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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-Q

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

            For the quarterly period ended September 30, 2002

                                       OR

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

            For the transition period from ______ to _______

Commission           Registrant, State of Incorporation,        I.R.S. Employer
File Number             Address, and Telephone Number         Identification No.
--------------------------------------------------------------------------------
 000-32503               PSEG ENERGY HOLDINGS L.L.C.              22-2983750
                   (A New Jersey Limited Liability Company)
                              80 Park Plaza-T22
                        Newark, New Jersey 07102-4194
                                 973-456-3581
                             http://www.pseg.com

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 [ ]

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<PAGE>

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----
PART I. FINANCIAL INFORMATION

   Item 1. Financial Statements ............................................   1

   Item 2. Management's Discussion and Analysis of Financial
           Condition and Results of Operations .............................  25

   Item 3. Quantitative and Qualitative Disclosures About Market Risk ......  42

   Item 4. Controls and Procedures .........................................  43

PART II. OTHER INFORMATION

   Item 1. Legal Proceedings ...............................................  43

   Item 5. Other Information ...............................................  44

   Item 6. Exhibits and Reports on Form 8-K ................................  47

   Signature ...............................................................  48
<PAGE>

                          PART I. FINANCIAL INFORMATION

                          ITEM 1. FINANCIAL STATEMENTS
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                              (Millions of Dollars)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                     For the Quarter            For the Nine Months
                                                                                          Ended                        Ended
                                                                                       September 30,                September 30,
                                                                                    -------------------         -------------------
                                                                                    2002          2001          2002          2001
                                                                                    -----         -----         -----         -----
<S>                                                                                 <C>           <C>           <C>           <C>
OPERATING REVENUES
   Electric Generation and Distribution Revenues ...........................        $ 112         $  47         $ 244         $  47
   Income from Capital and Operating Leases ................................           57            58           173           156
   Gain on Withdrawal from Partnership Interest ............................           --             1            47            51
   Income From Joint Ventures and Partnerships .............................           25            35            63            95
   Interest and Dividend Income ............................................            8            18            32            32
   Net Gain (Losses) on Investments ........................................            1            (8)          (37)          (23)
   Other ...................................................................            9             8            23            23
                                                                                    -----         -----         -----         -----
       Total Operating Revenues ............................................          212           159           545           381
                                                                                    -----         -----         -----         -----
OPERATING EXPENSES
   Electric Energy Costs ...................................................           55            21           113            21
   Operation and Maintenance ...............................................           16            18            33            26
   Depreciation and Amortization ...........................................           11             6            25             8
   Write-down of Project Investments .......................................           --            --           506            --
   Administrative and General ..............................................           27            20            75            57
                                                                                    -----         -----         -----         -----
       Total Operating Expenses ............................................          109            65           752           112
                                                                                    -----         -----         -----         -----
OPERATING INCOME (LOSS) ....................................................          103            94          (207)          269
OTHER INCOME (LOSS)
   Gain (Loss) on Early Retirement of Debt .................................            4            --             4            (3)
   Foreign Currency Transaction Loss .......................................           (2)           --           (71)           --
   Change in Fair Value of Derivative Financial Instruments ................           13            (2)           15            (1)
   Other ...................................................................            2             1             2             1
                                                                                    -----         -----         -----         -----
       Total Other Income (Loss) ...........................................           17            (1)          (50)           (3)
                                                                                    -----         -----         -----         -----
INTEREST EXPENSE
   Interest Expense ........................................................           64            52           176           135
   Capitalized Interest ....................................................           (5)           (3)          (10)          (13)
                                                                                    -----         -----         -----         -----
       Total Interest Expense--Net .........................................           59            49           166           122
                                                                                    -----         -----         -----         -----
INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTERESTS,
   DISCONTINUED OPERATIONS, AND CUMULATIVE EFFECT OF A
   CHANGE IN ACCOUNTING PRINCIPLE ..........................................           61            44          (423)          144
INCOME TAXES ...............................................................          (16)          (12)          160           (30)
MINORITY INTERESTS .........................................................           (2)           --             2            --
                                                                                    -----         -----         -----         -----
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS AND
   CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE ...................           43            32          (261)          114
DISCONTINUED OPERATIONS
   Loss from Discontinued Operations (net of tax) ..........................           (3)           (3)          (41)          (17)
                                                                                    -----         -----         -----         -----
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE .............................................           40            29          (302)           97
Cumulative Effect of a Change in Accounting Principle (net of tax) .........           --            --          (120)            9
                                                                                    -----         -----         -----         -----
NET INCOME (LOSS) ..........................................................           40            29          (422)          106
Preferred Stock Dividend Requirements ......................................           (6)           (6)          (17)          (17)
                                                                                    -----         -----         -----         -----
EARNINGS (LOSS)  AVAILABLE TO PUBLIC
   SERVICE ENTERPRISE GROUP INCORPORATED ...................................        $  34         $  23         $(439)        $  89
                                                                                    =====         =====         =====         =====
</TABLE>

See Notes to Consolidated Financial Statements.


                                       2
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
                           CONSOLIDATED BALANCE SHEETS
                                     ASSETS
                              (Millions of Dollars)
                                   (Unaudited)

                                                     September 30,  December 31,
                                                         2002          2001
                                                     -------------  ------------
CURRENT ASSETS
   Cash and Cash Equivalents ........................    $    64      $    54
   Accounts Receivable:
     Trade ..........................................        116          108
     Other ..........................................         18           19
     Affiliated Companies ...........................         23           --
   Notes Receivable .................................        108           --
   Interest Receivable ..............................          5           --
   Assets Held for Sale .............................         23          422
   Inventory ........................................         14           15
   Prepayments ......................................          1            2
   Current Assets of Discontinued Operations ........        358          483
                                                         -------      -------
       Total Current Assets .........................        730        1,103
                                                         -------      -------
PROPERTY, PLANT AND EQUIPMENT
   Electric Generation and Distribution Assets ......        697          669
   Construction in Progress .........................        307          345
   Real Estate ......................................        104          115
   Property and Equipment ...........................         35           52
                                                         -------      -------
       Total ........................................      1,143        1,181
   Accumulated Depreciation and Amortization ........       (118)        (157)
                                                         -------      -------
       Net Property, Plant and Equipment ............      1,025        1,024
                                                         -------      -------

INVESTMENTS
   Capital Leases - Net .............................      2,944        2,784
   Corporate Joint Ventures .........................      1,096        1,115
   Partnerships Interests - Net .....................        613          659
   Other Investments ................................         46           56
                                                         -------      -------
       Total Investments ............................      4,699        4,614
                                                         -------      -------

OTHER ASSETS
   Goodwill .........................................        443          548
   Deferred Costs ...................................         52           81
   Other ............................................         57           69
                                                         -------      -------
       Total Other Assets ...........................        552          698
                                                         -------      -------

TOTAL ASSETS ........................................    $ 7,006      $ 7,439
                                                         =======      =======

See Notes to Consolidated Financial Statements.


                                       3
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
                           CONSOLIDATED BALANCE SHEETS
                         LIABILITIES AND CAPITALIZATION
                              (Millions of Dollars)
                                   (Unaudited)

                                                     September 30,  December 31,
                                                         2002          2001
                                                     ------------   -----------
CURRENT LIABILITIES
   Long-Term and Medium-Term Debt Due Within
     One Year .......................................    $   314      $   242
   Short-Term Borrowings Due to Public Service
     Enterprise Group Incorporated ..................         --           38
   Payables:
     Trade Accounts .................................         56           48
     Taxes ..........................................          4           21
     Interest .......................................         66           49
     Other ..........................................         42           49
     Affiliated Companies ...........................          1           45
   Borrowings Under Lines of Credit .................        253          300
   Non-Recourse Notes Payable .......................        271          285
   Current Liabilities of Discontinued Operations ...        280          251
                                                         -------      -------
       Total Current Liabilities ....................      1,287        1,328
                                                         -------      -------
NONCURRENT LIABILITIES
   Deferred Income Taxes and Investment
     and Energy Tax Credits .........................      1,067        1,211
   Other Noncurrent Liabilities .....................        190           99
                                                         -------      -------
       Total Noncurrent Liabilities .................      1,257        1,310
                                                         -------      -------

COMMITMENTS AND CONTINGENT LIABILITIES ..............         --           --
                                                         -------      -------

MINORITY INTERESTS ..................................         41           47
                                                         -------      -------

CAPITALIZATION
   Project Level, Non-Recourse Long-Term Debt .......        681          634
   Senior Notes .....................................      1,761        1,644
   Medium-Term Notes ................................         --          252
                                                         -------      -------
       Total Long-Term Debt .........................      2,442        2,530
                                                         -------      -------

   STOCKHOLDER'S EQUITY
     Common Stock, Issued: 100 Shares ...............         --           --
     Preferred Stock ................................        509          509
     Additional Paid-in Capital .....................      1,790        1,490
     Retained Earnings ..............................         71          510
     Accumulated Other Comprehensive Loss ...........       (391)        (285)
                                                         -------      -------
       Total Stockholder's Equity ...................      1,979        2,224
                                                         -------      -------
TOTAL LIABILITIES AND CAPITALIZATION ................    $ 7,006      $ 7,439
                                                         =======      =======

See Notes to Consolidated Financial Statements.


                                       4
<PAGE>

                            PSEG ENERGY HOLDINGS INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (Millions of Dollars)
                                   (Unaudited)

                                                                 For the
                                                            Nine Months Ended
                                                              September 30,
                                                          ----------------------
                                                            2002         2001
                                                          --------     ---------
CASH FLOWS FROM OPERATING ACTIVITIES
   Net (Loss) Income .................................     $  (422)     $   106
   Adjustments to Reconcile Net (Loss) Income to
    Net Cash Flows from Operating Activities:
     Depreciation and Amortization ...................          39           14
     Deferred Income Taxes (Other than Leases) .......        (207)         (16)
     Leveraged Lease Income, Adjusted for Rents
      Received .......................................          72           56
     Investment Distributions ........................           5           72
     Undistributed Earnings from Affiliates ..........         (42)         (60)
     Net Gains on Investments/Partnerships ...........          (9)         (28)
     Foreign Currency Transaction Loss ...............          71           --
     Proceeds from Withdrawal from Partnership
      Interests ......................................          47           50
     Write-down of Project Investments ...............         506           --
     Loss on Disposal of Discontinued Operations
      (net of tax) ...................................          34           --
     Cumulative Effect of a Change in Accounting
      Principle (net of tax) .........................         120           (9)
     Net Changes in Certain Current Assets and
      Liabilities:
       Accounts Receivable ...........................         (79)        (127)
       Taxes Payable .................................         (17)           8
       Accounts Payable ..............................         (30)          55
       Interest Payable ..............................          13           24
       Other Current Assets and Liabilities ..........          11            6
     Other ...........................................           8           18
                                                           -------      -------
     Net Cash Provided by Operating Activities .......         120          169
                                                           -------      -------

CASH FLOWS FROM INVESTING ACTIVITIES
   Investments in Joint Ventures and Partnerships ....        (241)        (125)
   Investments in Capital Leases .....................         (31)        (442)
   Additions to Property, Plant and Equipment ........        (243)        (120)
   Return of Capital from Partnerships ...............         118            2
   Reductions of (Additions to) Deferred Costs .......           5          (23)
   Acquisitions, Net of Cash Acquired ................         (16)        (532)
   Other .............................................          18          (72)
                                                           -------      -------
     Net Cash Used in Investing Activities ...........        (390)      (1,312)
                                                           -------      -------

CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from Additional Paid-in Capital ..........         300          400
   Net Decrease in Short-Term Debt ...................         (70)        (192)
   Net (Decrease) Increase in Short-Term
    Affiliate Borrowings .............................         (15)          65
   Proceeds from Senior Notes ........................         134          939
   Early Retirement of Senior Notes ..................         (19)          --
   Proceeds from Project-Level Non-Recourse Debt .....         164          254
   Repayment of Medium-Term and Project-Level
    Non-Recourse Debt ................................        (198)        (287)
   Cash Dividends Paid ...............................         (17)         (20)
   Other .............................................           3            8
                                                           -------      -------
     Net Cash Provided by Financing Activities .......         282        1,167
                                                           -------      -------
   Effect of Exchange Rate Changes on Cash
    and Cash Equivalents .............................          (2)          (1)
                                                           -------      -------
   Net Change in Cash and Cash Equivalents ...........          10           23
   Cash and Cash Equivalents at Beginning
    of Period ........................................          54           16
                                                           -------      -------
   Cash and Cash Equivalents at End of
    Period ...........................................     $    64      $    39
                                                           =======      =======

Supplemental Disclosure of Cash Flow Information:
     Cash Payments During the Period for:
       Income Taxes ..................................     $   (77)     $   (55)
       Interest ......................................     $   124      $    97
Non-Cash Investing and Financing Activities:
       Fair Value of Property, Plant and
        Equipment Acquired ...........................     $    34      $   628
       Debt Assumed from Companies Acquired ..........     $    --      $   221

See Notes to Consolidated Financial Statements.


                                       5
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Basis of Presentation

Basis of Presentation

As  of  September  30,  2002,  PSEG  Energy  Holdings  Inc.  (Energy  Holdings),
incorporated  under  the laws of the  State  of New  Jersey  with its  principal
executive offices located at 80 Park Plaza, Newark, New Jersey 07102 is a direct
wholly-owned  subsidiary of Public Service Enterprise Group Incorporated (PSEG).
Unless the context  otherwise  indicates,  all references to "Energy  Holdings",
"we", "us" or "our" herein mean PSEG Energy  Holdings Inc. and its  consolidated
subsidiaries.  For a discussion of the formation of PSEG Energy  Holdings L.L.C.
as the  successor to PSEG Energy  Holdings  Inc. in October  2002,  see Note 11.
Subsequent  Events.  We have three principal direct  wholly-owned  subsidiaries;
PSEG Global Inc.  (Global),  PSEG  Resources  Inc.  (Resources)  and PSEG Energy
Technologies  Inc.  (Energy  Technologies).  In the second  quarter of 2002,  we
initiated a process for the sale of Energy  Technologies  businesses,  including
the Demand Side Management  (DSM)  investments.  Our intention was to dispose of
the  stock of these  businesses  through  sales to third  parties.  In the third
quarter  of  2002,  we  decided  to  continue  to own  the DSM  investments  and
anticipate  continued  profitability.  In  October  2002,  we sold our  majority
interest in the Tanir Bavi power plant in India for $45 million.  For additional
information, see Note 3. Discontinued Operations.

The financial  statements  included  herein have been  prepared  pursuant to the
rules and regulations of the Securities and Exchange  Commission (SEC).  Certain
information  and note  disclosures  normally  included in  financial  statements
prepared in accordance with generally accepted  accounting  principles have been
condensed or omitted  pursuant to such rules and  regulations.  However,  in the
opinion of  management,  the  disclosures  are adequate to make the  information
presented complete and not misleading.  These consolidated  financial statements
and  Notes  to  Consolidated  Financial  Statements  (Notes)  should  be read in
conjunction  with our Notes contained in the 2001 Annual Report on Form 10-K and
as updated on our Current  Report on Form 8-K dated  September  27, 2002 and the
first and second quarter 2002 Quarterly Reports on Form 10-Q. These Notes update
and supplement  matters  discussed in the 2001 Annual Report on Form 10-K and as
updated on our Current  Report on Form 8-K dated  September  27,  2002,  and the
first and second quarter 2002 Quarterly Reports on Form 10-Q.

The unaudited  financial  information  furnished herein reflects all adjustments
which are, in the opinion of  management,  necessary to fairly state the results
for  the  interim  periods  presented.  All  such  adjustments  are of a  normal
recurring nature. The year-end  Consolidated  Balance Sheet was derived from the
audited consolidated  financial statements included in the 2001 Annual Report on
Form 10-K.  Certain  reclassifications  of prior  period  data have been made to
conform with the current period presentation.

Note 2. Recent Accounting Pronouncements

On January 1, 2002,  we adopted  Financial  Accounting  Standards  Board  (FASB)
Statement of Financial  Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible  Assets"  (SFAS 142).  Under SFAS 142,  goodwill is a  nonamortizable
asset, and is subject to an annual review for impairment,  and an interim review
when certain events or circumstances  occur that indicate the carrying value may
not be recoverable.  Under SFAS 142, we had a transitional  period of six months
from the date of adoption to complete our goodwill impairment testing, which was
completed as of June 30, 2002. We evaluated the  recoverability  of the recorded
amount of  goodwill  based on certain  operating  and  financial  factors.  Such
impairment  testing  included  discounted  cash flow tests which  require  broad
assumptions and significant judgment to be exercised by management. As a result,
in the second quarter of 2002 we have recorded  after-tax charges to reflect the
goodwill  impairment of $120 million,  retroactive  to January 1, 2002, and such
amount has been  recognized  as a  Cumulative  Effect of a Change in  Accounting
Principle  in  accordance  with the new  standard.  For further  analysis of the
impairment  of goodwill see Note 3.  Discontinued  Operations  and Note 4. Asset
Impairments.


                                       6
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

On January 1, 2002,  we adopted  SFAS No. 144,  "Accounting  for  Impairment  or
Disposal of Long-Lived  Assets" (SFAS 144). Under SFAS 144 long-lived  assets to
be disposed of are  measured at the lower of carrying  amount or fair value less
costs to sell,  whether  reported in continuing  operations  or in  discontinued
operations. Discontinued operations will no longer be measured at net realizable
value or include  amounts for  operating  losses that have not yet  occurred.  A
long-lived  asset must be tested for  impairment  whenever  events or changes in
circumstances  indicate that its carrying amount may be impaired. For additional
information relating to asset impairments,  see Note 3. Discontinued  Operations
and Note 7. Commitments and Contingencies.

During the third quarter of 2002, we adopted SFAS No. 145,  "Rescission  of FASB
Statements Nos. 4, 44 and 64,  Amendment of FASB Statement No. 13, and Technical
Corrections"  (SFAS 145). This Statement  rescinds SFAS No. 4, "Reporting  Gains
and Losses from  Extinguishments  of Debt,"  (SFAS 4) and an  amendment  of that
Statement,  SFAS No. 64,  "Extinguishments  of Debt Made to Satisfy Sinking Fund
Requirements"   (SFAS  64).   SFAS  4  required   that  gains  and  losses  from
extinguishments of debt that were included in the determination of net income be
aggregated,  and if material,  classified as an  extraordinary  item.  Since the
issuance of SFAS 4, the use of debt  extinguishments has become part of the risk
management   strategy   of  many   companies,   representing   a  type  of  debt
extinguishment  that  does  not  meet  the  criteria  for  classification  as an
extraordinary item. Based on this trend, the FASB issued this rescission of SFAS
4 and SFAS 64. Accordingly, under SFAS 145, we now record these gains and losses
in Other  Income  (Loss).  We recorded  pre-tax  gains of $4 million ($3 million
after-tax)  from the early  retirement  of debt as a component  of Other  Income
(Loss) in the  quarter  and nine months  ended  September  30,  2002.  Also,  we
reclassified a pre-tax loss of $3 million ($2 million  after-tax) from the early
retirement  of debt to a component  of Other  Income  (Loss) for the nine months
ended September 30, 2001 in accordance with SFAS 145.

