.  Other income was lower primarily
due to the  recognition of a gain on the termination of a forward rate agreement
in the 1997 period.

         Citrus - Equity in earnings of Citrus  decreased  $1.7  million to $4.9
million. The decline was primarily due to lower trading margins and lower prices
for firm transportation capacity at Citrus Trading.

Natural Gas Sales and Supply

         As a result of FERC Order No. 636, Southern  terminated or renegotiated
to market pricing substantially all of its gas supply contracts through which it
had historically  obtained its long-term gas supply.  Pending the termination of
the remaining  supply  contracts,  Southern's  remaining gas supply is sold on a
month-to-month  basis.  Gas sales  revenue and natural gas cost are  included in
other revenue.

         Southern's annual purchase  commitments total less than $25 million per
year for 1998 and subsequent  years.  Based on Southern's  current  expectations
with  respect to natural  gas  prices in 1998 and the years  following,  only an
insignificant amount of gas volumes is expected to be at prices above market.

Rate Matters

         Under terms of a  settlement  approved by the FERC,  all of  Southern's
previously  pending  rate  proceedings  and  proceedings  to recover  gas supply
realignment and other  transition costs  associated with the  implementation  of
FERC Order No. 636 have been resolved.  The settlement requires Southern to file
a new rate case no later than September 1, 1999.


<PAGE>

ENERGY SERVICES

         Sonat Energy Services, through its majority-owned  subsidiaries,  Sonat
Marketing  and Sonat Power  Marketing  L.P.  (Sonat Power  Marketing),  conducts
marketing activities in the natural gas and electric  industries,  respectively.
Sonat Marketing  purchases and resells  substantially all of Sonat Exploration's
natural  gas  production,  as well as  purchasing  and  reselling  gas for other
customers. Both of these subsidiaries utilize derivative instruments in managing
commodity  price  risk (see  Market  Risk and Note 3 of the  Notes to  Condensed
Consolidated Financial Statements).

         Sonat  Marketing's  natural gas business has continued to grow rapidly,
although margins have remained under intense  pressure.  Sonat Marketing's sales
volumes  for the first  quarter  of 1998  increased  18  percent  from the first
quarter  of 1997.  This  growth  was  achieved  in large  part by the  Company's
continuing  focus on its  strategy of working  closely  with its  customers  and
delivering outstanding customer service.

         Sonat Power Marketing has executed  electric power purchase,  sales and
transmission  agreements  with  numerous  companies.  Sonat Power  Marketing has
remained  focused  on  expanding  its  wholesale  electric  business,  which  is
evidenced by the significant  growth in sales volumes.  Sales volumes  increased
127 percent to 3.2 million  megawatt hours in the first quarter of 1998 compared
with the first quarter of 1997. Despite its rapid growth,  however,  Sonat Power
Marketing is not yet profitable in the very competitive emerging power marketing
business.

         In February 1998, a subsidiary of Sonat Energy  Services  acquired a 50
percent  interest  in a natural  gas-fired  power  plant in Georgia  for a gross
investment of approximately $12 million.

         Sonat Intrastate-Alabama Inc. (SIA), a wholly owned subsidiary of Sonat
Energy  Services,  owns an  approximately  450-mile  intrastate  pipeline system
extending  from  natural  gas fields and coal seam gas  production  areas in the
Black  Warrior  Basin in  northwest  and  central  Alabama to  connections  with
customers in Alabama,  as well as  interconnections  with three other pipelines,
including  Southern.  SIA's  throughput  in the first quarter of 1998 was 12 Bcf
compared to 8 Bcf in the first quarter of 1997.

         Sonat Power Systems Inc., a wholly owned subsidiary of Sonat,  formed a
strategic alliance in 1997 with AlliedSignal Power Systems Inc., an unaffiliated
company,  to market and support its onsite electric power systems in 13 Southern
states from Texas to Virginia, plus the District of Columbia.



