FORM 10-Q




                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549



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


                                      OR


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


               For the quarterly period ended December 31, 1997


                        Commission file number 1-3571


                         LONG ISLAND LIGHTING COMPANY


             Incorporated pursuant to the Laws of New York State


      Internal Revenue Service - Employer Identification No. 11-1019782


            175 East Old Country Road, Hicksville, New York 11801
                                (516) 755-6650

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 $5 par  value,
outstanding on December 31, 1997, was 121,521,195.

<PAGE>


                         LONG ISLAND LIGHTING COMPANY




Part I - FINANCIAL INFORMATION



                                                                    PAGE NO.


      Item 1 - Financial Statements

               Statement of Income                                     3

               Balance Sheet                                           6

               Statement of Cash Flows                                 8

               Notes to Financial Statements                           9


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



Part II - OTHER INFORMATION

      Item 1 -  Legal Proceedings                                     26

      Item 2 - Changes in Securities                                  26

      Item 3 - Defaults Upon Senior Securities                        26

      Item 4 - Submission of Matters to a Vote
               of Security Holders                                    26

      Item 5 - Other Information                                      26

      Item 6 - Exhibits and Reports on Form 8 - K                     26

      Signature


<PAGE>

<TABLE>
<CAPTION>
                          LONG ISLAND LIGHTING COMPANY
                               STATEMENT OF INCOME
                                   (UNAUDITED)
                (THOUSANDS OF DOLLARS - EXCEPT PER SHARE AMOUNTS)

                                                                  THREE MONTHS ENDED                    
                                                                      DECEMBER 31
                                                                 ----------------------
                                                                   1997        1996                         
                                                                 ----------------------                 
<S>                                                               <C>         <C>                           
REVENUES
Electric                                                          $572,336    $550,046                  
Gas                                                                207,286     192,057                    
                                                                                                         
                                                                 ----------  ----------
Total Revenues                                                     779,622     742,103                    
                                                                 ----------  ----------                 

EXPENSES
Operations - fuel and purchased power                              264,940     245,786                    
Operations - other                                                 112,934      88,681                    
Maintenance                                                         29,594      30,523                     
Depreciation and amortization                                       39,793      40,103                   
Base financial component amortization                               25,243      25,243                     
Rate moderation component amortization                             (10,709)      9,690                    
Regulatory liability component amortization                        (22,144)    (22,144)                   
Other regulatory amortization                                        2,310      (7,215)                   
Operating taxes                                                    117,553     119,203                   
Federal income tax - current                                        20,382      10,905                   
Federal income tax - deferred and other                             27,757      31,639                   
                                                                                                         
                                                                 ----------  ----------
Total Expenses                                                     607,653     572,414                   
                                                                 ----------  ----------                  
OPERATING INCOME                                                   171,969     169,689                   
                                                                 ----------  ----------                 

OTHER INCOME AND (DEDUCTIONS)
Rate moderation component carrying charges                           5,928       6,571                     
Class Settlement                                                    (4,049)     (5,461)                   
Other income and deductions, net                                   (24,967)      2,719                      
Allowance for other funds used during construction                     885         754                      
Federal income tax - current                                         2,525           0                    
Federal income tax - deferred and other                              5,283        (268)                    
                                                                                                         
                                                                 ----------  ----------
Total Other Income and (Deductions)                                (14,395)      4,315                     
                                                                 ----------  ----------                  
INCOME BEFORE INTEREST CHARGES                                     157,574     174,004                    
                                                                 ----------  ----------                  

INTEREST CHARGES AND (CREDITS)
Interest on long-term debt                                          87,868      93,024                    
Other interest                                                      14,154      17,760                   
Allowance for borrowed funds used during construction               (1,204)       (940)                    
                                                                                                         
                                                                 ----------  ----------
Total Interest Charges and (Credits)                               100,818     109,844                    
                                                                 ----------  ----------                  

NET INCOME                                                          56,756      64,160                   
Preferred stock dividend requirements                               12,949      13,022                    
                                                                 ----------  ----------                 
EARNINGS FOR COMMON STOCK                                          $43,807     $51,138                  
                                                                 ==========  ==========                 
AVERAGE COMMON SHARES OUTSTANDING (000)                            121,507     120,780                   
BASIC AND DILUTED EARNINGS PER COMMON SHARE                          $0.36       $0.43                     

DIVIDENDS DECLARED PER COMMON SHARE                                 $0.445      $0.445                    
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.




                                        - 3 -
<PAGE>

<TABLE>
<CAPTION>
                          LONG ISLAND LIGHTING COMPANY
                               STATEMENT OF INCOME
                                   (UNAUDITED)
                (THOUSANDS OF DOLLARS - EXCEPT PER SHARE AMOUNTS)

                                                                   NINE MONTHS ENDED                        
                                                                      DECEMBER 31                             
                                                                 ----------------------                  
                                                                   1997        1996                       
                                                                 ----------------------                 
<S>                                                             <C>         <C>                            
REVENUES
Electric                                                        $1,922,752  $1,907,167                   
Gas                                                                373,766     379,314                    
                                                                                                        
                                                                 ----------  ----------
Total Revenues                                                   2,296,518   2,286,481                    
                                                                 ----------  ----------                 

EXPENSES
Operations - fuel and purchased power                              663,382     652,982                    
Operations - other                                                 294,742     277,207                     
Maintenance                                                         84,262      87,647                     
Depreciation and amortization                                      117,954     116,360                    
Base financial component amortization                               75,728      75,728                    
Rate moderation component amortization                               7,615      (8,906)                     
Regulatory liability component amortization                        (66,430)    (66,430)                   
Other regulatory amortization                                       43,922     100,076                     
Operating taxes                                                    349,214     352,048                   
Federal income tax - current                                        64,100      29,359                    
Federal income tax - deferred and other                            103,370     124,250                     
                                                                                                
                                                                 ----------  ----------                 
Total Expenses                                                   1,737,859   1,740,321                    
                                                                 ----------  ----------                  
OPERATING INCOME                                                   558,659     546,160                    
                                                                 ----------  ----------                  

OTHER INCOME AND (DEDUCTIONS)
Rate moderation component carrying charges                          17,843      19,359                      
Class Settlement                                                   (12,415)    (15,400)                    
Other income and deductions, net                                   (21,870)     13,277                        
Allowance for other funds used during construction                   2,808       2,169                       
Federal income tax - current                                           878           0                         
Federal income tax - deferred and other                              4,844      (1,511)                      
                                                                                                         
                                                                 ----------  ----------                 
Total Other Income and (Deductions)                                 (7,912)     17,894                      
                                                                 ----------  ----------                  
INCOME BEFORE INTEREST CHARGES                                     550,747     564,054                    
                                                                 ----------  ----------                 

INTEREST CHARGES AND (CREDITS)
Interest on long-term debt                                         263,530     281,942                     
Other interest                                                      44,423      50,159                     
Allowance for borrowed funds used during construction               (3,507)     (2,758)                     
                                                                                                         
                                                                 ----------  ----------
Total Interest Charges and (Credits)                               304,446     329,343                    
                                                                 ----------  ----------                 

NET INCOME                                                         246,301     234,711                    
Preferred stock dividend requirements                               38,865      39,145                     
                                                                 ----------  ----------                  
EARNINGS FOR COMMON STOCK                                         $207,436    $195,566                    
                                                                 ==========  ==========                 
AVERAGE COMMON SHARES OUTSTANDING (000)                            121,331     120,498
BASIC AND DILUTED EARNINGS PER COMMON SHARE                          $1.71       $1.63                     

DIVIDENDS DECLARED PER COMMON SHARE                                 $1.335      $1.335
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.



