SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

     [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
                            AND EXCHANGE ACT OF 1934

                For the quarterly period ended September 30, 1998

                                       OR

    [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 16 (d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                          Commission file number 1-3571

                     LONG ISLAND LIGHTING COMPANY d/b/a LIPA
             (Exact name of registrant as specified in its charter)

              New York                                          11-1019782
(State or other jurisdiction of incorporation                (I.R.S. Employer
           or organization)                                  Identification No.)

333 Earle Ovington Boulevard, Suite 403, Uniondale, New York        11553
       (Address of principal executive offices)                   (Zip Code)

Registrant's telephone number, including area code:               (516) 222-7700
                                                                  
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

The  total  number  of shares of the  registrant's  Common  Stock $1 par  value,
outstanding on November 11, 1998, was 100.


<PAGE>

                     Long Island Lighting Company d/b/a LIPA

                                                                        Page No.
                                                                        --------

Part I - FINANCIAL INFORMATION

         Item 1 - Financial Statements

                    Statement of Operations                                 2-3

                    Balance Sheet                                           4-5

                    Statement of Cash Flows                                   6

                    Notes to Financial Statements                          7-14

         Item 2 - Management's Discussion and Analysis of
                    Financial Condition and Results of Operations         15-21

         Item 3 - Quantitative and Qualitative Disclosures   
                    About Market Risk                                        21

Part II - OTHER INFORMATION                                                  22

         Item 1 - Legal Proceedings                                          22

         Item 2 - Changes in Securities and Use of Proceeds                  23

         Item 3 - Defaults upon Senior Securities                            23

         Item 4 - Submission of Matters to a Vote of Security Holders        23

         Item 5 - Other Information                                          23

         Item 6 - Exhibits and Reports on Form 8-K                           23

         Signature                                                           24


<PAGE>

                                                                               2


PART I.  FINANCIAL INFORMATION

ITEM 1.   Financial Statements

                Long Island Lighting Company d/b/a LIPA (a wholly
              owned subsidiary of the Long Island Power Authority)
                             Statement of Operations
                                   (Unaudited)
                (Thousands of Dollars - Except Share Information)

                                                    Successor     Predecessor
                                                      Company       Company
                                                     --------------------------
                                                        Three Months Ended
                                                     --------------------------
                                                           September 30,
                                                     --------------------------
                                                        1998          1997
                                                     --------------------------
Revenue - Electric                                   $ 693,698    $     790,331

Expenses
Operations - fuel and purchased power                  172,900          172,445
Operations and maintenance                             194,060          100,990
Depreciation and amortization                           50,479           32,537
Base financial component amortization                     --             25,243
Rate moderation component amortization                    --              9,126
Regulatory liability component amortization               --            (22,143)
Other regulatory amortization                             --             27,261
Operating taxes                                         80,213          107,684
Federal income tax - current                              --             33,997
Federal income tax - deferred and other                   --             59,152
                                                     ---------     ------------
Total Expenses                                         497,652          546,292
                                                     ---------     ------------
Operating Income                                       196,046          244,039
                                                     ---------     ------------

Other Income and (Deductions)
Other income and deductions, net                         9,915            1,909
Allowance for other funds used during construction        --                427
Federal income tax - current                              --               (946)
Federal income tax - deferred and other                   --                255
                                                     ---------      -----------
Total Other Income                                       9,915            1,645
                                                     ---------      -----------
Income from Continuing Operations
   Before Interest Charges                             205,961          245,684
                                                     ---------      -----------
Interest Charges and (Credits)
Interest on long-term debt                              41,821           94,760
Interest on advances from and note payable
   to the Authority                                     56,770             --
Other interest                                           3,915            6,981
Allowance for borrowed funds used during
   construction                                           (527)          (1,252)
                                                     ---------     ------------
Total Interest Charges                                 101,979          100,489
                                                     ---------     ------------
Income from continuing operations                      103,982          145,195

Loss from discontinued operations net of
   taxes of zero and ($6,290), respectively               --                811
                                                     ---------     ------------
Net Income                                             103,982          144,384
Preferred stock dividend requirements                     --             12,948
                                                     ---------     ------------
Earnings for Common Stock                            $ 103,982     $    131,436
                                                     =========     ============
Average Common Shares Outstanding                          N/A      121,341,228

Basic and Diluted Earnings per Common Share                N/A     $      1.09

Dividends Declared per Common Share                        N/A     $     0.445

   The accompanying notes are an integral part of these financial statements.

<PAGE>

                                                                               3
 

               Long Island Lighting Company d/b/a LIPA (a wholly
              owned subsidiary of the Long Island Power Authority)
                             Statement of Operations
                                   (Unaudited)
               (Thousands of Dollars - Except Share Information)

<TABLE>
<CAPTION>
                                                      Successor        Predecessor Company
                                                       Company     ------------------------------  
                                                   ---------------                  Six Months
                                                   May 29, 1998 to  April 1, 1998      Ended
                                                     September 30,    to May 28,    September 30,
                                                         1998           1998            1997
                                                   ---------------  -------------   ------------
<S>                                                    <C>          <C>             <C>         
Revenue - Electric                                     $896,437     $   330,011     $  1,350,417

Expenses
Operations - fuel and purchased power                   239,687          91,762          321,031
Operations and maintenance                              228,743          68,993          199,780
Depreciation and amortization                            68,434          22,986           64,765
Base financial component amortization                      --            16,014           50,486
Rate moderation component amortization                     --           (39,574)          18,324
Regulatory liability component amortization                --           (14,048)         (44,286)
Other regulatory amortization                              --            14,694           31,343
Operating taxes                                         111,262          60,885          200,319
Federal income tax - current                               --           (79,081)          60,395
Federal income tax - deferred and other                    --             1,219           67,723
                                                       --------    ------------     ------------
Total Expenses                                          648,126         143,850          969,880
                                                       --------    ------------     ------------
Operating Income                                        248,311         186,161          380,537
                                                       --------    ------------     ------------

Other Income and (Deductions)
Other income and deductions, net                         15,311          89,205            6,072
Allowance for other funds used during construction         --               374            1,216
Federal income tax - current                               --           (62,303)            (946)
Federal income tax - deferred and other                    --          (185,541)            (375)
                                                       --------    ------------     ------------
Total Other Income and (Deductions)                      15,311        (158,265)           5,967
                                                       --------    ------------     ------------
Income from Continuing Operations
   Before Interest Charges                              263,622          27,896          386,504
                                                       --------    ------------     ------------
Interest Charges and (Credits)

Interest on long-term debt                               55,903          61,852          191,684
Interest on advances from and note payable 
   to the Authority                                      77,333            --              --
Other interest                                            4,585           4,206           14,247
Allowance for borrowed funds used during 
   construction                                            (690)           (540)          (2,118)
                                                       --------    ------------     ------------
Total Interest Charges                                  137,131          65,518          203,813
                                                       --------    ------------     ------------
Income (loss) from continuing operations                126,491         (37,622)         182,691

Income from discontinued operations net of
   taxes of zero, ($42,651), and ($8,022), 
   respectively                                            --            36,225            6,855
                                                       --------    ------------     ------------
Net Income (Loss)                                       126,491          (1,397)         189,546
Preferred stock dividend requirements                      --             8,037           25,917
                                                       --------    ------------     ------------
Earnings (Loss) for Common Stock                       $126,491    $     (9,434)    $    163,629
                                                       ========    ============     ============
Average Common Shares Outstanding                           N/A     121,822,647      121,243,500
Basic and Diluted Earnings per Common Share                 N/A          ($0.08)    $       1.35
Dividends Declared per Common Share                         N/A            .445              .89

</TABLE>

   The accompanying notes are an integral part of these financial statements.

