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, 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 1-14161

                             MARKETSPAN CORPORATION
             (Exact name of Registrant as specified in its charter)

          New York                                       11-3431358
(State or other jurisdiction of                        (I.R.S. Employer
incorporation or organization)                          Identification No.)


     175 East Old Country Road, Hicksville, New York        11801
       (Address of principal executive offices)           (Zip Code)


                                 (516) 755-6650
               Registrant's telephone number, including area code

                                      NONE
(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  [  ]

                     APPLICABLE ONLY TO CORPORATE ISSUERS:

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

   Class of Common Stock              Outstanding at August 12, 1998
      $.01 par value                             158,802,422


<PAGE>

                                    

                    MARKETSPAN CORPORATION AND SUBSIDIARIES

                                     INDEX

Part I.     Financial Information                                Page No.

            Condensed Consolidated Balance Sheet -
            June 30, 1998 and March 31, 1998                       3

            Condensed Consolidated Statement of Income -
            Three Months Ended June 30, 1998 and 1997              5

            Condensed Consolidated Statement of Cash Flows -
            Three Months Ended June 30, 1998 and 1997              6

            Notes to Condensed Consolidated Financial
            Statements                                             7

            Management's Discussion and Analysis of Results
            of Operations and Financial Condition                 15


Part II.    Other Information

            Item 1 - Legal Proceedings                            26

            Item 6 - Exhibits and Reports on Form 8-K             27


Signature                                                         28



<PAGE>
<TABLE>
<CAPTION>
                     MarketSpan Corporation and Subsidiaries
                      CONDENSED CONSOLIDATED BALANCE SHEET
                            (In Thousands of Dollars)


                                                           June 30,1998          March 31,1998
                                                          ---------------      ------------------
                                                           (UNAUDITED)             (AUDITED)

ASSETS
<S>                                                   <C>                  <C>                  
Utility Plant and Property
  Electric                                            $        1,094,357   $           4,049,629
  Gas                                                          3,147,633               1,233,281
  Common                                                         317,914                 290,221
  Construction work in progress                                   81,540                 118,808
  Accumulated depreciation                                    (1,426,978)             (1,877,858)
  Gas exploration and production, at cost                        816,079                       -
  Accumulated depletion                                         (276,823)                      -
                                                          ---------------      ------------------
                                                               3,753,722               3,814,081
                                                          ---------------      ------------------
Regulatory Assets
  Base financial component, net                                        -               3,155,334
  Rate moderation component                                            -                 434,004
  Shoreham post-settlement costs                                       -               1,005,316
  Shoreham nuclear fuel                                                -                  66,455
  Unamortized cost of issuing securities                           7,711                 159,941
  Postretirement benefits other than pensions                     52,210                 340,109
  Regulatory tax asset                                            66,080               1,737,932
  Other                                                          168,483                 192,763
                                                          ---------------      ------------------
                                                                 294,484               7,091,854
                                                          ---------------      ------------------
Other Property & Investments                                     111,884                  50,816
                                                          ---------------      ------------------
Goodwill                                                         173,874                       -
                                                          ---------------      ------------------
Current Assets
  Cash and temporary cash investments                          2,171,649                 180,919
  Customer accounts receivable                                   190,600                 321,372
  Allowance for uncollectible accounts                           (30,773)                (23,483)
  Other accounts receivable                                      140,795                  43,744
  Special deposits                                                29,843                  95,790
  Accrued revenues                                                52,034                 124,464
  Gas in storage, at average cost                                 93,696                  14,634
  Fuel oil, at average cost                                            -                  32,142
  Materials and supplies, at average cost                         66,045                  54,883
  Deferred federal income taxes                                   75,415                       -
  Other                                                           80,897                  13,807
                                                          ---------------      ------------------
                                                               2,870,201                 858,272
                                                          ---------------      ------------------
Deferred Charges                                                 357,109                  85,702
                                                          ---------------      ------------------
Total Assets                                          $        7,561,274   $          11,900,725
                                                          ===============      ==================
</TABLE>

See accompanying Notes to the Condensed Consolidated Financial Statements.


                                       3

<PAGE>

<TABLE>
<CAPTION>

                     MarketSpan Corporation and Subsidiaries
                      CONDENSED CONSOLIDATED BALANCE SHEET
                            (In Thousands of Dollars)


                                                                   June 30,1998           March 31,1998
                                                                -------------------     -------------------
                                                                   (UNAUDITED)              (AUDITED)

CAPITALIZATION AND LIABILITIES
<S>                                                         <C>                     <C>                   
Capitalization
  Common stock                                              $            2,893,883  $            1,706,355
  Retained earnings                                                        890,546                 956,092
  Foreign currency translation adjustment                                   (1,429)                      -
                                                                -------------------     -------------------
     Total common equity                                                 3,783,000               2,662,447
  Preferred stock                                                          448,000                 562,600
  Long-term debt                                                         1,938,033               4,381,949
                                                                -------------------     -------------------
Total Capitalization                                                     6,169,033               7,606,996
                                                                -------------------     -------------------
Regulatory Liabilities                                                      48,746                 389,431
                                                                -------------------     -------------------
Current Liabilities
  Current maturities of long-term debt                                           -                 101,000
  Current redemption requirements of preferred stock                             -                 139,374
  Accounts payable and accrued expenses                                    380,818                 258,701
  Dividends payable                                                         48,824                  58,748
  Accrued taxes                                                             12,359                  34,753
  Customer deposits                                                         29,608                  28,627
  Class settlement                                                          60,000                  60,000
  Accrued interest and other                                                38,268                 146,607
                                                                -------------------     -------------------
                                                                           569,877                 827,810
                                                                -------------------     -------------------

Deferred Credits and Other Liabilities
  Deferred federal income tax                                              328,705               2,539,364
  Class settlement                                                          55,011                  46,940
  Pensions and other postretirement benefits                               139,920                 401,401
  Claims,damages & other reserves                                          135,363                  66,254
  Other                                                                     15,697                  22,529
                                                                -------------------     -------------------
                                                                           674,696               3,076,488
                                                                -------------------     -------------------
Minority Interest in Subsidiary Company                                     98,922                       -
                                                                -------------------     -------------------
Total Capitalization and Liabilities                        $            7,561,274  $           11,900,725
                                                                ===================     ===================
</TABLE>

See accompanying Notes to the Condensed Consolidated Financial Statements.

                                       4
<PAGE>
<TABLE>
<CAPTION>


                   MarketSpan Corporation and Subsidiaries es
              UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF INCOME 
                    (In Thousands Except Per Share Amounts)



                                                                      Three Months Ended
                                                          -----------------------------------------
                                                               June 30                June 30
                                                                1998                   1997
                                                          ------------------     ------------------

<S>                                                       <C>                    <C>   
Revenues
Electric                                                  $             398,052  $             560,086
Gas distribution                                                        153,957                104,402
Gas production                                                           11,713                      -
Other                                                                    18,893                      -
                                                              ------------------     ------------------
Total Revenues                                                          582,615                664,488

Operating Expenses
Fuel and purchased power                                                 91,796                148,586
Purchased gas                                                            64,390                 43,190
Operations                                                              149,416                 94,306
Maintenance                                                              33,639                 27,782
Depreciation, depletion and amortization                                 47,555                 38,893
Electric regulatory amortization                                        (49,819)                 6,317
Other regulatory amortization                                            10,476                 11,043
Operating taxes                                                          97,758                109,324
Federal income taxes (credit)                                           (60,461)                33,867
                                                              ------------------     ------------------
Total Operating Expenses                                                384,750                513,308
                                                              ------------------     ------------------
Operating Income                                                        197,865                151,180

Other Income and (Deductions)
Transaction related expenses                                            (63,651)                     -
Other                                                                   (20,139)                (1,829)
                                                              ------------------     ------------------
Income Before Interest Charges                                          114,075                149,351

Interest Charges                                                         76,825                104,190
                                                              ------------------     ------------------

Net Income                                                               37,250                 45,161
Preferred stock dividend requirements                                    11,216                 12,968
                                                              ------------------     ------------------
Earnings for Common Stock                                 $              26,034  $              32,193
                                                              ==================     ==================


Average Common Shares Outstanding                                       134,166                121,146

Basic and Diluted Earnings Per Common Share               $                0.19  $                0.26
                                                              ==================     ==================


</TABLE>

See accompanying Notes to the Condensed Consolidated Financial Statements.