                                      -4-

<PAGE>

<TABLE>
<CAPTION>

                          LONG ISLAND LIGHTING COMPANY
                               STATEMENT OF INCOME
                (THOUSANDS OF DOLLARS - EXCEPT PER SHARE AMOUNTS)

                                                                  TWELVE MONTHS ENDED
                                                                      DECEMBER 31
                                                                 ----------------------
                                                                   1997        1996
                                                                 ----------------------
                                                                 (UNAUDITED) (AUDITED)
                                                                 ----------------------
<S>                                                             <C>         <C>       
REVENUES
Electric                                                        $2,480,543  $2,466,435
Gas                                                                667,157     684,260
                                                                 ----------  ----------
Total Revenues                                                   3,147,700   3,150,695
                                                                 ----------  ----------

EXPENSES
Operations - fuel and purchased power                              965,249     963,251
Operations - other                                                 390,415     381,076
Maintenance                                                        113,602     118,135
Depreciation and amortization                                      156,515     153,925
Base financial component amortization                              100,971     100,971
Rate moderation component amortization                              13,522     (24,232)
Regulatory liability component amortization                        (88,573)    (88,573)
Other regulatory amortization                                       56,140     127,288
Operating taxes                                                    466,727     472,076
Federal income tax - current                                        87,478      42,197
Federal income tax - deferred and other                            136,994     168,000
                                                                 ----------  ----------
Total Expenses                                                   2,399,040   2,414,114
                                                                 ----------  ----------
OPERATING INCOME                                                   748,660     736,581
                                                                 ----------  ----------

OTHER INCOME AND (DEDUCTIONS)
Rate moderation component carrying charges                          23,762      25,259
Class Settlement                                                   (16,911)    (20,772)
Other income and deductions, net                                   (21,225)     19,197
Allowance for other funds used during construction                   3,525       2,888
Federal income tax - current                                           878           0
Federal income tax - deferred and other                              5,633         940
                                                                 ----------  ----------
Total Other Income and (Deductions)                                 (4,338)     27,512
                                                                 ----------  ----------
INCOME BEFORE INTEREST CHARGES                                     744,322     764,093
                                                                 ----------  ----------

INTEREST CHARGES AND (CREDITS)
Interest on long-term debt                                         353,698     384,198
Other interest                                                      61,082      67,130
Allowance for borrowed funds used during construction               (4,456)     (3,699)
                                                                 ----------  ----------
Total Interest Charges and (Credits)                               410,324     447,629
                                                                 ----------  ----------

NET INCOME                                                         333,998     316,464
Preferred stock dividend requirements                               51,834      52,216
                                                                 ----------  ----------
EARNINGS FOR COMMON STOCK                                         $282,164    $264,248
                                                                 ==========  ==========
AVERAGE COMMON SHARES OUTSTANDING (000)                            121,245     120,360
BASIC AND DILUTED EARNINGS PER COMMON SHARE                          $2.33       $2.20

DIVIDENDS DECLARED PER COMMON SHARE                                  $1.78       $1.78
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.




                                        - 5 -

<PAGE>

<TABLE>
<CAPTION>

                          LONG ISLAND LIGHTING COMPANY
                                  BALANCE SHEET
                             (THOUSANDS OF DOLLARS)

                                           DECEMBER 31    MARCH 31     DECEMBER 31
                                              1997          1997          1996
ASSETS                                     (UNAUDITED)   (UNAUDITED)   (AUDITED)
                                           -----------   -----------   -----------
<S>                                       <C>           <C>           <C>      
UTILITY PLANT
Electric                                   $4,005,928    $3,900,264    $3,882,297
Gas                                         1,218,703     1,171,183     1,154,543
Common                                        286,442       263,267       260,268
Construction work in progress                 116,147       108,850       112,184
Nuclear fuel in process and in reactor         16,163        15,503        15,454
                                           -----------   -----------   -----------
                                            5,643,383     5,459,067     5,424,746
                                           -----------   -----------   -----------
Less - Accumulated depreciation and
  amortization                              1,847,842     1,759,110     1,729,576
                                           -----------   -----------   -----------
Total Net Utility Plant                     3,795,541     3,699,957     3,695,170
                                           -----------   -----------   -----------


REGULATORY ASSETS
Base financial component (less accumulated
  amortization of $858,253, $782,525        3,180,577     3,256,305     3,281,548
  and $757,282)
Rate moderation component                     385,537       409,512       402,213
Shoreham post-settlement costs              1,003,589       996,270       991,795
Shoreham nuclear fuel                          66,986        68,581        69,113
Unamortized cost of issuing securities        166,783       187,309       194,151
Postretirement benefits other than pensions   346,090       357,668       360,842
Regulatory tax asset                        1,746,883     1,767,164     1,772,778
Other                                         189,263       200,137       199,879
                                           -----------   -----------   -----------
Total Regulatory Assets                     7,085,708     7,242,946     7,272,319
                                           -----------   -----------   -----------


                                           -----------   -----------   -----------
NONUTILITY PROPERTY AND OTHER INVESTMENTS      49,882        18,870        18,597
                                           -----------   -----------   -----------
                                           -----------   -----------   -----------


CURRENT ASSETS
Cash and cash equivalents                     179,995        64,539       279,993
Special deposits                               67,431        37,631        38,266
Customer accounts receivable (less allowance
  for doubtful accounts of $26,135,           247,479       305,436       255,801
  $23,675 and $25,000)
Other accounts receivable                      53,742        42,946        65,764
Accrued unbilled revenues                     162,157       141,389       169,712
Materials and supplies at average cost         52,530        55,454        55,789
Fuel oil at average cost                       53,154        49,703        53,941
Gas in storage at average cost                 66,599        10,893        73,562
Deferred tax asset                             11,349        93,349       145,205
Prepayments and other current assets           12,878         8,805         8,569
                                           -----------   -----------   -----------
Total Current Assets                          907,314       810,145     1,146,602
                                           -----------   -----------   -----------


                                           -----------   -----------   -----------
DEFERRED CHARGES                               69,281        77,656        76,991
                                           -----------   -----------   -----------

TOTAL ASSETS                              $11,907,726   $11,849,574   $12,209,679
                                          ===========   ===========   ===========

</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.





                                      - 6 -
<PAGE>

<TABLE>
<CAPTION>
                          LONG ISLAND LIGHTING COMPANY
                                  BALANCE SHEET
                             (THOUSANDS OF DOLLARS)

                                           DECEMBER 31    MARCH 31     DECEMBER 31
                                              1997          1997          1996
CAPITALIZATION AND LIABILITIES             (UNAUDITED)   (UNAUDITED)   (AUDITED)
                                           -----------   -----------   -----------
<S>                                       <C>           <C>           <C>       
CAPITALIZATION
Long-term debt                             $4,395,555    $4,471,675    $4,471,675
Unamortized discount on debt                  (13,861)      (14,628)      (14,903)
                                           -----------   -----------   -----------
                                            4,381,694     4,457,047     4,456,772
                                           -----------   -----------   -----------

Preferred stock - redemption required         637,450       638,500       638,500
Preferred stock - no redemption required       63,562        63,598        63,664
                                           -----------   -----------   -----------
Total Preferred Stock                         701,012       702,098       702,164
                                           -----------   -----------   -----------

Common stock                                  607,837       605,022       603,921
Premium on capital stock                    1,142,581     1,131,576     1,127,971
Capital stock expense                         (47,879)      (48,915)      (49,330)
Retained earnings                             907,209       861,751       840,867
Treasury stock, at cost                        (1,204)         (385)          (60)
                                           -----------   -----------   -----------
Total Common Shareowners' Equity            2,608,544     2,549,049     2,523,369
                                           -----------   -----------   -----------

                                           -----------   -----------   -----------
Total Capitalization                        7,691,250     7,708,194     7,682,305
                                           -----------   -----------   -----------

REGULATORY LIABILITIES
Regulatory liability component                119,039       178,558       198,398
1989 Settlement credits                       118,229       125,138       127,442
Regulatory tax liability                       26,649       100,377       102,887
Other                                         143,155       158,660       139,510
                                           -----------   -----------   -----------
Total Regulatory Liabilities                  407,072       562,733       568,237
                                           -----------   -----------   -----------

