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       June 30, 1997

                                       OR

        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
        EXCHANGE ACT OF 1934

For the transition period from                          to

Commission file number      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:

                 85,750,945 SHARES OUTSTANDING ON JULY 31, 1997



<PAGE>



                           SONAT INC. AND SUBSIDIARIES


                                      INDEX
<TABLE>
<CAPTION>

                                                                                          Page No.

PART I.    Financial Information

           Item 1.    Financial Statements
                      Condensed Consolidated Balance Sheets
<S>                                                                                       <C>
                          (Unaudited)--June 30, 1997 and December 31, 1996                 1

                      Condensed Consolidated Statements of Income
                          (Unaudited)--Three Months and Six Months Ended
                          June 30, 1997 and 1996                                           2

                      Condensed Consolidated Statements of Cash Flows
                          (Unaudited)--Six Months Ended June 30, 1997 and 1996             3

                      Notes to Condensed Consolidated Financial
                          Statements (Unaudited)                                           4 - 10

           Item 2.    Management's Discussion and Analysis of Financial
                          Condition and Results of Operations                             11 - 23

PART II.   Other Information

           Item 6.    Exhibits and Reports on Form 8-K                                    24

</TABLE>




<PAGE>


                                                                  
                          PART I. FINANCIAL INFORMATION
Item 1.  Financial Statements
                           SONAT INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                  June 30,             December 31,
                                                                    1997                   1996
                                                                          (In Thousands)
                                                                ASSETS
Current Assets:
<S>                                                               <C>                   <C>       
   Cash and cash equivalents                                      $   18,366            $   29,639
   Accounts receivable                                               430,918               577,021
   Inventories                                                        51,979                30,500
   Gas imbalance receivables                                          13,635                21,694
   Other                                                              52,162                34,436
                                                                  ----------            ----------
      Total Current Assets                                           567,060               693,290
                                                                  ----------            ----------

Investments in Unconsolidated Affiliates and Other                   484,556               465,121
                                                                  ----------            ----------

Plant, Property and Equipment                                      5,342,957             5,084,283
   Less accumulated depreciation, depletion
      and amortization                                             2,730,368             2,650,419
                                                                  ----------            ----------
                                                                   2,612,589             2,433,864
                                                                  ----------            ----------
Deferred Charges and Other:
   Gas supply realignment costs                                        6,176                11,144
   Other                                                             166,677               171,240
                                                                  ----------            ----------
                                                                     172,853               182,384
                                                                  ----------            ----------

Total Assets                                                      $3,837,058            $3,774,659
                                                                  ==========            ==========

                                                 LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Long-term debt due within one year                             $   52,870            $   53,707
   Unsecured notes                                                   280,731               158,030
   Accounts payable                                                  409,097               510,130
   Accrued income taxes                                               11,902                26,726
   Accrued interest                                                   31,846                28,584
   Gas imbalance payables                                             13,360                20,290
   Other                                                              53,820                51,370
                                                                  ----------            ----------
      Total Current Liabilities                                      853,626               848,837
                                                                  ----------            ----------

Long-Term Debt                                                       861,150               872,255
                                                                  ----------            ----------

Deferred Credits and Other:
   Deferred income taxes                                             337,394               284,564
   Reserves for regulatory matters                                     4,641                14,644
   Other                                                             171,368               169,995
                                                                  ----------            ----------
                                                                     513,403               469,203
                                                                  ----------            ----------
Commitments and Contingencies

Stockholders' Equity:
   Common stock and other capital                                    115,955               118,881
   Retained earnings                                               1,551,769             1,495,186
                                                                  ----------            ----------
                                                                   1,667,724             1,614,067
   Less treasury stock                                                58,845                29,703
                                                                  ----------            ----------
      Total Stockholders' Equity                                   1,608,879             1,584,364
                                                                  ----------            ----------

Total Liabilities and Stockholders' Equity                        $3,837,058            $3,774,659
                                                                  ==========            ==========
</TABLE>


                                                       See accompanying notes.
<PAGE>

                           SONAT INC. AND SUBSIDIARIES
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                   Three Months                   Six Months
                                                  Ended June 30,                Ended June 30,
                                                1997          1996         1997            1996
                                                  (In Thousands, Except Per-Share Amounts)

<S>                                           <C>            <C>         <C>            <C>       
Revenues                                      $815,304       $637,330    $1,887,447     $1,332,934
                                              --------       --------    ----------     ----------

Costs and Expenses:
   Natural gas cost                            548,293        386,825     1,323,391        842,980
   Electric power cost                          42,970          9,101        75,856         13,897
   Operating and maintenance                    48,555         43,019        90,490         82,277
   General and administrative                   34,270         41,155        75,308         74,113
   Depreciation, depletion
      and amortization                          64,639         71,378       133,122        138,751
   Taxes, other than income                     11,108         11,611        16,902         23,444
                                              --------       --------    ----------     ----------
                                               749,835        563,089     1,715,069      1,175,462
                                              --------       --------    ----------     ----------

Operating Income                                65,469         74,241       172,378        157,472

Other Income (Loss), Net:
   Equity in earnings of
      unconsolidated affiliates                  9,445          7,498        19,567         16,453
   Minority interest                                76           (447)         (796)        (5,109)
   Other                                           787          1,993         4,613          1,889
                                              --------       --------    ----------     ----------
                                                10,308          9,044        23,384         13,233
                                              --------       --------    ----------     ----------

Interest:
   Interest income                                 707            700         1,573          2,323
   Interest expense                            (23,375)       (23,916)      (45,146)       (48,135)
   Interest capitalized                            907          1,319         2,032          2,678
                                              --------       --------    ----------     ----------
                                               (21,761)       (21,897)      (41,541)       (43,134)
                                              --------       --------    ----------     ----------

Income before Income Taxes                      54,016         61,388       154,221        127,571

Income Tax Expense                              17,793         20,793        51,152         41,407
                                              --------       --------    ----------     ----------

Net Income                                    $ 36,223       $ 40,595    $  103,069     $   86,164
                                              ========       ========    ==========     ==========

Earnings Per Share of Common Stock            $    .42       $    .47    $     1.20     $     1.00
                                              ========       ========    ==========     ==========

Weighted Average Shares Outstanding             86,026         86,208        86,127         86,168

Dividends Paid Per Share                      $    .27       $    .27    $      .54     $      .54
                                              ========       ========    ==========     ==========