<PAGE>


ENERGY SERVICES

                                                        Three Months
                                                       Ended March 31,
                                                1998                      1997
                                                        (In Millions)

Revenues                                        $936.8                   $959.7
                                                ======                   ======

Operating Income                                $  1.1                   $  1.5
                                                ======                   ======

Earnings Before Interest and Taxes              $  0.8                   $  0.9
                                                ======                   ======

Sonat Marketing Gas Sales Volumes (100%)
    (Billion Cubic Feet)                           360                      304
                                                ======                   ======

Sonat Power Marketing Sales Volumes (100%)
    (Thousands of Megawatt Hours)                3,170                    1,397
                                                ======                   ======


First Quarter 1998 to First Quarter 1997 Analysis

         First quarter 1998  financial  results were  essentially  flat with the
previous year with EBIT of $.8 million  compared with $.9 million in 1997. While
natural gas and  electric  marketing  volumes  were both higher and  origination
activities increased, mild winter weather depressed margin opportunities.  Sonat
Marketing's  sales  volume  rose to 4 Bcf per day  from 3.5 Bcf per day in 1997,
while Sonat Power  Marketing's sales volumes reached 3.2 million megawatt hours,
up  significantly  from 1.4 million megawatt hours in the first quarter of 1997.
Results for 1998 also include start-up losses for Sonat Power Systems which were
not included in the prior period.

         Both revenues and natural gas cost decreased when compared to the prior
period due to a sharp decline in natural gas prices.







<PAGE>


Income Statement Items
                                                     Three Months
                                                    Ended March 31,
                                             1998                     1997
                                                     (In Millions)

Interest Expense, Net                       $ 28.5                   $ 21.6

         Net interest expense  increased in the 1998 period compared to the same
period last year due to higher  average debt levels  partly offset by the effect
of lower interest rates on debt and higher  interest  income on restricted  cash
and other  investments.  Interest  capitalized  decreased due to lower  interest
capitalized at Sonat Exploration.

Income Tax Expense                          $ 18.3                   $ 35.0

         Income tax expense  decreased  in the 1998 period  compared to the 1997
period due to lower pretax income.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Operating Activities                        $229.6                   $287.9

         Cash flow from operations  decreased $58.3 million compared to the 1997
period primarily due to lower operating results at Sonat Exploration,  which was
discussed earlier in the operating section.

         The change in restricted  cash,  accrued  long-term  compensation,  and
other current assets and liabilities primarily represents the payment of certain
expenses in connection  with the merger between the Company and Zilkha Energy in
January  1998  (see  Note 2 of the  Notes to  Condensed  Consolidated  Financial
Statements).  The change in  deferred  income  taxes and  accrued  income  taxes
primarily  reflects much higher levels of intangible  drilling costs compared to
the 1997 period and the payment of accrued  long-term  compensation upon closure
of the Zilkha merger. The change in accounts  receivable and accounts payable is
primarily  attributable  to higher  receivable and payable  balances in December
1996  reflecting  higher  natural gas prices as compared to December  1997.  The
change in inventory  represents the sale of gas storage  inventory  purchased in
December 1997 at Sonat Marketing.

Investing Activities                        $(297.4)                 $(230.6)

         Net cash used in investing  activities was $66.8 million higher in 1998
compared  to  1997.   The  increase  was  primarily   attributable   to  capital
expenditures, which were higher due to increased developmental drilling at Sonat
Exploration.  Advances to  unconsolidated  affiliates,  specifically  the Destin
Pipeline and the Georgia  natural  gas-fired  power plant joint  ventures,  also
contributed to the increase.
<PAGE>

                                                       Three Months
                                                      Ended March 31,
                                              1998                     1997
                                                      (In Millions)

         Capital  expenditures for the Company's  business  segments  (excluding
exploratory costs and unconsolidated affiliates) were as follows:

         Exploration and Production         $ 221.3                  $ 174.0
         Natural Gas Transmission              25.6                     31.8
         Energy Services                        2.2                      2.8
         Other                                  2.3                      1.0
                                            -------                  -------

         Total                              $ 251.4                  $ 209.6
                                            =======                  =======

     The  Company's  share  of  capital   expenditures  by  its   unconsolidated
affiliates  was $34.9  million and $2.0 million in the first quarter of 1998 and
1997, respectively.