CURRENT LIABILITIES
Current maturities of long-term debt          101,000         1,000       251,000
Current redemption requirements                 1,050         1,050         1,050
  of preferred stock
Accounts payable and accrued expenses         288,658       230,189       289,141
LRPP payable                                   30,118        40,499        40,499
Accrued taxes (including federal income tax
  of $15,034, $49,262 and $25,884)             54,466        51,157        63,640
Accrued interest                              157,787       143,983       160,615
Dividends payable                              58,671        58,474        58,378
Class Settlement                               60,000        58,333        55,833
Customer deposits                              28,885        29,173        29,471
                                           -----------   -----------   -----------
Total Current Liabilities                     780,635       613,858       949,627
                                           -----------   -----------   -----------

DEFERRED CREDITS
Deferred federal income tax                 2,506,904     2,420,443     2,442,606
Class Settlement                               55,970        89,487        98,497
Other                                          21,394        20,889        39,447
                                           -----------   -----------   -----------
Total Deferred Credits                      2,584,268     2,530,819     2,580,550
                                           -----------   -----------   -----------

OPERATING RESERVES
Pensions and other postretirement benefits    399,072       387,048       381,996
Claims and damages                             45,429        46,922        46,964
                                           -----------   -----------   -----------
Total Operating Reserves                      444,501       433,970       428,960
                                           -----------   -----------   -----------

COMMITMENTS AND CONTINGENCIES                  -             -             -
                                           -----------   -----------   -----------

TOTAL CAPITALIZATION AND LIABILITIES      $11,907,726   $11,849,574   $12,209,679
                                          ===========   ===========   ===========

</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.
                                      - 7 -
<PAGE>

<TABLE>
<CAPTION>

                          LONG ISLAND LIGHTING COMPANY
                             STATEMENT OF CASH FLOWS
                             (THOUSANDS OF DOLLARS)


                                                   THREE MONTHS ENDED      NINE MONTHS ENDED        TWELVE MONTHS ENDED
                                                      DECEMBER 31,             DECEMBER 31,              DECEMBER 31,
                                                    1997        1996         1997        1996          1997        1996
                                                 ----------- -----------   ----------  ----------   ----------- -----------
                                                  unaudited   unaudited     unaudited   unaudited    unaudited     audited
<S>                                                <C>         <C>          <C>         <C>           <C>         <C>     
OPERATING ACTIVITIES
Net Income                                          $56,756     $64,160     $246,301    $234,711      $333,998    $316,464
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
      CASH PROVIDED BY OPERATING ACTIVITIES
  Provision for doubtful accounts                     9,446       4,470       18,300      18,291        23,121      23,119
  Depreciation and amortization                      39,793      40,103      117,954     116,360       156,515     153,925
  Base financial component amortization              25,243      25,243       75,728      75,728       100,971     100,971
  Rate moderation component amortization            (10,709)      9,690        7,615      (8,906)       13,522     (24,232)
  Regulatory liability component amortization       (22,144)    (22,144)     (66,430)    (66,430)      (88,573)    (88,573)
  Other regulatory amortization                       2,310      (7,215)      43,922     100,076        56,140     127,288
  Rate moderation component carrying charges         (5,928)     (6,571)     (17,843)    (19,359)      (23,762)    (25,259)
  Class Settlement                                    4,049       5,461       12,415      15,400        16,911      20,772
Amortization of cost of issuing                       7,936       8,163       22,884      25,125        30,971      34,611
   and redeeming securities
  Federal income tax - deferred and other            22,474      31,907       98,526     125,761       131,361     167,060
  Allowance for other funds used during                (885)       (754)      (2,808)     (2,169)       (3,525)     (2,888)
    construction
  Pensions and Other Post Retirement Benefits        25,054       4,217       38,319      14,821        51,815      14,952
  Gas Cost Adjustment                                 2,745     (14,015)       1,250     (16,236)       (6,641)      2,954
  Other                                              15,886       6,838       63,284      36,195        72,372      49,238
CHANGES IN OPERATING ASSETS AND LIABILITIES
  Accounts receivable                                49,494      48,328       31,111      73,207          (527)     69,215
  Accrued unbilled revenues                         (43,231)    (23,932)     (20,768)    (21,044)        7,555      14,728
  Materials and supplies, fuel oil                     (643)      2,371      (56,233)    (78,233)       11,009     (34,531)
    and gas in storage
  Accounts payable and accrued expenses              49,048      60,670       61,743      60,255         2,791      28,258
  Accrued taxes                                      (2,674)     30,272        3,309      13,391        (9,174)      3,142
  Accrued interest                                   10,482      18,304       13,804       8,259        (2,828)      2,290
  Class Settlement                                  (13,809)    (10,589)     (44,265)    (36,718)      (55,271)    (42,084)
  Special deposits                                     (482)     (2,364)     (29,165)     25,146       (29,165)     25,146
  Other                                             (27,980)    (22,568)     (73,575)    (40,349)      (86,542)    (46,620)
                                                 ----------- -----------   ----------  ----------   ----------- -----------
Net Cash Provided by Operating Activities           192,231     250,045      545,378     653,282       703,044     889,946
                                                 ----------- -----------   ----------  ----------   ----------- -----------

INVESTING ACTIVITIES

Construction and nuclear fuel expenditures          (84,198)    (63,344)    (201,666)   (195,707)     (252,041)   (239,896)
Shoreham post-settlement costs                       (9,271)    (11,178)     (30,207)    (35,924)      (40,410)    (49,355)
Investment in subsidiary                                  0           0      (30,000)          0       (30,000)          0
Other                                                (1,026)     (2,694)      (2,319)     (3,600)       (2,159)     (4,806)
                                                 ----------- -----------   ----------  ----------   ----------- -----------
Net Cash Used in Investing Activities               (94,495)    (77,216)    (264,192)   (235,231)     (324,610)   (294,057)
                                                 ----------- -----------   ----------  ----------   ----------- -----------

FINANCING ACTIVITIES

Proceeds from sale of common stock                    4,750       4,754       13,784      14,165        18,424      18,837
Issuance of long-term debt                           24,880           0       24,880           0        24,880           0
Redemption of long-term debt                         (1,000)          0       (1,000)   (415,000)     (251,000)   (415,000)
Redemption of preferred stock                             0      (3,750)      (1,050)     (4,800)       (1,050)     (4,800)
Preferred stock dividends paid                      (12,948)    (13,049)     (38,885)    (39,192)      (51,854)    (52,264)
Common stock dividends paid                         (54,004)    (53,626)    (161,758)   (160,506)     (215,507)   (213,753)
Other                                                  (904)        (56)      (1,701)        (10)       (2,325)       (369)
                                                 ----------- -----------   ----------  ----------   ----------- -----------
Net Cash Used in Financing Activities               (39,226)    (65,727)    (165,730)   (605,343)     (478,432)   (667,349)
                                                 ----------- -----------   ----------  ----------   ----------- -----------
                                                 ----------- -----------   ----------  ----------   ----------- -----------
Net Increase (Decrease) in Cash
                                                 ----------- -----------   ----------  ----------   ----------- -----------
  and Cash Equivalents                              $58,510    $107,102     $115,456   ($187,292)     ($99,998)   ($71,460)
                                                 =========== ===========   ==========  ==========   =========== ===========
Cash and cash equivalents at beginning of period   $121,485    $172,891      $64,539    $467,285      $279,993    $351,453
Net Increase (Decrease) in cash
  and Cash Equivalents                               58,510     107,102      115,456    (187,292)      (99,998)    (71,460)
                                                 =========== ===========   ==========  ==========   =========== ===========
Cash and Cash Equivalents at end of period         $179,995    $279,993     $179,995    $279,993      $179,995    $279,993
                                                 =========== ===========   ==========  ==========   =========== ===========

</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.