In July 2001,  the FASB issued SFAS No. 143,  "Accounting  for Asset  Retirement
Obligations"  (SFAS 143).  Under SFAS 143, the fair value of a liability  for an
asset  retirement  obligation  should be  recorded  in the period in which it is
incurred.  Upon  settlement  of the  liability,  an entity  either  settles  the
obligation  for its  recorded  amount  or  incurs a gain or loss if the  settled
amount  differs from the  liability  recorded.  SFAS 143 is effective for fiscal
years beginning  after June 15, 2002. We are currently  evaluating this guidance
and  cannot  determine  the  impact  on  our  financial  position,   results  of
operations, or net cash flows, however, such impact could be material.

In June 2002,  the FASB issued SFAS No. 146,  "Accounting  for Costs  Associated
with Exit or Disposal  Activities"  (SFAS 146). SFAS 146 addresses the financial
accounting and reporting for costs associated with exit or disposal  activities.
SFAS 146 states that a liability for a cost  associated with an exit or disposal
activity  shall be  recognized  and measured  initially at its fair value in the
period when the  liability is incurred.  A liability  is  established  only when
present  obligations to others are determined.  SFAS 146 does not apply to costs
associated  with the  retirement of long-lived  assets  covered in SFAS 143 (see
above).  It  applies to costs  associated  with an exit  activity  that does not
involve an entity newly  acquired in a business  combination  or with a disposal
activity  covered  by SFAS 144 (see  above).  We will apply SFAS 146 for exit or
disposal  activities  initiated  after December 31, 2002. We are evaluating this
guidance and do not believe that it will have a material impact on our financial
position, results of operations, or net cash flows.

Note 3. Discontinued Operations

Energy Technologies' Investments

Energy Technologies is comprised of 11 heating, ventilating and air conditioning
(HVAC) and mechanical  operating  companies and an asset  management group which
includes  various  DSM  investments.  DSM  investments  in  long-term  contracts
represent expenditures made by Energy Technologies to share DSM customers' costs
associated with the installation of energy efficient equipment. DSM revenues are
earned  principally  from  monthly  payments  received  from  utilities,   which
represent  shared  electricity  savings  from  the  installation  of the  energy
efficient equipment.

During the second  quarter of 2002, we completed our  impairment  testing of all
recorded  goodwill in accordance with guidance set forth in SFAS 142,  including
the goodwill associated with the 11 HVAC/mechanical operating


                                       7
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

companies  acquired by Energy  Technologies.  Such analysis  indicated  that the
entire $53 million of goodwill associated with the HVAC/mechanical companies was
impaired, which resulted in a $32 million (after-tax) charge (net of $21 million
in taxes).  In accordance  with SFAS 142, this charge was recorded as of January
1, 2002 as a Cumulative Effect of a Change in Accounting Principle and reflected
in our results of operations for the nine months ended September 30, 2002.

In June 2002,  we adopted a plan to sell our  interests  in the  HVAC/mechanical
operating  companies.  The sale of the  HVAC/mechanical  operating  companies is
expected to be  completed  by June 2003.  We have  retained  the  services of an
investment-banking  firm to market the  HVAC/mechanical  operating  companies to
interested parties.  The  HVAC/mechanical  operating companies meet the criteria
for  classification  as  components  of  discontinued  operations  and all prior
periods have been reclassified to conform to the current year's presentation.

In the second quarter of 2002, we had initiated a process for the sale of Energy
Technologies'  DSM investments,  which we had expected to sell by June 30, 2003.
Based on our  assessments,  we believe  the fair  market  value of these  assets
approximates their carrying value as of September 30, 2002. For the period ended
June 30,  2002,  Energy  Technologies'  DSM  investments  were  classified  as a
component of discontinued  operations.  In the third quarter of 2002, we decided
to continue to own the DSM investments and anticipate  continued  profitability.
As of September  30, 2002,  the fair value of DSM  projects  approximates  their
carrying  value and no reduction in the recorded  amount is  indicated.  For the
period ended  September 30, 2002, all DSM  investments  were  reclassified  from
discontinued operations to continuing operations and the consolidated statements
for all periods presented have been restated to reflect this reclassification.

In addition to the goodwill impairment, we further reduced the carrying value of
the  investments  in the 11  HVAC/mechanical  operating  companies to their fair
value less costs to sell,  and  recorded a loss on  disposal  for the six months
ended June 30, 2002 of $20 million, net of $11 million in taxes. As of September
30,  2002,  the  carrying  value  of  the  HVAC/mechanical  operating  companies
approximates  the fair value and  accordingly  no  additional  reduction  in the
carrying  value was required for the three months ended  September 30, 2002. Our
remaining  investment  position in Energy  Technologies  is  approximately  $110
million,  of which approximately $32 million relates to deferred tax assets from
discontinued  operations,  for which no valuation allowance is deemed necessary.
Excluding the deferred tax assets from  discontinued  operations,  approximately
$40 million of our remaining  investment balance relates to the asset management
group.  Although  we  believe  that we will be able to sell the  HVAC/mechanical
companies, we can give no assurances that we will be able to realize their total
carrying values.

Operating results of Energy Technologies'  HVAC/mechanical  operating companies,
less certain  allocated costs from Energy Holdings,  have been reclassified into
discontinued  operations  in our  Consolidated  Statements  of  Operations.  The
results of operations of these discontinued  operations for the quarter and nine
months  ended  September  30,  2002,  yielded  additional  losses of $3  million
(after-tax) and $12 million (after-tax), respectively, and are disclosed below:

                                         Quarter Ended        Nine Months Ended
                                         September 30,          September 30,
                                      -------------------    -------------------
                                       2002        2001        2002        2001
                                      ------      -------    -------      ------
                                                  (Millions of Dollars)
Operating Revenues .............      $ 107       $ 127       $ 292       $ 328
Pre-Tax Operating Loss .........         (5)         (5)        (18)        (25)
Loss Before Income Taxes .......         (5)         (6)        (19)        (29)

The  carrying  amounts  of the assets and  liabilities  of Energy  Technologies'
HVAC/mechanical  operating companies,  as of September 30, 2002 and December 31,
2001, have been reclassified into Current Assets of Discontinued  Operations and
Current   Liabilities  of   Discontinued   Operations,   respectively,   on  our
Consolidated Balance Sheets. The carrying amounts of the major classes of assets
and liabilities of Energy Technologies'  HVAC/mechanical operating companies, as
of September  30, 2002 and December 31, 2001,  are  summarized  in the following
table:


                                       8
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

                                                   September 30,    December 31,
                                                       2002            2001
                                                   -------------    ------------
                                                      (Millions of Dollars)
   Total Current Assets ..........................     $ 94            $152
   Net Property, Plant and Equipment .............       16               8
   Total Investments .............................        9              13
   Total Other Assets ............................        5              57
                                                       ----            ----
TOTAL ASSETS .....................................     $124            $230
                                                       ====            ====
   Total Current Liabilities .....................     $ 84            $ 76
   Total Noncurrent Liabilities ..................        3               2
   Total Long-Term Debt ..........................        5               1
                                                       ----            ----
TOTAL LIABILITIES ................................     $ 92            $ 79
                                                       ====            ====

Tanir Bavi

As of  September  30,  2002,  Global  owned a 74%  interest  in Tanir Bavi Power
Company  Private  Ltd.  (Tanir  Bavi),  which  owns and  operates a 220 MW barge
mounted,  combined-cycle generating facility in India. A plan to exit Tanir Bavi
was adopted in June 2002.  Global signed an agreement in August 2002 under which
an affiliate of its partner in this venture,  GMR Vasavi  Group,  a local Indian
company,  purchased  Global's  majority  interest  in Tanir  Bavi.  The sale was
completed in October 2002. Tanir Bavi meets the criteria for classification as a
component  of   discontinued   operations   and  all  prior  periods  have  been
reclassified  to  conform  to the  current  year's  presentation.  In the second
quarter,  we reduced the carrying  value of Tanir Bavi to the  contracted  sales
price of $45 million and recorded a loss on disposal of $14 million (after-tax).
The  operating  results  of Tanir Bavi for the six  months  ended June 30,  2002
yielded income of $5 million (after-tax).

For information  regarding goodwill  impairment  associated with Tanir Bavi, see
Note 2. Recent Accounting Pronouncements and Note 4. Asset Impairments.

The  carrying  amounts  of the  assets  and  liabilities  of Tanir  Bavi,  as of
September 30, 2002 and December 31, 2001,  have been  reclassified  into Current
Assets of  Discontinued  Operations  and  Current  Liabilities  of  Discontinued
Operations,  respectively,  in our  Consolidated  Balance  Sheets.  The carrying
amounts of the major  classes of assets and  liabilities  of Tanir  Bavi,  as of
September  30, 2002 and December  31,  2001,  are  summarized  in the  following
tables:


                                       9
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

                                                   September 30,    December 31,
                                                       2002            2001
                                                   -------------    ------------
                                                      (Millions of Dollars)
   Total Current Assets ..........................     $ 34             $ 36
   Net Property, Plant and Equipment .............      183              190
   Total Other Assets ............................       17               27
                                                       ----             ----
TOTAL ASSETS .....................................     $234             $253
                                                       ====             ====
   Total Current Liabilities .....................     $ 52             $ 45
   Total Long-Term Debt ..........................      117              108
   Minority Interest .............................       19               19
                                                       ----             ----
TOTAL LIABILITIES ................................     $188             $172
                                                       ====             ====

Note 4. Asset Impairments

As of December 31, 2001, our aggregate investment exposure in Argentina was $632
million, including certain loss contingencies.  These investments included a 90%
owned distribution company,  Empresa Distribuidora de Electricidad de Entre Rios
S.A.  (EDEERSA);  minority  interests in three distribution  companies,  Empresa
Distribuidora de Energia Norte S.A. (EDEN), Empresa Distribuidora de Energia Sur
S.A.  (EDES),  and  Empresa  Distribuidora  La  Plata  S.A.  (EDELAP);  and  two
generating companies,  Central Termica San Nicolas (CTSN), and Parana which were
under contract for sale to certain subsidiaries of The AES Corporation (AES). As
of June 30,  2002,  we  determined  that  the  carrying  value of our  Argentine
investments was impaired.  The combination of the year-to-date operating losses,
goodwill  impairment  at EDEERSA,  write-down  of $506 million for all Argentine
assets, and certain loss contingencies  resulted in a pre-tax charge to earnings
of $632 million ($410 million after-tax) for the nine months ended September 30,
2002. In connection with the write-down of our Argentine  assets,  we recorded a
deferred  tax asset of $222  million.  We believe  that we will have  sufficient
future  capital  gains to realize this  deferred tax asset.  For a discussion of
certain  contingencies  related  to  our  Argentine  investments,  see  Note  7.
Commitments and Contingencies.

The tables below provide pre-tax and after-tax impacts of the various impairment
charges,  results of operations and accruals of loss contingencies recorded with
respect to our  investments  in Argentina  for the quarter and nine months ended
September 30, 2002 and September 30, 2001.

<TABLE>
<CAPTION>
                                                                              Quarter Ended                  Nine Months Ended
                                                                              September 30,                     September 30,
                                                                         ----------------------           ----------------------
                                                                          2002            2001            2002             2001
                                                                         ------           -----           -----            -----
                                                                                          (Millions of Dollars)
                                                                                                (Pre-Tax)
<S>                                                                      <C>              <C>             <C>              <C>
(Losses) Earnings Before Local Taxes-EDEERSA .................           $   --           $   6           $ (59)           $  11
Write-down of EDEERSA ........................................               --              --             (94)              --
Write-down of Assets Held for Sale to AES ....................               --              --            (412)              --
Loss Contingencies and Other .................................               --              --             (11)              --
Goodwill Impairment-EDEERSA ..................................               --              --             (56)              --
                                                                         ------           -----           -----            -----
    Total ....................................................           $   --           $   6           $(632)           $  11
                                                                         ------           -----           -----            -----
</TABLE>


                                       10
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                              Quarter Ended                  Nine Months Ended
                                                                              September 30,                     September 30,
                                                                         ----------------------           ----------------------
                                                                          2002            2001            2002             2001
                                                                         ------           -----           -----            -----
                                                                                          (Millions of Dollars)
                                                                                               (After-Tax)
<S>                                                                      <C>              <C>             <C>              <C>
(Losses) Earnings-EDEERSA ....................................           $   --           $   3           $ (40)           $   6
Write-down of EDEERSA ........................................               --              --             (61)              --
Write-down of Assets Held for Sale to AES ....................               --              --            (268)              --
Loss Contingencies and Other .................................               --              --              (5)              --
Goodwill Impairment-EDEERSA ..................................               --              --             (36)              --
                                                                         ------           -----           -----            -----
    Total ....................................................           $   --           $   3           $(410)           $   6
                                                                         ------           -----           -----            -----
</TABLE>

EDEERSA

Given  the  year-to-date  and  projected  operating  losses at  EDEERSA  and the
continued economic uncertainty in Argentina, we determined that it was necessary
to test these assets for impairment.  Such impairment  analysis was completed as
of June 30, 2002. As a result of this analysis,  we determined that these assets
were completely impaired under SFAS 144. We recorded total charges and losses of
$213  million,  pre-tax,  related to this  investment  for the nine months ended
September  30, 2002.  These  pre-tax  charges  consisted of goodwill  impairment
charges of $56 million, nine month operating losses of $59 million, of which $45
million was recorded in the first quarter of 2002, writing off the remaining $94
million net asset balance pursuant to our SFAS 144 impairment  analysis and loss
contingencies  and other items of $4 million.  The total  after-tax  charges and
losses  related to this  investment  were $139 million for the nine months ended
September 30, 2002.

In  addition,  we have  developed  an exit  strategy  to  dispose  of our equity
interest in  EDEERSA.  This exit is expected to be complete by June 30, 2003 and
we intend to operate EDEERSA while carrying out our exit plans.  However, due to
uncertainties  related to the timing and method of disposal of our investment in
EDEERSA,  the impairment charges and results of EDEERSA's operations will not be
reported as a  discontinued  operation  until  EDEERSA has been disposed of or a
sale is probable.  Global is currently in discussions with interested  potential
acquirers of EDEERSA.  During the second quarter of 2002,  EDEERSA  defaulted on
its debt, which is nonrecourse to Global and us.

As of  January 1,  2002,  goodwill  related  to our  investment  in EDEERSA  was
approximately  $56  million  and  was  included  in  our  previously   disclosed
investment  exposure.  As part of the  adoption of SFAS 142, we have  determined
that this goodwill was impaired and all of the goodwill has been written-down as
a cumulative  effect of a change in  accounting  principle as of January 1, 2002
and is reflected in our Consolidated Statement of Operations for the nine months
ended September 30, 2002. See below, Goodwill Impairment Analysis, for a further
discussion of our goodwill analysis.


                                       11
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Our share of the (Losses) Earnings for EDEERSA were included in our Consolidated
Statement of Operations as indicated in the following table:

<TABLE>
<CAPTION>
                                                                              Quarter Ended                 Nine Months Ended
                                                                              September 30,                    September 30,
                                                                         ----------------------          ----------------------
                                                                          2002            2001           2002             2001*
                                                                         ------------------------------------------------------
                                                                                          (Millions of Dollars)
<S>                                                                       <C>             <C>            <C>              <C>
Operating Revenues ...................................................    $ 10            $ 23           $ 29             $ 28
Operating Expenses
                                                                             8              21             22               21
                                                                          ----            ----           ----             ----
Operating Income .....................................................       2               2              7                7
Other Losses - Foreign Currency Transaction Loss .....................      --              --            (68)              --
Minority Interest and Other
                                                                            (2)              4              2                4
                                                                          ----            ----           ----             ----
(Loss) Earnings before Taxes .........................................    $ --            $  6           $(59)            $ 11
                                                                          ====            ====           ====             ====
</TABLE>

*     Operating  results for EDEERSA included $5 million of revenues recorded in
      accordance  with the equity method of accounting  for the six months ended
      June 30, 2001.

Stock Purchase Agreement

On August 24, 2001,  Global entered into a Stock Purchase  Agreement with AES to
sell its minority interests in EDEN, EDES,  EDELAP,  CTSN and Parana, to certain
subsidiaries  of AES.  In  connection  with  the  terms  of the  Stock  Purchase
Agreement,  Global has accrued  interest  and other  receivables  of $17 million
through February 6, 2002, which are direct  obligations of AES and represent the
total remaining  exposure  associated with these investments on our Consolidated
Balance Sheets. On February 6, 2002, AES notified Global that it was terminating
the Stock Purchase Agreement.  In the Notice of Termination,  AES alleged that a
Political Risk Event,  within the meaning of the Stock Purchase  Agreement,  had
occurred by virtue of certain  decrees of the  Government of Argentina,  thereby
giving AES the right to terminate  the Stock  Purchase  Agreement.  Global filed
suit in New York State Supreme Court for New York County  against AES to enforce
its rights  under the Stock  Purchase  Agreement.  A  settlement  was reached in
October 2002 between the parties  under which Global will transfer its shares of
EDEN, EDES, EDELAP, Parana and CTSN to AES. AES has paid Global $15 million plus
interest  under  the  settlement  and has  issued  notes  that  would  yield  an
additional  $15 million when the notes mature on various dates ending July 2003.
The litigation is stayed pending AES performance of settlement obligations.

Goodwill Impairment Analysis

In the second quarter,  we finalized our evaluation of the effect of SFAS 142 on
the recorded  amount of goodwill.  The total amount of goodwill  impairments  is
$120  million,  net of tax of $66  million  and  was  comprised  of $36  million
(after-tax) at EDEERSA, $34 million (after-tax) at Rio Grande Energia (RGE), $32
million  (after-tax) at Energy Technologies and $18 million (after-tax) at Tanir
Bavi. All of the goodwill related to these companies,  other than RGE, was fully
impaired. As noted above, this impairment charge has been recorded as of January
1,  2002 as a  Cumulative  Effect  of a Change in  Accounting  Principle  and is
reflected  in  Consolidated  Statement of  Operations  for the nine months ended
September 30, 2002. The $53 million of goodwill at Energy  Technologies  and the
$27  million  of  goodwill  at Tanir  Bavi as of  December  31,  2001  have been
reclassified into Current Assets of Discontinued  Operations on our Consolidated
Balance Sheets. For further detail regarding the goodwill  impairments at Energy
Technologies and Tanir Bavi, see Note 3. Discontinued Operations.

As of September  30, 2002,  the  remaining  carrying  value of goodwill was $443
million,  of which  $434  million  was  recorded  in  connection  with  Global's
acquisitions  of Sociedad  Austral de Electricidad  S.A.  (SAESA) and Empresa de
Electricidad  de los Andes S.A.  (Electroandes)  in Chile and Peru in August and
December  of 2001,  respectively.  For the year ended  December  31,  2001,  the
amortization expense related to goodwill was $3 million.