</TABLE>









                                                       See accompanying notes.
<PAGE>

                           SONAT INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                            Six Months
                                                                          Ended June 30,
                                                                    1997                 1996
                                                                          (In Thousands)
Cash Flows from Operating Activities:
<S>                                                                <C>                   <C>      
   Net income                                                      $ 103,069             $  86,164
   Adjustments to reconcile net income to net
      cash provided by operating activities:
         Depreciation, depletion and amortization                    133,122               138,781
         Deferred income taxes                                        52,830                64,173
         Equity in earnings of unconsolidated affiliates,
           less distributions                                        (15,056)              (11,292)
         Gain on disposal of assets                                     (311)               (3,274)
         Reserves for regulatory matters                             (10,003)             (167,339)
         Gas supply realignment costs                                  4,968               174,947
         Change in:
           Accounts receivable                                       146,103               (16,332)
           Inventories                                               (21,479)              (12,032)
           Accounts payable                                         (101,033)               45,496
           Accrued interest and income taxes, net                    (19,331)              (17,331)
           Other current assets and liabilities                       (6,363)               16,155
         Other                                                        33,024               (27,945)
                                                                   ---------             ---------

           Net cash provided by operating activities                 299,540               270,171
                                                                   ---------             ---------

Cash Flows from Investing Activities:
   Plant, property and equipment additions                          (333,504)             (271,099)
   Net proceeds from disposal of assets                                  338                 4,603
   Advances to unconsolidated affiliates
      and other                                                       (8,696)               (4,696)
                                                                   ---------             ---------

           Net cash used in investing activities                    (341,862)             (271,192)
                                                                   ---------             ---------

Cash Flows from Financing Activities:
   Proceeds from issuance of long-term debt                          750,000                  -
   Payments of long-term debt                                       (761,942)               (7,139)
   Changes in short-term borrowings                                  122,701                37,600
                                                                   ---------             ---------
      Net changes in debt                                            110,759                30,461
   Dividends paid                                                    (46,486)              (46,562)
   Treasury stock purchases and other                                (33,224)               (6,406)
                                                                   ---------             ---------

           Net cash provided by (used in)
              financing activities                                    31,049               (22,507)
                                                                   ---------             ---------

Net Decrease in Cash and Cash Equivalents                            (11,273)              (23,528)

Cash and Cash Equivalents at Beginning of Period                      29,639                37,289
                                                                   ---------             ---------

Cash and Cash Equivalents at End of Period                         $  18,366             $  13,761
                                                                   =========             =========

Supplemental Disclosures of Cash Flow Information
Cash Paid for:
   Interest (net of amount capitalized)                            $  34,868             $  33,924
   Income taxes paid (refunds received), net                          21,896                (6,092)

</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 1996 periods have been restated to reflect the  reclassification  of
natural  gas sales,  natural  gas cost and  transition  cost  recovery  to other
revenues in the  Condensed  Consolidated  Statements  of Income.  Certain  other
amounts  in the 1996  condensed  consolidated  financial  statements  have  been
reclassified to conform with the 1997 presentation.

2.      Derivative Financial Instruments

        Through May 1997, the Company used futures contracts,  options and price
swap  agreements  solely  to hedge  its  commodity  price  risk on crude oil and
natural gas. Gains or losses experienced on such hedging transactions are offset
by the related gains or losses  recognized on the sale of the  commodity.  Sonat
Marketing Company L.P. (Sonat Marketing)  performs all hedging activity for both
its own operations and for the operations of Sonat Exploration Company.

        Sonat Marketing used derivatives (futures, swaps, and options) solely to
hedge physical  transactions.  In June 1997, Sonat Marketing also began engaging
in derivative  transactions that are not linked to physical transactions to meet
the needs of its customers. These derivative transaction types together with any
physical  transactions  that are not  linked to either a  derivative  or another
physical  transaction  are  included  in a  risk  pool.  All  of  the  Company's
derivative  transactions,  including  those in the risk  pool,  are  subject  to
policies that limit the aggregate value at risk and mark-to-market  positions to
amounts approved by the Company's Risk Oversight Committee.  The transactions in
this risk pool have been accounted for using  mark-to-market  accounting.  Under
such method, all positions,  both derivative and physical,  are recorded at fair
value.  Changes in the market value of these  positions,  net of  reserves,  are
recognized  as unrealized  gains or losses in operating  income in the period of
change  offset  by other  assets  and  liabilities  related  to risk  management
activity on the balance sheet.  The market prices used to value the transactions
reflect  management's  estimates of market  value,  taking into account  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. As of June 30,
1997,  the  results of  accounting  for such  derivatives  under  mark-to-market
accounting  were not  material.  Sonat  Marketing  will  continue  to use  hedge
accounting on futures,  swaps,  and option  transactions  that were entered into
prior to June 1997 because such  transactions  qualified and continue to qualify
for  hedge  accounting.   In  addition,   certain  significant  future  physical
transactions that are specifically hedged with a

<PAGE>


2.      Derivative Financial Instruments (Cont'd)

derivative and that meet the criteria of a hedged transaction in accordance with
Statement  of  Financial  Accounting  Standards  (SFAS) No. 80,  Accounting  for
Futures Contracts, will also continue to be accounted for in accordance with the
hedge accounting provisions of this standard.

        Futures - Natural  gas and oil 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.  Oil futures
are for fixed units of 1,000  barrels and are  available  for up to 34 months in
the  future.  NYMEX  requires  both  parties  (buyers  and  sellers)  to futures
contracts to deposit cash or other assets (the margin) with a broker at the time
the  contract is  initiated.  Brokers  mark open  positions  to market daily and
require   additional  assets  to  be  maintained  on  deposit  when  significant
unrealized  losses  are  experienced,  or  allow  deposits  to be  reduced  when
unrealized gains are experienced. At June 30, 1997, the Company had net deposits
of $23.2 million with brokers for margin calls, included in other current assets
on the  Condensed  Consolidated  Balance  Sheet,  of which $19.9 million was for
Sonat  Marketing's  operations  and $3.3  million  was for  Sonat  Exploration's
operations.

        At June 30, 1997, the Company had the following open futures positions:
<TABLE>
<CAPTION>

                                                                          Deferred Gain or
                                                Open Contracts                 (Loss)
                                                 Long (Short)              (In Thousands)
Natural Gas Futures:
<S>                                                <C>                         <C>     
    For Marketing's operations                       1,798                     $  (588)
    For Exploration's operations                    (1,317)                     (2,682)
                                                   -------                     -------
        Total                                          481                     $(3,270)
                                                   =======                     =======

Oil Futures:
    For Marketing's operations                        -                        $  -
    For Exploration's operations                      (450)                       (166)
                                                   -------                     -------
        Total                                         (450)                    $  (166)
                                                   =======                     =======
</TABLE>

        The above contracts will mature during 1997 and 1998.

        Swaps  - 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.