<PAGE>

                                                                               4

 
                Long Island Lighting Company d/b/a LIPA (a wholly
              owned subsidiary of the Long Island Power Authority)
                                  Balance Sheet
                             (Thousands of Dollars)

                                                   Successor       Predecessor
                                                    Company          Company
                                                  ------------     -----------
                                                  September 30       March 31,
                                                      1998             1998
                                                  (unaudited)
                                                   -----------     -----------
Assets

Utility Plant
Electric                                           $2,027,927      $ 4,031,510
Gas                                                      --          1,233,281
Common                                                   --            290,221
Construction work in progress                          42,735          118,808
Nuclear fuel in process and in reactor                 16,431           18,119
                                                   ----------      -----------
                                                    2,087,093        5,691,939
Less- Accumulated depreciation and amortization        31,011        1,877,858
                                                   ----------      -----------
Total Net Utility Plant                             2,056,082        3,814,081
                                                   ----------      -----------
                                                                  
Regulatory Assets                                                 
Base financial component, net of accumulated                      
   amortization of $883,496 at March 31, 1998            --          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                   --            159,941
Postretirement benefits other than pensions              --            340,109
Regulatory tax asset                                     --          1,737,932
Other                                                    --            192,763
                                                   ----------      -----------
Total Regulatory Assets                                  --          7,091,854
                                                   ----------      -----------
                                                                  
Current Assets                                                    
Cash and cash equivalents                             552,720          180,919
Special deposits                                         --             95,790
Customer accounts receivable (less allowance                      
   for doubtful accounts of $19,467                               
   and $23,483)                                       224,327          297,889
Other accounts receivable                              12,052           43,744
Accrued unbilled revenues                              86,432          124,464
Promissory note receivable                            397,000             --
Materials and supplies at average cost                   --             54,883
Fuel oil at average cost                                 --             32,142
Gas in storage at average cost                           --             14,634
Prepayments and other current assets                   31,373           13,807
                                                   ----------      -----------
Total Current Assets                                1,303,904          858,272
                                                   ----------      -----------
                                                                  
Promissory note receivable                            681,467             --
                                                   ----------      -----------
Designated funds                                      280,006             --
                                                   ----------      -----------
Nonutility Property and Other investments              19,199           50,816
                                                   ----------      -----------
Deferred Charges                                       56,100           85,702
                                                   ----------      -----------
Acquisition adjustment (net of accumulated                        
   amortization of $39,093 at September 30, 1998)   4,013,215             --
                                                   ----------      -----------
Total Assets                                       $8,409,973      $11,900,725
                                                   ==========      ===========

   The accompanying notes are an integral part of these financial statements.


<PAGE>

                                                                               5
 

               Long Island Lighting Company d/b/a LIPA (a wholly
              owned subsidiary of the Long Island Power Authority)
                                  Balance Sheet
                             (Thousands of Dollars)

                                                   Successor       Predecessor
                                                    Company          Company
                                                  ------------     -----------
                                                  September 30       March 31,
                                                      1998             1998
                                                   (unaudited)
                                                   -----------     -----------
Capitalization
Long-term debt                                      $2,934,074     $  4,395,555
Unamortized discount on debt                              --            (13,606)
Note Payable - the Authority                         4,117,600             --
                                                    ----------     ------------
                                                     7,051,674        4,381,949
                                                    ----------     ------------
                                                                  
Preferred Stock - redemption required                     --            562,600
                                                    ----------     ------------
                                                                  
Common stock                                              --            608,635
Premium on capital stock                                  --          1,146,425
Capital stock expense                                     --            (47,501)
Retained earnings                                      126,491          956,092
Treasury stock, at cost                                   --             (1,204)
                                                    ----------     ------------
Total Common Shareowners' Equity                       126,491        2,662,447
                                                    ----------     ------------
Total Capitalization                                 7,178,165        7,606,996
                                                    ----------     ------------
                                                                  
Regulatory Liabilities                                            
Regulatory liability component                            --             99,199
1989 Settlement credits                                   --             59,397
Regulatory tax liability                                  --             78,913
Other                                                     --            151,922
                                                    ----------     ------------
Total Regulatory Liabilities                              --            389,431
                                                    ----------     ------------
                                                                  
Current Liabilities                                               
Current maturities of long-term debt                   397,000          101,000
Current redemption requirements of preferred stock        --            139,374
Due to the Authority                                   613,794             --
Due to KeySpan                                          63,093             --
Accounts payable and accrued expenses                     --            228,583
LRPP payable                                              --             30,118
Accrued taxes                                           75,735           34,753
Accrued interest                                        52,333          146,607
Dividends payable                                         --             58,748
Class Settlement                                          --             60,000
Customer deposits                                       23,275           28,627
                                                    ----------     ------------
Total Current Liabilities                            1,225,230          827,810
                                                    ----------     ------------
                                                                  
Deferred Credits                                                  
Deferred federal income tax - net                         --          2,539,364
Class Settlement                                          --             46,940
Other                                                    4,887           22,529
                                                    ----------     ------------
Total Deferred Credits                                   4,887        2,608,833
                                                    ----------     ------------
                                                                  
Operating Reserves                                                
Pensions and other postretirement benefits                --            401,401
Claims and damages                                       1,691           66,254
                                                    ----------     ------------
Total Operating Reserves                                 1,691          467,655
                                                    ----------     ------------
Commitments and Contingencies                                     
                                                    ----------     ------------
Total Capitalization and Liabilities                $8,409,973     $ 11,900,725
                                                    ==========     ============

   The accompanying notes are an integral part of these financial statements.

<PAGE>

                                                                               6


                Long Island Lighting Company d/b/a LIPA (a wholly
              owned subsidiary of the Long Island Power Authority)
                             Statement of Cash Flows
                                   (Unaudited)
                             (Thousands of Dollars)
 
<TABLE>
<CAPTION>
                                                      Successor            Predecessor Company
                                                       Company        -----------------------------  
                                                    ---------------                    Six Months
                                                    May 29, 1998 to   April 1, 1998      Ended
                                                     September 30,      to May 28,    September 30,
                                                         1998             1998            1997
                                                    ---------------   -------------   ------------
<S>                                                   <C>              <C>             <C>         
Operating Activities

Net Income                                            $   126,491      $   (1,397)     $  189,546  
Adjustments to reconcile net income to                                                 
   net cash provided by (used in)                                                      
   operating activities                                                                
Depreciation and amortization                              68,434          27,743          78,162
Base financial component amortization                        --            16,014          50,485
Rate moderation component amortization                       --           (39,574)         18,324
Regulatory liability component amortization                  --          (131,834)        (44,286)
Other regulatory amortization                                --            14,858          41,611
Rate moderation component carrying charges                   --            (6,411)        (11,914)
Class Settlement                                             --             2,018           8,366
Amortization of cost of issuing and redeeming                                          
  securities                                                  264           4,964          14,948
Federal income tax - deferred and other                      --            56,966          76,052
Allowance for other funds used during construction           (690)           (418)         (1,923)
Pensions and Other Post Retirement Benefits                  --            12,873          13,265
Gas Cost Adjustment                                          --             5,369          (1,495)
Other                                                        (437)         36,099          47,396
Changes in operating assets and liabilities                                            
   Accounts receivable, net                               (64,702)         53,765          (9,529)
   Accrued unbilled revenues                              (11,791)         47,465          22,463
   Materials and supplies, fuel oil and gas in                                         
     storage                                                 --           (31,238)        (55,590)
   Accounts payable and accrued expenses                     --            21,068          12,695
   Net change in due to the Authority and KeySpan         457,386            --              --
   Pensions and other post retirement benefits               --          (250,000)           --
   Accrued taxes                                           75,734          15,924           5,983
   Accrued interest                                        52,331         (38,393)          3,322
   Class Settlement                                          --            (6,918)        (30,456)
   Special deposits                                          --            66,492         (28,683)
   Other                                                  (11,930)        (54,725)        (45,595)
                                                      -----------       ---------       ---------
Net Cash Provided by (used in) Operating Activities       691,090        (179,290)        353,147
                                                      -----------       ---------       ---------
Investing Activities                                                                   
Construction and nuclear fuel expenditures                (31,769)        (66,493)       (117,468)
Shoreham post settlement costs                               --            (6,650)        (20,936)
Establish designated funds                               (280,006)           --              --
Investment in subsidiary                                     --              --           (30,000)
Acquisition of common stock                            (2,497,500)           --              --
Merger costs, net of cash transferred                     (61,789)           --              --
Other                                                        --            (2,009)         (1,293)
                                                      -----------       ---------       ---------
Net Cash Used in Investing Activities                  (2,871,064)        (75,152)       (169,697)
                                                      -----------       ---------       ---------
Financing Activities                                                                   
Proceeds from sale of common stock                           --             4,184           9,034
Issuance of notes payable                                    --           350,000            --
Proceeds of note payable - parent                       4,949,528            --              --
Repayment of note payable - parent                       (831,928)           --              --
Redemption of long-term debt                           (1,186,000)       (100,000)           --
Issuance of preferred stock                                  --            75,000            --
Redemption  of preferred stock                           (221,600)       (116,390)         (1,050)
Bond issuance costs                                       (48,316)           --              --
Preferred stock dividends paid                               --            (5,711)        (25,937)
Common stock dividends paid                                  --           (54,147)       (107,754)
Other                                                      (3,990)         (2,749)           (797)
                                                      -----------       ---------       ---------
Net cash Provided by (used in) Financing Activities     2,657,694         150,187        (126,504)
                                                      -----------       ---------       ---------
Net Increase (Decrease) in Cash and Cash Equivalents      477,720        (104,255)         56,946
Cash and cash equivalents at beginning of period           75,000         180,919          64,539
                                                      -----------       ---------       ---------
Cash and cash equivalents at end of period            $   552,720       $  76,664       $ 121,485
                                                      ===========       =========       =========
</TABLE>
                                                                               