                                       12
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of September 30, 2002, our pro-rata share of the remaining  goodwill included
in equity method  investees  totaled $271 million.  In accordance with generally
accepted accounting principles, such goodwill is not consolidated on our balance
sheet.  Our share of the  amortization  expense  related to such goodwill was $8
million for the year-ended December 31, 2001.

As of September 30, 2002 and December 31, 2001,  our goodwill and pro-rata share
of goodwill in consolidated and equity method projects was as follows:

                                                          As of
                                          September 30, 2002   December 31, 2001
                                          ------------------   -----------------
Global                                           (Millions of Dollars)
   SAESA (1) .............................    $   289              $   315
   EDEERSA(2) ............................         --                   63
   Electroandes (3) ......................        145                  164
   Elektrocieplowna Chorzow Sp
    Z.o.o. (ELCHO) .......................          6                    6
   Skawina CHP Plant (Skawina) ...........          3                   --
                                              -------              -------
         Total Consolidated Goodwill .....        443                  548
                                              -------              -------
Global
   RGE (4) ...............................         56                  142
   Chilquinta Energia Finance Co. L.L.C
    (Chilquinta) (5) .....................        156                  174
   Luz del Sur ...........................         34                   34
   Kalaeloa ..............................         25                   25
                                              -------              -------
     Pro-Rata Share of Equity
      Investment Goodwill ................        271                  375
                                              -------              -------
         Total Goodwill ..................    $   714              $   923
                                              =======              =======

(1)   The decrease at SAESA relates to final  purchase  price  adjustments  that
      resulted in higher value allocated to deferred tax assets.

(2)   The decrease at EDEERSA relates to an impairment of $56 million under SFAS
      142 and to purchase  price  adjustments  of $7 million made  subsequent to
      December 31, 2001.

(3)   The decrease at Electroandes  relates to purchase price  adjustments  made
      subsequent to December 31, 2001 which  resulted in higher value  allocated
      to Property, Plant and Equipment.

(4)   The decrease at RGE relates to an  impairment  under SFAS 142 totaling $50
      million,  and to the  devaluation  of the Brazilian  Real amounting to $36
      million.

(5)   The decrease at Chilquinta relates to the devaluation of the Chilean Peso.


                                       13
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note  5. Income Taxes

A tax  (benefit)  expense  has  been  recorded  for the  results  of  continuing
operations. An analysis of that (benefit) expense is as follows:

<TABLE>
<CAPTION>
                                                                                  Quarter Ended                Nine Months Ended
                                                                                  September 30,                  September 30,
                                                                             --------------------------    -------------------------
                                                                               2002           2001            2002           2001
                                                                               ----           ----            ----           ----
                                                                                            (Millions of Dollars)
<S>                                                                          <C>             <C>             <C>             <C>
Pre-Tax (Loss) Income ..............................................         $  61           $  44           $(423)          $ 144

Tax Computed at the Federal Statutory Rate @ 35% ...................            22              15            (148)             50

Increases (decreases) from Federal statutory rate
 attributable to:
    State Income Taxes after Federal Benefit .......................             1               3               2               7
    Rate Differential of Foreign Operations ........................            (7)             (5)            (14)            (26)
    Other ..........................................................            --              (1)             --              (1)
                                                                             -----           -----           -----           -----
Total Income Tax (Benefit) Expense .................................         $  16           $  12           $(160)          $  30
                                                                             -----           -----           -----           -----

      Effective Income Tax Rate ....................................          26.2%           27.3%           37.8%           20.8%
</TABLE>

In connection  with the  write-down of our Argentine  assets,  certain  goodwill
impairments  and impairment  charges  associated with our decision to exit Tanir
Bavi and the businesses of Energy Technologies, we recorded a deferred tax asset
of $269 million.  The deferred tax asset is reflected as a reduction of deferred
tax liability on our Consolidated  Balance Sheets.  We reviewed the deferred tax
asset for recoverability and determined a valuation  allowance was not required.
For a  discussion  of  certain  events  related  to tax  planning,  see Note 11.
Subsequent Events.

Note 6. Financial Instruments and Risk Management

Our  operations  are exposed to market risks from  changes in commodity  prices,
foreign  currency  exchange  rates,  interest rates and equity prices that could
affect our results of operations and financial condition. We manage our exposure
to these market risks through our regular  operating  and  financing  activities
and,  when deemed  appropriate,  hedge these risks through the use of derivative
financial  instruments.  We use the term "hedge" to mean a strategy  designed to
manage  risks of  volatility  in prices or rate  movements  on  certain  assets,
liabilities or anticipated  transactions and by creating a relationship in which
gains or losses on derivative  instruments  are expected to  counterbalance  the
losses or gains on the assets,  liabilities or anticipated  transactions exposed
to such market risks. We use derivative financial instruments as risk management
tools  which  are  consistent  with our  business  plans  and  prudent  business
practices and not for speculative purposes.

The notional  amounts of derivatives do not represent  amounts  exchanged by the
parties  and,  thus,  are  not a  measure  of our  exposure  through  our use of
derivatives.

Equity Securities

Resources  has  investments  in  equity  securities  and  limited  partnerships.
Resources  carries its partnership  investments in certain capital and leveraged
buyout funds  investing in securities at fair value where market  quotations and
an  established  liquid  market of  underlying  securities  in the portfolio are
available.  Consequently, the carrying value of these investments is affected by
changes in the fair value of the underlying securities. Fair value is determined
by  adjusting  the  market  value of the  securities  for  liquidity  and market
volatility  factors,  where  appropriate.  For investments  where there is not a
liquid market,  Resources  relies on the investment fund manager to determine if
the fund has  experienced  an other than  temporary  impairment for which a loss
would need to be


                                       14
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

recorded.  During the nine month period  ended  September  30,  2002,  Resources
recognized  a loss  for  investment  where  there  is  not a  liquid  market  of
approximately  $26 million  pre-tax,  which is included in Net Gain  (Losses) on
Investments.  As of September 30, 2002,  Resources had  investments in leveraged
buyout funds of approximately $91 million, of which $21 million was comprised of
public  securities with available market prices and $70 million was comprised of
non-publicly traded securities.  Comparably,  as of December 31, 2001, Resources
had  investments in leveraged  buyout funds of  approximately  $130 million,  of
which $35 million was  comprised  of public  securities  with  available  market
prices and $95 million was comprised of non-publicly traded securities.

Foreign Currencies

We conduct our  business on a  multinational  basis in a wide variety of foreign
currencies.  Our objective for foreign  currency  risk  management  policy is to
preserve  the  economic  value of cash  flows in  currencies  other  than the US
Dollar. Our policy is to hedge significant probable future cash flows identified
as  subject  to  significant  foreign  currency  variability.  In  addition,  we
typically hedge a portion of our exposure resulting from identified  anticipated
cash  flows,   providing  the  flexibility  to  deal  with  the  variability  of
longer-term  forecasts as well as changing market conditions,  in which the cost
of hedging may be excessive relative to the level of risk involved.  Our foreign
currency   hedging   activities  to  date  include  hedges  of  US  Dollar  debt
arrangements in operating  companies that conduct  business in currencies  other
than the US Dollar  and  purchase  of  options  to limit  downside  on  earnings
translation.

As of September  30, 2002,  Global and  Resources  had  international  assets of
approximately $3.0 billion and $1.5 billion,  respectively. For further analysis
of our  international  assets,  see Note 8.  Financial  Information  by Business
Segments.

Resources'  international  investments are primarily  leveraged leases of assets
located in Austria,  Australia,  Belgium,  China, Germany, the Netherlands,  New
Zealand  and the United  Kingdom  with  associated  revenues  denominated  in US
Dollars and therefore, not subject to foreign currency risk.

Global's international  investments are primarily in projects that presently, or
are expected to, generate or distribute  electricity in, Brazil,  Chile,  China,
India,  Italy,  Oman, Peru, Poland,  Taiwan and Venezuela.  Investing in foreign
countries involves certain additional risks.  Economic conditions that result in
higher  comparative rates of inflation in foreign countries are likely to result
in declining  values in such  countries'  currencies.  As  currencies  fluctuate
against the US Dollar,  there is a corresponding  change in Global's  investment
value in terms of the US Dollar.  Such  change is  reflected  as an  increase or
decrease in the investment value and Other Comprehensive (Loss) Income (OCI), as
part  of  the  cumulative  translation  adjustment,   a  separate  component  of
Stockholder's   Equity.   As  of  September  30,  2002,  net  foreign   currency
devaluations have reduced the reported amount of our total Stockholder's  Equity
by $324  million,  of which $212  million  and $105  million  were caused by the
devaluation  of the Brazilian Real and the Chilean Peso,  respectively.  For the
net  foreign  currency  devaluations  for the  quarter  and  nine  months  ended
September 30, 2002 and 2001, see Note 9. Comprehensive (Loss) Income.

In May 2002, Energy Holdings purchased foreign currency call options in order to
hedge its average 2002 earnings  denominated in Brazilian  Reais and in Peruvian
Nuevo Sols for the remainder of 2002. As of September 30, 2002, there were three
call  options  outstanding  on the  Brazilian  Real,  one expiring in each month
through December 2002. The aggregate notional and fair values of these contracts
were approximately $4 million and $1 million,  respectively, as of September 30,
2002.  In addition,  there were three call options  outstanding  on the Peruvian
Nuevo Sol, one  expiring in each month  through  December  2002.  The  aggregate
notional value of these contracts was  approximately  $7 million as of September
30, 2002.  The fair value of the option  contracts as of September  30, 2002 was
immaterial. These options are not considered hedges for accounting purposes and,
as a result,  changes in their fair value are  recorded  directly  to  earnings.
Global  recorded a gain of $1 million  related to Brazilian and Peruvian  option
contracts that expired during the third quarter of 2002.

The fair value of foreign currency derivatives, designated and effective as cash
flow hedges, are initially recorded in OCI. Reclassification of unrealized gains
or losses on cash flow hedges from OCI into earnings  generally  occurs when the
hedged  transaction is recorded in earnings and generally  offsets the change in
the value of the hedged


                                       15
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

item.  We  estimate  reclassifying  $1 million of  foreign  exchange  gains from
foreign currency cash flow hedges,  including our pro-rata share from our equity
method investees, from OCI to our Consolidated Statements of Operations over the
next 12 months. For the quarter and nine months ended September 30, 2002, losses
transferred from OCI to our Consolidated Statements of Operations were less than
$1 million.

Interest Rates

We are subject to the risk of fluctuating interest rates in the normal course of
business.  Our policy is to manage  interest  rate risk through the use of fixed
rate debt, floating rate debt and interest rate swaps. As of September 30, 2002,
a hypothetical  10% change in market interest rates would result in a $3 million
change in annual  interest  costs  related to our  short-term  and floating rate
debt.

We  construct  a  hypothetical  swap to  mirror  all the  critical  terms of the
underlying debt and utilize  regression  analysis to assess the effectiveness of
the actual swap at inception  and on an ongoing  basis.  The  assessment is done
periodically  to ensure the swaps continue to be effective.  PSEG determines the
fair value of interest  rate swaps  through  counterparty  valuations,  internal
valuations  and the  Bloomberg  swap  valuation  function.  There  have  been no
material  changes in the  techniques or models used in the valuation of interest
rate swaps during the periods presented. There is minimal impact of counterparty
credit risk on the fair value of the hedges since our policies  require that our
counterparties have investment grade credit ratings.

We have  entered into  interest  rate swaps to lock in fixed  interest  rates on
certain of our construction  loans to hedge forecasted future interest payments.
We  have  elected  to  use  the  Hypothetical   Derivative   Method  to  measure
ineffectiveness of the hedges as described under Derivative Implementation Group
(DIG) Issue No. G7.

Ineffectiveness  may occur if the actual draw down of the debt and the  notional
amount of the swap during the  construction  phase are different.  The amount of
ineffectiveness,  if any, is  recorded  in earnings at the end of the  reporting
period.  The impact of  ineffectiveness  on net income should be reduced because
the  interest  rate  swaps  and the  underlying  debt  are  indexed  to the same
benchmark interest rate. Therefore, interest rate fluctuations should be offset.

Global is constructing electric generation facilities in Oman and Poland (ELCHO)
and has recently completed  construction on a facility in Tunisia. The operating
companies of these  facilities  have entered into interest rate swaps to lock in
fixed  interest  rates on up to $591  million of its  construction  loans.  Such
interest  rate  swaps  hedge  the  value of the cash  flows of  future  interest
payments. The gross notional amounts, interest rates, fair values and impacts to
Accumulated OCI as of September 30, 2002 are listed below. Global currently owns
81%, 55%, and 60% of the Oman, Polish, and Tunisian investments, respectively:

<TABLE>
<CAPTION>
                                              Oman              Poland (ELCHO)                      Tunisia
                                           ----------    ----------------------------    ---------------------------
                                             US $           US $        Polish Zloty        US $            Euro
                                            Tranche       Tranche         Tranche         Tranche          Tranche
                                           ----------    -----------    -------------    ----------       ----------
                                                            (Millions of Dollars, where applicable)
<S>                                          <C>           <C>             <C>             <C>            <C>
Notional Amount..........................    $121           $141            $62             $53              $67
Pay Rate.................................    6.3%           8.4%           13.2%            7.0%            5.2%
Receive Rate.............................    LIBOR         LIBOR           WIBOR*          LIBOR          EURIBOR**
Fair Value ..............................    $(29)         $(56)           $(34)            $(7)            $(3)
Balance in Accumulated OCI...............     $15           $19             $11              $3              $2
Percent Ownership........................     81%           55%             55%             60%              60%
Maturity.................................    2018           2010            2010            2009            2009
</TABLE>

 *    WIBOR- Warsaw Inter-Bank Offered Rate
**    EURIBOR-Euro Area Inter-Bank Offered Rate

The  ineffective  portion  of  these  interest  rate  swaps is  recorded  in our
Consolidated Statements of Operations.  During the quarter and nine months ended
September 30, 2002, Global recorded losses of less than $1 million,  after taxes
and minority interest, due to the ineffectiveness of such interest rate swaps.


                                       16
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Global holds investments in various  generation  facilities in the United States
that are accounted for under the equity method of accounting and, therefore, are
not consolidated in Global's financial  statements.  Global holds a 50% indirect
ownership in two investments  located in Texas and a 50% direct ownership in one
investment  in  Hawaii  (collectively  the  investees),  which  hold  US  Dollar
denominated debt with variable  interest  payments tied to LIBOR rates. In order
to lock in fixed  interest  rates on such debt,  the investees each entered into
interest  rate  swaps to hedge  the  value  of the  cash  flows of their  future
interest  payments.  As of September 30, 2002, the aggregate notional balance of
these swaps was $307 million  (Global's  share was $154  million),  the weighted
average  fixed  interest  rate paid was  6.9%,  and  Global's  share of the loss
position of these swaps was $15 million and is recorded as a reduction  to Total
Investments.  These swaps were designated as hedges for accounting purposes and,
as a result, changes in the fair value of the hedge were recorded in OCI.

The fair value of interest  rate swaps,  designated  and  effective as cash flow
hedges, are initially recorded in OCI.  Reclassification  of unrealized gains or
losses  on cash flow  hedges of  variable-rate  debt  instruments  from OCI into
earnings  occurs as interest  payments  are accrued on the debt  instrument  and
generally offsets the change in the interest accrued on the underlying  variable
rate debt.  We  estimate  reclassifying  $15  million  of losses  from cash flow
hedges, including our pro-rata share from our equity method investees,  from OCI
to our  Consolidated  Statements of Operations over the next 12 months.  For the
quarter and nine months ended  September  30, 2002,  losses of $2 million and $8
million, respectively, were reclassified from OCI to our Consolidated Statements
of Operations.

Valuation of Senior Notes

Based on the  borrowing  rates  currently  available to us for debt with similar
terms and  remaining  maturities,  the fair value of our  long-term  debt was as
follows:

                                                     September 30, 2002
                                            ------------------------------------
                                              Carrying Amount       Fair Value
                                            -------------------    -------------
                                                  (Millions of Dollars)
Senior Notes -- Energy Holdings............      $1,761               $1,425

As of October 31, 2002, we had $1.741 billion of Senior Notes  outstanding,  the
fair value of which was $1.265  billion.  The fair value of the Senior  Notes is
based on  information  obtained from market  sources.  The capital  markets have
experienced a period of unusual volatility, especially for the energy sector.

Energy Technologies

In April 2002, Energy  Technologies  entered into two interest rate caps with an
aggregate notional of approximately $5 million to hedge project related floating
rate  financings  entered  into in the second  quarter of 2002.  These caps were
entered  into  to  protect  against  benchmark  interest  rate  fluctuations  in
accordance with our risk management policy guidelines. As of September 30, 2002,
the fair value of the caps was immaterial.

Credit Risk

Credit  risk  relates  to the risk of loss  that we would  incur as a result  of
nonperformance  by  counterparties,  pursuant to the terms of their  contractual
obligations.  We have established credit policies that we believe  significantly
minimize our exposure to credit risk.  These  policies  include an evaluation of
potential  counterparties'  financial  condition,  including credit ratings. For
Global,  primary credit risk includes credit worthiness of counterparties to its
power purchase  agreements or  non-performance by counterparties in construction
contracts.  For  Resources,  primary  credit risk includes  creditworthiness  of
counterparties to its leveraged leases.


                                       17
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 7. Commitments and Contingencies

Global

      Argentine Economic Crisis

Global has certain  obligations  that are likely to occur if certain projects in
Argentina  continue to default on their debt and  performance  obligations.  The
estimated amount to cover this exposure is $7 million and has been recorded as a
component of general and administrative operating expenses.

Defaults in non-recourse project finance debt agreements do not cross-default to
any of our other credit agreements.  In June 2002 the  Administrative  Agent for
the EDELAP project loan notified  Global that the loan was in default and Global
paid $2 million in Sponsor  guarantees that were due. This amount is included in
the $632 million of Argentine investment exposure that was impaired and recorded
in the Consolidated Statement of Operations.  The Parana project loan is also in
default.  Although a waiver has been negotiated,  it expired in May 2002 and the
lenders have taken no further action.

Under  certain  circumstances,  Global  could be  obligated  to settle its share
(approximately  $26  million)  of a  project  loan for  EDELAP  should it or the
majority  owner of the  project,  take  certain  actions  including  forcing  or
permitting  certain  loan  parties  to  declare  bankruptcy.  In  addition,  the
guarantee  can be triggered by  transferring  the shares of certain loan parties
without  lender  consent.  Breach  of this  transfer  covenant  can be  cured by
delivering  certain pledge agreements  relating to the ownership of loan parties
to the lenders.  Global could also be liable for any incremental  direct damages
arising from the breach of these covenants.  Given the likely cure of any breach
by the project sponsors,  such a contingent  obligation has a low probability of
being  triggered,  and therefore no provision has been made in our  Consolidated
Financial Statements.  Under the terms of settlement of Global's litigation with
AES, AES is required to deliver pledge agreements that may be required under the
loan documents. For further discussion of the litigation settlement, see Note 4.
Asset Impairments.