                                                           - 8-
<PAGE>




                        NOTES TO FINANCIAL STATEMENTS

                 FOR THE THREE MONTHS ENDED DECEMBER 31, 1997
                                  (UNAUDITED)



NOTE 1. BASIS OF PRESENTATION

These Notes to Financial  Statements  reflect  events  subsequent to January 31,
1997,  the date of the most recent Report of Independent  Auditors,  through the
date of this Report on Form 10-Q for the three months  ended  December 31, 1997.
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,  nine and twelve months ended  December 31, 1997, the
Company's  Transition  Report  for the three  months  ended  March 31,  1997 and
Quarterly  Report on Form  10-Q for the three  months  ended  June 30,  1997 and
September 30, 1997 and the Company's Annual Report on Form 10-K/A filed June 30,
1997,  for the year ended  December  31,  1996,  and the  Company's  Joint Proxy
Statement/Prospectus filed June 30, 1997.

The financial  statements  furnished are 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 three month period presented. Operating results for the three
month  period are not  necessarily  indicative  of results to be expected for an
entire year due to the seasonal nature of the gas and electric business.

On April 11, 1997,  the Company  changed its year-end  from December 31 to March
31. Accordingly,  the Company's financial  statements have been presented on the
new basis, as well as its previous basis for comparative purposes.

Certain prior year amounts have been  reclassified to be consistent with current
year presentation.

NOTE 2. LONG ISLAND POWER AUTHORITY TRANSACTION

On June 26, 1997, the Company and the Long Island Power Authority (LIPA) entered
into  definitive  agreements  pursuant  to  which,  after  the  transfer  of the
Company's  gas  assets,  non-nuclear  electric  generating  facility  assets and
certain other assets and liabilities to one or more newly-formed subsidiaries of
a new  holding  company,  the  Company's  common  stock will be sold to LIPA for
$2.4975 billion in cash.  Subject to all required  regulatory  approvals,  it is
anticipated  that  LIPA  will  own  the  Company's  electric   transmission  and
distribution  system,  its 18%  interest in the Nine Mile Point 2 Nuclear  Power
Station (NMP2),  and  substantially  all of its electric  regulatory  assets and
liabilities,  and will  assume  or  refinance  part of or the  total  amount  of
approximately  $339  million in  preferred  stock and $3.6  billion in long term
debt.

In December 1997, the United States Nuclear  Regulatory  Commission (NRC) issued
an order  approving  the  indirect  transfer  of  control of the  Company's  18%
ownership  interest in NMP2 to LIPA,  as  contemplated  in the LIPA  transaction
agreements.  In addition,  in December  1997, the Company filed with the Federal
Energy Regulatory  Commission (FERC) a settlement agreement reached with LIPA in
connection with the Company's  October 1997 filing of its proposed rates for the
sale of capacity and energy to LIPA,  as  contemplated  in the LIPA  transaction
agreements.  The Company had previously  filed an application  with FERC seeking
approval of the transfer of the Company's electric transmission and distribution
system to LIPA in connection with LIPA's purchase of the stock of the Company.

On February 11, 1998, FERC issued orders on both Company filings.  Specifically,
FERC approved the Company's application to transfer assets to LIPA in connection
with LIPA's  acquisition of the Company's stock. In addition,  FERC accepted for
filing the  Company's  proposed  rates for sale of capacity  and energy to LIPA.
Those rates may go into effect on the date the service to LIPA  begins,  subject
to  refund,   and  final  rates  will  be  set  after  FERC  has  completed  its
investigation of such rates, the timing of which cannot be determined.

 In January  1998,  the Company  filed an  application  with the Public  Service
Commission  of the  State of New  York  (PSC) in  connection  with the  proposed
transfer  of its gas,  non-nuclear  generation  and common  assets  and  related
liabilities to one or more  subsidiaries  of the holding company to be formed as
contemplated in the LIPA  transaction  agreements.  On February 4, 1998, the PSC
issued an order  finding that the transfer of the above  mentioned  assets would
not adversely affect the environment.

NOTE 3. RATE MATTERS

ELECTRIC AND GAS

In December 1997, the PSC approved the continuation of the following  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 and
remediation costs; and (b) the electric Rate Moderation  Component (RMC) and the
LILCO  Ratemaking  and  Performance  Plan  (LRPP)   mechanisms  and  performance
incentive programs.

KEYSPAN ENERGY CORPORATION (FORMERLY THE BROOKLYN UNION GAS COMPANY)
TRANSACTION

PSC SETTLEMENT AGREEMENT

      In 1997, the Company and the Brooklyn Union Gas Company  (Brooklyn  Union)
filed a joint  petition with the Public  Service  Commission of the State of New
York (PSC or Commission) seeking PSC approval,  under section 70 of the New York
Public  Service  Law, of the KeySpan  Agreement by which the Company and KeySpan
each would become  subsidiaries  of a newly-formed  holding  company  through an
exchange of shares of common stock with the holding  company.  In addition,  the
petition   called  for   approximately   $1.0  billion  of  efficiency   savings
attributable to operating synergies that are expected to be realized over the 10
year period  following  the  combination  to be allocated to  ratepayers  net of
transaction costs for the combination. On December 10, 1997, Brooklyn Union, the
Company,  the Staff of the  Department of Public Service and three other parties
entered into a Settlement  Agreement  (Stipulation)  resolving  all issues among
them in the proceeding.  Hearings on the Stipulation  were held in early January
1998 and, on  February  4, 1998,  the PSC  approved,  effective  February 5, the
Stipulation,  modified  only to reduce  Brooklyn  Union's  earnings caps for the
remaining years of its rate plan.

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

      For  Brooklyn  Union,  effective  on the date of the  consummation  of the
KeySpan Transaction,  Brooklyn Union's base rates to core/firm customers will be
reduced by $23.9 million annually. In addition,  effective in the fiscal year in
which the KeySpan Transaction is consummated,  Brooklyn Union will be subject to
an earnings sharing provision pursuant to which it will be required to credit to
core/firm  customers  60% of any utility  earnings up to 100 basis  points above
certain  threshold  equity  return  levels over the term of the rate plan (other
than any earnings  associated  with discrete  incentives) and 50% of any utility
earnings  in  excess  of 100 basis  points  above  such  threshold  levels.  The
threshold  levels,  as modified by the February 5 Order,  13.75% for fiscal year
1998,  13.50% for fiscal years 1999,  2000, and 2001; and 13.25% for fiscal year
2002. A safety and reliability incentive mechanism will be implemented effective
on the  consummation  date of the KeySpan  Transaction,  with a maximum 12 basis
point  pre-tax  return on equity  penalty  if  Brooklyn  Union  fails to achieve
certain safety and reliability performance standards.  With the exception of the
simplification  of the  customer  service  performance  standards,  the  current
Brooklyn Union rate plan approved by the PSC in 1996 remains unchanged.  Any gas
cost savings allocable to Brooklyn Union resulting from the KeySpan  Transaction
will be reflected in rates to utility customers through the GAC as those savings
are realized.

      The Stipulation, which obligates the Company to reduce electric customers'
bills by  approximately  2.5%  resulting  from the savings in operating and fuel
costs,  related to  synergy  savings,  also  defers  the time  within  which the
Commission  must act on the Company's  pending  electric rate plan until July 1,
1998.  However,  any  reduction in customers'  bills would not become  effective
until the Commission sets the Company's electric rates.

      The Stipulation adopts certain affiliate  transaction  restrictions,  cost
allocation  and  financial  integrity  conditions,  and a  competitive  code  of
conduct.  These restrictions and conditions eliminate or relax many restrictions
currently applicable to Brooklyn Union in such areas as affiliate  transactions;
use of the name and  reputation  of Brooklyn  Union by  unregulated  affiliates;
common officers of the holding company, the utility subsidiaries and unregulated
subsidiaries; dividend payment restrictions; and the composition of the Board of
Directors of Brooklyn Union.

      The  Stipulation  also  enables the  utilities  to form one or more shared
services  subsidiaries to perform  functions  common to both utilities and their
affiliates such as accounting, finance, human resources, and information systems
and technology to realize synergy savings.