        Sonat  Exploration has hedged various  portions of its 1997 through 2000
production  of oil  and  gas by  entering  into  fixed-price  swaps  with  Sonat
Marketing.  Marketing has then hedged its risk from entering into these swaps by
putting on futures  positions  and  entering  into  offsetting  swaps with third
parties with aggregate volumes equal to its swaps with Sonat Exploration.
<PAGE>

2.      Derivative Financial Instruments (Cont'd)

        At June 30, 1997, the Company had the following open swap positions:
<TABLE>
<CAPTION>

                                                           Fair          Remaining Term of
                                           Volume          Value       Individual Contracts
                                            (Bcf)     (In Thousands)
Natural Gas Swaps:
<S>                                         <C>          <C>              <C>             
    For Marketing's operations               83          $   (496)         1 month - 64 months
    For Exploration's operations            140           (20,393)        4 months - 18 months
                                            ---          --------
                                            223          $(20,889)
                                            ===          ========
</TABLE>

        Options - 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 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 June
30, 1997, Sonat Marketing had only over-the-counter options.

        In order to meet the  requirements  of certain gas purchase  agreements,
Sonat Marketing has purchased puts of 23.5 TBtu and sold calls of 18.8 TBtu with
a  counterparty  at zero cost.  Sonat  Marketing also has sold puts for notional
volumes of 5.9 TBtu.  At June 30, 1997,  the market  value of these  options was
$7.1 million unfavorable.

        Credit Risk - Due to changes in market conditions the value of swaps and
options can change in relation to their value to the  Company.  Sonat  Marketing
has established policies and procedures to evaluate potential counterparties for
creditworthiness   before  entering  into   over-the-counter   swap  and  option
agreements.  At June 30, 1997,  the market value of the  Company's  in-the-money
swaps was $1.3 million.  The credit risk  resulting from  in-the-money  swaps is
monitored  on a regular  basis.  Reserves  for credit  risk are  established  as
necessary.



<PAGE>


3.      Unconsolidated Affiliates

        The  following  table  presents the  components of equity in earnings of
unconsolidated affiliates.
<TABLE>
<CAPTION>

                                                      Three Months                  Six Months
                                                     Ended June 30,               Ended June 30,
                                                 1997          1996           1997          1996
                                                                    (In Thousands)

Company's Share of Reported Earnings (Losses):

<S>                                             <C>            <C>          <C>            <C>    
   Exploration and Production                   $   84         $  146       $   201        $   188
                                                ------         ------       -------        -------

   Natural Gas Transmission:
      Citrus Corp.                               5,807          4,365        12,102         10,009
      Amortization of Citrus basis
         difference                                346            346           692            692
      Bear Creek Storage Company                 2,623          2,411         5,331          5,029
      Other                                         78            (88)           66           (135)
                                                ------         ------       -------        -------
                                                 8,854          7,034        18,191         15,595
                                                ------         ------       -------        -------

   Energy Marketing                                191           -              483           -
                                                ------         ------       -------        -------

   Other                                           316            318           692            670
                                                ------         ------       -------        -------
          
                                                $9,445         $7,498       $19,567        $16,453
                                                ======         ======       =======        =======
</TABLE>


        Natural Gas  Transmission  Affiliates  - Sonat owns 50 percent of Citrus
Corp., the parent of Florida Gas Transmission  Company. A subsidiary of Southern
Natural  Gas  Company  owns  50  percent  of  Bear  Creek  Storage  Company,  an
underground gas storage company.



<PAGE>


3.      Unconsolidated Affiliates (Cont'd)

        The following is summarized income statement information for Citrus:
<TABLE>
<CAPTION>

                                                     Three Months                  Six Months
                                                    Ended June 30,               Ended June 30,
                                                1997          1996           1997          1996
                                                                   (In Thousands)

<S>                                           <C>            <C>           <C>            <C>     
Revenues                                      $189,546       $193,300      $360,468       $378,037
Expenses:
   Natural gas cost                            104,988        106,355       188,583        204,683
   Operating expenses                           27,980         25,898        50,430         48,294
   Depreciation and amortization                14,382         21,306        34,587         41,519
   Interest and other                           24,247         25,452        48,482         50,848
   Income taxes                                  6,335          5,558        14,182         12,675
                                              --------       --------      --------       --------

Income Reported                               $ 11,614       $  8,731      $ 24,204       $ 20,018
                                              ========       ========      ========       ========
</TABLE>

        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.
<TABLE>
<CAPTION>

                                                     Three Months                  Six Months
                                                    Ended June 30,               Ended June 30,
                                                1997          1996           1997          1996
                                                               (In Thousands)

<S>                                             <C>            <C>          <C>            <C>    
Revenues                                        $8,973         $8,952       $18,319        $18,193
Expenses:
   Operating expenses                            1,120          1,370         2,361          2,535
   Depreciation                                  1,358          1,353         2,714          2,707
   Other expenses, net                           1,248          1,408         2,581          2,894
                                                ------         ------       -------        -------

Income Reported                                 $5,247         $4,821       $10,663        $10,057
                                                ======         ======       =======        =======
</TABLE>



<PAGE>


4.      Debt and Lines of Credit

        Long-Term  Debt -  Sonat  has a bank  revolving  credit  agreement  that
provides for periodic  borrowings and  repayments of up to $500 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, 1997,  there was an outstanding  balance of $155 million.  During the
first six months of 1997,  $750 million was borrowed and $755 million was repaid
under the revolving credit agreement,  resulting in $150 million  outstanding at
June 30, 1997, at a rate of 5.80 percent.

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

        Sonat and Southern have available  short-term  lines of credit of $200.0
million and $50.0 million,  respectively,  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 June 30, 1997,
Sonat had $10 million  outstanding  at a rate of 6.66  percent and no amount was
outstanding under Southern's agreement.

        Sonat had $270.7 million in commercial  paper  outstanding at an average
rate of 5.89 percent at June 30, 1997.

5.      Commitments and Contingencies

        Rate Matters - 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 June 30, 1997,  Southern's rates are
established by a settlement with all of its customers  (except one  representing
approximately  2 percent of  Southern's  firm  transportation  volumes) that was
approved by a FERC order issued in 1995 and are not subject to refund. (See Rate
Matters in Item 2 of this report.)

        Sea Robin - In January 1995 Sea Robin Pipeline Company,  a subsidiary of
Southern,  filed with the FERC a petition for a declaratory  ruling that the Sea
Robin  pipeline  system is  engaged  in the  gathering  of  natural  gas and is,
therefore,  exempt from FERC regulation  under the Natural Gas Act. In June 1995
the FERC denied Sea Robin's  petition on the basis that the primary  function of
the Sea Robin  system  is the  interstate  transportation  of gas.  Sea  Robin's
request for  rehearing  of that ruling was denied by the FERC on June 26,  1996.
Sea Robin filed on August 15, 1996,  for judicial  review of the orders  denying
its

<PAGE>


5.      Commitments and Contingencies (Cont'd)

petition and had oral argument in its pending appeal before the Eleventh Circuit
on July 10, 1997.