   The accompanying notes are an integral part of these financial statements.

<PAGE>

                                                                               7


Long Island Lighting Company d/b/a LIPA
(a wholly owned subsidiary of the Long Island Power Authority)

Notes to Financial Statements
For the Three Months Ended September 30, 1998
(Unaudited)
--------------------------------------------------------------------------------

1.   Basis of Presentation

     As used herein, the term "LILCO" means the Long Island Lighting Company,
     the publicly owned gas and electric utility company as it existed prior to
     the LIPA/LILCO merger, as described in Note 2 below, and the term "LIPA"
     means that company as it exists after the LIPA/LILCO merger as a
     wholly-owned electric utility subsidiary company of the Long Island Power
     Authority (the "Authority"), doing business as LIPA.

     These Notes to Financial Statements reflect events subsequent to May 22,
     1998, the date of the most recent Report of Independent Accountants,
     through the date of this Report on Form 10-Q for the three months ended
     September 30, 1998. These Notes to Financial Statements should be read in
     conjunction with Management's Discussion and Analysis of Financial
     Condition and Results of Operations for the three and six months ended
     September 30, 1998, LIPA's Quarterly Report on Form 10-Q for the three
     months ended June 30, 1998, LILCO's Audited Financial Statements for the
     year ended March 31, 1998, and the transition period from January 1, 1997
     to March 31, 1997. In addition, please refer to the discussion following
     regarding the change in control of LILCO on May 28, 1998.

     The financial information as of September 30, 1998 and 1997, and for the
     periods in the three and six months then ended is unaudited. However, in
     the opinion of management, the financial statements include all
     adjustments, consisting of normal recurring accruals, necessary for a fair
     presentation of the financial statements for the periods presented.
     Operating results for any of the periods presented are not necessarily
     indicative of results to be expected for the entire year due to the
     seasonal nature of the electric business.

2.   Change in Control

     On May 28, 1998, LIPA Acquisition Corp., a wholly-owned subsidiary of the
     Authority, was merged with and into LILCO (the "Merger") pursuant to an
     Agreement and Plan of Merger dated as of June 26, 1997, by and among LILCO,
     MarketSpan Corporation (formerly known as BL Holding Corp., and currently
     known as KeySpan Energy Corporation, "KeySpan"), the Authority and LIPA
     Acquisition Corp., (the "Merger Agreement"). As a result of the Merger, the
     Authority became the holder of 100 shares of LILCO's common stock,
     representing 100% of the outstanding voting securities of LILCO. The former
     holders of LILCO's common stock, which was widely held by the public,
     received a pro-rata share of (i) cash consideration of $2,497,500,000 and
     (ii) 3,440,625 shares of the common stock of KeySpan, which were received
     by LILCO in exchange for certain assets of LILCO transferred to
     subsidiaries of KeySpan. Pursuant to the Merger Agreement, the former
     holders of LILCO's common stock (other than holders of dissenting shares)
     were deemed to have subscribed for additional shares of the common stock of
     KeySpan, with an aggregate purchase price equal to the cash consideration.
     In order to effect the Merger, it was necessary to (i) retire all shares of
     LILCO's preferred stock, whether by conversion, redemption or cancellation,
     and (ii) redeem certain of LILCO's bonds, at an additional cost to LIPA of
     approximately $1,556,900,000. The cash
<PAGE>

                                                                               8


Long Island Lighting Company d/b/a LIPA
(a wholly owned subsidiary of the Long Island Power Authority)

Notes to Financial Statements
For the Three Months Ended September 30, 1998
(Unaudited)
--------------------------------------------------------------------------------

     consideration required for the Merger was obtained by the Authority from
     the proceeds of the issuance and sale of its Electric System General
     Revenue Bonds, Series 1998A and Electric System Subordinated Revenue Bonds,
     Series 1 through Series 6. The proceeds from the sale of the bonds were
     then transferred by the Authority to LIPA in exchange for a promissory note
     of approximately $4,949,000,000. As a result of the Merger, there was a
     change in control of LILCO which effectively resulted in the creation of a
     new reporting entity (the "Successor Company"). Accordingly, the
     accompanying financial statements for the periods prior to and including
     May 28, 1998 (the "Predecessor Company") are not comparable to the
     financial statements presented subsequent to May 28, 1998. A black line has
     been drawn on the accompanying financial statements to distinguish between
     the Successor and Predecessor Company balances and activity.

     Pursuant to the Merger Agreement, on May 28, 1998, immediately prior to the
     Merger, all of the assets of LILCO 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 KeySpan. The consideration for the
     Transferred Assets consisted of (i) 3,440,625 shares of the common stock of
     KeySpan, (ii) 553,000 shares of the Series B Preferred Stock of KeySpan,
     (iii) 197,000 shares of the Series C Preferred Stock of KeySpan and (iv)
     promissory notes of $962,900,000. The interest rate and timing of principal
     and interest payments on the promissory notes from KeySpan are identical to
     the terms of certain Predecessor Company indebtedness assumed by the
     Successor Company in the Merger, but issued to finance assets transferred
     to KeySpan subsidiaries. KeySpan will make principal and interest payments
     to the Successor Company, when due, and the Successor Company will transfer
     those amounts to debtholders.

     The value of the consideration was determined by KeySpan and the
     Predecessor Company to be equal to the net fair market value of the
     Transferred Assets. The Transfer was effected by a Bill of Sale, dated as
     of May 28, 1998, made and executed by LILCO and acknowledged by KeySpan.
     The remaining assets and liabilities of LILCO acquired by LIPA consist of:
     (i) LILCO's electric transmission and distribution system, (ii) its net
     investment in Nine Mile Point Nuclear Power Station, Unit 2 ("NMP2"), (iii)
     certain regulatory assets and liabilities associated with its electric
     business, (iv) allocated accounts receivable and other assets and
     liabilities and (v) substantially all of its long-term debt.

     The financial statements of the Successor Company include the push down of
     the Authority's basis, including costs related to the acquisition, in the
     assets acquired and liabilities assumed. Because of the manner in which the
     Successor Company's rates and charges will be established by the Authority,
     the original net book value of the transmission and distribution and
     nuclear generation assets acquired in the Merger is considered to be their
     fair value. Because the New York State Public Service Commission will no
     longer have regulatory oversight of the Successor Company, all regulatory
     assets and liabilities, as well as the amortization of those assets and
     liabilities, were eliminated from the financial statements for the periods
     after May 29, 1998. The excess of the acquisition costs over the fair value
     of the net assets acquired has been recorded as an intangible asset titled
     "acquisition 


<PAGE>

                                                                               9


Long Island Lighting Company d/b/a LIPA
(a wholly owned subsidiary of the Long Island Power Authority)

Notes to Financial Statements
For the Three Months Ended September 30, 1998
(Unaudited)
--------------------------------------------------------------------------------

     adjustment" and is being amortized over a 35 year period, the weighted
     average useful life of the net plant assets acquired.