<PAGE>





NOTE 4. CAPITALIZATION

In December 1997, the Company  received  proceeds from the sale of $24.9 million
of  Electric  Facilities  Revenue  Bonds  issued  by the New York  State  Energy
Research and  Development  Authority.  The net proceeds  from this offering were
used to  reimburse  the treasury for  electric  generation  projects  previously
completed.




<PAGE>




MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

EARNINGS

THREE MONTHS ENDED DECEMBER 31, 1997

Earnings per common  share for the three months ended  December 31, 1997 reflect
lower  earnings in both the electric  and gas  businesses  when  compared to the
three months ended  December 31,  1996.  This  reduction is primarily  due to an
accrual for certain  contractual  obligations  for key  employees  required as a
result of the KeySpan Energy  Corporation  (formerly  Brooklyn Union) merger and
the Long Island Power Authority  (LIPA)  transaction,  as discussed below in the
section  titled "Other Income and  Deductions."  The effects of these  increased
costs  were  partially  offset  by lower  interest  expense  and a change  in an
electric  ratemaking  mechanism  which  eliminates the effects of seasonality on
monthly  operating  income,  as more fully discussed in the section titled "Rate
Moderation Component."

NINE MONTHS ENDED DECEMBER 31, 1997

For the nine months  ended  December  31,  1997 the  Company had overall  higher
earnings  resulting from higher  earnings in the electric  business and slightly
lower  earnings in the gas business  compared to the nine months ended  December
31, 1996.

In the  electric  business,  the  increase in earnings for the nine months ended
December 31, 1997, was primarily due to lower interest expense combined with the
change in the ratemaking  noted above.  These positive  impacts more than offset
the  effects of lower  short-term  interest  income and the  accruals  discussed
above.

The decrease in earnings in the gas business for the nine months ended  December
31, 1997 resulted from lower short-term interest income and the accruals,  noted
above, partially offset by lower operations and maintenance expenses.

TWELVE MONTHS ENDED DECEMBER 31, 1997

For the twelve months ended December 31, 1997 the Company had higher earnings in
both the electric and gas  businesses  when  compared to the twelve months ended
December 1996.

Electric  business  earnings  increased for the twelve months ended December 31,
1997,  primarily due to reductions in interest  expense combined with the change
to the ratemaking noted above,  partially  offset by lower  short-term  interest
income and the accruals discussed above.

The  increase  in  earnings  in the gas  business  for the twelve  months  ended
December 31, 1997, was primarily due to a one-time revenue enhancement  relating
to an Independent  Power Producer  contract and lower  operation and maintenance
expenses,   partially  offset  by  lower  short-term  interest  income  and  the
recognition of the accruals, noted above.


REVENUES

Electric

The  increase in  electric  revenues of  approximately  $22.3  million and $15.6
million for the three and nine months ended  December  31,  1997,  respectively,
when  compared to the same periods in 1996,  was due to higher sales volumes and
higher fuel expense recoveries.  The increase of approximately $14.1 million for
the twelve months ended  December 31, 1997,  when compared to the same period in
1996, was due to higher fuel expense recoveries and higher system sales volumes,
partially  offset  by  lower  sales to other  utilities.  Fluctuations  in sales
volumes are  generally  attributable  to weather.  The  Company's  electric rate
structure  eliminates  the impact on earnings of sales volumes that are above or
below adjudicated levels.

Gas

The increase in gas revenues of approximately $15.2 million for the three months
ended December 31, 1997, when compared to the same period in 1996, was primarily
due to higher  gas fuel  expense  recoveries  resulting  from  higher gas costs.
System sales volumes were approximately the same during both periods.

The  decreases in gas revenues of  approximately  $5.5 million and $17.1 million
for the nine and twelve  months  ended  December 31,  1997,  respectively,  when
compared to the same periods in 1996,  were  primarily  the result of lower fuel
expense  recoveries  driven  by  lower  sales  volumes  due  to  warmer  weather
experienced in 1997 compared to 1996.  The portion of the decrease  attributable
to lower fuel expense has no effect on earnings as  corresponding  reductions in
fuel expense  offset the reduction in fuel expense  recoveries.  The lower sales
volumes were partially offset by higher revenues from the  transportation of gas
for others.  In the twelve  months  ended  December  31,  1997,  the decrease in
revenues  was  partially  offset by an  enhancement  to revenues  relating to an
Independent Purchased Power contract.

Variations in sales volumes  resulting from weather have a limited impact on net
revenues  (revenues net of fuel  expenses),  as the Company's gas rate structure
includes a weather  normalization  mechanism  which  mitigates the impact on net
revenues of experiencing weather that is warmer or colder than normal.


FUEL AND PURCHASED POWER

Fuel and purchased  power  expenses for the three,  nine and twelve months ended
December 31, 1997 and 1996, were as follows:

<TABLE>
<CAPTION>

            Three Months Ended       Nine Months Ended       Twelve Months Ended
            12/31/97   12/31/96     12/31/97   12/31/96     12/31/97   12/31/96
               (In Millions)           (In Millions)           (In Millions)

<S>             <C>       <C>           <C>       <C>           <C>       <C> 
Electric System
 Oil            $ 30      $ 30          $ 80      $ 91          $117      $158
 Gas              48        45           166       131           205       138
 Nuclear           4         3            11        11            15        15
 Purchases        81        81           235       248           320       329
                  --        --           ---       ---           ---       ---
Total

  Electric       163       159           492       481           657       640

Gas System       102        87           171       172           308       323
                ----      ----          ----      ----          ----      ----
Total           $265      $246          $663      $653          $965      $963
                ====      ====          ====      ====          ====      ====

</TABLE>

Electric System

THREE MONTHS ENDED DECEMBER 31, 1997

For the three months ended  December 31, 1997,  electric  fuel costs  increased,
when compared to the same period in 1996. Higher system sales volumes and higher
prices for gas used for electric generation contributed to this increase.

NINE MONTHS ENDED DECEMBER 31, 1997

For the nine months ended December 31, 1997, electric fuel costs increased, when
compared to the same period in 1996 as a result of higher  system sales  volumes
coupled with higher purchased power prices. This increase in electric fuel costs
was  mitigated,  for the nine months ended December 31, 1997, as the Company was
able to reduce purchases and oil fired generation by increasing  production with
more  economical gas as a result of the completion in May 1997 of the conversion
of an oil fired steam generating unit at Port Jefferson to dual-fuel capability.

TWELVE MONTHS ENDED DECEMBER 31, 1997

For the twelve months ended  December 31, 1997,  electric fuel costs  increased,
when  compared  to the same  period  in 1996,  primarily  as a result  of higher
purchased power prices. This increase in electric fuel costs was mitigated,  for
the twelve  months ended  December  31, 1997,  as the Company was able to reduce
purchases and oil fired generation by increasing production with gas as a result
of the completion in May 1997 of the conversion of an oil fired steam generating
unit at Port  Jefferson  to  dual-fuel  capability.  Also  contributing  to this
increase was the absence of profits  generated by the sale of electric  business
unit gas supplies to non-traditional customers (off-system sales) primarily as a
result of low demand for gas,  brought  about by the mild winter  weather in the
first three months of 1997.  Profits from such gas sales offset the cost of fuel
for electric  generation,  supporting the Company's  goal of providing  electric
energy to customers at the lowest cost possible.

Of the  Company's 11 steam  generation  units,  nine burn natural gas;  seven of
which are also capable of burning oil. This  dual-fuel  capability  provides the
Company  with the  ability  to burn  the most  cost  efficient  fuel  available,
consistent  with  seasonal  and  environmental  requirements.  In an  effort  to
maximize the Company's operating  flexibility,  the Company is in the process of
adding natural gas firing  capability to one of its two remaining oil only steam
generating units. Completion is scheduled for the spring of 1998.