        Following the filing of Sea Robin's petition for a gathering  exemption,
several of the  shippers on the Sea Robin system filed with the FERC in February
1995 a  complaint  against  Sea Robin  under  Section 5 of the  Natural  Gas Act
claiming that Sea Robin's rates are unjust and unreasonable.  In its answer, Sea
Robin asked the FERC to dismiss the complaint or to find that its rates continue
to be just and reasonable based on the data it presented. On August 2, 1996, the
FERC issued an order on the complaint,  instituting an investigation and hearing
under Section 5 of the Natural Gas Act and requiring that an initial decision be
issued  by May 2,  1997.  On  December  31,  1996,  Sea Robin  filed a  proposed
settlement of the complaint  proceeding  pursuant to which it would  voluntarily
reduce its transportation  rates by $.0042 per decatherm (Dth),  calculated on a
100 percent load factor basis,  effective  January 1, 1997.  The  settlement was
supported by the staff of the FERC and one of two groups of active  intervenors,
but  was  opposed  by the  complainant  shippers,  the  other  group  of  active
intervenors.  By order dated April 22, 1997,  the FERC  approved the  settlement
with modifications,  making a merits determination as to the just and reasonable
rates to become effective for contesting and non-contesting parties as of May 1,
1997.  Under the FERC Order,  Sea Robin's  transportation  rates were reduced an
additional $.006 per Dth,  calculated on a 100 percent load factor basis,  below
the proposed settlement rate level. Sea Robin sought rehearing of the settlement
order on May 22, 1997, arguing that the FERC improperly  modified the settlement
terms as to non-contesting  parties, and that it failed to properly consider Sea
Robin's filed case in making its merits determinations as to contesting parties.




<PAGE>





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

                           SONAT INC. AND SUBSIDIARIES
                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Operating Income

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

                                                     Three Months                  Six Months
                                                    Ended June 30,               Ended June 30,
                                                 1997         1996           1997          1996
                                                                  (In Millions)
Operating Income (Loss):
<S>                                             <C>           <C>           <C>           <C>   
   Exploration and production                   $17.6         $39.0         $ 74.3        $ 59.0
   Natural gas transmission                      45.2          36.4           92.0          84.5
   Energy marketing                              (0.4)         (0.1)           1.1          12.3
   Other                                          3.1          (1.0)           5.0           1.7
                                                -----         -----         ------        ------

      Operating Income                          $65.5         $74.3         $172.4        $157.5
                                                =====         =====         ======        ======
</TABLE>


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.  In 1996,  Sonat  Exploration  broadened its growth
strategy by  increasing  its focus on  exploration  and  aggressive  development
drilling  as  opposed  to  primarily  property   acquisitions  and  exploitation
drilling.  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 Marketing segment.

        Sonat Exploration's most important  exploratory program is in the Cotton
Valley  Pinnacle  Reef  trend in the East  Texas salt  basin,  a  high-potential
onshore  exploratory play that is one of the most active in the lower 48 states.
In the first quarter of 1997, Sonat Exploration  completed  drilling and testing
its fourth Cotton Valley Pinnacle Reef trend discovery in the Bear Grass area of
Leon County,  Texas.  Sonat Exploration has a 50 percent working interest in the
well. Two reef wells have been completed since the end of the first quarter, one
of which was  successful.  Sonat  Exploration  is currently  drilling five other
wells in the Cotton Valley Pinnacle Reef trend and anticipates completing all of
them in the third quarter of 1997. In July 1997 Sonat Exploration announced that
its Ryon No.  1 Cotton  Valley  Pinnacle  Reef  well in the  Tri-Cities  area of
Henderson  County,  Texas,  failed to  encounter a reef.  The Ryon No. 1 was the
first  exploratory  test in the northern part of the Cotton Valley Pinnacle Reef
trend.  Sonat Exploration has numerous other reef-like seismic anomalies to test
in this area and in its other  acreage in the trend and the  results of the Ryon
No. 1 do not change Sonat Exploration's plans for its exploration program or its
view  concerning  the  production  potential  for reef  drilling  in the  trend.
Additional drilling in this northern area is scheduled for the fourth quarter of
1997.  Sonat  Exploration  has  drilled  seven  wells  in this  trend so far and
completed five producing wells for a success rate of 71 percent.

        The Austin Chalk trend of east Texas and west Louisiana was again a very
active  drilling  area,  with 15 wells  drilled in the Austin Chalk trend in the
first six months of 1997, of which 13 were  successful.  Sonat  Exploration  had
excellent  completion  results  from  its  first  company-operated  well  in the
Hurricane Branch area of Vernon Parish, Louisiana, the Scobee No. 1 well, during
the first  quarter of 1997.  The  Scobee No. 1  exhibited  the  highest  initial
hydrocarbon  production  rate of any Sonat  operated well in the entire  Eastern
Austin Chalk area, flowing 3,840 barrels of oil and 9.5 million cubic feet (Mcf)
of natural gas per day. Sonat  Exploration has a 60 percent working  interest in
this well. To date Sonat  Exploration  has completed four wells in the Hurricane
Branch area that have a combined total gross production of 18 Mcf of natural gas
and 6,620 barrels of oil per day. The Company has increased its drilling program
in the Hurricane Branch area to six rigs.

        Overall,  during  the  first  six  months  of  1997,  Sonat  Exploration
participated in the completion of 210 gross development wells, of which 198 were
successful, and seven exploratory wells, four of which were successful.