                                        5
<PAGE>
<TABLE>
<CAPTION>

                     MarketSpan Corporation and Subsidiaries
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (UNAUDITED)
                            (In Thousands of Dollars)


                                                                           Three Months Ended
                                                                      June 30             June 30
                                                                       1998                1997
                                                                    ------------------------------
Operating Activities
<S>                                                         <C>                <C>            

Net Income                                                  $          37,250  $        45,161
Adjustments to reconcile net income to net
      cash provided by operating activities
  Depreciation and amortization                                        47,555           38,893
  Electric regulatory amortization                                    (49,819)          12,298
  Other regulatory amortization                                        10,476           13,052
  Rate moderation component carrying charges                           (6,411)          (5,981)
  Class settlement                                                    (14,988)           4,199
  Amortization of cost of issuing and redeeming securities              3,703            7,934
  Federal income tax - deferred and other                            (181,293)          10,551
  Pensions and other post retirement benefits                          11,269                -
  Other                                                              (155,428)          28,490
Changes in operating assets and liabilities
  Accounts receivable and accrued revenue                              90,418           53,075
  Pensions and other post retirement benefits                        (285,212)               -
  Materials and supplies, fuel oil and gas in storage                  (3,766)         (31,174)
  Accounts payable and accrued expenses                                70,370           33,485
  Accrued taxes                                                       (80,234)          (8,087)
  Accrued interest and other                                           67,486          (27,288)
  Class settlement                                                     23,058          (10,639)
  Special deposits                                                     65,947          (30,285)
                                                               ---------------    -------------
Net Cash Provided by (Used in) Operating Activities                  (349,619)         133,684
                                                               ---------------    -------------

Investing Activities

Construction expenditures                                            (100,199)         (69,219)
Net cash from KeySpan and LILCO transactions                           90,168                -
Proceeds from LIPA transaction                                      2,497,500                -
Shoreham post-settlement costs                                         (6,650)         (11,983)
Miscellaneous investment                                               (1,740)             221
                                                               ---------------    -------------
Net Cash Provided by (Used in) Investing Activities                 2,479,079          (80,981)
                                                               ---------------    -------------

Financing Activities

Proceeds from sale of common stock                                      6,514            4,309
Issuance of preferred stock                                            75,000                -
Redemption of long-term debt                                         (100,000)               -
Issuance of notes payable                                             350,000                -
Redemption of notes payable                                          (350,000)               -
Preferred stock dividends paid                                        (12,926)         (12,968)
Common stock dividends paid                                           (90,353)         (53,844)
Other                                                                 (16,965)            (729)
                                                               ---------------    -------------
Net Cash Used in Financing Activities                                (138,730)         (63,232)
                                                               ---------------    -------------
Net Increase (Decrease) in Cash and Cash Equivalents                1,990,730          (10,529)
                                                               ===============    =============
Cash and cash equivalents at beginning of period            $         180,919  $        64,539
Net Increase (Decrease) in cash and cash equivalents                1,990,730          (10,529)
                                                               ===============    =============
Cash and cash equivalents at end of period                  $       2,171,649  $        54,010
                                                               ===============    =============
</TABLE>

See accompanying Notes to the Condensed Consolidated Financial Statements.

                                        6
<PAGE>



                    MARKETSPAN CORPORATION AND SUBSIDIARIES
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1.    ORGANIZATION OF THE COMPANY

     MarketSpan Corporation ("Company" or "MarketSpan"), a New York corporation,
     is  filing  its  first  report on Form  10-Q as  successor  to Long  Island
     Lighting  Company  ("LILCO"),  as a result of the transaction with the Long
     Island Power Authority  ("LIPA")  discussed below (the "LIPA  Transaction")
     and following the  acquisition of KeySpan Energy  Corporation  ("KeySpan").
     MarketSpan  is a utility  holding  company that has been granted  exemption
     under the Public  Utility  Holding  Company Act of 1935,  as amended.  As a
     result of the transaction with LIPA, LILCO became a wholly owned subsidiary
     of LIPA, a corporate  municipality and a political  subdivision of New York
     State.  KeySpan,  a wholly owned  subsidiary  of  MarketSpan  and an exempt
     utility  holding  company under the Public Utility  Holding  Company Act of
     1935, as amended,  is no longer a registrant  under the  Securities  Act of
     1933, as amended and the Securities Exchange Act of 1934, as amended.

      On May 28, 1998,  the Company  completed  two business  combinations  as a
      result  of which  it (i)  acquired  the  non-nuclear  electric  generating
      facilities, gas distribution operations and common plant formerly owned by
      LILCO and  entered  into  long-term  service  agreements  to  operate  the
      electric  transmission and distribution system acquired by LIPA ; and (ii)
      acquired  KeySpan,  the parent  company of The Brooklyn  Union Gas Company
      ("Brooklyn  Union"),  (See Notes to the Condensed  Consolidated  Financial
      Statements, Note 2.)

      With  the  exception  of a small  portion  of  Queens  County,  MarketSpan
      subsidiaries are the only providers of gas  distribution  services on Long
      Island, N.Y. - Nassau,  Suffolk,  Queens and Kings Counties - with a total
      population of  approximately  6.9 million.  Queens and Kings  Counties are
      part of New York City. In addition,  MarketSpan  subsidiaries  provide gas
      distribution  services to Richmond County, a part of New York City, with a
      total population of approximately .4 million.  Brooklyn Union provides gas
      distribution   services  to  Queens,   Kings  and  Richmond  Counties  and
      MarketSpan  Gas  Corporation,  a  subsidiary  of  MarketSpan  provides gas
      distribution  services to Nassau and  Suffolk  Counties  and the  Rockaway
      Pennisula in Queens County.

      Prior  to  May  29,  1998,  LILCO  conducted  its  operations  as a  fully
      integrated electric  generation,  transmission and distribution utility in

<PAGE>

     combination  with its separate gas distribution  operations.  Subsequent to
     the consummation of the LIPA Transaction, MarketSpan through its subsidiary
     MarketSpan  Generation LLC, generates  electricity on Long Island, N.Y. for
     sale  to LIPA  under  a 15 year  Power  Supply  Agreement.  Its  production
     operations are conducted at five steam generation  facilities and forty-two
     internal combustion  facilities with an aggregate rated generating capacity
     of 3,978 M.W. Electric transmission and distribution operating services and
     customer billing  services are provided to LIPA by a MarketSpan  subsidiary
     MarketSpan  Electric  Services LLC, under an eight year Management  Service
     Agreement.  Fuel management and  procurement  services are provided to LIPA
     under a 15 year Energy Management  Agreement by MarketSpan Trading Services
     LLC,  a  MarketSpan  subsidiary.  This  Energy  Management  Agreement  also
     requires  that  MarketSpan  Trading  Services LLC provide LIPA with certain
     system  power supply  services  for a period of eight  years.  In addition,
     three  years  after  May 28,  1998,  when  the  transaction  with  LIPA was
     consummated,  LIPA will have the right for a one year period to acquire the
     non-nuclear  generating  assets formally owned by LILCO and currently owned
     by MarketSpan  Generation  LLC. The purchase price for such assets would be
     the fair market value at the time of the exercise of the right, which value
     will be determined by independent appraisers.