Electric Energy Available

The percentages of total electric energy  available by type of fuel for electric
operations,  for the three,  nine and twelve months ended  December 31, 1997 and
1996, were as follows:

<TABLE>
<CAPTION>

          Three Months Ended        Nine Months Ended        Twelve Months Ended
         12/31/97    12/31/96      12/31/97    12/31/96     12/31/97    12/31/96
         --------    --------      --------    --------     --------    --------
<S>           <C>         <C>         <C>         <C>         <C>         <C> 
Oil            23%         19%         17%         18%         18%         24%
Gas            27          32          40          31          38          25
Nuclear         9           6           8           8           9           9
Purchases      41          43          35          43          35          42
             ----         ----        ----        ----        ----        ---
Total         100%        100%        100%        100%        100%        100%
              ===         ===         ===         ===         ===         === 

</TABLE>

The use of gas for  electric  generation  decreased  for the three  months ended
December 31, 1997 when  compared to the same period in 1996 as fuel oil was more
economical  than gas and purchased  power.  For the nine and twelve months ended
December  31,  1997,  the use of gas for  electric  generation  increased as gas
became more  economical  than fuel oil and purchased  power when compared to the
same periods in 1996.




<PAGE>



Gas System

THREE MONTHS ENDED DECEMBER 31, 1997

For the three months  ended  December 31,  1997,  gas fuel costs  increased  for
operating  the gas  business,  when  compared to the same  period in 1996,  as a
result of an increase in average gas prices partially offset by the operation of
the Gas Cost Adjustment (GCA) mechanism which permits the Company to increase or
decrease  the  current  year  fuel  expenses  for  differences  between  amounts
collected in rates and amounts actually spent for fuel during the previous year.
For the three months ended  December 31, 1997, the amounts being  refunded,  via
the GCA, were greater than that for the same period in 1996.

NINE AND TWELVE MONTHS ENDED DECEMBER 31, 1997

For the nine and twelve  months ended  December  31,  1997,  gas fuel costs were
lower  than the prior  year as a result of a decrease  in sales  volumes,  lower
average gas prices and the  operation of the GCA  mechanism.  In  addition,  the
amounts being refunded, via the GCA, were greater than that for the same periods
in 1996.

OPERATIONS AND MAINTENANCE EXPENSES

For the three,  nine and twelve months ended  December 31, 1997,  operations and
maintenance  (O&M) expenses,  excluding fuel and purchased  power,  increased by
$23.3 million,  $14.1 million and $4.8 million,  respectively,  when compared to
the same periods in 1996,  principally as a result of the  recognition of higher
performance  based  employee  incentives  and  higher  provisions  for  doubtful
accounts.

RATE MODERATION COMPONENT

The  Rate  Moderation  Component  (RMC)  reflects  the  difference  between  the
Company's electric revenue  requirements  under conventional  ratemaking and the
revenues  provided by its  electric  rate  structure.  In  addition,  the RMC is
adjusted  monthly for the operation of the Company's Fuel  Moderation  Component
(FMC)  mechanism  and the  difference  between  the  Company's  share of  actual
operating  costs at Nine Mile Point 2 Nuclear Power  Station  (NMP2) and amounts
provided for in electric rates.

For the three months ended  December 31, 1997,  the Company  recorded a non-cash
credit to income of approximately $10.7 million compared to a non-cash charge of
$9.7  million in the same period in 1996.  For the nine and twelve  months ended
December  31,  1997,  the  Company  recorded   non-cash  charges  to  income  of
approximately  $7.6 million and $13.5  million,  respectively.  For the nine and
twelve months ended December 31, 1996, the Company recorded  non-cash credits to
income of approximately $8.9 million and $24.2 million, respectively.

In December 1997, the Company  petitioned the Public Service Commission (PSC) to
change the monthly  amortization  of the RMC to a method  designed to compensate
for seasonality in the electric  business.  Accordingly,  effective  December 1,
1997, the Company began recording the RMC amortization on a non-levelized basis.
Previously,  the Company had amortized  the RMC on a straight  line  (levelized)
basis over each 12 month period  beginning  December 1. As a result of the above
change,  for the three,  nine and twelve  months ended  December  31, 1997,  the
Company recorded non-cash credits of $13.6 million more than it would have under
the previous methodology. This change in methodology will continue to affect the
comparability  of quarterly  earnings during the 12-month period ending December
31, 1998.  It should be noted,  however,  that under this new  methodology,  the
total RMC  amortization for the rate year ended November 30, 1998, will be equal
to the total RMC amortization under the previous method.

The Company  continues to believe that the full amortization and recovery of the
RMC balance,  which at December 31, 1997, was approximately  $386 million,  will
take place within the time frame  established by the RMA, in accordance with the
rate plans submitted to the PSC for the single rate year 1997 and the three year
rate period 1997  through  1999.  In December  1997,  the Company  received  PSC
approval to  continue  the RMC and the LILCO  Ratemaking  and  Performance  Plan
(LRPP)  ratemaking  mechanisms  and incentives for the electric rate year ending
November 30, 1997. In the event that the LIPA  transaction  is not  consummated,
the Company  expects that the PSC will issue an order providing for, among other
things, the continuing  recovery,  through rates, of the RMC balance, one of the
Shoreham-related  regulatory  assets.  If such an  electric  rate  order  is not
obtained or does not provide for the continuing recovery of the RMC balance, the
Company may be required to write-off  the amount not expected to be provided for
in rates. For a further discussion of the LIPA transaction,  see the Joint Proxy
Statement/Prospectus filed June 30, 1997.

For a further  discussion  of the RMC,  RMA and FMC,  see the  Company's  Annual
Report on Form 10-K/A filed June 30, 1997, for the year ended December 31, 1996.



<PAGE>



OTHER REGULATORY AMORTIZATION

The components of other regulatory amortization,  for the three, nine and twelve
months ended December 31, 1997 and 1996, were as follows:

<TABLE>
<CAPTION>
                                                       (In millions of dollars)
---------------------------------------------------------------------------------
                                   Three Months      Nine Months    Twelve Months
                                   1997     1996    1997    1996     1997    1996
---------------------------------------------------------------------------------
<S>                                <C>     <C>       <C>    <C>      <C>     <C> 
Net Margin                         $ -     $(43)     $13    $  5     $ 2     $  3
Amortization of LRPP Deferral        -       11        -      42       -       59
Excess Earnings - Electric          (7)      10       (5)     10       6       10
Excess Earnings - Gas               (3)       2        7       8       9       10
OTHER                               12       13       29      35      39       45
---------------------------------------------------------------------------------
                                   $ 2     $ (7)     $44    $100     $56     $127
---------------------------------------------------------------------------------
</TABLE>

These variances are due to regulatory  mechanisms and have no impact on earnings
since they  reflect the net  deferral of income and expense  resulting  from the
Company's ratemaking mechanisms discussed in further detail below.

NET  MARGIN-  An  electric  business  unit  revenue  reconciliation   mechanism,
established  under  the  LRPP,  which  eliminates  the  impact  on  earnings  of
experiencing  sales that are above or below  adjudicated  levels by  providing a
fixed annual net margin level (defined as sales  revenue,  net of fuel and gross
receipts  taxes).  Variations in electric  revenue  resulting  from  differences
between actual and adjudicated net margin sales levels are deferred on a monthly
basis  during  the rate year  through  a charge  or  credit to other  regulatory
amortization.  These deferrals are then refunded to or recovered from ratepayers
as explained below under "LRPP Amortization."

LRPP  AMORTIZATION- As established under the LRPP,  deferred balances  resulting
from the net margin,  electric property tax  reconciliation,  earned performance
incentives,  and associated  carrying  charges are accumulated  during each rate
year.  The first $15 million of the total deferral is recovered from or credited
to electric  ratepayers by increasing  or  decreasing  the RMC balance.  Amounts
deferred in excess of $15 million,  upon approval by the PSC, are refunded to or
recovered from ratepayers through the FCA mechanism over the subsequent 12-month
period, with the offset being recorded in other regulatory amortization.