<PAGE>


EXPLORATION AND PRODUCTION OPERATIONS
<TABLE>
<CAPTION>

                                                     Three Months                  Six Months
                                                    Ended June 30,               Ended June 30,
                                                1997          1996           1997          1996
                                                                 (In Millions)
Revenues:
<S>                                            <C>           <C>           <C>            <C>   
   Sales to others                             $ 36.1        $ 41.3        $ 76.0         $ 57.1
   Intersegment sales                            75.6          97.8         189.9          193.6
                                               ------        ------        ------         ------
      Total Revenues                            111.7         139.1         265.9          250.7
                                               ------        ------        ------         ------

Costs and Expenses:
   Operating and maintenance                     17.0          15.1          33.1           30.5
   Exploration expense                            7.8           5.1          13.8            8.6
   General and administrative                    12.1          14.1          26.0           26.0
   Depreciation, depletion and
      amortization                               51.3          59.2         105.7          114.1
   Taxes, other than income                       5.3           6.4          11.7           12.2
   Other expenses                                  .6            .2           1.3             .3
                                               ------        ------        ------         ------
                                                 94.1         100.1         191.6          191.7
                                               ------        ------        ------         ------
      Operating Income                         $ 17.6        $ 39.0        $ 74.3         $ 59.0
                                               ======        ======        ======         ======


Net Sales Volumes:
   Gas (Bcf)                                       47            51            97             98
   Oil and condensate (MBbls)                     922         1,304         1,964          2,382
   Natural gas liquids (MBbls)                    403           550           765            936
------------------------------------------------------------------------------------------------

Average Sales Prices:
   Gas ($/Mcf)                                 $ 1.89        $ 2.19        $ 2.20         $ 2.06
   Oil and condensate ($/Bbl)                   19.65         19.61         21.12          18.93
   Natural gas liquids ($/Bbl)                   8.47         11.31         12.57          10.54
------------------------------------------------------------------------------------------------
</TABLE>


Second Quarter 1997 to Second Quarter 1996 Analysis

        Operating income decreased $21.4 million  primarily due to lower natural
gas prices.  Average  realized natural gas prices for the second quarter of 1997
were $1.89 per Mcf compared with $2.19 per Mcf in the second  quarter of 1996, a
14 percent  decrease.  Natural gas production  declined to 47 billion cubic feet
(Bcf) from 51 Bcf in the second  quarter of 1996,  a decrease of 8 percent,  and
oil and condensate  production  declined 29 percent to 922,000  barrels from 1.3
million barrels in the second quarter of 1996. The drop in production  primarily
reflects declines in the Gulf Coast and Austin Chalk regions.

        Costs and expenses  were  slightly  lower in the second  quarter of 1997
primarily  due  to a  $7.9  million  decrease  in  depreciation,  depletion  and
amortization  expense,  resulting  from  lower  production  volumes  and a lower
amortization rate.  Additionally,  general and administrative expenses decreased
$2.0 million  primarily as a result of lower stock-based  compensation  expense.
Exploration expense increased $2.7 million as a result of increased  exploration
activity.  Operating and  maintenance  expense  increased  $1.9 million due to a
higher level of drilling activity.
<PAGE>

Six Months 1997 to Six Months 1996 Analysis

        Operating income  increased  primarily as a result of higher natural gas
prices.  Although natural gas prices weakened during the second quarter of 1997,
average realized natural gas prices increased to $2.20 per Mcf for the first six
months of 1997 compared with $2.06 for the first six months of 1996, a 7 percent
increase.  Realized oil prices  increased 12 percent to an average of $21.12 per
barrel  in 1997  from  $18.93  per  barrel  in 1996.  Lower  oil and  condensate
production,  which  decreased 18 percent to  approximately 2 million barrels for
the first six months of 1997, slightly offset the higher gas and oil prices.

        Costs  and  expenses  for the  first  six  months of 1997 were flat when
compared with the first six months of 1996.  Lower  depreciation,  depletion and
amortization  expense  was  offset  by higher  exploration  expense  and  higher
operating and  maintenance  expense.  Depreciation,  depletion and  amortization
expense decreased $8.4 million as a result of a lower  amortization rate as well
as lower production  volumes.  Exploration  expense  increased $5.2 million as a
result of increased  exploration  activity.  Operating and  maintenance  expense
increased  $2.6  million  primarily  as a result of a higher  level of  drilling
activity.

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 and Financial  Risk  Management  and Note 2 of the Notes to
Condensed  Consolidated  Financial  Statements.)  Gains or losses experienced on
Sonat  Exploration's  hedging  transactions are offset by the changes in revenue
recognized  on the sale of the  commodity.  Natural gas revenues were reduced by
$14.4 million and $19.5 million and oil revenues were reduced by $.7 million and
$4.6 million in the 1997 and 1996 six-month periods,  respectively,  relating to
hedging activities.

        A portion  of Sonat  Exploration's  future  production  is  hedged.  Gas
production for the last six months of 1997 through 2000 in the aggregate  amount
of 187.8 TBtus is hedged at a weighted average price of $2.03 per MMBtu. Of this
amount, 32.3 TBtu at a weighted average price of $2.03 relates to remaining 1997
production,  which represents  approximately 24 percent of expected  production.
Oil production of approximately 650 thousand barrels,  or 15 percent of expected
production,  is hedged for the remainder of 1997 at a weighted  average price of
$20.28 per barrel.



<PAGE>


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 is  aggressively  seeking to expand its pipeline  system in its
traditional market area and to connect new gas supplies.

        In March 1997 an amended  application and tariff for the Destin Pipeline
was filed with the Federal Energy  Regulatory  Commission  (FERC) to reflect the
fact that units of Shell Oil  Company and Amoco  Corporation  have joined in the
ownership  of this 1 Bcf per day,  $300 million  pipeline  designed to transport
natural gas from the growing eastern Gulf of Mexico  production  area.  Southern
has a one-third interest in this pipeline. Shell and Amoco have made substantial
firm transportation  commitments to this pipeline,  and discussions are underway
with other  prospective  shippers.  In June 1997 the FERC  issued a  Preliminary
Determination,  subject to completion of its environmental review, that approved
the  construction  and operation of the Destin  Pipeline.  In July 1997 the FERC
issued its Draft Environmental  Impact Statement.  The pipeline,  which is still
subject to final FERC approval, is expected to be completed in mid-1998.

        In April 1997 the FERC  issued an order that  permits  Southern to begin
construction  on a $36 million  project that will add 46 million  cubic feet per
day of firm capacity for customers in Georgia and Tennessee.  Construction began
in late  June,  and this  project  is  expected  to be in  service in late 1997.
Southern is also moving forward on expansions to eastern  Tennessee and northern
Alabama  that have a total  estimated  capital cost of $107  million.  The North
Alabama expansion,  which received FERC approval in May 1997, is now anticipated
to go in service in the fourth quarter of 1998. The East Tennessee  expansion is
anticipated  to go in service in November  1998,  subject to FERC approval of an
application that Southern filed in May 1997.