     The Authority was established as a corporate municipal instrumentality of
     the State of New York, constituting a political subdivision of the State,
     created by Chapter 517 of the Laws of 1986 (the "LIPA Act"). As such, it is
     a component unit of the State and is included in the State's annual
     financial statements. As a wholly-owned subsidiary of the Authority, the
     Successor Company is exempt from Federal, state and local income taxes. In
     addition, effective May 29, 1998, the Successor Company's financial
     statements have been prepared in accordance with standards applicable to
     governmental entities.

3.   Discontinued Operations

     The income statement of the Predecessor Company for the period April 1,
     1998 to May 28, 1998 has been prepared to present the gas business (as
     transferred to KeySpan subsidiaries pursuant to the Merger Agreement) as a
     discontinued operation, in accordance with the provisions of APB 30. The
     income statements for the three and six months ended September 30, 1997,
     has also been restated to present the gas business in a similar manner.

     The income from discontinued operations includes revenue from the gas
     business of approximately $79,979,000, $62,078,000 and $166,480,000 for the
     period April 1, 1998 to May 28, 1998, and the three and six months ended
     September 30, 1997, respectively.

4.   Commitments and Contingencies

     The cash consideration portion of the Merger Agreement was based upon
     preliminary estimated values of the LIPA acquired assets and assumed
     liabilities, as reflected in the financial records of the Predecessor
     Company at May 28, 1998. The promissory notes from KeySpan have been
     adjusted at May 28, 1998 to reflect the refinement of estimated values as
     of that date. The promissory notes from KeySpan will be further adjusted,
     pursuant to the Merger Agreement, based upon a final determination of the
     actual value of acquired net assets as of that date as agreed to by the
     Successor Company and KeySpan.

5.   Capitalization

     On May 29,1998, the Successor Company received approximately $4,949,000,000
     from the Authority in exchange for a promissory note. The interest rate on
     the note is equal to the interest rate paid by the Authority on certain
     bonds issued to the public (5.4% at September 30, 1998) and the note will
     be repaid through revenues collected by the Successor Company from electric
     customers. The note is collateralized by those revenues. The proceeds of
     this note were used primarily to (i) repay certain

<PAGE>

                                                                              10


Long Island Lighting Company d/b/a LIPA
(a wholly owned subsidiary of the Long Island Power Authority)

Notes to Financial Statements
For the Three Months Ended September 30, 1998
(Unaudited)
--------------------------------------------------------------------------------

     debt of $1,186,000,000, (ii) redeem preferred stock of $339,100,000 (iii)
     establish certain restricted funds of $311,495,000 and (iv) to acquire all
     of the then outstanding common stock of LILCO for $2,497,500,000.

6.   Management Fees and Contract Costs

     The expenses of the Successor Company for the period May 29, 1998 to
     September 30, 1998, reflect charges by the Authority of management fees
     equal to the Authority's employee and overhead costs, as well as the costs
     of certain contracts entered into by the Successor Company with KeySpan for
     the management of its assets.

7.   Reclassifications

     Certain prior period amounts have been reclassified in the financial
     statements to conform with the current period presentation.

8.   Rate Matters

     Under current New York law, the Authority is empowered to set rates for
     electric service in the Successor Company's service area without being
     required by law to obtain the approval of the New York State Public Service
     Commission (the "PSC") or any other State regulatory body. However, the
     Authority has agreed, in connection with the approval of the Merger by the
     New York State Public Authorities Control Board (the "PACB"), that it will
     not impose any permanent increase, nor extend or reestablish any portion of
     a temporary rate increase, in average customer rates over a 12 month period
     in excess of 2.5% without approval of the PSC, following a full evidentiary
     hearing. Another of the PACB conditions requires that the Authority reduce
     average rates within the Successor Company's service area by no less than
     14% over a ten year period commencing on the date when the Successor
     Company began providing electric service, when measured against the
     Predecessor Company's base rates in effect on July 16, 1997 (excluding the
     impact of the Shoreham tax settlement, but adjusted to reflect emergency
     conditions and extraordinary unforeseeable events.)

     The LIPA Act requires that any bond resolution of the Authority contain a
     covenant that it will at all times maintain rates, fees or charges
     sufficient to pay the costs of operation and maintenance of facilities
     owned or operated by the Authority; payments in lieu of taxes; renewals,
     replacements and capital additions; the principal of and interest on any
     obligations issued pursuant to such resolution as the same become due and
     payable, and to establish or maintain any reserves or other funds or
     accounts required or established by or pursuant to the terms of such
     resolution.

     Absent emergency conditions and unforeseeable events, LIPA expects to
     achieve an average rate reduction of no less than 14% over the ten year
     period for customers of the Successor Company, commencing on the date of
     the Merger and the Authority does not expect to increase average customer
     rates in excess of 2.5% over any 12 month period during the ten-year period
     following the date of the Merger. For purposes of determining compliance
     with the 2.5% and 14% PACB 

<PAGE>

                                                                              11


Long Island Lighting Company d/b/a LIPA
(a wholly owned subsidiary of the Long Island Power Authority)

Notes to Financial Statements
For the Three Months Ended September 30, 1998
(Unaudited)
--------------------------------------------------------------------------------

     conditions described in the first paragraph of this section, the Authority
     has interpreted the PACB conditions as allowing the exclusion of increases
     in the cost of electricity paid by the Successor Company's customers
     related to the Shoreham settlement, other pass-through adjustments and any
     decreases related to the RICO Credits. The Authority believes that it will
     be able to satisfy the 14% PACB condition and that it will be able to
     obtain any PSC approvals necessary to comply with its obligations under the
     LIPA Act and under the Authority's bond resolutions. If either the PSC or
     the PACB were to disagree with the Authority's interpretation of the PACB
     conditions, it may influence the timing and amount of rate increases
     implemented by the Authority and/or require (i) the modification of that
     portion of the Authority's plan to accelerate retirement of debt, (ii) the
     withdrawal of funds from the Rate Stabilization Fund to avoid or minimize
     rate increases, or (iii) other actions necessary to meet the conditions of
     the PACB approval.

     The Successor Company's rates are largely based on the Predecessor
     Company's pre-Merger rate design to avoid customer confusion and facilitate
     an efficient transition from Predecessor Company billing to Successor
     Company billing. In addition, the Successor Company's rates include a fuel
     and purchased power cost adjustment ("FPPCA"), a payment in lieu of taxes
     ("PILOT") payments recovery rider, a rider providing for the Shoreham
     Credits and the Suffolk Surcharge and a rider providing for the RICO
     Credits.

     The Successor Company's rates include the FPPCA to adjust rates to reflect
     significant changes in the cost of fuel, purchased power and related costs.
     The FPPCA is designed such that customers will not pay for average annual
     increases above an established base fuel and purchased power cost, or
     receive a credit for decreases below an established base cost, of less than
     one percent per year. Expenses for fuel and purchased power cost in excess
     of or below this level will be recovered from or returned to customers
     beginning the following year. Should fuel and purchased power costs
     increase in excess of five percent cumulatively over the original base
     cost, the FPPCA will recover, from that year forward, all costs in excess
     of the original base.

     The LIPA Act requires the Successor Company to make PILOTs to
     municipalities and school districts equal to the property taxes that would
     have been received by each such jurisdiction from the Predecessor Company
     if the acquisition of the Successor Company by the Authority had not
     occurred, and to make PILOTs for certain New York State and local taxes
     which would otherwise have been imposed on the Predecessor Company. The
     PILOT payments recovery rider allows for the Successor Company's rate
     adjustments to accommodate the PILOTs.