SAESA has guaranteed its share of a $35 million debt  obligation for a 50% owned
affiliate in Argentina, Edersa. This obligation was recorded on our Consolidated
Balance  Sheets as it was  considered  in the  valuation of SAESA at the date of
purchase in August  2001.  Global may be  required to make a $35 million  equity
contribution  to SAESA to repay the  obligation.  Since this obligation has been
previously  recorded,  there will be no impact to our Consolidated  Statement of
Operations if the transaction is funded.

      California

In May 2001,  GWF Energy LLC (GWF Energy),  a joint venture  between  Global and
Harbinger GWF LLC entered into a 10-year power purchase agreement (PPA) with the
California  Department of Water Resources (CDWR) to provide approximately 340 MW
of electric  capacity to  California  from three new natural  gas-fired  peaking
plants, the Hanford, Henrietta and Tracy Peaker Plants.

On August 22,  2002,  negotiations  between GWF Energy and the Public  Utilities
Commission  of the  State of  California  (CPUC)  and the  State  of  California
Electricity  Oversight Board  (collectively the California  Parties) relating to
complaints  filed with FERC under  Section 206 of the Federal Power Act resulted
in the  execution of (i) an amended and  restated PPA that has been  affirmed by
the CPUC as "just  and  reasonable"  and (ii) a  settlement  agreement  with the
California  Parties,  the Governor of the State of California  and the People of
California  by and through the Attorney  General.  In addition,  the  California
Parties withdrew with prejudice their FERC complaints against GWF Energy.

The Hanford and  Henrietta  Peaker  Plants were  completed in August 2001 and in
June 2002,  respectively,  and the Tracy Peaker Plant, a 166 MW facility, is now
under construction.  The commercial operations date deadline of the Tracy Peaker
Plant has been  extended  to July 1, 2003 under the  amended  and  restated  PPA
discussed   above.   Total


                                       18
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

project  cost for these  plants is  estimated  at  approximately  $345  million.
Global's permanent equity investment in these plants,  including  contingencies,
is not expected to exceed $150 million after  completion  of project  financing,
which is currently  expected to occur in the first quarter of 2003. In the event
financing does not occur, our investment exposure in these plants could increase
to  approximately  85% of the total  project  costs,  noted  above.  Our current
ownership  interest in this  project was 74% as of  September  30,  2002.  For a
description of turbine loans and working capital loans from Global to GWF Energy
pending   completion   of  project   financing,   see  Note  10.   Related-Party
Transactions.

      Chile

Global owns  SAESA,  a group of  companies  that  consists of four  distribution
companies  and  one  transmission  company  that  provide  electric  service  to
customers in southern  Chile.  SAESA has a $150  million loan  facility in place
that had an  original  maturity  date of October  18,  2002 and is recorded as a
component of Non-Recourse Notes Payable on our Consolidated Balance Sheets as of
September  30, 2002.  The  principal  payment was not made as scheduled  and the
lending  group has agreed not to declare  any payment  defaults or exercise  any
remedies  with regard to that loan before  November 8, 2002. A term sheet for an
extension  of the loan has been  agreed to and is expected  to be  finalized  by
November 8, 2002. We expect to refinance  this loan facility  during this period
of extension.  No assurances  can be given that the extension will be granted or
that other refinancing options will be available in a timely manner.

      Peru

In  December  2001,  Global  acquired  an  interest  in  Electroandes,  a 183 MW
hydroelectric  facility in Peru.  Part of the purchase price was financed with a
$100 million one year bridge loan maturing in December  2002.  The loan facility
provides  that the  maturity  date may be  extended  for six  months if  certain
conditions are met. No assurances can be given that the loan will be extended.

      India

We have a 20% interest in a 330 MW Naphtha/natural gas fired plant in the Indian
state of Tamil Nadu. Our investment  exposure in this facility is  approximately
$44 million.  Power from the facility is sold under a long-term  power  purchase
agreement with the Tamil Nadu Electricity  Board (TNEB) which sells the power to
retail end user  customers.  The TNEB has not been able to make full  payment to
the project for the  purchase of energy  under  contract  due to an overall poor
liquidity  situation.  The current past due receivable at the project company is
$55 million, our share of which is $11 million.

      Poland

In June 2002,  Global  completed its  acquisition  of 35% interest in the 590 MW
(electric) and 618 MW (thermal)  coal-fired Skawina CHP Plant, located in Poland
and in June 2002  increased its  ownership  interest to  approximately  50%. The
transaction  includes the obligation to purchase  additional shares in 2004 that
will bring Global's  aggregate interest in Skawina to approximately 75%. Skawina
supplies  electricity to three local  distribution  companies and heat mainly to
the city of Krakow,  under annual  one-year  contracts.  The sale is part of the
Polish  Government's  energy  privatization  program.  Global has  expended  $31
million during 2002 for its approximately  50% ownership  interest and the total
equity investment is expected to be approximately $44 million.

      Tunisia

Global owns a 60% interest in Carthage  Power Company  (CPC), a 471 MW gas-fired
combined-cycle  electric generation facility located in Rades,  Tunisia. CPC has
entered  into a  20-year  power  purchase  contract  for the sale of 100% of the
output to Societe  Tunisienne de l' Electricite  et du Gaz (STEG).  The contract
called for the plant to be  operational  by November 24, 2001,  however,  due to
delays in construction,  this deadline was not met. STEG has declared that it is
entitled to liquidated  damages at the rate of $67 thousand a day since November
24, 2001 in accordance  with the terms of the power  purchase  contract.  CPC is
contesting  STEG's claim and the two parties are


                                       19
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

currently  under  negotiation to settle this dispute.  The facility was built by
Alstom Centrales  Energetiques SA, (Alstom) an independent  contractor,  who was
also obligated to complete construction by September 3, 2001. CPC believes it is
entitled to liquidated damages from Alstom in amounts greater than the claims by
STEG.  Such  liquidated  damages are secured by letters of credit  totaling  $30
million.

      Other

We, and/or Global have guaranteed  certain  obligations of Global's  affiliates,
including the successful completion, performance or other obligations related to
certain of the projects in an aggregate amount of approximately  $244 million as
of September 30, 2002. The guarantees consist of a $61 million equity commitment
for ELCHO in Poland, $55 million of support for Skawina,  $56 million of various
guarantees for Dhofar Power Company in Oman, a $25 million  guarantee related to
bond payment obligations of Chilquinta in connection with electric  distribution
companies  in  Chile  and Peru  and  various  other  guarantees  comprising  the
remaining  $47 million.  A substantial  portion of such  guarantees is cancelled
upon successful completion,  performance and/or refinancing of construction debt
with non-recourse  project debt. Any downward revision in the current ratings of
our Senior Notes would  require the issuance of letters of credit to replace the
existing guarantees of $61 million for ELCHO and $25 million for Chilquinta.

We and our equity method investees are involved in various legal actions arising
in the normal course of business. We do not expect that there will be a material
adverse  effect on our financial  condition,  results of operations and net cash
flows as a result of these proceedings, although no assurances can be given.

Energy Technologies

In the normal  course of  business,  Energy  Technologies  secures  construction
obligations with performance bonds issued by insurance  companies.  In the event
that Energy Technologies'  tangible equity falls below $100 million, we would be
required to provide  additional  support  for the  performance  bonds.  Tangible
equity is defined as net equity less goodwill.  As of September 30, 2002, Energy
Technologies'  tangible  equity  was  $105  million.  We are in the  process  of
negotiating  alternate  support  arrangements  with bond  issuers,  including an
indemnification agreement, which is likely to be executed in the near future. As
of  September  30,  2002,  Energy  Technologies  had $220  million of such bonds
outstanding,  of which $46 million was at risk in ongoing construction projects.
We  expect  to  reduce  this  amount  over  time as part of its exit  from  this
business.  The  performance  bonds  are not  included  in the  $244  million  of
guaranteed obligations, discussed above. No assurances can be given that we will
be successful in extinguishing these obligations.


                                       20
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 8. Financial Information by Business Segments

      Information  related  to the  segments  of Energy  Holdings'  business  is
detailed below:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                           Energy                       Consolidated
                                                          Global         Resources      Technologies      Other(A)         Total
                                                          ------         ---------      ------------      --------      ------------
                                                                                    (Millions of Dollars)
<S>                                                      <C>              <C>             <C>              <C>              <C>
For the Quarter Ended
September 30, 2002:
Total Operating Revenues .......................         $   145          $    57         $    10          $    --          $   212
Loss from Discontinued Operations ..............         $    --          $    --         $    (3)         $    --          $    (3)
Segment Earnings (Loss) Available
  to PSEG ......................................         $    20          $    17         $    (1)         $    (2)         $    34

------------------------------------------------------------------------------------------------------------------------------------

For the Quarter Ended
September 30, 2001:
Total Operating Revenues .......................         $   101          $    50         $     8          $    --          $   159
Income (Loss) from Discontinued
Operations .....................................         $     2          $    --         $    (5)         $    --          $    (3)
Segment Earnings (Loss) Available
  to PSEG ......................................         $    18          $     9         $    (3)         $    (1)         $    23

------------------------------------------------------------------------------------------------------------------------------------

For the Nine Months Ended
September 30, 2002:
Total Operating Revenues .......................         $   387          $   135         $    22          $     1          $   545
Loss from Discontinued Operations
  (including loss on disposal) .................         $    (9)         $    --         $   (32)         $    --          $   (41)
Cumulative Effect of a Change in
  Accounting Principle .........................         $   (88)         $    --         $   (32)         $    --          $  (120)
Segment (Loss) Earnings Available
  to PSEG ......................................         $  (399)         $    26         $   (62)         $    (4)         $  (439)

------------------------------------------------------------------------------------------------------------------------------------

For the Nine Months Ended
September 30, 2001:
Total Operating Revenues .......................         $   226          $   134         $    20          $     1          $   381
Income (Loss) from Discontinued
  Operations ...................................         $     2          $    --         $   (19)         $    --          $   (17)
Cumulative Effect of a Change in
  Accounting Principle .........................         $     9          $    --         $    --          $    --          $     9
Segment Earnings (Loss) Available
  to PSEG ......................................         $    77          $    27         $   (15)         $    --          $    89

------------------------------------------------------------------------------------------------------------------------------------

As of September 30, 2002:
Total Assets ...................................         $ 3,893          $ 3,174         $   206          $  (267)         $ 7,006

------------------------------------------------------------------------------------------------------------------------------------

As of December 31, 2001:
Total Assets ...................................         $ 4,074          $ 3,026         $   290          $    49          $ 7,439

------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(A)   Other  activities  include amounts  applicable to Energy Holdings  (parent
      corporation),  Enterprise  Group  Development  Corporation,  PSEG  Capital
      Corporation and intercompany eliminations.


                                       21
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

      Geographic information for Energy Holdings is disclosed below:

<TABLE>
<CAPTION>
                                                                  Revenues (1)                              Identifiable Assets(2)
                                                -----------------------------------------------------    ---------------------------
                                                     Quarter Ended               Nine Months Ended
                                                     September 30,                 September 30,
                                                ----------------------        -----------------------    September 30,  December 31,
                                                  2002          2001            2002           2001          2002           2001
                                                --------      --------        --------       --------    -------------  ------------
                                                                              (Millions of Dollars)
<S>                                              <C>            <C>            <C>            <C>         <C>            <C>
United States ............................       $   56         $   60         $  151         $  183      $2,525         $2,675
Foreign Countries ........................          156             99            394            198       4,481          4,764
                                                 ------         ------         ------         ------      ------         ------
     Total ...............................       $  212         $  159         $  545         $  381      $7,006         $7,439
                                                 ------         ------         ------         ------      ------         ------
</TABLE>

Assets in foreign countries include:
   Chile .........................................         $  878         $  880
   Netherlands ...................................            961            911
   Argentina .....................................             --            737
   Peru ..........................................            566            520
   Tunisia .......................................            337            245
   India(3) ......................................            306            288
   Poland ........................................            329            166
   Brazil ........................................            204            282
   Other .........................................            900            735
                                                           ------         ------
      Total ......................................         $4,481         $4,764
                                                           ======         ======

(1)   Revenues  are  attributed  to  countries  based  on the  locations  of the
      investments.

(2)   Assets are  comprised  of  investment  in  corporate  joint  ventures  and
      partnerships  that are accounted for under the equity method and companies
      in  which  we  have a  controlling  interest  for  which  the  assets  are
      consolidated on our financial statements. Amount is net of pre-tax foreign
      currency  translation  adjustment  of $359  million and $283 million as of
      September 30, 2002, and December 31, 2001, respectively.

(3)   $234 million and $253 million  relates to our Tanir Bavi  operations as of
      September 30, 2002 and December 31, 2001, respectively. For description of
      the  discontinued  operations  of Tanir  Bavi,  see  Note 3.  Discontinued
      Operations.

The table below  reflects our investment  exposure in Latin American  countries,
through Global:

                             Investment Exposure          Equity Exposure
                        ---------------------------  ---------------------------
                        September 30,  December 31,  September 30,  December 31,
                           2002           2001           2002          2001
                        -------------  ------------  -------------  ------------
                                        (Millions of Dollars)
Argentina .............     $ --          $632         $ --          $632
Brazil ................      433           467          221           298
Chile .................      562           542          466           465
Peru ..................      443           387          435           388
Venezuela .............       52            53           52            53

The investment  exposure  consists of our invested equity plus equity commitment
guarantees.  Equity exposure is equal to our investment  exposure net of foreign
currency translation adjustments, reflected in other comprehensive income.


                                       22
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 9. Comprehensive (Loss) Income

<TABLE>
<CAPTION>
                                                                               Quarter Ended                   Nine Months Ended
                                                                               September 30,                     September 30,
                                                                        -------------------------          ------------------------
                                                                          2002             2001              2002             2001
                                                                        --------         --------          -------           ------
                                                                                            (Millions of Dollars)
<S>                                                                       <C>              <C>              <C>               <C>
Net (Loss) Income ............................................            $ 40             $ 29             $(422)            $ 106
Foreign currency translation adjustments (A) .................             (49)             (37)             (135)              (75)
Reclassification adjustment for losses
   included in net income ....................................              --               --                69                --
Cumulative effect of a change in accounting
   principle (net of tax of $14 and
   minority interest of $12) .................................              --               --                --               (15)
Current period declines in fair value of
  derivative instruments-net (B) .............................             (19)             (18)              (40)              (19)
                                                                          ----             ----             -----             -----
Comprehensive (Loss) Income ..................................            $(28)            $(26)            $(528)            $  (3)
                                                                          ====             ====             =====             =====
</TABLE>

(A)   Net of tax of $5 million and $4 million for the quarters  ended  September
      30,  2002 and 2001,  respectively,  and $44 million and $8 million for the
      nine months ended September 30, 2002 and 2001, respectively.

(B)   Net of tax and  minority  interest  of $22 million and $41 million for the
      quarter and nine months ended September 30, 2002, respectively.

Note 10. Related-Party Transactions

Administrative Costs

PSEG Services Corporation (Services) provides and bills administrative  services
to us on a monthly  basis.  Our costs related to such  services  amounted to $15
million  and $24  million  for the nine  months  ended  September  30,  2002 and
September 30, 2001, respectively.

Additional Paid-in Capital

For the nine months ended  September  30, 2002,  PSEG  invested  $300 million of
additional  equity in us, the  proceeds  of which were used to repay  short-term
debt and fund additional investments at Global.

Loans to TIE

In April  1999,  Global  and its  partner,  Panda  Energy  International,  Inc.,
established  Texas  Independent  Energy,  L.P. (TIE), a 50/50 joint venture,  to
develop, construct, own, and operate electric generation facilities in Texas. As
of September  30, 2002 and December 31, 2001,  Global's  investments  in the TIE
partnership  include $74 million and $165 million,  respectively,  of loans that
earn  interest at an annual  rate of 12% that are being  repaid over the next 10
years. Cash payments are currently being received from the projects for the full
amount of  interest  on such  loans to TIE.  However,  only 50% of the  interest
income is recognized in earnings,  representative  of the portion of the project
not owned by Global.

Loans to GWF Energy

Global's   permanent  equity  investment  in  GWF  Energy's  plants,   including
contingencies,  is not  expected  to exceed $150  million  after  completion  of
project financing,  which is currently expected to occur in the first quarter of
2003.  Pending  completion  of project  financing,  Global  provided  GWF Energy
approximately  $98 million of secured loans to finance the purchase of turbines.
The turbine  loans bear  interest at rates ranging from 12% to 15% per annum and
are payable in installments beginning May 31, 2002, with final maturity no later
than December 31, 2002.  As of


                                       23
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September  30, 2002,  the secured  loans to finance the purchase of turbines was
$87  million.  Global has also  provided GWF Energy up to $74 million of working
capital  loans  to  fund  construction   costs  pending  completion  of  project
financing.  Such loans earn interest at 20% per annum and are  convertible  into
equity at Global's  option.  During the third quarter of 2002,  Global converted
$55 million of such working capital loans to equity,  which  increased  Global's
ownership of GWF Energy to 74%, and reduced the working  capital loan balance to
$19 million as of September 30, 2002. Since the partnership agreement stipulates
that the  condition  for control is  ownership of 75% of the voting  stock,  our
investment  in GWF Energy is  recorded  in  accordance  with the equity  method.
Harbinger  GWF LLC has the right to buy back from  Global up to  one-half of the
reduction of its equity  ownership in GWF Energy from the 50%  ownership  level.
Such right terminates at the earlier of project  financing or June 30, 2003. The
loan structures were put in place to provide Global with a preferential cash and
earnings distribution from the project similar to our subordinated loans for our
Texas facility. For a discussion of the commercial dates of operation and issues
of the  construction  process  with respect to these three  plants,  see Note 7.
Commitments and Contingencies.

Note 11. Subsequent Events

PSEG Energy Holdings L.L.C.

PSEG Energy Holdings  L.L.C.,  a New Jersey limited  liability  company,  is the
successor  to  PSEG  Energy  Holdings  Inc.  pursuant  to  a  merger  which  was
consummated  in October  2002.  PSEG Energy  Holdings  L.L.C.  was the surviving
entity in the  merger.  The  merger  was  consummated  to change the form of the
business from a corporation to a limited liability company. PSEG Energy Holdings
L.L.C.  succeeded to all the assets and liabilities of PSEG Energy Holdings Inc.
in accordance  with the New Jersey  Limited  Liability  Company Act. PSEG Energy
Holdings  L.L.C.  has  succeeded  to  PSEG  Energy   Holdings'  Inc.   reporting
obligations under the Securities  Exchange Act of 1934, as amended (the Exchange
Act).