      KeySpan owns  significant  investments in gas  exploration  and production
      operations  primarily through The Houston Exploration Company ("THEC"),  a
      64% owned subsidiary of Brooklyn Union.  THEC owns  approximately 400 BCFe
      of natural gas  reserves  primarily  in the Gulf Coast region both onshore
      and offshore. Moreover, KeySpan subsidiaries own investments accounted for
      on the equity method,  in domestic and international  pipeline  operations
      and provide gas  marketing and related  energy  systems  installation  and
      management  services  primarily  within the greater New York  metropolitan
      area.

     As a result of the transactions and business  combination  described above,
     the  composition  of  MarketSpan's  assets  and  liabilities  reflects  the
     monetization of substantial regulatory and other assets previously owned by
     its  predecessor   company  and  a  related  reduction  of  financial  risk
     associated  with that  company.  Consequently,  the  results of  operations
     reported  herein  may not be  indicative  of future  results  or  operating
     trends.  Management  is  exploring  opportunities  to expand the  Company's
     operations through possible investments and acquisitions, the magnitude and
     timing of which can not be determined.


<PAGE>



2.    SALE OF LILCO ASSETS, ACQUISITION OF KEYSPAN AND TRANSFER OF
      ASSETS AND LIABILITIES TO MARKETSPAN

      On May 28, 1998, pursuant to the Agreement and Plan of Merger, dated as of
      June 26, 1997, by and among MarketSpan  Corporation  (formerly known as BL
      Holding Corp.,  "MarketSpan"),  Long Island Lighting Company,  Long Island
      Power Authority, and LIPA Acquisition Corp. (the "Merger Agreement"), LIPA
      acquired all of the outstanding  common stock of LILCO for $2.4975 billion
      in cash and thereafter directly or indirectly assumed, certain liabilities
      including  approximately  $3.5 billion in debt,  as well as  approximately
      $222 million of LILCO's  preferred  stock.  In addition,  LIPA  reimbursed
      LILCO $117.5 million  related to certain  series of preferred  stock which
      were  redeemed by LILCO prior to May 28, 1998.  Immediately  prior to such
      acquisition,  all of LILCO's  assets  employed  in the  conduct of its gas
      distribution  business and its non-nuclear  electric generation  business,
      and all common assets used by LILCO in the operation and management of its
      electric  transmission and distribution  business and its gas distribution
      business  and/or  its  non-nuclear   electric   generation  business  (the
      "Transferred  Assets")  were sold to  MarketSpan  and  transferred  to the
      following   wholly  owned   subsidiaries  of  MarketSpan  at  MarketSpan's
      direction:  MarketSpan Gas Corporation,  MarketSpan  Trading Services LLC,
      MarketSpan  Generation LLC, MarketSpan  Corporate Services LLC, MarketSpan
      Utility  Services LLC, and  MarketSpan  Electric  Services LLC, each a New
      York  corporation or limited  liability  company,  and MarketSpan  Finance
      Corporation, a Vermont corporation (the "Transfer").

      The  consideration  for the Transferred  Assets consisted of (i) 3,440,625
      shares of the  common  stock of  MarketSpan,  (ii)  553,000  shares of the
      Series B preferred stock of MarketSpan, (iii) 197,000 shares of the Series
      C preferred stock of MarketSpan,  and (iv) the assumption by MarketSpan of
      certain liabilities of LILCO. In connection with the Transfer and prior to
      the  effectiveness  of the LIPA  Transaction,  LILCO  sold  Series B and C
      preferred stock for $75 million in a private placement.

      Moreover,  all of LILCO's  outstanding  long-term debt as of May 28, 1998,
      except  for its 1997  Series  A  Electric  Facilities  Revenue  Bonds  due
      December 1, 2027 which were assigned to  MarketSpan,  was  transferred  to
      LIPA. In accordance with the LIPA Agreement,  MarketSpan issued promissory
      notes to LIPA  amounting  to $1.078  billion  which  represents  an amount
      equivalent  to  the  sum  of (i)  the  principal  amount  of  7.3%  Series
      Debentures due July 15, 1999 and 8.2% Series Debentures due March 15, 2023
      outstanding  as of May 28,  1998,  (ii) an  allocation  of  certain of the

<PAGE>

      Authority  Financing Notes (such  allocation  representing the estimate of
      the amount of debt  required to finance  certain  generation  construction
      requirements),  and  (iii) the  amount by which the net book  value of the
      assets  transferred to LIPA at May 28, 1998 was less than  $2,500,800,000.
      The promissory  notes contain  identical  terms as the debt referred to in
      items (i) and (ii) above.

      On May 28, 1998, immediately  subsequent to the LIPA Transaction,  KeySpan
      was  merged  with and into a  subsidiary  of  MarketSpan,  pursuant  to an
      Agreement and Plan of Exchange and Merger,  dated as of December 29, 1996,
      between LILCO and Brooklyn Union.  This agreement was amended and restated
      as of February 7, 1997,  June 26, 1997, and September 29, 1997, to reflect
      certain  technical  changes and the assignment by Brooklyn Union of all of
      its rights and  obligations  under the agreement to KeySpan.  On September
      29,  1997,  KeySpan  became the  parent  company  of  Brooklyn  Union when
      Brooklyn Union reorganized into a holding company structure.

      As a  result  of these  transactions,  holders  of  KeySpan  common  stock
      received one share of MarketSpan  common stock,  par value $.01 per share,
      for each share of KeySpan  they owned and  holders of LILCO  common  stock
      received  0.880 of a share of  MarketSpan  common  stock for each share of
      LILCO they owned. Upon the closing of these  transactions,  former holders
      of KeySpan and LILCO owned 32% and 68%,  respectively,  of the  MarketSpan
      common stock.  MarketSpan's common stock and its preferred stock Series AA
      have been listed on the New York and  Pacific  Stock  Exchanges  under the
      symbol "MN". KeySpan and LILCO common stock are no longer traded.

      The purchase  price of $1.223  billion for the  acquisition of KeySpan has
      been allocated to assets acquired and liabilities assumed based upon their
      estimated fair values.  The fair value of the utility  assets  acquired is
      represented by their book value which approximates the value recognized by
      the New York State Public Service Commission ("PSC") in establishing rates
      for regulated  utility  services.  The  estimated  fair value of KeySpan's
      non-utility assets approximates their carrying values.

      MarketSpan has recorded goodwill in the amount of $174 million,  including
      $15 million of LILCO's transaction costs that will not be recovered in gas
      rates. The $174 million represents the excess of the acquisition cost over
      the fair value of the net assets acquired,  and is being amortized over 40
      years as goodwill.



<PAGE>



     The following is the  comparative  unaudited pro forma  combined  condensed
     financial  information  for the twelve months ended June 30, 1998 and 1997.
     The pro forma disclosures are intended to reflect the results of operations
     as if the  combinations,  as discussed above were  consummated on the first
     day of the  reporting  period.  These  pro  forma  disclosures  may  not be
     indicative of future results.