     Pre-Merger Rate Matters

     In December 1997, the PSC approved the continuation of the following
     Predecessor Company ratemaking mechanisms for the rate year ended November
     30, 1997: (a) the gas excess earnings mechanism whereby earnings in excess
     of a return on common equity of 11.0% was allocated equally between
     ratepayers and shareowners, with the ratepayers' share of excess earnings
     credited to the regulatory asset created as a result of costs associated
     with manufactured gas plant site investigation

<PAGE>

                                                                              12


Long Island Lighting Company d/b/a LIPA
(a wholly owned subsidiary of the Long Island Power Authority)

Notes to Financial Statements
For the Three Months Ended September 30, 1998
(Unaudited)
--------------------------------------------------------------------------------

     and remediation costs; and (b) the electric Rate Moderation Component
     ("RMC") and the Long Island Lighting Company Ratemaking and Performance
     Plan ("LRPP") mechanisms and performance incentive programs.

     Electric

     In April 1996, the PSC issued an order directing the Predecessor Company to
     file financial and other information sufficient to provide a legal basis
     for setting new rates for the three-year period 1997 through 1999. In
     compliance with the order, the Predecessor Company submitted a multi-year
     rate plan to be reviewed by the PSC. As an interim measure, pending the
     consummation of the Merger or the adjudication of its electric rate filing,
     the Predecessor Company submitted petitions in May 1997 and December 1997
     requesting PSC approval to extend, through the rate years ending November
     30, 1996 and 1997, respectively, the provisions of its 1995 electric rate
     order ( the "1995 Order"). These petitions were approved by the PSC in
     December 1997 and April 1998, respectively.

     The basis of the 1995 Order included minimizing future electric rate
     increases while continuing to provide for the recovery of the Predecessor
     Company's regulatory assets and retaining consistency with the rate
     moderation agreement objective of restoring the Predecessor Company to
     financial health. The 1995 Order, which became effective December 1, 1994,
     froze base electric rates, reduced the Predecessor Company's allowed return
     on common equity from 11.6% to 11.0% and modified or eliminated certain
     performance based incentives.

     For the rate year ended November 30, 1997, the Predecessor Company earned
     12.7 basis points, or approximately $2.9 million, net of tax effects, as a
     result of its performance under all incentive programs.

     The deferred balances resulting from the net margin and expense
     reconciliations, and earned performance-based incentives are netted at the
     end of each rate year under the 1995 Order. The first $15 million of the
     total deferral was recovered from or credited to ratepayers by increasing
     or decreasing the RMC balance. Deferrals in excess of the $15 million, upon
     approval of the PSC, were refunded to or recovered from the customers
     through the FCA mechanism over a 12-month period. For the rate year ended
     November 30, 1997, the amount to be returned to customers resulting from
     the revenue and expense reconciliations, performance-based incentive
     programs and associated carrying charges totaled $4.1 million. Consistent
     with the mechanics of the LRPP, it is anticipated that the entire balance
     of the deferral will be used to reduce the RMC balance upon approval by the
     PSC of the Predecessor Company's reconciliation filing which was submitted
     to the PSC in March 1998. For the rate year ended November 30, 1996, the
     Predecessor Company recorded a net deferred LRPP credit of approximately
     $14.5 million which was subsequently applied as a reduction to the RMC upon
     the PSC's approval of the Predecessor Company's reconciliation filing in
     December 1996. For the rate year ended November 30, 1995, the Predecessor
     Company recorded a net deferred credit of approximately $41 million. The
     first $15 million of the deferral was applied as a reduction to the RMC
     while the remaining portion of the deferral of $26 million will be returned
     to customers through the fuel cost adjustment when approved by the PSC.
     Another mechanism of the LRPP provided that earnings in excess of the
     allowed return on common

<PAGE>

                                                                              13


Long Island Lighting Company d/b/a LIPA
(a wholly owned subsidiary of the Long Island Power Authority)

Notes to Financial Statements
For the Three Months Ended September 30, 1998
(Unaudited)
--------------------------------------------------------------------------------

     equity, excluding the impacts of the various incentive and/or penalty
     programs, were used to reduce the RMC. For the rate years ended November
     30, 1997, 1996 and 1995, the Predecessor Company earned $4.8 million, $9.1
     million, and $6.2 million, respectively, in excess of its allowed return on
     common equity. These excess earnings were applied as reductions to the RMC.

     Gas

     In May 1997, the Predecessor Company submitted a petition requesting PSC
     approval to extend through the rate year ending November 30, 1997, the gas
     excess earnings sharing mechanism established in its prior three-year gas
     rate settlement agreement which expired on November 30, 1996. Pursuant to
     this request, earnings in excess of a return on common equity of 11.0% were
     to be allocated equally between customers and shareowners with the
     customers' share of excess earnings credited to the regulatory asset
     created as a result of costs associated with manufactured gas plant ("MGP")
     site investigation and remediation costs. This request was approved by the
     PSC in December 1997. As a result of this mechanism, the customer's
     allocation of excess earnings amounted to $6.3 million for the rate year
     ended November 30, 1997, and through the date of the Merger, was to be
     applied to offset costs incurred to investigate and remediate MGP sites.
     The prior gas rate settlement provided that earnings in excess of a 10.6%
     return on common equity be shared equally between the Predecessor Company's
     firm gas customers and its shareowners. For the rate years ended November
     30, 1996 and 1995, the firm gas customers' portion of gas excess earnings
     totaled approximately $10 million and $1 million, respectively. In 1997,
     the Predecessor Company was granted permission by the PSC to apply the
     customers' portion of the gas excess earnings and associated carrying
     charges for the 1996 and 1995 rate years to the recovery of deferred costs
     associated with post-retirement benefits other than pensions and costs
     incurred for investigation and remediation of MGP sites.

<PAGE>

                                                                              14


Long Island Lighting Company d/b/a LIPA
(a wholly owned subsidiary of the Long Island Power Authority)

Notes to Financial Statements
For the Three Months Ended September 30, 1998
(Unaudited)
--------------------------------------------------------------------------------

9.   Subsequent Events

     On October 12, 1998, LIPA commenced a tender offer for its 7.30% Debentures
     Due 2000, 6.25% Debentures Due 2001, 7.05% Debentures Due 2003, 7.00%
     Debentures Due 2004, 7.125% Debentures Due 2005 and 9.00% Debentures Due
     2022 (collectively, the "Debentures"). In conjunction with the tender
     offers, LIPA also commenced a consent solicitation from the holders of the
     Debentures to effect an amendment to the indentures under which the
     Debentures were issued. The amendment deletes an inoperative provision in
     the indentures. As of October 26, 1998, the requisite consents for the
     amendment to the indentures were received. The tender offers for the
     Debentures expired at 5:00 p.m., New York City time, on November 9, 1998,
     and LIPA purchased an aggregate principal amount of Debentures including
     accrued interest in the amount of $1,131,671,323 on November 12, 1998
     pursuant to the tender offers. Payment for Debentures purchased pursuant to
     the tender offers was made from the sale of $1,313,800,000 Electric System
     General Revenue Bonds, Series 1998B (the "Refinancing Bonds") of the
     Authority which closed on November 12, 1998. Under the terms of the
     financing agreement dated as of May 1, 1998, between LIPA and the
     Authority, a portion of the proceeds from the sale of the Refinancing Bonds
     were advanced to LIPA to fund payment for the tendered Debentures. In
     addition, on November 12, 1998, the Authority closed the sale of
     $250,000,000 Electric System Subordinated Revenue Bonds, Series 7.

     On October 26, 1998 LIPA sent a notice of redemption to the holders of its
     7.50% Debentures Due 2007 calling for redemption on November 25, 1998 all
     of such debentures at a redemption price equal to 103.54% of the
     $142,000,000 aggregate principal amount outstanding. In addition, on
     October 27, 1998 LIPA sent a notice of redemption to the holders of its
     8.90% Debentures Due 2019 calling for redemption on November 27, 1998 all
     of such debentures at a redemption price equal to 105.94% of the
     $420,000,000 aggregate principal amount outstanding.

     On November 12, 1998, LIPA defeased certain of its New York State Energy
     Research and Development Authority notes in the amount of $379,246,422.

     In October 1998 the Board of Trustees of the Authority approved and LIPA
     subsequently issued rebate checks to customers totaling approximately
     $158.7 million and also provided credits against certain customers
     statements totaling approximately $9.7 million.