As part of the PSEG Energy Holdings L.L.C.  reorganization,  PSEG Resources Inc.
became a wholly  owned  subsidiary  of PSEG  Resources  LLC, a newly  formed New
Jersey  limited  liability  company.  PSEG Resources LLC is wholly owned by PSEG
Energy Holdings L.L.C. This reorganization is expected to have a positive impact
on earnings in future periods.


                                       24
<PAGE>

                 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Following are the significant changes in or additions to information reported in
our  Annual  Report  on Form  10-K  for the year  ended  December  31,  2001 and
Quarterly  Reports on Form 10-Q for the  quarters  ended March 31, 2002 and June
30, 2002  affecting  our  consolidated  financial  condition  and the results of
operations  of  us  and  our   subsidiaries.   This  discussion  refers  to  our
Consolidated Financial Statements (Statements) and related Notes to Consolidated
Financial  Statements  (Notes)  and  should  be read in  conjunction  with  such
Statements and Notes.

Corporate Structure

Unless the context  otherwise  indicates,  all references to "Energy  Holdings",
"we", "us" or "our" herein mean PSEG Energy  Holdings Inc. and its  consolidated
subsidiaries.  For a discussion of the formation of PSEG Energy  Holdings L.C.C.
as the  successor to PSEG Energy  Holdings  Inc. in October  2002,  see Note 11.
Subsequent  Events of the Notes.  Energy  Holdings  has three  principal  direct
wholly-owned  subsidiaries:  PSEG  Global Inc.  (Global),  PSEG  Resources  LLC.
(Resources) and PSEG Energy  Technologies  Inc.  (Energy  Technologies).  Energy
Holdings also has a finance subsidiary,  PSEG Capital Corporation (PSEG Capital)
and is also the parent of Enterprise  Group  Development  Corporation  (EGDC), a
commercial  real  estate  property  management  business,  and is  conducting  a
controlled exit from this business.

Overview of the Quarter and Nine Months Ended September 30, 2002

Earnings  (Loss)  Available  to PSEG  for the  quarter  and  nine  months  ended
September  30,  2002 was  income of $34  million  and  losses  of $439  million,
respectively.  These results include  after-tax  charges of $535 million for the
nine  months  ended  September  30,  2002,  related to the asset  impairment  of
investments in Argentina and losses from  operations of those  impaired  assets,
discontinued  operations  of  Energy  Technologies'   HVAC/mechanical  operating
companies and a generating  facility in India and goodwill  impairment  charges.
These charges discussed above are summarized in the following table:

                                       Quarter Ended         Nine Months Ended
                                    September 30, 2002      September 30, 2002
                                    --------------------------------------------
                                            (Millions of Dollars)
                                    --------------------------------------------
Global
Argentina - EDEERSA and Assets Held
 for Sale to AES
           Write-down of Investment        $ --                    $374
           Goodwill Impairment               --                      36
                                           ----                    ----
      Total Argentina                        --                     410
                                           ----                    ----
India - Tanir Bavi
           Discontinued Operations           --                       9
           Goodwill Impairment               --                      18
                                           ----                    ----
    Total Tanir Bavi                         --                      27
                                           ----                    ----
Brazil - RGE
           Goodwill Impairment               --                      34
                                           ----                    ----
  Total for Global                           --                     471
                                           ----                    ----

Energy Technologies
           Discontinued Operations            3                      32
           Goodwill Impairment               --                      32
                                           ----                    ----
  Total Energy Technologies                   3                      64
                                           ----                    ----
    Total                                  $  3                    $535
                                           ====                    ====


                                       25
<PAGE>

For the quarter and nine months ended  September  30, 2002,  excluding the above
charges,   Earnings  Available  to  PSEG  were  $37  million  and  $96  million,
respectively.  Comparable  earnings  for  the  quarter  and  nine  months  ended
September 30, 2001 were $26 million and $98 million,  respectively. The increase
in earnings for the quarter ended  September 30, 2002,  excluding these charges,
as  compared  to the same  period in the  prior  year was  primarily  due to the
acquisitions late in 2001 of SAESA and Electroandes,  increased earnings at RGE,
as well as the  commencement of operations at the generation  facility in Rades,
Tunisia  (Rades)  at  Global,  and  higher  Net  Investment  Gains  (Losses)  in
Resources'  leveraged  buyout funds.  These  increases were partially  offset by
decreased earnings at GWF and TIE.

The flat  earnings  performance  for the nine months ended  September  30, 2002,
excluding the above charges,  as compared to the nine months ended September 30,
2001,  was  primarily  due to  the  acquisitions  late  in  2001  of  SAESA  and
Electroandes, increased earnings at RGE, as well as the commencing of operations
by Rades at Global, and increased  leveraged lease income at Resources partially
offset by  decreased  earnings  at GWF and TIE and lower  Net  Investment  Gains
(Losses) in Resources' leveraged buyout funds.

See Results of Operations for further analysis.

Future Outlook

We are a part of PSEG's diversified portfolio.  In order to achieve our business
objectives,  Global will focus on improving the  profitability of its generation
and  distribution  investments.  Resources,  with  recent  investments  and less
exposure  to its  investment  in the KKR  leveraged  buyout  funds,  expects  to
continue  to be a steady  contributor  to earnings  and cash  flows.  Resources'
assets  generate cash flow and earnings in the near term,  while  investments at
Global generally have a longer time horizon before achieving  expected cash flow
and earnings.  Also,  Resources'  passive lower-risk assets serve to balance the
higher risk associated with operating assets at Global.

While  Global  realized  substantial  growth  in  2001,  significant  challenges
developed during the fourth quarter of 2001, and have continued into 2002. These
challenges include the Argentine economic, political and social crisis, the soft
power market in Texas (see Business  Environment),  recent developments in India
(see Note 3.  Discontinued  Operations and Note 7. Commitments and Contingencies
of the Notes and Business Environment) and the worldwide economic downturn.  The
financial  effects of several of these  challenges  are behind us as a result of
the changes we recorded in the second  quarter of 2002.  Also,  we have recently
reached  a  settlement  with AES  related  to our  investments  held for sale in
Argentina,  receiving $15 million and notes that would yield an  additional  $15
million  due to mature on various  dates  ending July 2003.  Similarly,  we have
completed  the sale of our  investment  in Tanir  Bavi at its  reduced  carrying
value,  receiving  proceeds of approximately  $45 million in October 2002. Going
forward Global has limited its spending to contractual commitments and refocused
its  strategy  from one of  accelerated  growth to one that  places  emphasis on
increasing  the  efficiency  and returns of its existing  assets.  Modest growth
planned at Resources is dependent  upon  availability  of potential  investments
meeting certain profit thresholds.

In early 2002, we began to evaluate the future prospects of Energy Technologies'
business  model and its fit in our  portfolio  given the  slower  pace of retail
energy  deregulation  in the  markets  in which we are  active,  as well as, the
substandard  performance of Energy  Technologies  since its  inception.  In June
2002, we adopted a plan to sell our interests in the HVAC/mechanical  businesses
and DSM  investments  of Energy  Technologies.  In the third quarter of 2002, we
decided  to  continue  to own  the  DSM  investments  and  anticipate  continued
profitability.  For further discussion of the discontinued  operations of Energy
Technologies, see Note 3. Discontinued Operations of the Notes.

      Factors Affecting Future Outlook

Our  success  will be  dependent,  in part,  on our  ability to  mitigate  risks
presented by our international  strategy.  The economic and political conditions
in certain  countries  where Global has  investments  present  risks that may be
different  than those found in the United  States  including:  renegotiation  or
nullification of existing contracts,  changes in law or tax policy, interruption
of business,  risks of nationalization,  expropriation,  war, and other factors.
Operations  in foreign  countries  also present risks  associated  with currency
exchange and  convertibility,  inflation and  repatriation of earnings.  In some
countries in which Global has  interests,  economic and monetary  conditions and
other factors could affect Global's ability to convert its cash distributions to
US Dollars or other freely convertible  currencies and move funds.  Furthermore,
the central bank of any such country may have the authority to suspend, restrict
or otherwise impose  conditions on foreign  exchange  transactions or to approve
distributions to foreign investors. Although Global generally seeks to structure
power  purchase  contracts and other project  revenue


                                       26
<PAGE>

agreements to provide for payments to be made in, or indexed to, US Dollars or a
currency freely  convertible into US Dollars,  its ability to do so in all cases
may be limited.

The international  risks discussed above can potentially be magnified due to the
volatility of foreign  currencies.  The foreign  exchange rates of the Brazilian
Real,  Chilean  Peso and  Peruvian  Sol have  recently  weakened  due to various
political  and  economic  factors.  This  could  result in  comparatively  lower
contributions  from our  distribution  investments in US Dollar terms.  While we
still expect certain investments in Latin America to contribute significantly to
our earnings in the future,  the political and economic  risks  associated  with
this region could have a material adverse impact on our remaining investments in
the region.

In addition,  we have exposure to the equity and debt markets through our use of
short-term  financing,  the potential impact to Resources' investment in the KKR
leveraged  buyout funds, and other equity and debt investments held by us. Also,
increases  in the cost of  capital,  which  could  result from market and lender
concerns  regarding us, our industry,  United States and international  economic
conditions and other factors,  could make it more difficult for us to enter into
profitable  investments.  Recent  market trends could also affect our ability to
access capital,  potentially impacting both our business plans and opportunities
as well as our liquidity.  For example, we have significantly trimmed our future
capital expenditure programs in response to changes in the financial marketplace
and pressures on leverage ratios.  Also, changes in our credit ratings by rating
agencies  could  significantly  impact our access to  capital,  cost of capital,
ability to meet earnings  expectations  and future  business  plans. We are also
subject to credit risk, particularly within our unregulated businesses.

See  Business  Environment  and Credit  Risk for further  discussion,  including
recent  events  regarding  the  credit  ratings  of  certain  counterparties  to
Resources' leveraged leases.

Results of Operations

Energy Holdings -- Revenues

Revenues increased $53 million or 33% to $212 million and $164 million or 43% to
$545  million  for the  quarter  and  nine  months  ended  September  30,  2002,
respectively, from the comparable periods in 2001.

Revenues for the quarter  ended  September 30, 2002 were  favorably  impacted by
increased  revenues of $44 million at Global of which $31 million was related to
the  acquisition  late  in the  third  quarter  of  2001  of  SAESA,  a  Chilean
distribution  company  and $10 million  was  related to the  acquisition  in the
fourth quarter of 2001 of Electroandes,  a Peruvian generation company. Revenues
also  increased  $32 million due to the  generation  facility  located in Rades,
Tunisia commencing operation via a retroactive  commercial operating date in the
second  quarter  of 2002.  Also  contributing  $16  million to the  increase  in
revenues was Skawina in Poland in which we purchased a majority  ownership  late
in the second quarter of 2002.  Revenues further  increased by $8 million due to
improved earnings from RGE, a Brazilian electric  distribution  company,  as new
regulatory  changes  allow RGE to recover from  customers  prior tariff  charges
previously  expensed.  Partially  offsetting  these  increases was a decrease at
EDEERSA of $18 million, which reflects the ongoing economic crisis in Argentina.
There were also  decreased  earnings  totaling $9 million at our GWF  generation
facilities due to the reversal of an accounts receivable reserve in 2001 related
to California  Power Exchange pricing in 2001 and lower energy prices in 2002 as
compared to 2001;  and  decreased  earnings of $8 million at our TIE  generation
facilities due to lower energy prices in 2002 as compared to 2001.

In addition to the overall  increase at Global,  revenues  also  increased by $7
million in the third quarter of 2002 at Resources. The increase at Resources was
primarily related to higher Net Gains (Losses) on Investments  resulting from no
net change in the carrying value of publicly traded and private  securities held
within the KKR leveraged  buyout funds in the third quarter of 2002, as compared
to a $8 million loss in the same period of 2001.

Revenues for the nine months ended September 30, 2002 were favorably impacted by
increased  revenues of $161  million at Global of which $142 million was related
to the  acquisitions  of SAESA and  Electroandes.  Revenues  also  increased $32
million due to the  inception of operations  at Rades as discussed  above.  Also
contributing  $16 million to the increase in revenues  was Skawina,  in which we
purchased a majority  ownership  late in the second quarter of 2002 as discussed
above.  Revenues  further  increased  at Global by $21  million  due to improved
earnings from RGE


                                       27
<PAGE>

as a result of the new regulatory changes described above.  Partially offsetting
these increases were decreases in earnings of $18 million at GWF and $17 million
at TIE as a result of lower energy prices.

In addition,  Resources had a slight  increase in revenues due to an increase of
$16 million from higher  leveraged  lease income from  continued  investment  by
Resources in such  financing  transactions.  This  increase was mostly offset by
lower Net Gains  (Losses) on  Investments  of $15 million,  of which $26 million
resulted  from a decrease in the  carrying  value of private  equity  securities
within certain leveraged buyout funds.

Energy Holdings -- Operating Expenses

Operating  expenses  increased  $44 million to $109  million and $640 million to
$752  million  for the  quarter  and  nine  months  ended  September  30,  2002,
respectively,  from the comparable  periods in 2001. The operating  expenses for
the  nine  months  ended  September  30,  2002  include  a $515  million  charge
associated  with the  write-down of all Argentine  investments  and certain loss
contingencies.  Our  investments in the Argentine  operations  were deemed to be
fully impaired and we recorded a $506 million write-down of project investments.
In connection with our plans to exit these businesses in Argentina,  we recorded
loss  contingencies  of $7 million  associated with certain  potential  interest
payment defaults at the project level and an additional $2 million of legal fees
for the nine months ended September 30, 2002. The loss  contingencies  and legal
fees were recorded as a component of administrative and general expenses.

For the nine months ended September 30, 2002, operating expenses,  less expenses
associated  with the  $515  million  impairment  of our  Argentine  investments,
increased  $125  million  or  112%,  from the  comparable  period  in 2001.  The
increases  for the  quarter  and nine  months  ended  September  30,  2002  were
primarily  due to operating  expenses  incurred at SAESA and  Electroandes.  The
operating  expenses for the comparable  periods in 2001 did not include expenses
for Electroandes as it was purchased in the fourth quarter of 2001, and included
only a  portion  of  expenses  for SAESA as it was  purchased  late in the third
quarter of 2001.

Energy Holdings -- Interest Expense - Net and Preferred Stock Dividend
Requirements

Interest Expense -- Net and Preferred Stock Dividend Requirements  increased $10
million or 18% to $65  million  and $44  million or 32% to $183  million for the
quarter  and nine  months  ended  September  30,  2002,  respectively,  from the
comparable  periods in 2001. The increase was primarily due to interest  expense
associated  with the $550 million of 8.5% Senior Notes issued in June 2001,  the
$400 million of 8.625% Senior Notes issued in February 2001 and the $135 million
of 8.625% Senior Notes issued in June 2002. The proceeds from the sale of Senior
Notes were used for general  corporate  purposes,  including  the funding of the
aforementioned  acquisitions.  In  addition,  interest  expense  increased  from
non-recourse financings at SAESA, EDEERSA and Electroandes. Partially offsetting
these increases was reduced interest  expense  associated with the repayments of
$35 million PSEG Capital  Corporation  (PSEG Capital) 6.73% Medium-Term Notes in
June 2001,  $135 million 6.74%  Medium-Term  Notes in October 2001,  $98 million
variable  rate  Medium-Term  Notes in June 2002 and $100  million  variable-rate
Medium-Term Notes in July 2002.

At September  30, 2002 and December 31, 2001, we had total debt  outstanding  of
$3.280 billion and $3.395 billion,  respectively, of which $959 million and $909
million,  respectively,  is  non-recourse  to us. At  September  30,  2002,  and
December  31, 2001,  there was  non-recourse  debt  related to our  discontinued
operations of $160 million and $137 million, respectively, that is excluded from
total debt outstanding,  noted above. Such amounts are classified as a component
of Current  Liabilities of Discontinued  Operations and are no longer classified
as long-term debt outstanding on our Consolidated Balance Sheets.

Energy Holdings -- Losses From Discontinued Operations

      Energy Technologies

Energy  Technologies is comprised of 11 HVAC/mechanical  operating companies and
an  asset  management   group  which  includes  various  DSM  investments.   DSM
investments  in  long-term  contracts  represent  expenditures  made  by  Energy
Technologies to share DSM customers'  costs  associated with the installation of
energy  efficient  equipment.


                                       28
<PAGE>

DSM  revenues  are  earned  principally  from  monthly  payments  received  from
utilities,  which represent shared electricity  savings from the installation of
the energy efficient equipment.

In  June  2002,  we  formally  executed  a plan  to sell  our  interests  in the
HVAC/mechanical  operating  companies.  We  have  retained  the  services  of an
investment-banking  firm to market the  HVAC/mechanical  operating  companies to
interested  parties and they have completed an analysis of the fair market value
of the operating companies. The sale of the HVAC/mechanical  operating companies
is expected to be  completed  by June 30, 2003.  The  HVAC/mechanical  operating
companies  meet the criteria for  classification  as components of  discontinued
operations  and all prior  periods were  reclassified  to conform to the current
year's presentation.

We have  reduced  the  carrying  value of  these  related  investments  to their
estimated  net  realizable  value,  and incurred a loss on disposal for the nine
months  ended  September  30, 2002 of $20  million  (after-tax).  The  operating
results of these  discontinued  operations for the quarter and nine months ended
September 30, 2002, yielded additional losses of $3 million  (after-tax) and $12
million (after-tax), respectively.

      Tanir Bavi

As of Septmber 30, 2002, Global owned a 74% interest in Tanir Bavi Power Company
Private  Ltd.  (Tanir  Bavi),  which owns and  operates a 220 MW barge  mounted,
combined-cycle  generating  facility  in India.  A plan to exit  Tanir  Bavi was
adopted in June 2002.  Global  signed an agreement in August 2002 under which an
affiliate  of its partner in this  venture,  GMR Vasavi  Group,  a local  Indian
company,  purchased  Global's  majority  interest  in Tanir  Bavi.  The sale was
completed in October 2002. Tanir Bavi meets the criteria for classification as a
component  of   discontinued   operations   and  all  prior  periods  have  been
reclassified  to  conform  to the  current  year's  presentation.  In the second
quarter,  we reduced the carrying  value of Tanir Bavi to the  contracted  sales
price of $45 million and recorded a loss on disposal of $14 million (after-tax).
The  operating  results  of Tanir Bavi for the six  months  ended June 30,  2002
yielded income of $5 million (after-tax).

For information  regarding goodwill  impairment  associated with Tanir Bavi, see
Note 2. Recent Accounting Pronouncements and Note 4. Asset Impairments.