                                                         Twelve Months Ended 
                                                               June 30
                                                               -------
            Pro Forma Results (in thousands)              1998        1997
            --------------------------------              ----        ----
                 Revenues                              2,375.7     2,447.7
                 Operating Income                        382.1       293.2
                 Net Income                              195.7       204.4
                 E.P.S. (basic and diluted)               1.02        1.08

3.    BASIS OF PRESENTATION

      The  financial   statements  presented  herein  reflect  the  consolidated
      statements of  MarketSpan.  For  financial  reporting  purposes,  LILCO is
      deemed  a  predecessor  company  to  MarketSpan  pursuant  to  a  purchase
      accounting  transaction,   in  which  KeySpan  was  acquired.   Since  the
      acquisition  of  KeySpan  was  accounted  for  as  a  purchase,   purchase
      accounting  adjustments,  including  goodwill,  have been reflected in the
      financial  statements herein.  Further, the financial statements presented
      reflect the results of  operations of LILCO from April 1, 1998 through May
      28, 1998 and of MarketSpan from May 29, 1998 through June 30, 1998.

      In the  opinion  of the  Company,  the  accompanying  unaudited  Condensed
      Consolidated  Financial  Statements  contain all adjustments  necessary to
      present fairly the financial  position of the Company as of June 30, 1998,
      and the  results of its  operations  and cash  flows for the three  months
      ended  June 30,  1998 and  1997.  Certain  reclassifications  were made to
      conform  prior  period  financial   statements  with  the  current  period
      financial statement presentation. Other than as noted, adjustments were of
      a normal, recurring nature.

      As permitted by the rules and  regulations  of the Securities and Exchange
      Commission ("SEC"), the Condensed Consolidated Financial Statements do not
      include all of the accounting information normally included with financial
      statements  prepared in  accordance  with  generally  accepted  accounting
      principles.  Accordingly,  the Condensed Consolidated Financial Statements
      should be read in  conjunction  with the  financial  statements  and notes
      thereto  included in the Long Island Lighting  Company's  Annual Report on
      Form 10-K for the fiscal year ended  March 31,  1998,  the KeySpan  Energy

<PAGE>

      Corporation Annual Report on Form 10-K for the fiscal year ended September
      30, 1997,  and the KeySpan  Energy  Corporation  Form 10-Q for the quarter
      ended December 31, 1997 and March 31, 1998.

      THEC uses the full cost method of accounting for its investment in natural
      gas and oil  properties.  Under the full cost  method of  accounting,  all
      costs of  acquisition,  exploration and development of natural gas and oil
      reserves  are  capitalized  into a  "full  cost  pool"  as  incurred,  and
      properties  in the pool are depleted and charged to  operations  using the
      unit-of-production  method  based on the ratio of  current  production  to
      total  proved  natural  gas and oil  reserves.  To the  extent  that  such
      capitalized  costs  (net  of  accumulated   depreciation,   depletion  and
      amortization)  less  deferred  taxes exceed the present value (using a 10%
      discount rate) of estimated  future net cash flows from proved natural gas
      and  oil  reserves  and the  lower  of cost  or  fair  value  of  unproved
      properties,  such excess costs are charged to operations.  If a write-down
      is required, it would result in a charge to earnings but would not have an
      impact  on  cash  flows  from  operating  activities.   Once  incurred,  a
      write-down  of oil and gas  properties  is not  reversible at a later date
      even if oil and gas prices increase.

      Natural gas prices  declined  substantially  in the quarter ended June 30,
      1998 from prices in effect  during the quarter  ended March 31,  1998.  If
      prices  continue  to  decline,  THEC may be  required  to  write  down the
      carrying value of its natural gas and oil properties depending upon prices
      and the results of drilling  programs  during the quarter ended  September
      30, 1998.

      As of June 30,  1998,  THEC  estimates,  using prices in effect as of such
      date, that the ceiling limitation imposed under full cost accounting rules
      on total  capitalized  natural gas and oil property costs exceeded  actual
      capitalized costs.

      The  gas   distribution   business  is  influenced  by  seasonal   weather
      conditions.  Annual revenues are substantially realized during the heating
      season  (November  1 to April 30) as a result of the large  proportion  of
      heating  sales,   primarily   residential,   compared  with  total  sales.
      Accordingly,  results of operations historically are most favorable in the
      three months ended March 31, with  results of  operations  being next most
      favorable in the three months ended  December 31.  Results for the quarter
      ended June 30 are marginally unprofitable, and losses are usually incurred
      in the quarter ended September 30.
<PAGE>

      The gas utility  tariffs of Brooklyn Union and MarketSpan Gas  Corporation
      each  contain a weather  normalization  adjustment  that  largely  offsets
      shortfalls  or excesses  of firm net  revenues  (revenues  less gas costs)
      during a heating season due to variations from normal weather.

      Revenues  associated  with  billings to LIPA for electric  generation  and
      related transmission,  distribution and delivery services are not affected
      by weather.  Further,  the  agreement  with LIPA  includes a provision for
      MarketSpan to earn in the aggregate approximately $11.5 million plus up to
      an  additional  $5 million if certain  cost savings are achieved in annual
      management  service  fees  from  LIPA  for  the  management  of  the  LIPA
      transmission and distribution  system and the management of all aspects of
      fuel and power supply. These agreements also contain certain incentive and
      penalty provisions which could impact earnings from such agreements.

      Certain  statements  contained in this Form 10-Q concerning  expectations,
      beliefs,  plans,   objectives,   goals,   strategies,   future  events  or
      performance  and underlying  assumptions  and other  statements  which are
      other than statements of historical facts, are forward-looking  statements
      within the meaning of Section 21E of the Securities  Exchange Act of 1934,
      as amended. These forward-looking  statements reflect numerous assumptions
      and  involve a number of risks and  uncertainties  and actual  results may
      differ  materially  from those  discussed  in such  statements.  Among the
      factors  that  could  cause  actual  results  to  differ  materially  are:
      available  sources  and  cost  of  fuel,  state  and  federal   regulatory
      initiatives  that  increase  competition,  threaten  cost  and  investment
      recovery,  and impact  rate  structures;  the  ability  of the  Company to
      successfully  reduce its cost  structure;  the degree to which the Company
      develops non-regulated business ventures; inflationary trends and interest
      rates;  and other  risks  detailed  from time to time in reports and other
      documents  filed by the Company and its  predecessors  with the Securities
      and Exchange Commission.  For any of these statements,  the Company claims
      the  protection  of  the  safe  harbor  for  forward-looking   information
      contained  in the Private  Securities  Litigation  Reform Act of 1995,  as
      amended.

4.    REGULATORY ASSETS

      MarketSpan's  regulated  subsidiaries  are  subject to the  provisions  of
      Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
      the Effects of Certain Types of Regulation".  Regulatory assets arise from
      the  allocation  of costs and revenues to  accounting  periods for utility
      ratemaking   purposes   differently   from  bases  generally   applied  by

<PAGE>

      nonregulated  companies.  Regulatory  assets are  recognized in accordance
      with SFAS-71.

      MarketSpan's  regulatory assets of $294.5 million are primarily  comprised
      of net  regulatory  tax  assets,  transaction  costs  associated  with the
      combinations  and  certain  environmental  remediation  and  investigation
      costs.  In  the  opinion  of  management,   regulatory  assets  are  fully
      recoverable  in rates.  However,  the  Company  continually  assesses  the
      applicability of SFAS-71 to its operations both severally and as a whole.

      In the event that the provisions of SFAS-71 were no longer applicable, the
      Company  estimates that the related  write-off could result in a charge to
      net  income  of  approximately  $159.7  million  (excluding  corresponding
      credits) or  approximately  $1.19 per share of common stock which would be
      classified as an extraordinary item.