<PAGE>

                                                                              15


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

     Cautionary Statement Regarding Forward-Looking Statements

     This report contains statements which, to the extent they are not
     recitations of historical fact, constitute "forward-looking statements"
     within the meaning of the Securities Litigation Reform Act of 1996. In this
     respect, the words "estimate," "project," "anticipate," "expect," "intend,"
     "believe" and similar expressions are intended to identify forward-looking
     statements. All such forward-looking statements are intended to be subject
     to the safe harbor protection provided by the Reform Act. A number of
     important factors affecting the Registrant's business and financial results
     could cause actual results to differ materially from those stated in the
     forward-looking statements. Those factors include state and federal
     regulatory rate proceedings, competition, and certain environmental matters
     each as discussed herein, in the Registrant's Annual Report on Form 10-K
     filed May 28, 1998, for the year ended March 31, 1998, or in other reports
     filed by the Registrant with the Securities and Exchange Commission.

     General

     Effective May 29, 1998, MarketSpan (currently known as KeySpan Energy
     Corporation, "KeySpan"), provides operations and management services for
     the transmission and distribution system of the Successor Company through a
     management services agreement. The Successor Company contracts for capacity
     from the fossil fired generating plants of KeySpan through a power supply
     agreement. Energy is purchased by KeySpan on the Successor Company's behalf
     through an energy management agreement.

     The following table combines the condensed results of operations of both
     the Predecessor and Successor Companies in order to facilitate comparison
     of the six months ended September 30, 1998 and 1997.

<TABLE>
<CAPTION>
                                      Successor          Predecessor                              Predecessor
                                       Company             Company              Total               Company
                                  ------------------  ------------------  -------------------  ------------------
                                   May 29,1998 to     April 1, 1998 to     April 1, 1998 to    April 1, 1997 to
                                    September 30,          May 28,          September 30,        September 30,
                                        1998                1998                 1998                1997
                                  ------------------  ------------------  -------------------  ------------------
                                   (in thousands)      (in thousands)       (in thousands)      (in thousands)
<S>                                   <C>                <C>                  <C>                  <C>       
Electric Revenues                     $896,437           $ 330,011            $1,226,448           $1,350,417
Operating Expenses                     648,126             143,850               791,976              969,880
Other Income and (Deductions)           15,311            (158,265)             (142,954)               5,967
Interest Charges                       137,131              65,518               202,649              203,813
Income (Loss) from
    Continuing Operations             $126,491           $ (37,622)               88,869              182,691
</TABLE>

     The table highlights the effects of the Merger, which includes lower
     electric revenues as a result of the Successor Company's rate reduction
     (approximately 20% for all customers effective May 29, 1998).

     As a result of the Merger, the New York Public Service Commission does not
     have jurisdiction over the Successor Company with respect to the
     determination of rates and charges. Rates and  

<PAGE>

                                                                              16


     charges for the Successor Company will be determined by the Authority.
     Therefore, adjustments were made on May 29, 1998 to eliminate all
     regulatory assets and liabilities on the balance sheet; accordingly, the
     results of operations for the period May 29, 1998 to September 30, 1998
     exclude the amortization of such amounts. In addition, adjustments were
     made by the Successor Company on May 29, 1998 to eliminate deferred tax
     assets and liabilities due to the tax exempt status of the Authority.
     Therefore, the results of operations for the period May 29, 1998 to
     September 30, 1998 do not include a provision for income taxes.

     Earnings per Common Share

     Net losses for the period beginning April 1, 1998 and ending May 28, 1998
     were $9.4 million or $0.08 per common share. Earnings for common stock for
     the six months ended September 30, 1997, were $163.6 million or $1.35 per
     common share.

     The results for the period ended May 28, 1998 were negatively impacted by
     merger-related expenses such as legal, accounting, financial and tax
     consultants, certain severance payments made to Predecessor Company
     officers, and Federal income taxes resulting from the Merger. These items
     were partially offset by the positive impact on earnings caused by the
     change in method of amortizing the Rate Moderation Component (RMC)
     discussed below under the caption regulatory amortization.

     Revenues

     Electric

     The decrease in electric revenues of approximately $96.6 million and $124.0
     million for the three and six months ended September 30, 1998,
     respectively, when compared to the same period in 1997, was principally the
     result of the 20% rate reduction, for all customers, effective May 29,
     1998. Partially offsetting the reduction in revenues was an increase in
     usage by existing customers which may be attributable to a number of
     factors including the relative humidity, timing of hot weather, a strong
     and growing economy and price elasticity reflecting the effect of the
     Successor Company's 20% rate reduction.

     Fuel and Purchased Power

     Fuel and purchased power expense for the three and six months ended
     September 30, 1998 and 1997, were as follows:

<TABLE>
<CAPTION>
                                  Three Months Ended                      Six Months Ended
                             September 30,      September 30,       September 30,     September 30,
                                 1998               1997               1998                1997
                            -------------      -------------       -------------      -------------
                            (in millions)      (in millions)       (in millions)      (in millions)
<S>                             <C>                <C>                 <C>                <C> 
Oil                             $ 35               $ 32                $ 62               $ 50
Gas                               53                 59                  96                111
Nuclear                            2                  3                   3                  7
Purchased                         83                 78                 171                153
                                ----               ----                ----               ----
           Total                $173               $172                $332               $321
                                ====               ====                ====               ====
</TABLE>

<PAGE>

                                                                              17


     For the three and six months periods ended September 30, 1998, electric
     fuel costs increased, when compared to the same periods in 1997. The
     increase for the three and six month periods ended September 30, 1998, is
     primarily the result of higher sales volumes caused by warmer weather.
     However, the increase in fuel costs was mitigated as a result of an
     agreement between the Authority and KeySpan which requires that the most
     economical energy be delivered, whether that comes from generation owned by
     KeySpan or purchased from other sources. As a result of this agreement, oil
     fired generation was increased and production with less economical gas was
     reduced.

     Electric Energy Available

     The percentage of total electric energy available, by type of fuel, for
     electric operations for the three and six months ended September 30, 1998
     and 1997 were as follows:

<TABLE>
<CAPTION>
                                 Three Months Ended                      Six Months Ended
                             September 30,      September 30,       September 30,     September 30,
                                 1998               1997               1998                1997
                            -------------      -------------       -------------      -------------
                            (in millions)      (in millions)       (in millions)      (in millions)
<S>                              <C>                <C>                  <C>                 <C>
Oil                              26%                16%                  24%                 14%
Gas                              37%                47%                  35%                 46%
Nuclear                           7%                 8%                   6%                  8%
Purchased                        30%                29%                  35%                 32%
                                ---                ---                  ---                 --- 
        Total                   100%               100%                 100%                100%
                                ===                ===                  ===                 === 
</TABLE>

     Operations and Maintenance

     Operations and Maintenance, ("O&M"), expense increased approximately $93
     million during the three month period ended September 30, 1998, when
     compared to the comparable period in 1997. The increase is primarily due to
     the manner in which the Predecessor Company classifies certain expenses
     such as depreciation and amortization, property taxes, payroll and other
     operating taxes. These costs are incurred by the Successor Company as part
     of the costs of certain contracts entered into by the Authority with
     KeySpan for the management of the Successor Company's assets and are
     classified as O&M expense by the Successor Company. In addition, there were
     charges incurred by the Successor Company related to the overhead expenses
     of the Authority and an increase in storm costs.

     For the six month period ended September 30, 1998, O&M increased by
     approximately $98 million as a result of the items noted above plus higher
     accruals for doubtful accounts and the recognition of certain employee
     benefit expenses recognized during the period April 1, 1998 through May 28,
     1998.

     Depreciation and amortization

     Depreciation and amortization expense increased for the three and six month
     periods ended September 30, 1998 when compared to the same periods of the
     prior year primarily as a result of the amortization of acquisition costs
     totaling approximately $10 million per month beginning June 1998. This
     increase was partially offset by the absence of depreciation expense on the

<PAGE>

                                                                              18


     Predecessor Company's non-nuclear generating assets which is included in
     O&M as it is part of the management services agreement billings.