Financing Activities                        $  53.9                  $ (65.9)

         Financing  activities  provided  $53.9  million  in  1998  compared  to
requiring  $65.9  million  in 1997.  The change was  primarily  attributable  to
increased  borrowings in the current period, which helped finance higher capital
expenditures  and investments in joint  ventures.  The 1997 period also reflects
much higher repurchases under the Company's stock repurchase program.

CAPITAL RESOURCES

         At March 31, 1998, the Company had bank lines of credit and a revolving
credit  agreement  with banks with a total  capacity  of $1,250.0  billion.  The
Company's  bank  and  commercial  paper  borrowings  in the  aggregate  are  not
authorized to exceed the maximum amount  available under its lines of credit and
revolving  credit  agreement.  As a result,  after  giving  effect to the $639.5
million of commercial  paper and $22.4 million of borrowings from the short-term
line of credit,  $588.1 million was available to the Company under such lines of
credit and revolving credit agreement at March 31, 1998.

         Southern has filed a shelf  registration  statement with the Securities
and Exchange Commission which, when effective,  will provide for the issuance of
up to $500  million  in debt  securities.  Sonat  plans to file a similar  shelf
registration statement in 1998.

         The Company's capital expenditures and other investing requirements for
1998 are expected to aggregate $817 million. This amount reflects investments in
unconsolidated  affiliates  and proposed  expenditures  for oil and gas property
acquisitions,   exploration  and  development,   pipeline  expansion  and  other
projects.  The Company  completed  the Zilkha Energy merger on January 30, 1998,
issuing  $1.04 billion of common stock to the Zilkha  Energy  shareholders  (see
Note 2 of  the  Notes  to  Condensed  Consolidated  Financial  Statements).  The
Company's  cash  requirements  relating  to the  Zilkha  Energy  merger  totaled
approximately $290 million,  principally for repayment of debt and certain other
liabilities of Zilkha Energy and transaction expenses.
<PAGE>

         The Company has a stock repurchase program in effect through the end of
1998.  As of March 31,  1998,  the Company had  remaining  authority to purchase
approximately  997,500 shares of the Company's  common stock.  Shares  purchased
under the program are expected to be reissued in connection  with employee stock
option and restricted stock programs.

         The Company  believes that cash flow from  operations and borrowings in
either the private or public  market will  provide the Company with the means to
fund operations and currently planned investment and capital expenditures.

MARKET RISK

         Financial  instruments of the Company expose it to both commodity price
risk and interest rate risk.

         Commodity  Price Risk - The Company's  primary  market risk exposure is
the volatility of spot-market energy commodity prices, relating to the portfolio
position of its financial instruments and physical commitments, which can affect
the  operating  results of Sonat  Exploration  and Sonat  Energy  Services.  The
Company uses commodity futures  contracts,  options and price swap agreements to
hedge its commodity price risk on crude oil, natural gas and electricity.  Sonat
Energy Services  performs all hedging  activity  (non-trading)  for both its own
operations  and for the  operations of Sonat  Exploration.  In June 1997,  Sonat
Energy  Services,  through its  subsidiary,  Sonat  Marketing,  also began using
derivative  instruments  as a market maker  (trading  activity)  by  maintaining
active trading  positions in natural gas futures and swap contracts and limiting
its risk to changes in the value of its outstanding positions through the use of
Value-at-Risk  models,  establishment  of  offsetting  positions,  and limit and
monitoring procedures.

         The  Company's   non-trading   (hedging)  and  trading  activities  are
implemented  under a set of  policies  approved  by the Board of  Directors.  In
addition,  all derivative activities are internally reviewed by a Risk Oversight
Committee  to  ensure  compliance  with  all  policies.  The  Company's  use  of
derivative instruments to reduce the effect of market volatility is described in
Note 3 of the Notes to Condensed  Consolidated  Financial  Statements.  The Risk
Oversight   Committee  and  management   monitor  the  portfolio   Value-at-Risk
frequently to ensure compliance with Board limits.