<PAGE>

                    MARKETSPAN CORPORATION AND SUBSIDIARIES
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Operating Results
-----------------

The  following  is a  summary  of items  affecting  comparative  earnings  and a
discussion of the material changes in revenues and expenses during the following
periods:

(1)   Three Months ended June 30, 1998 vs. Three Months ended
      June 30, 1997.

To enhance the comparative  disclosures,  selected proforma  information for the
twelve  months  ended June 30,  1998 vs June 30,  1997 is  provided in Note 2 of
Notes to the Condensed Consolidated Financial Statements.

Results for the quarter ended June 30, 1998 include operations of LILCO's former
gas and  electric  business  for the period  April 1, 1998 through May 28, 1998.
Results for  MarketSpan  Gas  Corporation,  the electric  supply and  management
agreements  with LIPA,  and  KeySpan are  reflected  for the period May 29, 1998
through June 30, 1998. (See below under Utility Rate and Regulatory  Matters for
a description of the various  agreements  with LIPA.) As required under purchase
accounting,  results for the period ended June 30, 1997,  reflect results of the
former LILCO as previously reported, and do not include results of KeySpan.

Earnings
--------

Consolidated  earnings  for the first  quarter  ended  June 30,  1998 were $26.0
million,  or $0.19 per share,  compared to $32.2 million, or $0.26 per share, in
the  corresponding  period last year.  In the period  ended June 30,  1998,  the
Company absorbed substantial costs related to the LIPA Transaction.  The adverse
effect of these one time charges was offset by realizing  certain federal income
tax deductions related to the funding of post employment benefits for employees.
In  addition,   the  amortization  of  the  Rate  Moderation  Component  changed
significantly  during the quarter,  resulting in a favorable effect to earnings.
Due to the LIPA  Transaction,  the Rate  Moderation  Component  is no  longer in
effect.  Moreover,  the Company will be initiating a special  retirement program
and  exploring a  voluntary  severance  program as part of the  overall  plan to
realize the $1 billion of operating  synergy savings  already  reflected in both
utility tariff rates and contracts with LIPA. These programs,  if adopted,  will
result in additional one time charges during the current year.


<PAGE>



Earnings for the quarter ended June 30, 1998 also include  KeySpan's net loss of
$9 million  for the period May 29, 1998  through  June 30,  1998.  This loss was
primarily  attributable to the seasonality of the gas distribution business. The
weighted average number of common shares  outstanding used in the calculation of
earnings  per share for the quarter  ended June 30, 1998 reflect the issuance of
common stock to consummate the business combination effective on May 29, 1998.

Revenue Summary
---------------

Utility firm gas and transportation sales volumes for the quarter ended June 30,
1998, were 14,088 MDTH, compared to 10,097 MDTH in the corresponding period last
year. Total gas throughput, which includes sales to interruptible customers, was
21,407 MDTH for the quarter ended June 30, 1998,  compared to 13,326 MDTH in the
corresponding period last year. Sales for the quarter ended June 30, 1997 do not
include sales made by KeySpan.

The revenues of the Company were significantly  affected as a result of the LIPA
and KeySpan Transactions.  Below are the Company's revenues for the three months
ended June 30,  1998 and 1997.  (Note 2 of Notes to the  Condensed  Consolidated
Financial  Statements includes proforma  information for the twelve months ended
June 30, 1998 and 1997.)

                                       Three Months Ended June 30,
                                       --------------------------
                                              (In Millions)
                                          1998        1997
                                          ----        ----
MarketSpan Gas Revenues:
      Gas Distribution                  $154.0       $104.4
      Gas Production - THEC               11.7          -
MarketSpan Electric Revenues:
      LIPA Service Agreements             68.1          -
      Electric Services                  329.9        560.1
Other Revenues                            18.9          -
                                          ----         ----
TOTAL REVENUES                          $582.6       $664.5
                                        ======       ======

Gas Distribution and Production Revenues
----------------------------------------

Gas  distribution  revenues  for 1998 include  MarketSpan  Gas  Corporation  and
KeySpan  revenues  covering  the period May 29, 1998  through  June 30, 1998 and
LILCO's former gas business  revenues  covering the period April 1, 1998 through
May 28, 1998. Included in the gas production revenues for 1998 are THEC revenues
covering the period May 29,1998  through June 30, 1998. For the comparable  1997
period,  included in gas  distribution  revenues is MarketSpan  Gas  Corporation
(formerly  LILCO)  revenues  covering  the period April 1, 1997 through June 30,

<PAGE>

1997.  Pursuant to purchase accounting  requirements,  the comparative June 1997
quarter does not include revenues for KeySpan.

The increase in gas distribution and production  revenues of approximately $61.3
million  for the three  months  ended June 30,  1998 when  compared  to the same
period in 1997, was  principally the result of the inclusion in 1998 of revenues
generated by KeySpan for the period May 29, 1998 through June 30, 1998.

Electric Revenues
-----------------

Electric revenues in 1998 include revenues under various LIPA Service Agreements
covering  the period May 29, 1998  through  June 30, 1998 and  electric  service
revenues  covering  the  period  April 1, 1998  through  May 28,  1998.  For the
comparable 1997 period,  revenues include electric service revenues covering the
period April 1, 1997 through June 30, 1997.

The decrease in electric revenues of approximately  $162.1 million for the three
months  ended June 30, 1998 when  compared  to the same period in 1997,  was the
result of the LIPA  Transaction  which was consummated on May 28, 1998. Prior to
the LIPA Transaction,  LILCO provided fully integrated electric services to Long
Islanders.  Included  within the rates  charged to customers was a return on the
capital  investment in the generation and transmission  and  distribution  (T&D)
assets  required  to operate the  system,  as well as  recovery of the  electric
business costs to operate the system, including interest. Upon completion of the
LIPA Transaction,  the nature of the Company's  electric  activities has changed
from  that of an owner of an  integrated  electric  system,  with a  significant
capital  investment  to a new role as an owner of only the  generation  capacity
system  and as a  manager  of the T&D  system.  In its new role,  the  Company's
capital investment is significantly reduced and accordingly,  its revenues under
the LIPA contracts  reflect that reduction.  Revenues after May 28, 1998 reflect
the LIPA Service Agreements which contribute marginally to earnings.

Revenues resulting from the LIPA Service Agreements include the following:

Revenues   realized   under  the   Management   Services   Agreement(MSA)   were
approximately  $38  million  for the period  ended June 30, 1998 and are derived

<PAGE>

from the  performance  of the  day-to-day  operation and  maintenance of the T&D
system and the  management  of LIPA's  interest  in the Nine Mile Point  Nuclear
Power Station, Unit 2 (NMP2).

Revenues under the Power Supply Agreement (PSA) were  approximately  $27 million
for the period  ended June 30,  1998 and are  derived  from the sale of capacity
from MarketSpan's generating facilities.

Revenues  under the Energy  Management  Agreement  (EMA) were  approximately  $3
million  resulting  from  the  management  of  fuel  supplies  for  LIPA to fuel
MarketSpan's  generating  facilities,  energy  purchases on a least-cost  basis,
off-system  sales of output from  MarketSpan's  generating  facilities and other
power supplies either owned or under contract to LIPA.

See  Utility  Rate and  Regulatory  Matters  -  Electric  Operations  for a more
detailed description of each of these agreements.

Other Revenues
--------------

Other revenues  include revenues from KeySpan's  energy  management  subsidiary,
earnings  from the  investment of the proceeds  from the LIPA  Transaction,  and
equity investments of KeySpan covering the period May 29, 1998 through June 30 ,
1998.  Pursuant to purchase accounting  requirements,  the comparative June 1997
quarter does not include KeySpan.