     Operating taxes

     Operating taxes decreased during the three and six month periods ended
     September 1998, when compared to the comparable periods of 1997, as a
     result of the absence of property and payroll taxes related to the
     operation of the non-nuclear generating facilities of the Predecessor
     Company and reduced revenue taxes (due to lower revenues) partially offset
     by the PILOTS on the Shoreham Nuclear Power Station (Predecessor Company
     was able to capitalize these PILOTS under its electric rate structure).
     Regulatory amortization

     For the three month period ended September 30, 1998, the amortization of
     various regulatory assets and liabilities were not recorded as a result of
     the adjustments made on May 29, 1998, to eliminate the related regulatory
     assets and liabilities.

     The Rate Moderation Component ("RMC") reflected the difference between the
     Predecessor Company's electric revenue requirements under conventional
     ratemaking and the revenues provided by the rate structure in effect
     through May 28, 1998. The RMC amortization was adjusted by the operation of
     the Predecessor Company's Fuel Moderation Component ("FMC") mechanism and
     the difference between the Predecessor Company's share of actual operating
     costs at NMP2 and amounts provided for in electric rates.

     Included in the six month period ended September 30, 1998, however, was a
     non-cash credit to income of approximately $39.6 million, (recorded during
     the period April 1, 1998 through May 28, 1998), compared to a non-cash
     charge of $18.3 million for the comparable period in 1997.

     In December 1997, the Predecessor Company petitioned the New York State
     Public Service Commission ("PSC") to change the monthly amortization of the
     RMC to a method designed to compensate for the seasonality of the electric
     business. Accordingly, effective December 1, 1997, the Predecessor Company
     began recording RMC amortization on a non-levelized basis. Previously, the
     Predecessor Company had amortized the RMC on a straight-line basis over
     each 12 month period beginning December 1. As a result of the above change,
     for the period from April 1, 1998 to May 28, 1998, the Predecessor Company
     recorded non-cash credits of $46.5 million more than it would have under
     the previous method.

     Federal Income Tax

     The decrease in operating Federal income tax expense for the three and six
     months ended September 30, 1998, when compared to the same period in 1997,
     was principally the result of the fact that the Successor Company is not
     subject to Federal income taxes, various adjustments related to the Merger,
     and a decrease in operating pretax book income.

     The increase in non-operating Federal income tax expense of approximately
     $246 million for the six months ended September 30, 1998, when compared to
     the same period in 1997, was principally the result of an increase in
     non-operating pretax income, various adjustments related to the Merger, the
     reversal of previously recognized tax benefits because of the settlement of
     an IRS audit for tax years 1981 through 1989, partially offset by the fact
     that the Successor Company is not subject to Federal income taxes.

<PAGE>

                                                                              19


     Other Income and Deductions

     The increase in the other income and deductions of approximately $98
     million for the six months ended September 30, 1998, when compared to the
     same period in 1997 was primarily due to a settlement reached with the IRS
     in May 1998, by the Predecessor Company with respect to an audit covering
     the years 1981 to 1989. As a result of the settlement, the Predecessor
     Company released previously established reserves of approximately $117
     million. The release of these reserves had no impact on earnings as the
     reversal of the reserve in May was offset by an increase in tax expense
     during this period. In addition, there was an increase in interest income
     of approximately $15 million due to excess cash maintained by the Successor
     Company from the proceeds of the promissory note from the Authority. These
     increases were partially offset by approximately $36 million of merger
     related expenses recognized by the Predecessor Company during the period
     April 1, 1998 to May 28, 1998.

     The increase in other income and deductions of approximately $8 million for
     the three months ended September 30, 1998, when compared to the same period
     in 1997, was primarily due to an increase in interest income resulting from
     excess cash maintained by the Successor Company from the proceeds of the
     promissory note from the Authority.

     Liquidity and Capital Resources

     At September 30, 1998, LIPA had cash and cash equivalents of $552.7
     million. In addition, LIPA had designated funds aggregating $280.0 million
     on hand, $142.5 million and $103.5 million of which are available to fund a
     portion of the rebate checks to customers and capital expenditures,
     respectively. See "Financial Statements - Notes to Financial Statements -
     Subsequent Events." In addition, pursuant to a financing agreement between
     LIPA and the Authority dated May 1, 1998 (the "Financing Agreement"), at
     September 30, 1998, LIPA had an additional $335.5 million available to it
     from the Authority. Pursuant to the Financing Agreement, all cash generated
     by the assets of LIPA are paid immediately to the Authority, which in turn
     disburses monies for payment of the expenses of the Authority and LIPA.

     During the remainder of 1998, LIPA plans to use cash for the purchase of
     certain of its outstanding debentures pursuant to a tender offer, the
     redemption of certain of its debentures and the defeasance of certain of
     its New York State Energy Research and Development Authority ("NYSERDA")
     notes. See "Financial Statements - Notes to Financial Statements -
     Subsequent Events." During the twelve months subsequent to September 30,
     1998, LIPA intends to refinance $169.8 million of its NYSERDA notes, and
     capital expenditures are expected to be made by LIPA in the ordinary course
     of business for purposes of the normal upgrading and expansion of its
     system. In addition, the collection of electric revenues from customers is
     expected to be sufficient to meet LIPA's operating needs and debt service
     requirements for at least the twelve months subsequent to September 30,
     1998.

     Impact of Year 2000

     The Authority recently purchased new computer software to support certain
     activities of the Successor Company and believes that these systems will be
     Year 2000 compliant. Management also believes that, based on available
     information, it will be able to manage its Year 2000 transition for systems
     and infrastructure, without any material adverse effect on its business
     operations or financial prospects. However, there can be no assurance that
     failure to resolve any issue relating to such transition would not have a
     material adverse effect on the Successor Company. The Successor Company has
     had discussions with KeySpan, their largest vendor, who is responsible for
     the management and operation of the Successor Company's transmission and
     distribution system, and KeySpan has indicated that they have evaluated the
     extent to which modifications to its computer software, hardware and
     database will be necessary to accommodate the year 2000. KeySpan's computer
     applications are generally based on two digits and do require some
     additional programming to recognize the start of the new millennium. A
     corporate-wide program has been established by KeySpan to review all
     software, hardware, embedded systems and associated compliance plans of
     KeySpan and its subsidiaries. The program includes both information
     technology (IT) and non-IT systems. The critical non-IT systems are
     generally in the areas of electric production, distribution, transmission,
     gas distribution and communications. The readiness of suppliers and vendor
     systems is also under review. The project is under the direction of the
     Year 2000 Program Office, chaired by the Vice President, Technology
     Operations and Corporate Y2K Officer. The critical areas of operations are
     being addressed through a business process review methodology. Each of
     KeySpan's critical business processes is being reviewed to: identify and
     inventory sub-components; assess for year 2000 compliance; establish repair
     plans as necessary; and test in a year 2000 environment. The inventory
     phase for the IT systems is 100% complete and 95% complete for non-IT
     systems. The total assessment phase is 100% 

<PAGE>

                                                                              20


     complete for the IT systems, and 50% complete for non-IT systems. The
     assessment phase is expected to be complete by January 1, 1999.

     Hardware, software and embedded systems are being tested and certified to
     be Year 2000 complaint. Repair and testing to sustain operability is now
     65% complete for the IT systems and 20% complete for the non-IT systems.
     Components needed to support the critical business process and associated
     business contingency plans are expected to be ready for the year 2000 by
     July 1, 1999.

     Vendors and business partners needed to support the critical business
     processes of KeySpan are also being reviewed for their Year 2000
     compliance. At this time none of these vendors have indicated to KeySpan
     that they will be materially affected by the year 2000 problem.

     By December 1999, KeySpan expects to spend a total of approximately $30.9
     million to address the year 2000 issue. As of October 31, 1998, $11.3
     million has been expended on the project. The largest percent expended is
     attributable to the assessment, repair and testing of corporate IT
     supported computer software and in-house written applications, which totals
     $8.4 million. In 1998, Year 2000 IT costs represent 11.6% of the total IT
     budget. In 1999, the IT Year 2000 costs are expected to be 8.3% of the IT
     budget. The year 2000 issue has not directly resulted in delaying any IT
     projects. Presently, KeySpan expects that cash flow from operations and
     cash on-hand will be sufficient to fund year 2000 expenditures.