<PAGE>


SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>

                                                     Three Months                  Six Months
                                                    Ended June 30,               Ended June 30,
                                                1997          1996           1997          1996
                                                                 (In Millions)
Revenues (Note):
   Market transportation and
<S>                                            <C>           <C>            <C>           <C>   
      storage                                  $ 74.6        $ 76.1         $157.8        $160.5
   Supply transportation                         12.4          12.1           22.9          23.3
   Other                                         16.5           7.8           21.9          17.3
                                               ------        ------         ------        ------
      Total Revenues                            103.5          96.0          202.6         201.1
                                               ------        ------         ------        ------

Costs and Expenses (Note):
   Operating and maintenance                     22.2          22.4           39.8          42.3
   General and administrative                    19.1          20.5           37.1          40.0
   Depreciation and amortization                 11.9          12.4           23.6          24.8
   Taxes, other than income                       4.8           4.2           10.0           9.3
                                               ------        ------         ------        ------
                                                 58.0          59.5          110.5         116.4
                                               ------        ------         ------        ------
      Operating Income                         $ 45.5        $ 36.5         $ 92.1        $ 84.7
                                               ======        ======         ======        ======

Equity in Earnings of
   Unconsolidated Affiliates                   $  2.7        $  2.3         $  5.4        $  4.9
                                               ======        ======         ======        ======

                                                                 (Billion Cubic Feet)
Volumes:
   Market transportation                          136            144           306           354
   Supply transportation                          100             80           180           165
                                                 ----           ----         -----         -----
      Total Volumes                               236            224           486           519
                                                 ====           ====         =====         =====

   Transition gas sales                            17             18            35            35
                                                 ====           ====         =====         =====


CITRUS CORP.
                                                                    (In Millions)
Allocated Expenses Included in
   Operating Income                              $0.3           $0.1         $ 0.1         $ 0.2
                                                 ====           ====         =====         =====

Equity in Earnings of
   Citrus Corp.                                  $6.2           $4.7         $12.8         $10.7
                                                 ====           ====         =====         =====

                                                                 (Billion Cubic Feet)
Florida Gas Volumes (100%):
   Market transportation                          125            116           223           205
   Supply transportation                            5              6            13            16
                                                 ----           ----         -----         -----
      Total Volumes                               130            122           236           221
                                                 ====           ====         =====         =====
</TABLE>


Note:   The 1996 periods have been restated to reflect the  reclassification  of
        natural gas sales,  natural  gas cost and  transition  cost  recovery to
        other revenues.
<PAGE>

Second Quarter 1997 to Second Quarter 1996 Analysis

        Southern  Natural Gas Company and  Subsidiaries  - Operating  income for
Southern was $45.5 million  compared with $36.5 million in the second quarter of
1996.  The  improvement  is  primarily  due to the impact of recent  expansions,
improved  results at Sea Robin Pipeline  Company,  a wholly owned  subsidiary of
Southern,  and lower  expenses.  In  addition,  operating  income  includes  the
adjustment  of a reserve  due to a  favorable  ruling on a  royalty  issue.  The
reserve adjustment,  net of other out-of-period items including depreciation and
property  tax  adjustments  and  interest  related  to GSR  collection  in 1996,
increased operating income by $2.4 million.

        Market transportation revenues decreased due primarily to a reduction in
interruptible  volumes,  partially offset by increased  revenue from expansions.
Supply transportation  revenues increased due to an expansion in firm service at
Southern and increased volumes at Sea Robin.  Excluding the out-of-period  items
mentioned above, operating and maintenance expense decreased due to cost cutting
measures.  General and administrative  expenses decreased primarily due to lower
stock-based compensation expense.

        Citrus - Equity in earnings  of Citrus  increased  $1.5  million to $6.2
million primarily as a result of higher rates at Florida Gas in conjunction with
its rate filing effective in March 1997 and higher interruptible  transportation
revenue.

Six Months 1997 to Six Months 1996 Analysis

        Southern  Natural Gas Company and  Subsidiaries  - Operating  income for
Southern was $92.1 million  compared with $84.7 million for the six months ended
June 30, 1996. The improvement  was primarily due to the same factors  discussed
above.

        Market transportation  revenues decreased due to lower volumes resulting
primarily  from warmer  weather,  partially  offset by  increased  revenue  from
expansions.  Supply  transportation  revenues  decreased  somewhat  due to lower
transportation  rates at Sea  Robin,  partially  offset by higher  revenue  from
recent  expansions at Southern.  Operating and maintenance  expense decreased in
the  1997  period  due to cost  cutting  measures.  General  and  administrative
expenses decreased primarily due to lower stock-based  compensation and employee
benefit expenses.

        Citrus - Equity in earnings of Citrus  increased  $2.1  million to $12.8
million  primarily  as a result of the higher  rates at  Florida  Gas and higher
interruptible transportation revenue mentioned above.
<PAGE>

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 is selling a portion of its gas supply
to a number of its firm transportation  customers under contracts that have been
extended  through  November 30, 1997. The remainder is sold on a  month-to-month
basis. Gas sales revenue and natural gas cost are included in other revenue.

        Southern currently is incurring no take-or-pay  liabilities under any of
these contracts. Two market-priced contracts entered into with Exxon Corporation
in 1995 as part of a settlement of certain other gas purchase  contracts account
for 85 percent of Southern's  remaining estimated purchase  commitments in 1997,
which total $68 million. Annual purchase commitments total less than $20 million
for subsequent years. Based on Southern's  current  expectations with respect to
natural  gas  prices in the years  following  1997,  only a small  amount of gas
volumes are expected to be at prices above market.

Rate Matters

        A settlement  approved by the FERC in 1995  resolved  all of  Southern's
previously  pending rate  proceedings  and  proceedings to recover GSR and other
transition  costs  associated  with the  implementation  of FERC Order No.  636,
except for one  contesting  party  that  represents  approximately  2 percent of
Southern's  firm  transportation  volumes.  That party has  appealed  the FERC's
approval of the  settlement  and orders in the  proceedings to the United States
Circuit Court of Appeals. As a contesting party under the settlement, that party
has also  challenged at FERC the  collection by Southern of  approximately  $6.3
million  in GSR costs  allocable  to it under  Order  No.  636.  The  settlement
provides that, except in certain limited circumstances, Southern will not file a
general rate case to be effective prior to March 1, 1998, but requires  Southern
to file a new rate case no later than September 1, 1999.

ENERGY MARKETING

        Sonat Energy  Services,  through its  subsidiaries,  Sonat Marketing and
Sonat Power Marketing L.P. (Sonat Power Marketing),  conducts marketing business
in the  natural  gas and  electric  industries,  respectively.  Sonat  Marketing
purchases and resells  substantially all of Sonat Exploration  Company's natural
gas production.

        Sonat  Marketing's  business  has  continued  to  grow  rapidly.   Sonat
Marketing's  average  daily sales  volumes  increased 42 percent from the second
quarter of 1996.  This growth was achieved in large part by the Company's  focus
on its strategy of working closely with its customers and delivering outstanding
customer service.