Operating Expenses
------------------

For the three  months  ended June 30,  1998,  purchased  gas costs  reflect  the
seasonal nature of domestic  heating  consumption.  Further,  such costs reflect
activity of Brooklyn Union for the period May 29, 1998 through June 30, 1998.

For the three  months  ended June 30,  1998,  electric  fuel  expense  decreased
primarily as a result of the LIPA  Transaction.  In accordance with the terms of
the EMA, on May 29,  1998,  LIPA began paying for the fuel and  purchased  power
necessary to provide for electric system requirements.

Other operating expenses reflect the effects of the business combination and the
LIPA Transaction. These expenses have increased this quarter as compared to last
year due to the addition of KeySpan  operations and one time charges  associated
with the LIPA  Transaction.  Federal income taxes reflect the benefit of certain
tax deductions taken prior to the LIPA Transaction and are related  primarily to
the funding of other post employment benefits.

Other Income and Deductions
---------------------------

Transaction related expenses are primarily non-recurring charges associated with
the LIPA Transaction. Specifically these charges relate to severance payments to
certain former officers of LILCO,  amounting to approximately $22.5 million, and
LIPA Transaction costs and certain payments made to LIPA upon the closing of the
transaction amounting to approximately $41.2 million. Other deductions primarily

<PAGE>

reflect  a charge  to  earnings  to  reflect  an  updated  present  value of the
remaining payments under the Class Settlement.

Rate Moderation Component
-------------------------

Prior to the LIPA  Transaction,  the Rate Moderation  Component (RMC),  included
within the electric regulatory amortizations, represented the difference between
the  Company's  revenue  requirements  under  conventional  ratemaking  and  the
revenues  provided by its electric rate structure.  The RMC was adjusted for the
operation of the Company's Fuel  Moderation  Component  (FMC)  mechanism and the
difference  between the Company's  share of actual  operating  costs at NMP2 and
amounts provided for in electric rates.

In April  1998,  the PSC  authorized  a  revision  to the  Company's  method  of
recording its monthly RMC amortization. Prior to this revision, the amortization
of the annual level of RMC was recorded  monthly on a  straight-line,  levelized
basis over the Company's  rate year,  which runs from December 1 to November 30.
However, electric revenue requirements fluctuated from month to month based upon
consumption,  which was greatly  affected by the effects of weather.  Under this
revised method,  which was effective for the period December 1, 1997 through May
28,  1998,  the monthly  amortization  of the annual RMC level varied based upon
each month's  forecasted revenue  requirements,  which more closely aligned such
amortization with the Company's cost of service. As a result of this change, for
the  period  April  1,  1998  through  May  28,  1998,   the  Company   recorded
approximately $51.5 million more of non-cash RMC credits to income (representing
accretion of the RMC balance),  or $33.5 million net of tax,  representing  $.25
per share more than it would have under the previous method.

Dividends and Financial Condition (Liquidity)
---------------------------------------------

On June 26, 1998, the Board of Directors  declared a common stock dividend of 30
cents per share payable on August 1, 1998 to  shareholders of record on July 15,
1998.  This  dividend is a prorated  portion for  approximately  two months of a
dividend of $1.78 per share, annually. Hence, common stock dividend payments for
August 1, 1998 amount to $47.1 million  equivalent to an annual  requirement  of
$282.5  million.  Based on  recent  market  prices,  the  dividend  yield on the
Company's  common stock  approximates  6.5%. The Company is currently paying the
dividend at an annual rate of $1.78 per common share.  The dividend rate will be
reviewed annually by the Board of Directors and is scheduled for review sometime
within the quarter that will end June 30, 1999.  However,  the amount and timing
of all dividend  payments is subject to the discretion of the Board of Directors
and will depend upon  business  conditions,  results of  operations  , financial

<PAGE>

conditions  and other  factors.  In  addition,  on August 4, 1998,  the  Company
announced  that the Board of  Directors  declared a  quarterly  dividend  on the
Company's 7.95% Preferred Stock Series AA of $.49 per share payable on September
1, 1998 to shareholders of record on August 19, 1998. This dividend  declaration
amounts to  approximately  $7.2 million.  The annual  dividend rate is $1.98 per
share and amounts to approximately $28.9 million.

At June 30, 1998, various MarketSpan subsidiaries had available lines of credit.
KeySpan's  available  bank  lines  of  credit,  which  secure  the  issuance  of
commercial paper, amounted to $100 million. The lines of credit are available to
KeySpan and its principal  subsidiary Brooklyn Union. These lines of credit were
increased  to $150 million on July 1, 1998.  In addition,  THEC had an available
line of credit of $135  million.  In March 1998,  THEC  issued  $100  million of
8.625%  Senior  Subordinate  Notes due 2008.  These  notes  are  subordinate  to
borrowings under THEC's line of credit.

Prior to the business combination,  LILCO had available through October 1, 1998,
$250 million  under its  Revolving  Credit  Agreement  (1989 RCA), of which $100
million was borrowed for interim financing. In addition, MarketSpan had a bridge
loan of $250 million to fund certain  obligations  for  postretirement  benefits
other  than  pensions.  Upon  the  effectiveness  of the LIPA  Transaction,  all
borrowings were repaid and the 1989 RCA was terminated.

As a result of the LIPA  Transaction,  the Company has a  significant  amount of
cash which it intends  to use for,  among  other  things,  investment  in energy
related  businesses and  repurchase of shares of its common stock.  On August 3,
1998, the Company announced that the Board of Directors  authorized the purchase
of up to 10 percent of the Company's  outstanding common stock, or approximately
15 million  shares,  through open market  purchases.  Purchases  are expected to
commence on August 17, 1998.

Pursuant to the PSC's order dated  February 5, 1998 and April 14, 1998 approving
the business  combination,  Brooklyn  Union's and MarketSpan  Gas  Corporation's
ability to pay dividends is conditioned  upon  maintenance of a utility  capital
structure  with debt not exceeding 55% and 58%,  respectively,  of total utility
capitalization.  In addition,  the level of dividends paid by both utilities may
not be  increased  from current  levels if a 40 basis point  penalty is incurred
under the customer service performance program.


<PAGE>



Utility Rate and Regulatory Matters
-----------------------------------


Gas Operations

In 1997,  Brooklyn  Union and LILCO filed a joint  petition with the PSC seeking
PSC  approval,  under  section 70 of the New York  Public  Service  Law,  of the
combination  by which  KeySpan  and LILCO each would  become  subsidiaries  of a
newly-formed  holding company  MarketSpan (or if the  transaction  with LIPA was
also consummated KeySpan and certain other entities would become subsidiaries of
MarketSpan). (See Notes to the Condensed Consolidated Financial Statements, Note
2., "Sale of LILCO Assets,  Acquisition  of KeySpan,  and Transfer of Assets and
Liabilities to MarketSpan".) In addition,  the petition proposed $1.0 billion of
efficiency  savings,  excluding gas costs,  attributable to operating  synergies
that  are  expected  to be  realized  over  the 10  year  period  following  the
combination,  be allocated to ratepayers net of transaction  costs.  In December
1997,  Brooklyn Union,  LILCO, the Staff of the Department of Public Service and
six other parties entered into a Settlement  Agreement  (Stipulation)  resolving
all issues among them in the proceeding and, by order dated February 5, 1998 and
April 14, 1998 the PSC approved the Stipulation.