         Interest  Rate Risk - The Company's  entire  portfolio of interest rate
risk instruments is classified as non-trading. The Company's interest income and
expense are  sensitive to changes in the level of short-term  interest  rates in
the  United  States.  In  general,  the  Company  uses  excess  funds to  reduce
short-term debt levels and therefore has minimal cash equivalent investments. To
mitigate the impact of fluctuations in interest rates,  the Company  maintains a
balance among components of its capital structure, providing a mix of maturities
and pricing methods for its debt  obligations.  In the past the Company has used
derivative  instruments to aid in its management of interest rate risk, although
it is not currently doing so.
<PAGE>

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

         This Quarterly Report contains forward-looking statements regarding the
Company's  business  plans and prospects,  objectives,  future  drilling  plans,
expansion projects,  proposed capital  expenditures and expected  performance or
results.  These  forward-looking  statements are based on  assumptions  that the
Company  believes are  reasonable,  but are subject to a wide range of risks and
uncertainties and, as a result,  actual results may differ materially from those
expressed in such forward-looking statements. Important factors that could cause
actual  results to differ  include  changes in oil and gas prices and underlying
demand,  which would affect  profitability  and might cause the Company to alter
its plans;  the timing and success of the Company's  exploration and development
drilling  programs,  which would  affect  production  levels and  reserves;  the
results of the Company's hedging activities;  risks incident to the drilling and
operation of oil and gas wells;  future  drilling,  production  and  development
costs and the success of the Company's internal cost reduction  activities;  and
the  requirements  to receive  various  governmental  approvals  to proceed with
expansion  projects  at  Southern,  and  unanticipated  construction  delays  in
connection  with such  projects.  Realization  of the Company's  objectives  and
expected  performance can also be adversely affected by the actions of customers
and competitors, changes in governmental regulation of the Company's businesses,
and changes in general  economic  conditions  and the state of domestic  capital
markets.  The costs and benefits of Sonat  Exploration's  restructuring  program
have been estimated  based on a number of  assumptions,  including  estimates of
sales  proceeds  from its  divestiture  program,  the timing of such sales,  the
expenses  associated  with the  reorganization  and  assumed oil and gas prices.
Actual  results may differ from such  assumptions  and there can be no assurance
that the estimated costs and benefits will be incurred or realized as planned or
that the expected charge to earnings will be in the range estimated.




<PAGE>


                           PART II. OTHER INFORMATION


Item 4.  Submission of Matters to a Vote of Security Holders

         The Company held a Special Meeting of Stockholders in Houston, Texas on
January  30,  1998.  The  stockholders  voted on the  issuance  of shares of the
Company's  common  stock,  as  contemplated  in the Agreement and Plan of Merger
dated as of November 22, 1997, between the Company and Zilkha Energy Company (as
set forth in the Proxy Statement/Prospectus for the Meeting)("Proposal No. 1").

         The Vote on Proposal No. 1 was as follows:

------------------ ------------------- --------------------- ------------------
                       Voted For          Voted Against          Abstained
------------------ ------------------- --------------------- ------------------
------------------ ------------------- --------------------- ------------------
Proposal No. 1         64,094,347            427,775              269,615
------------------ ------------------- --------------------- ------------------

         There were no broker non-votes  (shares not voted on a matter because a
nominee  holding  shares  for  a  beneficial   owner  neither   receives  voting
instructions from such beneficial owner nor has discretionary  voting power with
respect thereto) with respect to the matter voted upon at the meeting, which was
approved by the shareholders.

         The Company held its 1998 Annual Meeting of Stockholders in Birmingham,
Alabama,  on April 23, 1998. The stockholders  voted (1) to elect four Directors
as members of the Board of  Directors  of the  Company,  to serve until the 2001
Annual Meeting of Stockholders and until their  respective  successors have been
duly elected and qualified,  and (2) on a proposal to elect Ernst & Young LLP as
the Company's Auditor ("Proposal No. 1").

         The vote for the nominees for Director was as follows:

------------------------------- -------------------- --------------------------
Name of Nominee                      Voted For           Authority Withheld
------------------------------- -------------------- --------------------------
------------------------------- -------------------- --------------------------
Max L. Lukens                       99,594,857                1,465,402
------------------------------- -------------------- --------------------------
------------------------------- -------------------- --------------------------
Benjamin F. Payton                  99,557,304                1,502,955
------------------------------- -------------------- --------------------------
------------------------------- -------------------- --------------------------
John J. Phelan, Jr.                 99,577,828                1,482,431
------------------------------- -------------------- --------------------------
------------------------------- -------------------- --------------------------
Selim K. Zilkha                     99,523,792                1,536,467
------------------------------- -------------------- --------------------------

     The terms of William O. Bourke,  Ronald L. Kuehn,  Jr.,  Robert J. Lanigan,
Charles Marshall,  Michael S. Zilkha,  Jerome J. Richardson,  Donald G. Russell,
Adrian M.  Tocklin,  James B.  Williams,  and Joe B. Wyatt  continued  after the
meeting.