        Sonat Marketing uses natural gas and oil futures contracts, options, and
gas and oil  price  swap  agreements  to  hedge  the  effects  of  market  price
volatility  on its  operating  results.  These  instruments  are used to lock in
margins on Sonat Marketing's gas transactions. Sonat Marketing also uses futures
to  enable  it to hedge  fixed-price  contracts  to both its  suppliers  and its
customers.  Additionally,  in June 1997,  Sonat Marketing also began engaging in
derivative transactions that are not linked to physical transactions to meet the
needs of its customers.  (See Market and Financial Risk Management and Note 2 of
the Notes to Condensed Consolidated Financial Statements.)

        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 grew to 1.9
million  megawatt hours in the second quarter of 1997 from 0.4 million  megawatt
hours in the second quarter of 1996.
<PAGE>

ENERGY MARKETING
<TABLE>
<CAPTION>

                                                     Three Months                  Six Months
                                                    Ended June 30,               Ended June 30,
                                                1997          1996           1997          1996
                                                                 (In Millions)

<S>                                            <C>           <C>           <C>            <C>     
Revenues                                       $695.8        $526.3        $1,655.5       $1,123.1
                                               ======        ======        ========       ========

Operating Income (Loss)                        $ (0.4)       $ (0.1)       $    1.1       $   12.3
                                               ======        ======        ========       ========

Sonat Marketing Gas Sales
   Volumes (100%)
      (Billion Cubic Feet)                        299             214            603           423
                                                =====             ===          =====           ===

Sonat Power Marketing Sales
   Volumes (100%)
      (Thousands of Megawatt Hours)             1,921             439          3,318           649
                                                =====             ===          =====           ===
</TABLE>


Second Quarter 1997 to Second Quarter 1996 Analysis

        Although revenues increased 32 percent, Sonat Energy Services' operating
loss  increased  $0.3 million in the second quarter of 1997 compared to the same
period in 1996. Sales volumes increased  sharply,  but unit trading margins were
lower due to intense  competition.  Energy marketing results were also adversely
affected by higher operating costs due to business growth.

Six Months 1997 to Six Months 1996 Analysis

        Revenues  increased  for the  six-month  period  due to higher  volumes.
Operating income for the energy marketing  segment for the six months ended June
30, 1997,  declined $11.2 million compared to the same period in 1996.  Although
sales volumes increased, unit trading margins were lower.  Additionally,  in the
six months ended June 30, 1996, increased price volatility and tight natural gas
supplies in certain markets created  excellent  trading  opportunities for Sonat
Marketing.  Similar conditions and opportunities did not occur in the six months
ended June 30, 1997.  Energy marketing  results were also adversely  affected by
higher operating costs due to business growth.






<PAGE>


Other Income Statement Items
<TABLE>
<CAPTION>

                                                     Three Months                  Six Months
                                                    Ended June 30,               Ended June 30,
                                                1997          1996           1997          1996
                                                                 (In Millions)

Other Income (Loss), Net:
   Equity in earnings of
<S>                                             <C>           <C>            <C>           <C>  
      unconsolidated affiliates                 $ 9.5         $ 7.4          $19.6         $16.4
   Minority interest                              0.1          (0.4)          (0.8)         (5.1)
   Other                                          0.7           2.0            4.6           1.9
                                                -----         -----          -----         -----
                                                $10.3         $ 9.0          $23.4         $13.2
                                                =====         =====          =====         =====
</TABLE>

        The increase in equity in earnings of unconsolidated  affiliates in both
1997 periods primarily reflects improved results at Citrus (discussed earlier in
the Natural Gas Transmission  section).  Minority  interest is AGL Resource's 35
percent  share  of  earnings  in  Sonat  Marketing  and  Sonat  Power  Marketing
(operating  results were  discussed  earlier in the Energy  Marketing  section).
Other in both of the 1996 periods  includes  gains on the sale of assets,  while
the 1997 periods include marginally higher levels of equity interest capitalized
at Southern Natural.  In addition,  the six-month period of 1997 includes a $2.4
million net gain on the termination of the remainder of an interest rate swap.
<TABLE>

<S>                                             <C>           <C>            <C>           <C>  
Interest Expense, Net                           $21.7         $21.9          $41.5         $43.1
</TABLE>

        Net interest  expense  decreased in both the  three-month  and six-month
periods of 1997 due to much lower average  regulatory  reserve balances.  Partly
offsetting  was an increase in interest  expense  resulting  from higher average
debt levels in both periods.  Additionally,  in the six-month  period,  interest
income decreased due to lower GSR related interest income.  Interest capitalized
decreased  in  both  periods  due  to  lower   interest   capitalized  at  Sonat
Exploration.

<TABLE>
<S>                                             <C>           <C>            <C>           <C>  
Income Tax Expense                              $17.8         $20.8          $51.2         $41.4
</TABLE>

        The change in income tax expense in both periods  reflects the change in
pretax income and the pattern of earnings.



<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

Cash Flows
<TABLE>
<CAPTION>
                                                                                   Six Months
                                                                                 Ended June 30,
                                                                             1997          1996
                                                                                 (In Millions)

<S>                                                                        <C>            <C>   
Operating Activities                                                       $ 299.5        $270.2
</TABLE>

        Cash flow from operations increased $29.3 million compared with the 1996
period  primarily  due  to  improved  operating  results  at  Sonat  Exploration
(discussed earlier in operating section) and higher cash flow at Southern.

        At  Southern,  the 1996 period  included  $35 million in cash refunds to
customers.  Other than those refunds, the change in gas supply realignment costs
was  attributable  to the  recording  of the Customer  Settlement  in the second
quarter of 1996.  In addition,  the change in reserves for  regulatory  matters,
deferred  income  taxes,  accrued  income  taxes  and  other was also due to the
settlement accounting. The changes in deferred income taxes and accrued interest
and income taxes resulting from the settlement  accounting are partially  offset
by the impact of higher  intangible  drilling costs at Sonat  Exploration in the
current  period.  The change in  accounts  receivable  and  accounts  payable is
primarily  attributable  to  improved  operating  results  and to the  expanding
business of Energy  Marketing,  which had high receivables and payables balances
in December 1996 due to higher  natural gas prices.  The change in other current
assets and  liabilities is primarily due to the level of broker  deposits in the
1996 period at Energy Marketing.

<TABLE>
<S>                                                                        <C>           <C>     
Investing Activities                                                       $(341.9)      $(271.2)
</TABLE>

        Net cash used in investing  activities  was $70.7 million higher in 1997
compared  to  1996.   The  increase  was  primarily   attributable   to  capital
expenditures, which were higher due to increased drilling at Sonat Exploration.