For the three,  nine and twelve months ended December 31, 1997, the amortization
of the deferred  LRPP balance in excess of $15 million  related to the rate year
ended  November  30,  1995,  has not begun,  as the  Company  has yet to receive
approval  from  the PSC to  begin  refunding  the  amount  owed to its  electric
ratepayers.  For the three,  nine and twelve months ended December 31, 1996, the
Company recognized $10.6 million, $42.4 million and $58.7 million, respectively,
of non-cash charges to income representing the amortization of the deferred LRPP
balance  related  to the rate  year  ended  November  30,  1994.  For a  further
discussion of the LRPP, see Note 3 of Notes to Financial  Statements included in
the  Company's  Annual  Report on Form 10-K/A filed June 30, 1997,  for the year
ended December 31, 1996.

EXCESS EARNINGS- Also recorded in other regulatory amortization,  if applicable,
are non-cash charges  representing:  (a) 100% of electric earnings  generated by
the  Company in excess of  amounts  provided  for in  electric  rates,  which is
returned to the electric  ratepayer through a reduction to the RMC balance;  and
(b) 50% of the gas  earnings  generated  by the  Company  in excess  of  amounts
provided for in gas rates,  which will be returned to the gas ratepayers through
a reduction in the amount due from gas ratepayers  related to  manufactured  gas
plant site (MGP) clean-up costs.  These rate year excess earnings are calculated
and  recorded  on the  Company's  books  on a  quarterly  basis to  reflect  the
Company's best estimate of amounts earned in excess of the Company's 11% allowed
return on common equity. As a result of these quarterly measurements, which, for
example,  in March  represent  four months of actual results and eight months of
projected results,  it is not uncommon to have increases or decreases during the
year.

OPERATING TAXES

For the three, nine, and twelve months ended December 31, 1997,  operating taxes
decreased compared to the same periods in the prior year,  primarily as a result
of the expiration, at December 31, 1996, of the Corporate Tax Surcharge.

FEDERAL INCOME TAX

For the three month period ended  December  31, 1997,  federal  income tax (FIT)
expense  decreased as a result of lower  pre-tax  book income.  For the nine and
twelve month periods ended December 31, 1997, FIT expense  increased as a result
of higher pre-tax book income.

The current operating  portion of the FIT liability,  for the three months ended
December 31, 1997, totaled $20.4 million, of which $15.3 million was Alternative
Minimum Tax (AMT).  The  operating  FIT  liability,  for the nine  months  ended
December 31, 1997,  totaled $64.1  million,  of which $36.2 million was AMT. The
operating FIT liability,  for the twelve months ended December 31, 1997, totaled
$87.5 million, of which $67.4 million was AMT. The increase in the FIT liability
over  the  comparable  periods  last  year  was  primarily  attributable  to the
Company's full  utilization of the AMT net operating loss  carryforwards  during
1996.


OTHER INCOME AND DEDUCTIONS

Other income and  deductions  decreased  for the three,  nine and twelve  months
ended December 31, 1997 when compared to the same periods in 1996,  primarily as
a result of the Company's  accrual of certain  contractual  obligations  for key
employees,  required as a result of the KeySpan merger and the LIPA transaction.
The nine and twelve month  decreases were also affected by lower interest income
from short-term investments and lower fuel incentives.

INTEREST EXPENSE

Interest expense  decreased for the three, nine and twelve months ended December
31, 1997,  when  compared to the same periods in 1996, as a result of lower debt
levels.

LIQUIDITY AND CAPITAL RESOURCES

At December  31,  1997,  the  Company's  cash and cash  equivalents  amounted to
approximately  $180  million,  compared to $65 million at March 31,  1997.  This
increase  in cash  and  cash  equivalents  was  primarily  attributable  to cash
generated from operations  exceeding the Company's  operating,  construction and
dividend  requirements.  In  addition,  the  Company  received  net  proceeds of
approximately  $24.5 million,  from the sales of tax-exempt  bonds, to reimburse
the treasury for amounts previously expended on electric generation projects.

At December 31,  1997,  March 31, 1997 and  December  31,  1996,  the  Company's
capitalization and ratios were as follows:
<TABLE>
<CAPTION>

                                                         (In millions of dollars)
--------------------------------------------------------------------------------
                             12/31/97          3/31/97             12/31/96
                        AMOUNT    PERCENT  AMOUNT   PERCENT   AMOUNT     PERCENT
--------------------------------------------------------------------------------
<S>                     <C>        <C>    <C>        <C>       <C>         <C> 
Long-term debt          $4,483      57.5  $4,458      57.8     $4,708       59.3
Preferred stock            702       9.0     703       9.1        703        8.9
Common shareowners'
 EQUITY                  2,609      33.5   2,549      33.1      2,523       31.8
--------------------------------------------------------------------------------
                        $7,794     100.0  $7,710     100.0     $7,934      100.0
--------------------------------------------------------------------------------
</TABLE>

A $250  million  line of  credit,  secured  by a first  lien upon the  Company's
accounts receivable and fuel oil inventories,  is available to the Company under
its Revolving Credit Agreement (RCA). The lending banks participating in the RCA
have agreed to extend their  commitments  through October 1, 1998. In July 1997,
the Company  utilized $40 million in interim  financing under the RCA, which was
repaid in August 1997.  The Company  will, in order to satisfy  short-term  cash
requirements,  continue to avail  itself of such interim  financing  through the
RCA, as necessary.

The Company has no current plans to access the capital  markets for financing as
cash from  operations  and/or on hand,  should be sufficient  to meet  operating
requirements  and debt  maturities  through  December 31, 1998,  including  $100
million of General and Refunding Bonds maturing April 15, 1998. The Company may,
however utilize short term borrowings above its line of credit to meet costs and
expenses  anticipated  to be incurred  in  conjunction  with the Keyspan  merger
and/or LIPA transaction.

CAPITAL REQUIREMENTS AND CAPITAL PROVIDED

Capital requirements and capital provided, for the three, nine and twelve months
ended December 31, 1997, were as follows:
<TABLE>
<CAPTION>

                                                            (In millions of dollars)
----------------------------------------------------------------------------------------
                     Three Months Ended       Nine Months Ended      Twelve Months Ended
                      December 31, 1997       December 31, 1997        December 31, 1997
----------------------------------------------------------------------------------------
<S>                          <C>                    <C>                         <C> 
Capital Requirements
Construction                 $84                    $202                        $252
----------------------------------------------------------------------------------------

Redemptions and Dividends
Long-term debt                 1                       1                         251
Preferred stock                -                       1                           1
Preferred stock dividends     13                      39                          52
Common stock dividends        54                     162                         216
----------------------------------------------------------------------------------------

Total Redemption and
  Dividends                   68                     203                         520
----------------------------------------------------------------------------------------

Shoreham post-settlement
  Costs                        9                      30                          40
----------------------------------------------------------------------------------------

Total Capital Requirements  $161                    $435                        $812
========================================================================================

Capital Provided

Cash from operations         $192                   $545                        $703
(Increase) Decrease in cash
  balances                    (59)                  (115)                        100
Long term debt issued          25                     25                          25
Common stock issued             5                     14                          18
Hedge funding                   -                    (30)                        (30)
Other investing and financing
  Activities                   (2)                    (4)                         (4)
----------------------------------------------------------------------------------------

Total Capital Provided       $161                   $435                        $812
========================================================================================

</TABLE>


For further information, see the Statement of Cash Flows.


RATE MATTERS

For a discussion of Rate Matters, see Note 3 of Notes to Financial Statements.

KEYSPAN ENERGY CORPORATION (FORMERLY BROOKLYN UNION) TRANSACTION

For a further discussion on the KeySpan Energy Corporation transaction, see Note
3 of Notes to Financial Statements.

LONG ISLAND POWER AUTHORITY TRANSACTION

For a further  discussion on the Long Island Power  Authority  transaction,  see
Note 2 of Notes to Financial Statements.