Energy Holdings -- Cumulative Effect of Change in Accounting Principle

We have  finalized  our  evaluation  of the effect of  adopting  SFAS 142 on the
recorded  amount of goodwill.  The total amount of goodwill  impairments is $120
million,  net of tax of $66 million and is comprised of $36 million  (after-tax)
at EDEERSA,  $34 million  (after-tax) at RGE, $32 million  (after-tax) at Energy
Technologies  and $18 million  (after-tax) at Tanir Bavi. All of the goodwill on
these companies,  other than RGE, is fully impaired.  This impairment charge has
been recorded as of January 1, 2002 as a component of the Cumulative Effect of a
Change in  Accounting  Principle and is reflected in  Consolidated  Statement of
Operations  for the nine months ended  September  30,  2002.  The $53 million of
goodwill at Energy Technologies and the $27 million of goodwill at Tanir Bavi as
of December 31, 2001 has been  reclassified  into Current Assets of Discontinued
Operations on our Consolidated  Balance Sheets. For further detail regarding the
goodwill  impairments  at  Energy  Technologies  and  Tanir  Bavi,  see  Note 3.
Discontinued Operations of the Notes.

Energy Holdings -- Earnings (Losses) Before Interest and Taxes (EBIT)
Contribution

EBIT includes operating income,  other income and minority  interest.  Such EBIT
includes  earnings  before  interest  and tax expense  recorded on  consolidated
projects,  the sum of which is  senior to our  recourse  interest  expense.  The
results of operations for each of our business segments are explained below with
reference to the EBIT contribution.  We borrow on the basis of a combined credit
profile to finance the  activities of our  subsidiaries.  As such, we manage the
capital  structure  of each of our  subsidiaries.  Debt  at each  subsidiary  is
evidenced by demand notes payable to us and/or PSEG Capital.

Information concerning EBIT is presented here as a measure of financial results,
including a measure of our ability to service debt. In addition, EBIT may not be
comparable to similarly titled measures by other  companies.  EBIT should not be
construed  as an  alternative  to operating  income or cash flow from  operating
activities,  each as  determined  according  to  generally  accepted  accounting
principles.  Although  we are not  required  to meet  minimum  EBIT to  interest
charges  tests as part of our  debt  covenants,  we use  these  measures  in our
financial and business


                                       29
<PAGE>

planning process to provide reasonable assurance that our forecasts will provide
adequate interest coverage to maintain or improve our target credit ratings.

                                          Earnings (Losses) Before Interest
                                               and Taxes Contribution
                                       -----------------------------------------
                                         Quarter Ended         Nine Months Ended
                                         September 30,           September 30,
                                       -----------------      ------------------
                                        2002        2001       2002        2001
                                       -----       -----      -----       -----
                                                (Millions of Dollars)
EBIT:
     Global .....................      $  62       $ 46       $(378)      $ 143
     Resources ..................         55         46         125         122
     Energy Technologies ........          3          3           5           6
     Other ......................         (2)        (2)         (7)         (5)
                                       -----       ----       -----       -----
Total EBIT ......................      $ 118       $ 93       $(255)      $ 266
                                       =====       ====       =====       =====

      Global

Global  develops,   acquires,   owns  and  operates   electric   generation  and
distribution  facilities  and  engages  in power  production  and  distribution,
including  wholesale and retail sales of electricity,  in selected  domestic and
international markets.

Until the fourth quarter of 2000,  Global's  investments  consisted primarily of
minority  ownership  positions in projects and joint  ventures.  Other than fees
collected for providing operations and maintenance  services,  Global's revenues
represented  its  pro-rata  ownership  share of net income  generated by project
affiliates  which are  accounted  for by the equity  method of  accounting.  The
expenses in the table below were those required to develop  projects and general
and administrative expenses required to operate the business as a whole.

In the fourth quarter of 2000,  Global  increased its interest in Carthage Power
Company,  an electric  generation  facility  then under  construction  in Rades,
Tunisia  from 35% to 60% and  completed  project  financing  for a 55%  economic
interest in ELCHO,  a power plant in Poland with the  expectation of an increase
to a 90% economic interest by 2003.

In the first  quarter of 2001,  Global  increased its interest in Tanir Bavi, an
electric  generation facility in India from 49% to 74%. (For a discussion of our
sale of Tanir Bavi, see above and Note 3. Discontinued Operations of the Notes.)
In the second  quarter of 2001,  Global  increased  its interest in EDEERSA,  an
electric  distribution  facility  in  Argentina  from 41% to 90%.  In the  third
quarter of 2001,  Global  purchased a 94% interest and an additional 6% interest
in the fourth quarter of 2001 in SAESA, a group of companies  consisting of four
distribution  companies  and one  transmission  company  that  provide  electric
service in Chile and a distribution company in Argentina.  In the fourth quarter
of  2001,  Global  acquired   Electroandes,   a  hydroelectric   generation  and
transmission  company  in Peru.  The  accounts  of Global  include  the  assets,
liabilities,  revenues and expenses of  majority-owned  subsidiaries  over which
Global exercises control.

In January 2002, Global completed  negotiations to buy a 35% interest in the 590
MW  (electric)  and 618 MW (thermal)  coal-fired  Skawina CHP Plant,  located in
Southern Poland and in June 2002 completed such 35% acquisition and purchased an
additional  approximate  15%,  increasing  its ownership to  approximately  50%.
Global consolidated the balance sheet,  statement of operations and statement of
cash flows of Skawina as of September 30, 2002.


                                       30
<PAGE>

Summary Results -- Global

                                              Quarter Ended    Nine Months Ended
                                              September 30,       September 30,
                                              -------------    -----------------
                                              2002    2001      2002      2001
                                              ----    -----    -----      ----
                                                   (Millions of Dollars)
EBIT:
Revenues .................................    $145    $ 101     $ 387     $ 226
Expenses .................................      95       53       714        80
                                              ----    -----     -----     -----
Operating Income (Loss) ..................      50       48      (327)      146
Other Income (Loss) and Minority Interests      12       (2)      (51)       (3)
                                              ----    -----     -----     -----
EBIT .....................................    $ 62    $  46     $(378)    $ 143
                                              ====    =====     =====     =====

Global's  EBIT  contribution  increased  $16 million or 35% and  decreased  $521
million for the quarter and nine months ended September 30, 2002,  respectively,
from the comparable periods in 2001.

The Global EBIT  contribution  increase for the quarter ended September 30, 2002
was primarily  related to the acquisitions of SAESA late in the third quarter of
2001 and of Electroandes in the fourth quarter of 2001.  Earnings also increased
due to the generation  facility located in Rades,  Tunisia commencing  operation
via a retroactive  commercial  operating  date in the second quarter of 2002 and
favorable  regulatory changes at RGE. Partially  offsetting these increases were
decreases at GWF due to the reversal of an accounts  receivable  reserve in 2001
related to California  Power Exchange pricing in 2001 and lower energy prices in
2002  as  compared  to  2001;  and  decreased  earnings  at our  TIE  generation
facilities due to lower energy prices in 2002 as compared to 2001.

The Global EBIT  contribution  decrease for the nine months ended  September 30,
2002 was due primarily to the $515 million of operating expenses associated with
the  write-down  and certain loss  contingencies  associated  with its Argentine
investments.  Investments  in the Argentine  operations  were deemed to be fully
impaired and we recorded a $506 million  write-down of project  investments.  In
connection  with  our  plans  to  exit  these   businesses,   we  recorded  loss
contingencies of $7 million  associated with certain potential  interest payment
defaults at the project level and an additional $2 million of legal fees for the
nine months ended September 30, 2002. The loss contingencies and legal fees were
recorded as a component of administrative and general expenses.

For the nine months ended September 30, 2002, the Global EBIT contribution, less
the $515 million of operating expenses associated with the asset impairments and
loss  contingencies in Argentina,  decreased $6 million or 4% as compared to the
same period in 2001.  The decrease is primarily  driven by marking the US Dollar
denominated  debt at EDEERSA to a devaluing  Argentine Peso and reduced earnings
from our  investments  in TIE and GWF Energy.  These  decreases  were  partially
offset by earnings from SAESA and Electroandes and increased earnings from RGE.

Global's  EBIT  contribution  for the nine  months  ended  September  30,  2002,
adjusted for the $515 million of operating expenses related to the write-down in
Argentina  and  the  $59  million  loss  at  EDEERSA  associated  with  currency
translation,  was $197 million.  Such EBIT includes earnings before interest and
tax expense recorded on consolidated projects, the sum of which is senior to our
recourse  interest expense.  The combined amounts of project-level  interest and
tax expense for the quarter  and nine months  ended  September  30, 2002 were $4
million  and  $12  million,  respectively.  The  following  summarizes  the  net
contribution to EBIT by Global projects in the following regions for the quarter
and nine months  ended  September  30,  2002 and  September  30, 2001  excluding
Argentina:


                                       31
<PAGE>

                                        Quarter Ended         Nine Months Ended
                                        September 30,           September 30,
                                      ----------------        -----------------
                                      2002        2001        2002        2001
                                      ----        ----        ----        -----
                                                (Millions of Dollars)
North America .................        $20        $ 33         $83        $ 114
Chile .........................         16           9          54           18
Peru ..........................         14           7          37           21
Brazil ........................          5          (5)         18           (5)
Asia Pacific ..................          3           2           6            5
All Other .....................         14          --          19            3

For a description of financial derivatives and their impacts to our consolidated
financial  statements,  see Note 6. Financial Instruments and Risk Management of
the Notes.

Global investments include partnership  interests in seven qualifying facilities
(QFs) in  California  that  sell  power  under  long-term  energy  and  capacity
contracts to Pacific Gas & Electric Company (PG&E).  These  facilities  realized
decreased operating earnings for the quarter and nine months ended September 30,
2002 as compared to the same periods in 2001 due to lower energy prices in 2002.
In  2001,  certain  of  these  generation  facilities  had  benefited  from  the
historically  high wholesale power prices in the California power market, as the
contract terms allowed for certain variable energy pricing. The energy output of
these  facilities  is currently  under a fixed energy  contract  amendment for a
period of five years ending in July,  2006 to PG&E and earnings are likely to be
less volatile in future periods.

In May 2001, GWF Energy,  a 50/50 joint venture between Global and Harbinger GWF
LLC,  entered  into a  ten-year  PPA with  CDWR to  provide  340 MW of  electric
capacity to California  from three new natural  gas-fired  peaking  plants,  the
Hanford,  Henrietta and Tracy Peaking Plants. The Hanford Peaking Plant, a 90 MW
facility,  was completed and began  operation in August 2001. In early 2002, the
Hanford Peaking Plant was taken off-line for a scheduled  environmental  upgrade
for a period of three months and  returned to operation in the third  quarter of
2002.  During  the six months  ended  June 30,  2002,  the  facilities  realized
operating  losses as no revenues  were earned  during the outage.  The  facility
returned to operations and recognized  profits in the third quarter of 2002. The
capacity  prices in the ten-year  contract  exceed $200/KW year and decline over
the life of the  contracts.  The earnings  stream from the contract is levelized
over its term.  This  indicates  that project cash flow will exceed  earnings as
some of the project  income  will be  deferred.  Over the next five  years,  our
estimates show that our share of project cash will exceed our share of income by
$30 million on a cumulative basis.

For a discussion of the Texas power market, see Business Environment.

      Resources

Resources  earns its leveraged  lease revenues  (recorded as Income from Capital
and Operating Leases) primarily from rental payments and tax benefits associated
with such  transactions.  As a passive investor in limited  partnership  project
financing transactions,  Resources recognizes revenue from its pro-rata share of
the income generated by these investments.  As an owner of beneficial  interests
in two leveraged buyout funds,  Resources recognizes revenue as the share prices
of public  companies  in the  leveraged  buyout  funds  fluctuate.  In addition,
revenue is  recognized  as  companies  in the fund  distribute  dividend  income
through the fund to the investors and as the fund liquidates its holdings.


                                       32
<PAGE>

Summary Results -- Resources

                                        Quarter Ended         Nine Months Ended
                                        September 30,           September 30,
                                      ----------------        -----------------
                                      2002        2001        2002        2001
                                      ----        ----        ----        -----
                                                (Millions of Dollars)
Revenues .........................    $57         $50         $135        $134
Expenses .........................      4           4           12          12
                                      ---         ---         ----        ----
Operating Income .................     53          46          123         122

Other Income .....................      2          --            2         --
                                      ---         ---         ----        ----
EBIT .............................    $55         $46         $125        $122
                                      ===         ===         ====        ====

Resources'  EBIT  contribution  increased $9 million or 20% and $3 million or 2%
for the quarter and nine months ended September 30, 2002, respectively, from the
comparable periods in 2001.

Resources' EBIT contribution  increased for the quarter ended September 30, 2002
primarily  due to higher Net Gains  (Losses) on  Investments  as compared to the
third quarter of 2001.  There was no gain or loss resulting from a change in the
carrying value of the publicly traded  securities  within  Resources'  leveraged
buyout funds in the third quarter of 2002 which compares to a loss of $8 million
in the third quarter of 2001 as a result of a decrease in the carrying  value of
the publicly traded securities within those funds.

The slight  increase in Resources' EBIT  contribution  for the nine months ended
September  30, 2002 was  primarily due to an increase of $16 million from higher
leveraged lease income from continued  investment by Resources in such financing
transactions.  This  increase was mostly  offset by lower Net Gains  (Losses) on
Investments of $15 million, of which $26 million resulted from a net decrease in
the carrying value of private equity  securities within certain leveraged buyout
funds.

The  following  summarizes  Resources'  lease  revenue  for the quarter and nine
months  ended   September  30,  2002  and  2001  by  credit   quality  of  lease
counter-parties.

                                          Quarter Ended       Nine Months Ended
                                          September 30,         September 30,
                                        ----------------      -----------------
                                        2002        2001      2002        2001
                                        ----        ----      ----        -----
                                                (Millions of Dollars)
Lease Revenue--Investment Grade (1) ..   $37        $38       $113        $100
Lease Revenue--Non-Investment
 Grade or not rated ..................    20         20         60          56
                                         ---        ---       ----        ----
Total ................................   $57        $58       $173        $156
                                         ===        ===       ====        ====

Cash Flow Available From
 Leveraged Leases (2)(3) .............    81         80        245         212

(1)   Investment  Grade  means rated at least  investment  grade by both S&P and
      Moody's.  For S&P,  the  minimum  investment  grade  rating  is BBB-.  For
      Moody's, the equivalent minimum investment grade rating is Baa3.

(2)   Over 80% of lease cash flow is provided by tax payments from PSEG pursuant
      to a tax allocation agreement between PSEG and Energy Holdings.

(3)   These amounts are equal to Income from Capital and  Operating  Leases from
      the  Consolidated  Statements  of Operations  plus Leverage  Lease Income,
      Adjusted  for Rents  Received  from the  Consolidated  Statements  of Cash
      Flows.

      Energy Technologies

Energy  Technologies is comprised of 11 HVAC/mechanical  operating companies and
an  asset  management   group  which  includes  various  DSM  investments.   DSM
investments  in  long-term  contracts  represent  expenditures  made  by  Energy
Technologies to share DSM customers'  costs  associated with the installation of
energy  efficient  equipment.


                                       33
<PAGE>

DSM  revenues  are  earned  principally  from  monthly  payments  received  from
utilities,  which represent shared electricity  savings from the installation of
the energy efficient equipment.

In  June  2002,  we  formally  executed  a plan  to sell  our  interests  in the
HVAC/mechanical  operating  companies and DSM investments.  We have retained the
services of an investment-banking  firm to market the HVAC/mechanical  operating
companies to  interested  parties.  In the third  quarter of 2002, we decided to
continue to own the DSM investments and anticipate continued profitability.  The
sale of the  HVAC/mechanical  operating companies is expected to be completed by
June 30, 2003.

Summary Results -- Energy Technologies

                                          Quarter Ended       Nine Months Ended
                                          September 30,         September 30,
                                        ----------------      -----------------
                                        2002        2001      2002        2001
                                        ----        ----      ----        -----
                                                (Millions of Dollars)
Revenues ........................        $10         $8        $22         $20
Expenses ........................          7          6         17          15
                                         ---         --        ---         ---
Operating Income ................          3          2          5           5
Other Income ....................         --          1         --           1
                                         ---         --        ---         ---
EBIT ............................        $ 3         $3        $ 5         $ 6
                                         ===         ==        ===         ===

Energy  Technologies' EBIT contribution was flat and decreased $1 million or 17%
for the quarter and nine months ended September 30, 2002, respectively, from the
comparable periods in 2001.

Liquidity and Capital Resources

The  following  discussion  of  our  liquidity  and  capital  resources  is on a
consolidated  basis,  noting  the uses and  contributions  of our  three  direct
operating subsidiaries, Global, Resources and Energy Technologies.

Financing Methodology

Our capital  requirements  are met  through  liquidity  provided  by  internally
generated cash flow and external  financings.  We make equity contributions from
time to time to our respective  direct and indirect  subsidiaries to provide for
part of their  capital and cash  requirements,  generally  relating to long-term
investments.  Also, we may from time to time,  repurchase  debt using funds from
commercial paper, debt issuances, and other sources of funding. During the third
quarter of 2002,  we  purchased  approximately  $19  million of Senior  Notes at
prices below par value.  In October 2002, we purchased an additional $20 million
of Senior Notes at prices below par value.  From time to time, we may repurchase
additional  debt  securities  using funds from  operations,  asset  sales,  debt
issuances and other sources of funding, and may make exchanges of new securities
for outstanding securities. Such repurchases may be at variable prices below, at
or above  prevailing  market  prices and may be  conducted  by way of  privately
negotiated  transactions,  open-market  purchases,  tender or exchange offers or
other  means.  We may  utilize  brokers or dealers  or effect  such  repurchases
directly.  Any such  repurchases  may be commenced or  discontinued  at any time
without notice.

As of September 30, 2002, we have  guaranteed  equity  contribution  commitments
related to certain of Global's  projects of $153 million.  In addition,  we have
other  guarantees  of $91 million  and $1 million  relating to Global and Energy
Technologies,  respectively.  At times,  we utilize  intercompany  dividends and
intercompany  loans  (except  that  PSE&G  may  not  make  loans  to us  or  our
subsidiaries and affiliates) to satisfy various subsidiary needs and efficiently
manage our and our  subsidiaries'  short-term  cash needs.  Any excess funds are
invested in accordance with guidelines adopted by our Board of Managers.

External  funding  to  meet  our  needs,  is  comprised  of  corporate   finance
transactions.  The debt incurred is our direct obligation.  Some of the proceeds
of  these  debt  transactions  are  used  to  make  equity  investments  in  its
subsidiaries.


                                       34
<PAGE>

As discussed below, depending on the particular company,  external financing may
consist of public and private capital market debt and equity transactions,  bank
revolving  credit and term loan  facilities,  commercial  paper  and/or  project
financings.  Some of these transactions involve special purpose entities (SPEs),
formed in accordance  with  applicable  tax and legal  requirements  in order to
achieve specified  beneficial  financial  advantages,  such as favorable tax and
legal liability treatment.  Substantially,  all SPEs are consolidated,  where we
have a controlling interest.