        Capital  expenditures  for the Company's  business  segments  (excluding
unconsolidated affiliates) were as follows:
<TABLE>

<S>                                                                        <C>           <C>    
        Exploration and Production                                         $ 267.4       $ 214.7
        Natural Gas Transmission                                              59.0          51.9
        Energy Marketing                                                       5.2           1.9
        Other                                                                  1.9           2.6
                                                                           -------       -------

        Total                                                              $ 333.5       $ 271.1
                                                                           =======       =======
</TABLE>

     The  Company's  share  of  capital   expenditures  by  its   unconsolidated
affiliates was $8.5 million and $4.9 million in the first six months of 1997 and
1996, respectively.



<PAGE>

<TABLE>
<CAPTION>

                                                                                   Six Months
                                                                                 Ended June 30,
                                                                             1997          1996
                                                                                 (In Millions)

<S>                                                                          <C>         <C>     
Financing Activities                                                         $31.1       $ (22.5)
</TABLE>

        Financing   activities  provided  $31.1  million  in  1997  compared  to
requiring  $22.5  million  in 1996.  The change was  primarily  attributable  to
increased borrowings, which helped finance higher capital expenditures,  and the
Company's stock repurchase program in the current period.

CAPITAL RESOURCES

        At June 30, 1997, the Company had lines of credit and a revolving credit
agreement  with a total  capacity of $750 million.  Of this,  $319.3 million was
available. The Company has a policy that bank and commercial paper borrowings in
the aggregate  will not exceed the maximum amount  available  under its lines of
credit and revolving  credit  agreement.  As a result,  at that date the Company
would not have  deemed  available  under the lines of credit  and the  revolving
credit  agreement an amount equal to the $270.7 million of commercial paper then
outstanding, plus the $160 million then outstanding in bank loans.

        Sonat  has  a  shelf  registration  with  the  Securities  and  Exchange
Commission  (SEC)  that  provides  for  issuance  of up to $500  million in debt
securities  of which $200  million has been  issued.  Southern  also has a shelf
registration  with the SEC for up to $200 million in debt  securities,  of which
$100 million has been issued.

        The Company has a stock repurchase  program in effect through the end of
1997.  As of June 30,  1997,  the Company had  remaining  authority  to purchase
approximately 210,000 shares of the Company's common stock. Shares purchased are
intended for reissuance in connection with employee stock options and restricted
stock programs.

        The Company believes that cash flow from operations and borrowings under
its existing credit facilities and shelf  registrations will provide the Company
with the means to fund operations and currently  planned  investment and capital
expenditures.

MARKET AND FINANCIAL RISK MANAGEMENT

        The  Company's  primary  market  risk  exposure  is  the  volatility  of
spot-market  natural gas and oil prices,  which affects the operating results of
Sonat  Exploration  and Sonat  Marketing.  The Company's use of  derivatives  to
reduce  the effect of this  volatility  is  described  in Note 2 of the Notes to
Condensed Consolidated Financial Statements.

        The Company's use of these derivative instruments is implemented under a
set of policies  approved by the Board of  Directors.  Speculative  transactions
using financial  derivatives are prohibited.  In the case of Sonat  Exploration,
these  policies  prohibit   transactions  not  matched  by  physical   commodity
positions.  For commodity  price  hedges,  these  policies set limits  regarding
volumes  relative to budgeted  production or sales levels.  Sonat Marketing uses
futures  contracts,  options,  and  price  swap  agreements  to  hedge  physical
positions.  In June 1997,  Sonat  Marketing  also began  engaging in  derivative
trading,  subject to a policy that limits the net positions to specific value at
risk  limits.  Material  forward rate  agreements  and swap  counterparties  are
approved  by the  Board,  and  volume  limits  for swaps are set for any  single
counterparty.  Reports detailing each transaction,  mark-to-market  and value at
risk  positions,  are  reviewed  by  management.  In  addition,  all  derivative
activities  are  internally  reviewed by a Risk  Oversight  Committee  to ensure
compliance with all policies. (See Note 2 of the Notes to Condensed Consolidated
Financial Statements.)
<PAGE>

FORWARD LOOKING STATEMENTS

        This report on Form 10-Q  contains  certain  forward-looking  statements
regarding the Company's future plans, objectives,  and expected performance that
are based on assumptions the Company  believes are reasonable,  but a variety of
factors  could  cause the  Company's  actual  results and  experience  to differ
materially from the anticipated  results or other expectations  expressed in the
Company's forward-looking statements.  Important factors that could cause actual
results  to differ  include  changes  in oil and gas  prices  and the timing and
success  of  the  Company's   exploratory  and  development   drilling  programs
(including  its drilling  programs in the Cotton Valley  Pinnacle Reef trend and
the Austin  Chalk  trend).  There can be no  assurance  that the actual level of
production from existing wells and the wells to be drilled in such programs will
equal expected volumes.

        The Company's  expectations  for success in the Cotton  Valley  Pinnacle
Reef trend is based in part on seismic  surveys.  Much of the available  data is
based on 2-D seismic  surveys.  While 2-D seismic data is helpful in identifying
geological  anomalies  which may  become  reef  prospects,  there is no basis to
predict how many  anomalies  identified by 2-D seismic data will be confirmed as
reef  prospects  by 3-D seismic  surveys.  The Company  plans to drill only reef
prospects  based on 3-D seismic  surveys.  Furthermore,  3-D seismic data cannot
confirm that economically  productive hydrocarbons will be present in the reefs,
and current  limitations on such  technology are such that there is no assurance
that the Company will be able to locate and penetrate the reef formations.

        In  addition,  there can be no  assurance  that the  Company's  pipeline
projects will receive timely regulatory  approvals and be constructed and placed
into service on schedule.




<PAGE>



                           PART II. OTHER INFORMATION



Item 6. Exhibits and Reports on Form 8-K

(a)     Exhibits1

Exhibit
Number                       Exhibits

11*            Computation of Earnings per Share

12*            Computation of Ratio of Earnings to Fixed Charges

27.1*          Financial Data Schedules for the period ended June 30, 1997

27.2*          Restated  Financial Data Schedules for the periods ended 
               March 31, 1997;  March 31, 1996; June 30, 1996;  September 30,
               1996; and December 31, 1996

27.3*          Restated  Financial Data Schedules for the periods ended 
               March 31, 1995;  June 30, 1995;  September 30, 1995;  December
               31, 1995; and December 31, 1994
-------------
*   Filed herewith

(b)     Reports on Form 8-K

        The Company did not file any report on Form 8-K during the quarter ended
June 30, 1997.



















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:       August 11, 1997                  By: /s/ James E. Moylan, Jr.
       ------------------------                  --------------------------
                                                 James E. Moylan, Jr.
                                                 Senior Vice President and
                                                 Chief Financial Officer





Date:      August 11, 1997                    By: /s/ Thomas W. Barker, Jr.
      -------------------------                   ---------------------------
                                                  Thomas W. Barker, Jr.
                                                  Vice President-Finance