     KeySpan is presently in the process of analyzing each of the critical
     business processes to identify possible Year 2000 risks. Each critical
     business process will be certified by the responsible corporate officer as
     being Year 2000 ready. However, the most reasonable likely worst case
     scenarios are also being identified. Business operating procedures will be
     reviewed to ensure that risks are minimized when entering the Year 2000 and
     other high risk dates. Contingency plans are being developed to address
     possible failure points in each critical business process.

     While KeySpan must plan for the following worst case scenarios, management
     believes that these events are improbable.

     Loss of gas pipeline delivery:

     KeySpan's generation subsidiary receives gas delivery from multiple
     national and international pipelines and, therefore the effects of a loss
     in any one pipeline can be mitigated through the use of other pipelines.
     Complete loss of all the supply lines is not considered a reasonable
     scenario. Nevertheless, the impact of the loss of any one pipeline is
     dependent on temperature and vaporization rate. The partial loss of gas
     supply will not affect KeySpan's ability to supply electricity since many
     of the plants have the ability to operate on oil.

     Loss of electric grid inter-connections/KeySpan operated electric
     distribution facilities Electric utilities are physically connected on a
     regional basis to manage electric load. This is often referred to as the
     regional grid. Presently, KeySpan is working with other regional utilities
     to develop a coordinated operating plan. Should there be an instability in
     the grid, KeySpan has the ability to remove itself and operate
     independently.

     Certain electric system components such as individual generating units,
     transmission and distribution system facilities, and the electric energy
     management system have the potential to malfunction due to Year 2000
     problems. KeySpan has inventoried electric system components 

<PAGE>

                                                                              21


     and developed a plan to certify mission critical process as Year 2000
     compliant. Contingency plans are being developed, where appropriate, for
     loss of critical system elements. KeySpan presently estimates that
     contingency plans regarding its electric facilities should be completed by
     July 1999.

     Loss of telecommunications:

     KeySpan has a substantial dependency on many telecommunication systems and
     services for both internal and external communications. External
     communications with the public and the ability of customers to contact
     KeySpan in cases of emergency response, is essential. KeySpan intends to
     coordinate its emergency response efforts with the offices of emergency
     management of the various local governments within its service territory.
     Internally, there are a number of critical processes in both the gas and
     electric operating areas that rely on external communication providers.
     Contingency plans will address methods for manually monitoring these
     functions. These contingency plans, KeySpan presently estimates, should be
     finalized by July 1999.

     In addition to the above, KeySpan is also planning for the following
     scenarios: short term reduction in system power generating capability;
     limitation of fuel oil operations; reduction in quality of power output;
     loss of automated meter reading; loss of ability to read, bill and collect;
     and loss of the purchasing/materials management system.

     KeySpan believes that, with modifications to existing software and
     conversions to new hardware and 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,
     and contingency plans fail the Year 2000 issue could have a material
     adverse impact on the operations of the Successor Company.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     None

<PAGE>

                                                                              22


Part II. OTHER INFORMATION

Item 1. Legal proceedings

     LIPA has been named as a nominal defendant in a derivative suit pending in
     the United States District Court for the Eastern District of New York
     entitled Sylvester v. Catacosinos, et al. A motion to dismiss on behalf of
     LIPA was filed on September 23, 1998. In addition, LIPA has been named as a
     defendant in an action brought by the County of Suffolk that is pending in
     New York State Supreme Court, Suffolk County, entitled County of Suffolk v.
     KeySpan. The response date has been postponed until such time as it is
     determined whether the action will be consolidated with a consolidated
     class action pending in New York State Supreme Court, Nassau County,
     entitled In re KeySpan Corporation Shareholder Litigation. Former officers
     and directors of LILCO also have been named as defendants in each of these
     actions.

     The complaints in the foregoing actions allege in substance that certain
     former officers of LILCO received excessive compensation which totaled
     approximately $67 million in connection with the closing of Brooklyn
     Union's merger with LILCO and with the Authority's acquisition of the
     common stock of LILCO. The Sylvester lawsuit seeks damages of an
     unspecified amount. The complaint brought by the County of Suffolk seeks
     that the defendants make restitution, or pay damages, of $67 million.

     Because the cases are in a very early stage, at which no discovery has yet
     taken place, LIPA cannot express an opinion as to the likelihood of any
     liability. LIPA has notified KeySpan of its entitlement to indemnification
     pursuant to an indemnification agreement dated June 26, 1997 for any losses
     LIPA suffers as a result of these litigations. LIPA expects that KeySpan
     will honor the request for indemnification.

     On September 28, 1998, Suffolk County and the Towns of Huntington and
     Babylon (collectively, the "Plaintiffs") brought a class action on behalf
     of themselves and all electric utility ratepayers in Suffolk County (the
     "Ratepayers") against the Authority, LIPA, KeySpan and others in the United
     States District Court for the Eastern District of New York entitled County
     of Suffolk et al. v. Long Island Power Authority, et al. (the "Huntington
     Lawsuit"). The Huntington Lawsuit alleges (i) that there exists a
     "regulatory compact" under which the Ratepayers have a legally protected
     property right to receive or share in the "capital gains" to KeySpan
     resulting from the Merger, (ii) that "capital gains" are recoveries in
     excess of net book value received on the disposition of LILCO's
     non-Shoreham tangible and intangible assets, (iii) that the amount of the
     alleged "capital gains" is not presently known but is believed by the
     Plaintiffs to be no less than $1 billion, and (iv) that the failure to
     refund this alleged "capital gain" directly to the Ratepayers unlawfully
     deprived them of their property under federal and state constitutional
     provisions. With respect to certain deferred tax reserves carried on the
     books of LILCO at the time of the Merger representing amounts collected
     from the Ratepayers that were to be used to pay federal income taxes with
     respect to Shoreham but had not been used at such time, the Plaintiffs
     allege that (i) this deferred tax reserve was in excess of $800 million,
     (ii) LILCO was required to refund this amount to the Ratepayers and (iii)
     KeySpan has been unjustly enriched by not making this refund.

     Based on these allegations, Plaintiffs are seeking judgements, among other
     things, (i) awarding damages against KeySpan and LIPA for impairment of
     contract, breach of contract and conversion and (ii) declaring that KeySpan
     holds the proceeds of the Merger attributable to the 

<PAGE>

                                                                              23


     "capital gains" and the deferred tax reserve in trust for the benefit of
     the Ratepayers and ordering KeySpan to make a full accounting of such
     proceeds. LIPA believes that, although the recovery sought by Plaintiffs
     could be material in amount, any such recovery would not have a material
     net financial impact on LIPA or its ratepayers.

Item 2. Changes in securities and use of proceeds

     None

Item 3. Defaults upon senior securities

     None

Item 4. Submission of matters to a vote of security holders

     None

Item 5. Other information

     None

Item 6. Exhibits and reports on form 8-k

     (A)    Exhibits

     4(c)   Financing Agreement Note dated as of May 28, 1998.

     10(ii) Dealer Manager Agreement between Salomon Smith Barney, Inc. and Long
            Island Lighting Company d/b/a LIPA dated as of October 12, 1998.

     10(jj) Financing Agreement dated as of May 1, 1998 between the Long Island
            Power Authority and LIPA Acquisition Corp.

     27     Financial Data Schedule.

     (B)    Reports on Form 8-K

            No reports on Form 8-K were filed during the quarter ended September
            30, 1998.

<PAGE>

                                                                              24


                                    SIGNATURE

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.

Date: November 16, 1998               LONG ISLAND LIGHTING COMPANY d/b/a LIPA
                                      (Registrant)

                                      /s/ David P. Warren
                                      ------------------------------------------
                                      David P. Warren
                                      Chief Financial Officer

<PAGE>

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(A)    Exhibits

4(c)   Financing Agreement Note dated as of May 28, 1998.

10(ii) Dealer Manager Agreement between Salomon Smith Barney, Inc. and Long
       Island Lighting Company d/b/a LIPA dated as of October 12, 1998.

10(jj) Financing Agreement dated as of May 1, 1998 between Long Island Power
       Authority and LIPA Acquisition Corp.

27     Financial Data Schedule.

(B)    Reports on Form 8-K
       None