<PAGE>



IMPACT OF YEAR 2000

Some of the  Company's  older  computer  programs  were written using two digits
rather than four to define the  applicable  year.  As a result,  those  computer
programs have  time-sensitive  software that recognizes a date using "00" as the
year 1900  rather  than the year  2000.  This  could  cause a system  failure or
miscalculations  causing  disruptions  of  operations,  including,  among  other
things,  a temporary  inability to process  transactions,  bill  ratepayers,  or
engage in similar normal business activities.

The company  embarked on a program in 1996 to complete  Year 2000  compliance by
year-end 1998. The Company currently expects to spend approximately $10 million,
consisting of $7 million to modify application systems and $3 million on overall
non-information  technology  systems,  to be  expended  over a three year period
(1997-1999).  As of December 31, 1997, $3.75 million of the $7 million, referred
to above, has been expended in investigating and modifying software. This effort
is scheduled to be completed in 1998 and testing will  continue into early 1999.
A corporate-wide  program has been established to review all software,  hardware
and associated  compliance  plans. The readiness of suppliers and vendor systems
is also under  review.  Contingency  and business  continuation  plans are being
prepared and will be reviewed periodically.

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

The costs of the  project  and the date on which the  Company  believes  it will
complete the Year 2000  modifications  are based on management's best estimates,
which were derived utilizing  numerous  assumptions of future events,  including
the continued  availability  of certain  resources and other  factors.  However,
there can be no  guarantee  that these  estimates  will be  achieved  and actual
results could differ  materially from those  anticipated.  Specific factors that
might  cause such  material  differences  include,  but are not  limited to, the
availability  and cost of personnel  trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.

ACCOUNTING PRONOUNCEMENT

In February  1997,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Statement of Financial  Accounting Standards No. 128, "Earnings Per Share" (SFAS
No. 128). This statement supersedes APB Opinion No. 15, "Earnings Per Share" and
simplifies the computation of earnings per share.  SFAS No. 128 is effective for
financial  statements  for both interim and annual periods ending after December
15, 1997. Accordingly, the Company adopted SFAS No. 128 at December 31, 1997.

The FASB issued Statement of Financial  Accounting Standards No. 130, "Reporting
Comprehensive  Income"  (SFAS No.  130).  The Company will adopt SFAS No. 130 on
April  1,  1998,  and does not  expect  any  material  effect  on its  financial
statements from adoption of the statement.


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 1995.  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  Company's  business and  financial  results  could cause actual  results to
differ  materially from those stated in the  forward-looking  statements.  Those
factors include the proposed  transactions  with The KeySpan Energy  Corporation
and LIPA as discussed under the heading "KeySpan Energy Corporation Transaction"
and "Long Island Power  Authority  Transactions",  state and federal  regulatory
rate  proceedings,  competition,  and  certain  environmental  matters  each  as
discussed  herein,  in the Company's Annual Report on Form 10-K/A filed June 30,
1997, for the year ended December 31, 1996, the Joint Proxy Statement/Prospectus
filed  June  30,  1997,  or in  other  reports  filed  by the  Company  with the
Securities and Exchange Commission.


<PAGE>



PART II.  OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS

      None

ITEM 2.     CHANGES IN SECURITIES

      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

      *10(a)      Indenture of Trust dated as of December 1, 1997 by and between
                  New York  State  Energy  Research  and  Development  Authority
                  (NYSERDA) and The Chase Manhattan  Bank, as Trustee,  relating
                  to the 1997 Electric Facilities Revenue Bonds.

                    Participation  Agreement dated as of December 1, 1997 by and
                    between  NYSERDA  and  the  Company  relating  to  the  1997
                    Electric Facilities Revenue Bonds.

      *10(b)      Executive  Retention  Agreement dated as of July
                  1, 1997 by and between the Company and  Theodore
                  A. Babcock, Vice President and Treasurer,  which
                  agreement   is   substantially   the   same   as
                  Executive  Retention  Agreement  by and  between
                  the  Company  and (1)  Michael E.  Bray,  Senior
                  Vice  President;  (2) Charles A.  Daverio,  Vice
                  President;   (3)   Jane   A.   Fernandez,   Vice
                  President;   (4)   Joseph   E.   Fontana,   Vice
                  President   and   Controller;   (5)   Robert  X.
                  Kelleher,  Senior Vice President;  (6) Howard A.
                  Kosel,  Vice  President;  (7)  John D.  Leonard,
                  Jr., Vice President;  (8) Adam M. Madsen, Senior
                  Vice  President;  (9) Kathleen A.  Marion,  Vice
                  President;   (10)  Brian  R.   McCaffrey,   Vice
                  President;  (11)  Joseph  W.  McDonnell,  Senior
                  Vice President;  (12) Leonard P. Novello, Senior
                  Vice   President  and  General   Counsel;   (13)
                  Anthony  Nozzolillo,  Senior Vice  President and
                  Chief Financial Officer;  (14) Richard Reichler,
                  Vice  President;  (15) William G.  Schiffmacher,
                  Senior   Vice   President;    (16)   Werner   J.
                  Schweiger,   Vice  President;  (17)  Richard  M.
                  Siegel,  Vice President;  (18) Robert B. Steger,
                  Senior Vice President;  (19) William E. Steiger,
                  Jr.,   Vice   President,   and  (20)  Edward  J.
                  Youngling, Senior Vice President.

      *27   Financial Data Schedule UT for the nine-month  period ended December
            31, 1997.

(B)   REPORTS ON FORM 8-K

      In its current  report on Form 8-K dated  December 31,  1997,  the Company
      provided unaudited pro forma combined condensed financial  information for
      LILCO and KeySpan at  September  30, 1997 and for the twelve  months ended
      September 30, 1997.



*Filed Herewith






<PAGE>












                                    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.



                                          LONG ISLAND LIGHTING COMPANY
                                                (Registrant)


                                            BY /S/ ANTHONY NOZZOLILLO
                                            -------------------------
                                             Senior Vice President and
                                            Principal Financial Officer


Dated: February 17, 1998


<PAGE>








                                 EXHIBIT INDEX


Exhibit No.

10(a)       Indenture  of Trust  dated as of December 1, 1997 by and between New
            York State Energy Research and Development  Authority  (NYSERDA) and
            The Chase Manhattan Bank, as Trustee,  relating to the 1997 Electric
            Facilities Revenue Bonds begins on page 32.

            Participation  Agreement dated as of December 1, 1997 by and between
            NYSERDA and the Company  relating  to the 1997  Electric  Facilities
            Revenue Bonds begins on page 158.

10(b)     Executive  Retention Agreement dated as of July 1, 1997 by and between
          the Company and Theodore A. Babcock,  Vice President,  which agreement
          is  substantially  the same as  Executive  Retention  Agreement by and
          between the Company  and (1) Michael E. Bray,  Senior Vice  President;
          (2) Charles A. Daverio,  Vice President;  (3) Jane A. Fernandez,  Vice
          President;  (4) Joseph E. Fontana, Vice President and Controller;  (5)
          Robert X. Kelleher,  Senior Vice President;  (6) Howard A. Kosel, Vice
          President;  (7) John D.  Leonard,  Jr.,  Vice  President;  (8) Adam M.
          Madsen, Senior Vice President; (9) Kathleen A. Marion, Vice President;
          (10) Brian R.  McCaffrey,  Vice  President;  (11) Joseph W. McDonnell,
          Senior Vice President;  (12) Leonard P. Novello, Senior Vice President
          and General Counsel;  (13) Anthony  Nozzolillo,  Senior Vice President
          and Chief Financial  Officer;  (14) Richard Reichler,  Vice President;
          (15) William G.  Schiffmacher,  Senior Vice President;  (16) Werner J.
          Schweiger,  Vice  President;  (17) Richard M. Siegel,  Vice President;
          (18) Robert B. Steger, Senior Vice President; (19) William E. Steiger,
          Jr.,  Vice  President,  and (20)  Edward  J.  Youngling,  Senior  Vice
          President, begins on page 190.

27        Financial  Data Schedule UT for the  nine-month  period ended December
          31, 1997 begins on page 211.