Under the  Stipulation,  effective May 29, 1998,  Brooklyn Union's base rates to
core customers were reduced by $23.866 million annually.  In addition,  Brooklyn
Union is now subject to an earnings sharing provision  pursuant to which it will
be required to credit core customers with 60% of any utility  earnings up to 100
basis points above certain  threshold  returns on equity levels over the term of
the rate plan (other than any earnings associated with discrete  incentives) and
50% of any utility  earnings in excess of 100 basis points above such  threshold
levels.  The threshold levels are 13.75% in rate year 1998, 13.50% in rate years
1999  through  2001,  and  13.25% in rate year 2002.  A safety  and  reliability
incentive mechanism was implemented on the consummation date of the combination,
with a maximum 12 basis point pretax return on equity  penalty if Brooklyn Union
fails to achieve certain safety and reliability performance standards.  With the
exception of the simplification of the customer service  performance  standards,
the  Brooklyn  Union rate plan  approved by the PSC in  September  1996  remains
unchanged.  Any gas cost savings  allocable to Brooklyn Union resulting from the
combination will be reflected in rates to utility customers as those savings are
realized.

The Stipulation also eliminated and relaxed many  restrictions  contained in the
September 1996 settlement agreement,  by which the PSC approved Brooklyn Union's
reorganization  into  a  holding  company  form,  in  such  areas  as  affiliate
transactions;  use of the name and  reputation of Brooklyn  Union by unregulated
affiliates; common officers of the holding company, the utility subsidiaries and
unregulated subsidiaries; dividend payment restrictions; and the composition of

<PAGE>

the Board of Directors of Brooklyn Union.

Also under the  Stipulation,  a  three-year  gas rate plan was  implemented  for
MarketSpan Gas Corporation  which provides for, among other things, an estimated
reduction in customers'  bills of  approximately  3.9%,  including fuel savings,
through at least November 30, 2000.  This gas rate reduction will occur in three
phases as follows:  (i) a reduction in base rates of approximately $12.2 million
to  reflect  decreases  in  MarketSpan  Gas  Corporation's  gas cost of  service
effective on February 5, 1998; (ii) a base rate reduction of approximately  $6.2
million associated with non-fuel savings related to the combination effective on
May 28, 1998 and (iii) an expected  reduction in the Gas Adjustment Clause (GAC)
to reflect  annual fuel savings  associated  with the  transaction  estimated at
approximately $4.0 million, the actual level of which will be reflected in rates
if and when they actually materialize.  MarketSpan Gas Corporation is subject to
an  earnings  sharing  provision  pursuant  to which it is required to credit to
core/firm customers 60% of any utility earnings in any rate year up to 100 basis
points above 11.10% and 50% of any utility earnings in excess of 12.10%.  Both a
customer service and a safety and reliability  incentive performance program was
implemented  effective  December 1, 1997 with maximum  pre-tax  return on equity
penalties of 40 and 12 basis points, respectively, if MarketSpan Gas Corporation
fails to achieve certain performance standards in these areas.

Electric Operations

MarketSpan,  through  its  subsidiaries,  provides  services  to LIPA  under the
following agreements:

MANAGEMENT  SERVICES  AGREEMENT (MSA) MarketSpan  Electric Services LLC ("MES"),
will manage the day-to-day  operations,  maintenance and capital improvements of
the T&D system.  LIPA will  exercise  control  over the  performance  of the T&D
system through specific  standards for performance and incentives to MarketSpan.
In exchange for providing the services,  MES will earn a $10 million  management
fee and will be operating under a contract which provides certain incentives and
imposes certain penalties based upon its performance. Annual service incentives,
excluding  cost  related  incentives  and  penalties  under the MSA can reach $7
million if certain targets are met or exceeded.  MES can earn certain incentives
for cost  reductions  associated  with its fixed fee to LIPA.  These  incentives
provide  for  MES to earn up to 100% of its  cost  reductions  on the  first  $5
million in reductions and earn up to 50% of each  additional  cost reductions up
to 15% of the total cost budget,  thereafter  all savings  accrue to LIPA.  With
respect to cost overruns, MES absorbs the first $15 million of overruns,  with a
sharing of overruns  above $15  million.  There are certain  limitations  on the
amount of cost sharing of

<PAGE>

overruns.

POWER SUPPLY AGREEMENT (PSA)
MarketSpan  Generation  LLC  will  sell to LIPA all of the  capacity  and to the
extent  requested,   energy  from  the  Company's  existing  oil  and  gas-fired
generating plants.  Sales of capacity and energy are made with rates approved by
the Federal Energy Regulatory Commission(FERC). Initial rates that were accepted
by FERC were  implemented  on May 29,  1998.  The rates may be  modified  in the
future in  accordance  with the terms of the PSA for (i)  agreed  upon labor and
expense  indices  applied  to the base year (ii) a return of and on net  capital
additions required for the generating  facilities and (iii) reasonably  incurred
expenses  that are outside the control of  MarketSpan  Generation  LLC.  The PSA
provides  incentives  and penalties  that can total $4 million  annually for the
maintenance of the output capability of the generating facilities.

ENERGY  MANAGEMENT  AGREEMENT  (EMA) The EMA  provides  for  MarketSpan  Trading
Services  LLC ("MTS") to procure and manage fuel  supplies  for LIPA to fuel the
generating  facilities under contract to it and perform off-system  capacity and
energy  purchases on a least-cost  basis to meet LIPA's  needs.  In exchange for
these  services MTS earns an annual fee of $1.5 million.  In addition,  MTS will
make off-system  sales of output from the generating  facilities and other power
supplies  either owned or under contract to LIPA. LIPA is entitled to two-thirds
of the profit  from any  off-system  energy  sales  arranged  by the  MarketSpan
Trading  Services LLC. The EMA provides  incentives and penalties that can total
$7 million  annually for  performance  related to fuel  purchases and off-system
power purchases.

Environmental Matters
---------------------

The Company is subject to various  Federal,  State and local laws and regulatory
programs related to the environment.  These  environmental  laws govern both the
normal, ongoing operations of the Company as well as the cleanup of historically
contaminated  properties.  Ongoing environmental  compliance  activities,  which
historically  have not been material,  are integrated with the Company's regular
operation and  maintenance  activities.  The Company is currently  reviewing the
environmental  liabilities of its subsidiaries.  As of June 30, 1998 the Company
had  an  accrued  liability  of  approximately  $103  million  representing  the
previously estimated minimum costs associated with investigation and remediation
at former manufactured gas plant sites. (See Notes to the Condensed Consolidated
Financial Statements, Note 4., "Regulatory Assets".)



<PAGE>



Computer Software, Year 2000 Issue
----------------------------------

The Company has  evaluated  the extent to which  modifications  to its  computer
software  and  database  will be necessary  to  accommodate  the Year 2000.  The
Company's  computer  systems are generally  based on two digits and will require
some  additional  programming to recognize the start of the new  millennium.  In
1996, the Emerging Issues Task Force of the Financial Accounting Standards Board
reached a consensus,  EITF Issue No.  96-14,  that  internal and external  costs
specifically  associated with modifying  internal-use  computer software for the
Year 2000 should be charged to expense as incurred.

A corporate-wide  program has been established to review all software,  hardware
and associated  compliance  plans. The readiness of suppliers and vendor systems
is also under review.  At this time,  no estimate can be made of the effect,  if
any, of Year 2000 problems on supplies and service  providers.  Contingency  and
business   continuation   plans  are  being   prepared   and  will  be  reviewed
periodically.

The Company  expects to spend  approximately  $16.3  million to address the Year
2000 issue. As of June 30, 1998, $7.1 million has been expended in investigating
and  modifying  software.  This effort is scheduled  to continue  into 1999 with
completion expected at the end of June 30, 1999.