         The vote on Proposal No. 1 was as follows:

------------------- ------------------- --------------------- ------------------
                        Voted For          Voted Against          Abstained
------------------- ------------------- --------------------- ------------------
------------------- ------------------- --------------------- ------------------
Proposal No. 1         100,738,115            183,214              138,930
------------------- ------------------- --------------------- ------------------

     There were no broker  non-votes with respect to either matter voted upon at
the meeting.  The four nominees for Director were duly elected as members of the
Board of Directors and Proposal No. 1 was approved by the stockholders.  
<PAGE>

Item 6.  Exhibits and Reports on Form 8-K

(a)      Exhibits(1)

Exhibit
Number                                      Exhibits


12*    Computation of Ratio of Earnings to Fixed Charges

27.1*  Financial Data Schedule for the period ended March 31, 1998

27.2*  Restated Financial Data Schedule for the period ended March 31, 1997

27.3*  Restated Financial Data Schedule for the period ended June 30, 1997

27.4*  Restated Financial Data Schedule for the period ended September 30, 1997

27.5*  Restated Financial Data Schedule for the period ended December 31, 1997

27.6*  Restated Financial Data Schedule for the period ended March 31, 1996

27.7*  Restated Financial Data Schedule for the period ended June 30, 1996

27.8*  Restated Financial Data Schedule for the period ended September 30, 1996


-------------
*   Filed herewith

(b)      Reports on Form 8-K

         The Company  filed a report on Form 8-K on January 22, 1998,  reporting
certain  information  under Item 5 with respect to the issuance of the Company's
press release relating to its 1997 results of operations.

         The Company  filed a report on Form 8-K on January 30, 1998,  reporting
certain  information  under Item 5 with  respect to the issuance and sale by the
Company of $100,000,000  aggregate principal amount of 6-5/8% Notes due February
1, 2008 and furnishing certain related exhibits under Item 7.

         The Company  filed a report on Form 8-K on February 2, 1998,  reporting
certain  information  under Item 5 with  respect to the issuance and sale by the
Company of $100,000,000  aggregate  principal amount of 7% Notes due February 1,
2018 and furnishing certain related exhibits under Item 7.

         The Company  filed a report on Form 8-K on February 4, 1998,  reporting
certain   information  under  Item  5  with  respect  to  the  approval  by  the
stockholders  of Sonat Inc.,  at a Special  Meeting held on January 30, 1998, to
issue common  shares for the merger of a wholly owned  subsidiary  of Sonat into
Zilkha  Energy  Company  and  furnishing  certain  related  exhibits,  including
financial statements of Zilkha, under Item 7.

         The  Company  filed a Report on Form 8-K on April 23,  1998,  reporting
certain  information  under Item 5 with  respect to the  restructuring  of Sonat
Exploration Company,  which was included in the Company's press release relating
to first quarter earnings.




----------------------
(1) The Company will furnish to requesting security holders the exhibits on this
list upon the  payment  of a fee of $.10 per page up to a  maximum  of $5.00 per
exhibit.  Requests  must be in writing  and should be  addressed  to Beverley T.
Krannich, Secretary, Sonat Inc., P. O. Box 2563, Birmingham, Alabama 35202-2563.



<PAGE>



                           SONAT INC. AND SUBSIDIARIES




                                   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.




                                                 SONAT INC.



Date:         May 13, 1998                By:      /s/ James E. Moylan, Jr.
       --------------------------                --------------------------
                                                 James E. Moylan, Jr.
                                                 Senior Vice President and
                                                 Chief Financial Officer




Date:         May 13, 1998                By:      /s/ Thomas W. Barker, Jr.
       --------------------------                ---------------------------
                                                 Thomas W. Barker, Jr.
                                                 Vice President-Finance