Global has certain investments that are accounted for under the equity method in
accordance with generally accepted accounting principles. Accordingly, an amount
is recorded on our balance sheet that is primarily our equity  investment and is
increased for our pro-rata share of earnings less any dividend distribution from
such investments.  The companies in which we invest that are accounted for under
the equity  method have an aggregate  $1.89  billion of debt on their  combined,
consolidated  financial  statements.  Our  pro-rata  share of such  debt is $697
million  and is  non-recourse  to us,  Global  and PSEG.  We are  generally  not
required to support the debt service obligations of these companies.

The  availability  and  cost  of  external  capital  could  be  affected  by our
performance as well as by the  performance of our  subsidiaries  and affiliates.
This could include the degree of structural or regulatory  separation between us
and our subsidiaries and between Public Service Electric and Gas Company (PSE&G)
and its non-utility  affiliates and the potential impact of affiliate ratings on
consolidated and unconsolidated  credit quality.  Additionally,  compliance with
applicable  financial  covenants will depend upon future financial  position and
levels of earnings and net cash flows, as to which no assurances can be given.

Financing  for  Global's  projects  and  investments  is  generally  provided by
non-recourse project financing  transactions.  These consist of loans from banks
and other  lenders that are  typically  secured by project and SPE assets and/or
cash flows. Non-recourse transactions generally impose no material obligation on
the  parent-level  investor to repay any debt incurred by the project  borrower.
However,  in some cases,  certain  obligations  relating to the investment being
financed,  including additional equity commitments,  are guaranteed by us and/or
Global.  The consequences of permitting a project-level  default include loss of
any  invested  equity  by the  parent.  PSEG  has  not  currently  provided  any
guarantees or credit support to us, except for the minimum net worth maintenance
support agreement to PSEG Capital Corporation,  a subsidiary of Energy Holdings,
which we plan to eliminate upon maturity of PSEG Capital  Corporation's  debt in
May 2003.

Over the next several years, we will be required to refinance  maturing debt and
expect to incur additional debt and provide equity to fund investment  activity.
Any inability to obtain  required  additional  external  capital or to extend or
replace  maturing  debt  and/or  existing   agreements  at  current  levels  and
reasonable interest rates may adversely affect our financial condition,  results
of operations and net cash flows.

Debt Covenants, Cross Default Provisions, Material Adverse Clause Changes, and
Ratings Triggers

The PSEG  credit  agreements  contain  cross-default  provisions  under  which a
default by it or its major subsidiaries (PSE&G, PSEG Power LLC, Energy Holdings)
in an  aggregate  amount  of $50  million  would  result  in a  default  and the
potential acceleration of payment under the agreements.

Our credit agreements contain cross-default  provisions under which a default by
us or our major  subsidiaries  (Resources,  Global) in an aggregate amount of $5
million, or a default by PSEG in an aggregate amount of $75 million would result
in a default and the potential acceleration of payment under the agreements. Our
Senior Note Indenture contains cross-default provisions under which a default by
us or our major subsidiaries  (Resources,  Global) in an aggregate amount of $25
million  would  result in a default and the  potential  acceleration  of payment
under the indenture.

A failure to make  principal  and or  interest  payments,  when due,  would be a
default under our credit  agreements  and  indentures.  Any inability to satisfy
required covenants and/or borrowing conditions would have a similar impact. If a
default were to occur,  the  respective  lenders and debt holders,  after giving
effect to any applicable  grace and/or cure periods,  could  determine that debt
payment  obligations may be  accelerated.  In the event of any likely default or
failure to satisfy  covenants or  conditions,  we, or the  relevant  subsidiary,
would  seek  to  renegotiate  terms  of the


                                       35
<PAGE>

agreements  with the lenders.  No  assurances  can be given as to whether  these
efforts would be successful. A declaration of cross-default could severely limit
PSEG's and/or our liquidity  and restrict the ability to meet  respective  debt,
capital and, in extreme cases,  operational cash requirements which could have a
material  adverse effect on our financial  condition,  results of operations and
net cash flows, and those of our subsidiaries.

The credit agreements generally contain provisions under which the lenders could
refuse  to  advance  loans in the  event of a  material  adverse  change  in the
borrower's business or financial condition. In that event, loan funds may not be
advanced.

As  explained in detail  below,  some of these  credit  agreements  also contain
maximum debt to equity  ratios,  minimum  cash flow tests and other  restrictive
covenants and  conditions to borrowing.  Compliance  with  applicable  financial
covenants  will  depend  upon our  future  financial  position  and the level of
earnings and cash flow, as to which no assurances can be given.

The debt indentures and credit  agreements do not contain any material  "ratings
triggers"  that  would  cause  an  acceleration  of the  required  interest  and
principal payments in the event of a ratings downgrade. However, in the event of
a downgrade,  we and/or our  subsidiaries  may be subject to increased  interest
costs on certain  bank debt.  We and Global may have to provide  collateral  for
certain commitments if our credit ratings should fall below investment grade.

Credit Ratings

All of our publicly traded debt has received  investment grade ratings from each
of the three major  credit  rating  agencies.  Debt at PSEG Capital has received
investment grade ratings from two major credit rating  agencies.  The changes in
the energy  industry and the bankruptcy of Enron Corp. are attracting  increased
attention  from  the  rating  agencies,  which  regularly  assess  business  and
financial matters. Given the changes in the industry,  attention to and scrutiny
of our  performance,  capital  structure  and  competitive  strategies by rating
agencies will likely continue. These changes could affect the bond ratings, cost
of capital and market prices of our securities. We will continue to evaluate our
capital structure,  financing  requirements,  competitive  strategies and future
capital expenditures to maintain our current credit ratings.

The current  ratings of  securities  of us and PSEG  Capital are shown below and
reflect the respective views of the rating agencies, from whom an explanation of
the  significance  of their ratings may be obtained.  There is no assurance that
these  ratings will  continue for any given period of time or that they will not
be revised or withdrawn entirely by the rating agencies, if, in their respective
judgments,  circumstances  so warrant.  Any downward  revision or withdrawal may
adversely affect the market price of our securities or those of PSEG Capital and
serve to increase those companies' cost of capital and access to capital.

                             Moody's (1)   Standard & Poor's (2)     Fitch(1)
                             -----------   ---------------------   -----------
Energy Holdings
Senior Notes                     Baa3               BBB-               BBB-

PSEG Capital
Medium Term Notes                Baa2               BBB-            Not Rated

(1)   On October 11, 2002,  Moody's  reaffirmed these credit ratings but changed
      the outlook from Stable to Negative.

(2)   Standard and Poor's has established an overall  corporate credit rating of
      BBB for us.

Short-Term Liquidity

We have the following  credit  facilities  for various  funding  purposes and to
provide us liquidity. These agreements are with a group of banks and provide for
borrowings with maturities of up to one year. The following table summarizes our
various facilities as of September 30, 2002.


                                       36
<PAGE>

                                     Expiration   Total     Primary    Amount
Energy Holdings                         Date     Facility   Purpose  Outstanding
                                     ----------  --------   -------  -----------
                                               (Millions of Dollars)
364-day Revolving Credit Facility     May 2003     $  200   Funding    $   --
Five-year Revolving Credit Facility   May 2004        495   Funding       210
Uncommitted Bilateral Agreement         N/A             *   Funding        43
                                                   ------              ------
       Total                                       $  695              $  253
                                                   ======              ======

*     Availability varies based on current market conditions.

The  five-year  facility also permits up to $250 million of letters of credit to
be issued of which $12 million were outstanding as of September 30, 2002.

Financial covenants contained in these facilities include the ratio of cash flow
available for debt service (CFADS) to fixed charges. At the end of any quarterly
financial period such ratio shall not be less than 1.50x for the 12-month period
then ending.  As a condition of borrowing,  the pro-forma CFADS to fixed charges
ratio shall not be less than 1.75x as of the quarterly  financial  period ending
immediately  following  the first  anniversary  of each  borrowing  or letter of
credit  issuance.  CFADS includes,  but is not limited to, operating cash before
interest and taxes,  depreciation and amortization,  pre-tax cash  distributions
from all asset  liquidations and equity capital  contributions  from PSEG to the
extent  not  used to  fund  investing  activity,  plus  non-cash,  non-recurring
charges.  In  addition,  the  ratio of  consolidated  recourse  indebtedness  to
recourse capitalization, at the end of any quarterly financial period, shall not
be greater  than 0.60 to 1.00.  This ratio is  calculated  by dividing the total
recourse indebtedness by the total recourse capitalization.  This ratio excludes
the debt of PSEG Capital  which is supported by PSEG.  As of September 30, 2002,
the  latest 12 months  CFADS  coverage  ratio was 6.3 and the ratio of  recourse
indebtedness to recourse capitalization was 0.47 to 1.00.

Compliance  with  applicable  financial  covenants  will  depend upon our future
financial  position  and the level of  earnings  and cash  flow,  as to which no
assurances  can be given.  In  addition,  any  future  growth  will  depend to a
significant degree on PSEG's ability to access capital and our ability to obtain
additional financing beyond current levels.

Capital Requirements

Modest growth planned at Resources is dependent upon  availability  of potential
investments  meeting  certain  profit  thresholds.   Global  has  refocused  its
strategy,  from accelerated  growth to emphasis on increasing the efficiency and
returns  on  its  existing  assets.  We are in the  process  of  exiting  Energy
Technologies'  HVAC/mechanical  operating  companies and expect to have sold all
companies by June 2003.  For the nine months ended  September  30, 2002, we made
net investments totaling  approximately $390 million. These investments were net
of $118 million of cash inflows  primarily  from loan  repayments  received from
TIE. These  investments  include an  approximately  50% interest of a coal-fired
generation facility in Poland, and additional investments in existing generation
and  distribution  facilities  and  projects  by Global and an  investment  in a
capital lease by  Resources.  For a discussion of the loans to TIE, see Note 10.
Related-Party Transactions of the Notes to Consolidated Financial Statements.

In 2002,  Global has expended $31 million during 2002 for its  approximately 50%
ownership  interest in Skawina and the total equity investment is expected to be
approximately  $44 million.  Global plans to increase its ownership  interest to
75% over the next few years.

As of September 30, 2002, we had $430 million  available for borrowing under our
$695  million of bank lines.  Additional  amounts of up to $100  million from an
uncommitted  bilateral  agreement may be available dependent upon current market
conditions.  In the third quarter of 2002,  PSEG  contributed an additional $100
million of equity and is expected to contribute  an  additional  $100 million in
the  fourth  quarter  of  2002.  We are in the  process  of  reviewing  our cost
structure  and  capital  investment  plans in light  of the  increasingly  risky
environment for international  investment.  Current plans anticipate a build out
of Global commitments amounting to a net new investment of $150 million over the
next two years, no material  investment at Resources for the next two years, and


                                       37
<PAGE>

additional  investments  of  approximately  $50  million  per  year  thereafter.
Resources'  investments are discretionary and are dependent upon availability of
potential investments meeting certain profit thresholds. We have $314 million of
long-term  debt  due  within  one  year,  including  $282  million  of  recourse
Medium-Term  Notes  (MTNs)  maturing  by the second  half of 2003,  of which $30
million  matured in October 2002. We have $289 million of recourse  Senior Notes
due in 2004, and $1.477 billion of recourse Senior Notes due in years subsequent
to 2006. Substantially all other debt maturities are non-recourse.

Financing Activities

In May 2002, we renewed our 364-day $200 million  Revolving Credit Facility with
a group of banks.  The new  facility  matures May 7, 2003.  The new facility has
identical terms and conditions to the existing facility with the exception of an
increase in the pricing spread of .125% per annum for borrowings.

PSEG  Capital  has a $650  million MTN program  which  provides  for the private
placement  of MTNs.  This MTN  program  is  supported  by a  minimum  net  worth
maintenance agreement between PSEG Capital and PSEG which provides,  among other
things,  that PSEG (1) maintain its ownership,  directly or  indirectly,  of all
outstanding common stock of PSEG Capital,  (2) cause PSEG Capital to have at all
times a positive tangible net worth of at least $100,000 and (3) make sufficient
contributions  of liquid assets to PSEG Capital in order to permit it to pay its
debt  obligations.  At September  30, 2002 and  December  31,  2001,  total debt
outstanding   under  the  MTN  program  was  $282  million  and  $480   million,
respectively,  maturing in 2003.  In October  2002,  $30 million of PSEG Capital
MTNs matured. We expect to repay the remaining debt and eliminate this borrowing
program by the second quarter of 2003.

We have no other material debt maturities in recourse  transactions  through the
end of 2003.

Environmental Matters

Global has ownership  interests in facilities,  including operating power plants
and   distribution   companies  and  power  plants  under   construction  or  in
development, in numerous countries. These include the United States (California,
Hawaii, Maine, New Hampshire, Pennsylvania and Texas), Argentina, Brazil, Chile,
China, India, Italy, Oman, Peru, Poland,  Taiwan,  Tunisia and Venezuela.  These
operations are subject to compliance with  environmental laws and regulations by
relevant  authorities at each location,  which may include air and water quality
control, land use, disposal of wastes, aesthetics and other matters. In order to
achieve  compliance,  expenditures  may be needed  for  construction,  continued
operation or remediation of new and existing facilities and sites.

As  Global  pursues  new  opportunities,  it will be  required  to  comply  with
applicable  environmental  laws and  regulations.  Global  attempts to take such
expenditures into consideration when considering an investment;  however,  there
can be no assurance that  environmental laws and regulations will not change. If
environmental  laws  or  regulations  change  in  the  future,  there  can be no
assurance that our financial condition, results of operations and net cash flows
will not be materially and adversely affected. We are committed to operating our
businesses  cleanly,   safely  and  reliably  and  strive  to  comply  with  all
environmental laws,  regulations,  permits and licenses.  However,  despite such
efforts, there have been instances of non-compliance,  although no such instance
resulted in revocation  of any permit or license or caused a materially  adverse
effect on our financial condition, results of operations and net cash flows.

We do not anticipate any material capital expenditures for environmental control
facilities  or in  connection  with  compliance  with  federal,  state  or local
environmental  laws and regulations in 2002 or in connection with the generation
projects  currently in construction or advanced  development.  We do not believe
that compliance with federal, state and local environmental laws and regulations
will have a  material  adverse  effect on our  financial  condition,  results of
operations and net cash flows.


                                       38
<PAGE>

Business Environment

We continue to evaluate the consequences of the continued  economic  slowdown in
the United States and worldwide.  The consequences of a prolonged  recession may
include the continued weakening of certain Latin American currencies,  including
the Brazilian Real, the Chilean Peso, the Peruvian Nuevo Sol, and the Venezuelan
Bolivar,  lower energy prices in power  markets,  including  power markets where
Global  invests  in  merchant  generation  assets,  and  further  credit  rating
downgrades of energy companies,  sovereign  ratings and certain airlines.  As of
September  30, 2002,  $1.7  billion or 24% of our assets were  invested in Latin
America,  specifically in Brazil,  Chile, Peru and Venezuela,  $1.236 billion of
leveraged  leases to domestic  energy  companies,  and $105 million or 1% of our
assets were  comprised  of  leveraged  leases of seven  aircraft  leased to five
separate lessees.

As of  September  30, 2002,  we had $50 million,  or less than 1%, of our assets
invested in the Turboven generation facilities (Turboven), located in Venezuela.
Recently,  Venezuela has been subject to a loss of capital as the country's debt
has been subject to a credit rating downgrade.  In February 2002, the government
of  Venezuela  abandoned  its crawling  currency peg and allowed the  Venezuelan
Bolivar to float freely with the US Dollar.  The Bolivar devalued  approximately
48% since  year-end 2001 from 758 Bolivars to 1 US Dollar to 1,469 Bolivars to 1
US Dollar as of September 30, 2002. The Turboven  power  purchase  contracts are
indexed to the US Dollar as are the fuel supply costs.  This implies that,  with
respect to power purchase  contracts,  a devaluation should not impact the level
of US Dollar revenues realized.  Our near term income statement exposure relates
to our  net  monetary  position  in  Bolivars.  Since  Turboven  is a US  Dollar
functional  entity,  any receivables and payables that are not indexed to the US
Dollar must be re-measured to the US Dollar. The impact of the re-measurement is
recorded as a loss or gain to our  Consolidated  Statements of  Operations.  The
recent  devaluation of the Bolivar did not have a material adverse impact on our
financial position, results of operations or net cash flows.

Global has $443 million  invested in the electric  generation  and  distribution
sector in Peru. Recent  privatizations in this sector have been cancelled due to
pressure from local residents. Such political pressure and disruption may have a
negative impact on Global's investments in Peru.

As of  September  30,  2002,  Global had $227  million  invested in two 1,000 MW
gas-fired  combined-cycle  electric  generating  facilities in Texas,  including
approximately  $74  million  of loans  earning an annual  rate of 12%.  The loan
structure  was put in place  to  provide  Global  with a  preferential  cash and
earnings flow from the projects  after  third-party  debt service.  Losses of $3
million from TIE, net of $8 million of interest income,  were below expectations
due to lower energy prices  resulting  from  over-supply  of energy in the Texas
power market for the nine months ended  September  2002. We received $95 million
of loan repayments and invested $47 million of equity in the TIE investments for
the nine months ended  September  30, 2002.  Global  expects this trend of lower
energy prices to continue  until the 2004-2005 time frame when market prices are
expected to increase,  as older less efficient  plants in the Texas power market
are  expected  to be retired  and the  demand for  electricity  is  expected  to
increase.  However,  no  assurances  can be  given as to the  accuracy  of these
estimates.  Current  projections  of future  cash  flows for each  plant,  using
independent  market studies for estimating gas and  electricity  prices,  market
heat rates and capacity  prices,  do not indicate the investment to be impaired.
We believe that those  independent  market  studies are the best  available  for
estimating future prices. This impairment test was completed as of June 30, 2002
in  accordance  with SFAS 144 at the project level and no assurance can be given
as to the accuracy of the projections used in the analysis.

Continued  weakness in the Texas power market will put pressure on TIE's ability
to meet financial covenants in its loan documents. Discussions are underway with
the  projects'  lenders  to improve  flexibility  in  meeting  these  covenants.
Potential  remedies may include  additional equity  investments by Global in the
Texas facilities.

We cannot  predict the impact of any further  currency  devaluations,  continued
economic  slowdown,  lower energy prices and potential lessee payment  defaults;
however,  such  impact  could have a material  adverse  effect on our  financial
condition, results of operations and net cash flows.

For a  discussion  of the  loans  to  GWF  Energy  that  provide  Global  with a
preferential  cash and  earnings  distribution  similar to the loans to TIE, see
Note 10. Related-Party Transactions.


                                       39
<PAGE>

Credit Risk

Counterparties  expose us to credit  losses in the event of  non-performance  or
non-payment.  We have a  credit  management  process  which  is used to  assess,
monitor and mitigate counterparty  exposure for us and our subsidiaries.  In the
event of non-performance or non-payment by a major counterparty,  there may be a
material  adverse  impact  on our and  our  subsidiaries'  financial  condition,
results of operations or net cash flows.