The  Company  believes  that,  with   modifications  to  existing  software  and
conversions  to new  software,  the Year 2000  Issue  will not pose  significant
operational  problems for its computer systems.  However,  if such modifications
and  conversions are not made, or are not completed on time, the Year 2000 Issue
could have a material adverse impact on the operations of the Company.

The costs of the  project  and the date on which the  Company  believes  it will
complete the Year 2000  modifications  are based on management's best estimates,
which were derived utilizing  numerous  assumptions of future events,  including
the continued  availability  of certain  resources and other  factors.  However,
actual results could differ materially from those anticipated.  Specific factors
that might cause such material  differences include, but are not limited to, the
availability  and cost of personnel  trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties.

Risk Management
---------------

The Company's  utility and gas  exploration and production  subsidiaries  employ
derivative financial instruments,  such as natural gas and oil futures,  options
and swaps,  for the purpose of hedging  exposure to  commodity  price risk.  The
value at risk of the related  positions as measured by the maximum adverse price
movement in a single day is not material.

<PAGE>

The  Company's  subsidiaries  are  exposed  to  credit  risk  in  the  event  of
nonperformance   by  counterparties   to  derivative   contracts,   as  well  as
nonperformance by the counterparties of the transactions  against which they are
hedged.  The  Company  believes  that the credit  risk  related to the  futures,
options and swap instruments is no greater than that associated with the primary
commodity contracts which they hedge, as the instrument contracts are with major
investment grade financial institutions,  and that elimination of the price risk
lowers the Company's overall business risk.

New Financial Accounting Standards
----------------------------------

The Financial  Accounting  Standards  Board has recently  issued the following
accounting  standards:  Statement of Financial  Accounting  Standards No. 128,
"Earnings  Per  Share"  (SFAS No.  128);  Statement  of  Financial  Accounting
Standards No. 130, "Reporting  Comprehensive Income" (SFAS No. 130); Statement
of Financial  Accounting  Standards No. 131,  "Disclosure about Segments of an
Enterprise  and Related  Information"  (SFAS No. 131);  Statement of Financial
Accounting  Standards  No. 132,  "Employer's  Disclosures  about  Pensions and
Other  Postretirement   Benefits(SFAS   No.132)";and  Statement  of  Financial
Accounting  Standards No. 133,  "Accounting  for  Derivative  Instruments  and
Hedging Activities" (SFAS No.133).

The  Company  has  adopted  SFAS No.  128 and SFAS No.  130.  As  computed  in
accordance  with the  requirements  of SFAS  No.  128  there is no  difference
between  basic and diluted  earnings per share  amounts.  Further,  a separate
line  item  has  been  included  in  the  Balance  Sheet  for   disclosure  of
comprehensive  income as per the  requirements  of SFAS No.  130.  The Company
will adopt SFAS No. 131 and SFAS No. 132 for its current  year end  reporting.
The  Company  will adopt SFAS No. 133 in fiscal year 2000.  The  Company  does
not expect any material effect from the adoption of these statements.

<PAGE>



Part II. Other Information
--------------------------


Item 1. Legal Proceedings
-------------------------

Subsequent to the closing of the  transactions  with LIPA and KeySpan on May 28,
1998,  former  shareholders of LILCO commenced 13 class action lawsuits  against
one or more of LILCO,  each of the former  officers  and  directors of LILCO and
MarketSpan.  The suits generally allege that in connection with certain payments
LILCO had  determined  were  payable  in  connection  with the LIPA and  KeySpan
transaction  to  LILCO's  chairman,   and  to  former  officers  of  LILCO  (the
"Payments") (1) the named defendants breached their fiduciary duty owed to LILCO
and KeySpan former and/or  current  MarketSpan  shareholders  as a result of the
Payments (2) the former directors and officers of LILCO intended to defraud such
shareholders by means of manipulative, deceptive and wrongful conduct, including
materially   inaccurate  and  incomplete  news  reports  and  filings  with  the
Securities and Exchange Commission; and (3) the former officers of LILCO derived
an improper economic benefit as a result of their breach of fiduciary duty.

In addition, three MarketSpan shareholder derivative actions have been commenced
pursuant  to which  such  shareholders  seek the return of  Payments  or damages
resulting  from among other things,  an alleged  breach of fiduciary duty on the
part of the former LILCO officers and directors.

A class action lawsuit has also been filed by the County of Suffolk on behalf of
Suffolk County ratepayers against LILCO's former officers and/or directors.  The
County of Suffolk alleges that the Payments were improper,  and seeks to recover
the Payments for the benefit of ratepayers.

Finally,  two class action  securities  suits were filed  alleging  that certain
officers and directors of LILCO violated the federal  securities laws by failing
to properly  disclose that the transactions  with LIPA and KeySpan would trigger
the Payments.

MarketSpan believes the allegations in the suits are entirely without merit, and
is  determined  to defend the  actions  vigorously.  Under the terms of the LIPA
Agreement, MarketSpan has assumed all indemnification obligations LILCO may have
to its former  officers  and  directors  and has agreed to  indemnify  LILCO for
certain  liabilities  relating to LILCO's activities prior to the closing of the
transaction with LIPA, including the activity relating to the Payments.

In addition,  certain related  proceedings  have been commenced  relating to the
Payments and disclosure made by LILCO with respect  thereto.  These  proceedings
include  investigations  by the New York State  Attorney  General,  the New York
State Public Service  Commission and LIPA,  hearings conducted by a committee of
the New York State assembly, and an informal,  non-public inquiry by the SEC. At
this time the Company is unable to determine the outcome of these proceedings.

<PAGE>


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

(a) Exhibits

          (3)  Certificate of Incorporation  filed April 16, 1998,  Amendment to
               Certification of  Incorporation  filed May 26, 1998 and Amendment
               to Certificate of Incorporation filed June 1, 1998.

          (10) Retirement   Agreement   between   the  Company  and  William  J.
               Catacosinos dated July 31, 1998.

          (27) Financial Data Schedule.


(b) Reports on Form 8-K

   On June 12, 1998 the Company filed a report on Form 8-K providing  disclosure
   applicable to: the transaction  between Long Island Lighting Company and Long
   Island Power Authority;  the formation of MarketSpan Corporation;  the merger
   of  KeySpan  Energy  Corporation  with and into a  subsidiary  of  MarketSpan
   Corporation and the  commencement  of lawsuits  against one or more of LILCO,
   each of the former officers and directors of LILCO and MarketSpan. The report
   on Form 8-K also contained pro forma financial  information as of and for the
   twelve months ended March 31, 1998.

   On August 5, 1998 the Company filed a report on Form 8-K providing disclosure
   applicable to: the resignation of Dr. William J.  Catacosinos as Chairman and
   Chief  Executive   Officer  and  as  a  director;   the  Board  of  Directors
   authorization to purchase up to 10% of the Company's outstanding common stock
   or approximately 15 million shares,  through open market  purchases;  and the
   decision of Company's subsidiary,  KeySpan Energy Development Corporation, to
   enter into a joint  venture  with Duke Energy  Corporation  and the  Williams
   Companies in  developing  the Cross  Bay(sm)  pipeline to transport  gas from
   existing interstate pipelines in New Jersey to New York City and Long Island.


<PAGE>




                    MARKETSPAN CORPORATION AND SUBSIDIARIES

                                   SIGNATURE

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



                               MARKETSPAN CORPORATION
                               (Registrant)

Date August 13, 1998           /s/ Craig G. Matthews
                               -------------------------------
                                 Craig G. Matthews
                                 Executive Vice President and
                                 Chief Financial Officer


Date August 13, 1998           /s/ Joseph E. Fontana
                               ------------------------------
                                 Joseph E. Fontana
                                 Vice President, Controller and
                                 Chief Accounting Officer