Credit  risk  relates  to the risk of loss  that we would  incur as a result  of
non-performance  by  counterparties  pursuant to the terms of their  contractual
obligations.  We have established credit policies that we believe  significantly
minimize  credit  risk.  These  policies  include  an  evaluation  of  potential
counterparties'  financial  condition  (including  credit  rating),   collateral
requirements under certain circumstances and the use of standardized agreements,
which may allow for the netting of positive  and negative  exposures  associated
with a single counterparty.

Resources also has credit risk related to its  investments in leveraged  leases,
totaling $1.6  billion,  which is net of deferred  taxes of $1.4 billion,  as of
September 30, 2002.  These  investments  are  significantly  concentrated in the
energy  related  industry  and  have  some  exposure  to the  airline  industry.
Resources is the lessor of domestic  generating  facilities in several US energy
markets.  As a result of recent  actions of the rating  agencies due to concerns
over forward energy prices,  the credit of some of the transaction  lessees,  or
ultimate  guarantors of the lease obligations,  was downgraded.  As of September
30,  2002,  75% of the  lease  portfolio  were  with  counterparties  that  were
investment  grade as rated by both S&P and  Moody's,  as compared to 86% at June
30,  2002.  Specifically,   the  lessees  in  the  following  transactions  were
downgraded  over the quarter by the rating  agencies.  Resources'  investment in
such transactions was approximately $451 million,  net of deferred taxes of $266
million as of September 30, 2002.

Resources  leases  1,173 MW of  coal-fired  generation  to  Reliant  Energy  Mid
Atlantic  Power  Holdings LLC (REMA),  an indirect  wholly-owned  subsidiary  of
Reliant  Resources  Incorporated  (RRI).  The leased  assets  are the  Keystone,
Conemaugh and Shawville  generating  facilities  located in the Pennsylvania New
Jersey Maryland Power Pool (PJM) West market in Pennsylvania. In addition to the
leased assets,  REMA also owns and operates another 2,830 MW located within PJM.
REMA is  capitalized  with over $1  billion  of equity  from RRI and has no debt
obligations senior to the lease obligations. REMA is currently rated BB+ by S&P,
and Baa3 by Moody's. As the lessor/equity participant in the lease, Resources is
protected with  significant  lease covenants that restrict the flow of dividends
from  REMA  to its  parent,  and  by  over-collateralization  of  REMA  with  an
additional 2,830 MW of non-leased assets, transfer of which is restricted by the
financing documents.  Restrictive  covenants include historical and forward cash
flow  coverage  tests  that  prohibit  discretionary  capital  expenditures  and
dividend  payments to the parent/lessee if stated minimum coverages are not met,
and  similar  cash flow  restrictions  if ratings are not  maintained  at stated
levels.  The covenants are designed to maintain cash reserves in the transaction
entity  for the  benefit  of the  non-recourse  lenders  and  the  lessor/equity
participants  in the event of a market  downturn  or  degradation  in  operating
performance of the leased assets.  Resources' investment in the REMA transaction
was $125 million, net of deferred taxes of $88 million at September 30, 2002.

Resources  is the  lessor of the  Collins  facility  to Midwest  Generation  LLC
(Midwest),  an indirect  subsidiary of Edison Mission  Energy (EME).  Collins is
comprised  of 2,698 MW of oil and natural gas fired  assets  located in the MAIN
power market located in the mid-western region of the United States. Midwest has
a contract  with Exelon to supply  capacity  and energy for 1,078 MW for Collins
through  December 2003 with an option to extend.  Both Midwest and EME are rated
BBB- by S&P and Ba3 by Moody's.  In addition to the leased  assets  Midwest owns
and  operates an  additional  4,459 MW of  generation  assets.  The  restrictive
covenants   protecting  us  are  similar  to  those  noted  above  in  the  REMA
transaction. Resources' investment in the Collins facility was $108 million, net
of deferred taxes of $69 million at September 30, 2002.

Resources also leases the Powerton and Joliet generating stations located in the
Mid-American  Interconnected Network (MAIN) market to Midwest. Both Powerton and
Joliet are coal fired stations comprising 2,896 MW of generating  capacity.  The
lease  obligations  are  guaranteed  by  EME.  The  guarantee  contains  certain
restrictive  covenants  including,  but not limited to,  additional  investment,
liens,  and sales of  non-leased  collateral.  In  addition,  EME is required to
maintain a minimum net worth equal to $400 million plus cumulative, consolidated
net income earned by it and its  subsidiaries  since 1992  (without  subtracting
losses).  Resources  investment in the Powerton and Joliet  transaction  was $87
million, net of deferred taxes of $74 million at September 30, 2002.

Resources  is the  lessor of the 370 MW coal  fired  Danskammer  plant to Dynegy
Danskammer  LLC  (Danskammer),  and the 1,200 MW natural  gas/oil  fired Roseton
plant to Dynegy Roseton LLC (Roseton).  Both Danskammer and


                                       40
<PAGE>

Roseton are  indirect  subsidiaries  of Dynegy  Holdings  Inc (DHI).  The leases
obligations  are guaranteed by DHI which is currently  rated B+ by S&P and B3 by
Moody's.  Resources'  investment in the Danskammer and Roseton  transaction  was
$131 million, net of deferred taxes of $34 million at September 30, 2002.

In the domestic lease transactions  described above, Resources has protected its
equity  investment by providing  for the right to assume the debt  obligation at
its discretion in the event of default by the lessee with the condition that the
debt is investment grade. If we were pursuing a debt assumption,  we would first
seek to renegotiate  all relevant terms of the agreement with the lenders.  Debt
assumption  normally  only would occur if an  appraisal  of the leased  property
yielded a value that exceeds the present value of the debt  outstanding.  Should
Resources  ever  directly  assume  a debt  obligation,  the  fair  value  of the
underlying  asset and the associated debt would be recorded on the balance sheet
instead of the net equity  investment  in the lease.  As of September  30, 2002,
Resources determined that the collectibility of the minimum lease payments under
its leveraged lease  investments is still  reasonably  predictable and therefore
continues to account for these investments as leveraged leases.

Resources  has  leasehold  interests  in the 340 MW natural gas fired Kings Lynn
generating  facility  and the 360 MW natural gas fired  Peterborough  generating
facility  located  in the  United  Kingdom.  The  counter-party  is an  indirect
subsidiary of TXU Europe, which is wholly owned by the TXU Corporation.  The TXU
Corporation   recently  announced  their  decision  to  reduce  their  financial
commitment to TXU Europe further noting their  intention to sell the subsidiary.
Moody's  recently  reduced  their  ratings  to Ca citing  that the entity is not
meeting its financial  commitments to suppliers or creditors when due. Our lease
transactions are secured and we believe that in any event of default, we will be
able to recover our lease investment  which totals $65 million,  net of deferred
taxes of $109 million,  as of September 30, 2002,  although no assurances can be
given.

Accounting Matters

For a discussion  of SFAS 142,  SFAS 143,  SFAS 144,  SFAS 145 and SFAS 146, see
Note 2. Recent Accounting Pronouncements of the Notes.

Forward-Looking Statements

Except for the historical  information contained herein,  certain of the matters
discussed  in this report  constitute  "forward-looking  statements"  within the
meaning  of  the  Private  Securities   Litigation  Reform  Act  of  1995.  Such
forward-looking  statements are subject to risks and  uncertainties  which could
cause  actual  results  to  differ  materially  from  those  anticipated.   Such
statements are based on management's  beliefs as well as assumptions made by and
information  currently  available to  management.  When used  herein,  the words
"will",  "anticipate",   "intend",  "estimate",   "believe",  "expect",  "plan",
"hypothetical",  "potential", "forecast", "projections" variations of such words
and similar expressions are intended to identify forward-looking  statements. We
undertake  no  obligation  to  publicly  update  or revise  any  forward-looking
statements, whether as a result of new information,  future events or otherwise.
The following  review of factors should not be construed as exhaustive or as any
admission  regarding the adequacy of our disclosures prior to the effective date
of the  Private  Securities  Litigation  Reform Act of 1995.  In addition to any
assumptions  and other factors  referred to specifically in connection with such
forward-looking  statements,  factors that could cause actual  results to differ
materially from those contemplated in any  forward-looking  statements  include,
among others, the following,  some of which relate to Energy Holdings indirectly
as a result of their potential impact upon PSEG or PSE&G:

      o     deregulation  and the unbundling of energy supplies and services and
            the establishment of a competitive  energy  marketplace for products
            and services;

      o     managing  rapidly changing  wholesale  energy trading  operations in
            conjunction  with  electricity and gas production,  transmission and
            distribution systems;

      o     managing   foreign   investments   and   electric   generation   and
            distribution  operations  in  locations  outside of the  traditional
            utility service territory;

      o     political and foreign currency risks;

      o     sales  retention  and growth  potential  in a mature  PSE&G  service
            territory;

      o     ability to complete development or acquisition of current and future
            investments;

      o     partner and counterparty risk;


                                       41
<PAGE>

      o     exposure to market price  fluctuations  and  volatility  of fuel and
            power supply, power output and marketable securities, among others;

      o     ability to obtain  adequate and timely rate relief,  cost  recovery,
            and other necessary regulatory approvals;

      o     federal, state and foreign regulatory actions;

      o     regulatory   oversight  with  respect  to  utility  and  non-utility
            affiliate relations and activities;

      o     operating  restrictions,  increased  costs and  construction  delays
            attributable to environmental regulations;

      o     nuclear  decommissioning  and the  availability of reprocessing  and
            storage facilities for spent nuclear fuel;

      o     licensing and regulatory  approvals  necessary for nuclear and other
            operating stations;

      o     the ability to economically and safely operate nuclear facilities in
            which  PSEG  has  an  interest   in   accordance   with   regulatory
            requirements;

      o     environmental concerns; and

      o     market  risk and debt and equity  market  concerns  associated  with
            these issues.

                      ITEM 3. QUALITATIVE AND QUANTITATIVE
                          DISCLOSURES ABOUT MARKET RISK

The risk inherent in our market risk sensitive  instruments and positions is the
potential loss arising from adverse changes in commodity prices, equity security
prices,  interest rates and foreign currency  exchange rates as discussed below.
Our policy is to use financial  instruments to manage risk  consistent  with our
business  plans and  prudent  practices.  PSEG has a Risk  Management  Committee
comprised of executive  officers,  which utilizes an independent  risk oversight
function  to  ensure  compliance  with  corporate   policies  and  prudent  risk
management  practices  for  all  of  its  subsidiaries,  including  us  and  our
subsidiaries.

Counterparties  expose us to credit  losses  in the event of  nonperformance  or
nonpayment. We have a credit management process which is used to assess, monitor
and mitigate counterparty exposure. In the event of nonperformance or nonpayment
by a major counterparty, there may be a material adverse impact on our financial
condition, results of operations and net cash flows.

      Commodity Risk

We are  subject  to  commodity  price  risk  related  to the  selling  prices of
electricity at our merchant  generation  facilities,  particularly  in the Texas
power market.  For a comprehensive  discussion of our generation plants in Texas
and the Texas power market, see "Business Environment," shown above.

      Equity Securities

Resources has investments in equity  securities and limited  partnerships  which
invest  in  equity  securities.  Resources  carries  its  investments  in equity
securities at their approximate fair value. Consequently,  the carrying value of
these  investments  is affected  by changes in the fair value of the  underlying
securities.  Fair value is  determined  by  adjusting  the  market  value of the
securities for liquidity and market volatility factors,  where appropriate.  The
aggregate fair values of such investments,  which had available market prices at
September  30, 2002 and  December  31,  2001,  were $21 million and $34 million,
respectively.  The decrease in the recorded  amount of investments was primarily
due a decline in the valuation of publicly traded equity  securities held within
its limited  partnerships.  A sensitivity analysis has been prepared to estimate
our exposure to market volatility of these investments.  The potential change in
fair value  resulting from a hypothetical  10% change in quoted market prices of
these  investments  would  result  in a $2  million  change  in  revenues  as of
September 30, 2002.

      Interest Rates

We are subject to the risk of fluctuating interest rates in the normal course of
business.  Our policy is to manage  interest  rate risk through the use of fixed
rate debt, floating rate debt and interest rate swaps. As of September 30,


                                       42
<PAGE>

2002, a  hypothetical  10% change in market  interest rates would result in a $3
million  change in annual  interest costs related to our short-term and floating
rate debt.

      Foreign Currencies

We conduct our  business on a  multinational  basis in a wide variety of foreign
currencies.  Our objective for foreign  currency  risk  management  policy is to
preserve  the  economic  value of cash  flows in  currencies  other  than the US
Dollar. Our policy is to hedge significant probable future cash flows identified
as  subject  to  significant  foreign  currency  variability.  In  addition,  we
typically hedge a portion of our exposure resulting from identified  anticipated
cash  flows,   providing  the  flexibility  to  deal  with  the  variability  of
longer-term  forecasts as well as changing market conditions,  in which the cost
of hedging may be excessive relative to the level of risk involved.  Our foreign
currency   hedging   activities  to  date  include  hedges  of  US  Dollar  debt
arrangements in operating  companies that conduct  business in currencies  other
than the US Dollar  and  purchase  of  options  to limit  downside  on  earnings
translation.

For further  discussion of risks  associated  with equity  securities,  interest
rates  and  foreign  currencies,  see  Note 6.  Financial  Instruments  and Risk
Management of the Notes.

                         ITEM 4. CONTROLS AND PROCEDURES

                       Disclosure Controls and Procedures

We have established and maintained  disclosure controls and procedures which are
designed to provide reasonable  assurance that material  information relating to
us,  including  our  consolidated  subsidiaries,  is made  known to us by others
within those  entities,  particularly  during the period in which this quarterly
report is being prepared.  We have  established a Disclosure  Committee which is
made up of several key  management  employees and reports  directly to the Chief
Financial  Officer and Chief  Executive  Officer,  to monitor and evaluate these
disclosure  controls  and  procedures.  The Chief  Financial  Officer  and Chief
Executive  Officer have evaluated the  effectiveness of our disclosure  controls
and  procedures  as of a date  within 90 days prior to the  filing  date of this
quarterly report (the  "Evaluation  Date").  Based on this  evaluation,  we have
concluded  that  our  disclosure  controls  and  procedures  were  effective  in
providing  reasonable  assurance  during  the period  covered in this  quarterly
report.  There were no  significant  changes in  internal  controls  or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation.

                           PART II. OTHER INFORMATION

                            ITEM 1. LEGAL PROCEEDINGS

Certain  information  reported  under  Item 1 of  Part  II of  Energy  Holdings'
Quarterly  Reports on Form 10-Q for the  quarters  ended March 31, 2002 and June
30, 2002 are updated below.

March 31,  2002 Form 10-Q Page 13 and June 30,  2002 Form 10-Q  Pages 14 and 15.
See Page 12. AES  termination of the Stock Purchase  Agreement,  relating to the
sale of certain  Argentine  assets.  New York State  Supreme  Court for New York
County (Docket No.  60155/2002) PSEG Global,  et al vs. The AES Corporation,  et
al.

In addition, see information on the following proceeding at the pages indicated:

Form 10-K Page 25.  March 31,  2002 Form 10-Q Pages 15 and 16 and June 30,  2002
Form  10-Q  Page 23.  See  Page 18.  Complaint  filed  with the FERC  addressing
contract  terms of  certain  Sellers  of Energy  and  Capacity  under  Long-Term
Contracts with the California  Department of Water  Resources.  Public Utilities
Commission of the State of  California v. Sellers of Long Term  Contracts to the
California Department of Water Resources FERC Docket No. EL02-60-000. California
Electricity  Oversight  Board v. Sellers of Energy and Capacity Under  Long-Term
Contracts  with the  California  Department of Water  Resources  FERC Docket No.
EL02-62-000.

                            ITEM 5. OTHER INFORMATION

Certain  information  reported under Energy Holdings' 2001 Annual Report on Form
10-K,  Quarterly  Reports on Form 10-Q for the quarters ended March 31, 2002 and
June 30, 2002 are updated below.

Form  10-K  Page 24.  On July 31,  2002 the  FERC  issued a Notice  of  Proposed
Rulemaking  (NOPR)  to  create  a  Standard  Market  Design  for  the  wholesale
electricity  markets  in the  United  States.  The  NOPR  seeks to  improve  the
consistency of market rules throughout the country,  including issues related to
reliability,   market  power  concerns,   transmission,   pricing,   congestion,
governance and other issues. We cannot predict the outcome of this matter or its
impact upon us if adopted,  which could  significantly  affect  transmission and
generation in the various markets in which we operate.


                                       43
<PAGE>

                    ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A)   A listing of exhibits being filed with this document is as follows:

Exhibit Number      Document
--------------      --------
12                  Computation of Ratios of Earnings to Fixed Charges

99                  Certification by E. James Ferland, Chief Executive Officer
                    of PSEG Energy Holdings L.L.C. Pursuant to Section 1350 of
                    Chapter 63 of Title 18 of the United States Code

99.1                Certification by Thomas M. O'Flynn, Chief Financial Officer
                    of PSEG Energy Holdings L.L.C. Pursuant to Section 1350 of
                    Chapter 63 of Title 18 of the United States Code

(B)   Reports on Form 8-K and 8-KA:

Date of Report                 Form         Items Reported
--------------                 ----         --------------
July 17, 2002                  8-K          5 and 7
July 29, 2002                  8-KA         5 and 7
September 27, 2002             8-K          5 and 7
October 1, 2002                8-K          5 and 7
October 11, 2002               8-K          5 and 7


                                       44
<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.

                           PSEG ENERGY HOLDINGS L.L.C.
                                  (Registrant)

                         By:     Derek M. DiRisio
                            ---------------------------
                                Derek M. DiRisio
                          Vice President and Controller
                         (Principal Accounting Officer)

Date: November 1, 2002


                                       45
<PAGE>

                Certification Pursuant to Rules 13a-14 and 15d-14
                       of the 1934 Securities Exchange Act

      I certify that:

1.    I have reviewed this quarterly report on Form 10-Q of PSEG Energy Holdings
      L.L.C.

2.    Based on my knowledge, this quarterly report does not contain any untrue
      statement of a material fact or omit to state a material fact necessary to
      make the statements made, in light of the circumstances under which such
      statements were made, not misleading with respect to the period covered by
      this quarterly report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this quarterly report, fairly present in all
      material respects the financial condition, results of operations and cash
      flows of the registrant as of, and for, the periods presented in this
      quarterly report;

4.    The registrant's other certifying officer and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
      have:

      a)    designed such disclosure controls and procedures to ensure that
            material information relating to the registrant, including its
            consolidated subsidiaries, is made known to us by others within
            those entities, particularly during the period in which this
            quarterly report is being prepared;

      b)    evaluated the effectiveness of the registrant's disclosure controls
            and procedures as of a date within 90 days prior to the filing date
            of this quarterly report (the "Evaluation Date"); and

      c)    presented in this quarterly report our conclusions about the
            effectiveness of the disclosure controls and procedures based on our
            evaluation as of the Evaluation Date;

5.    The registrant's other certifying officer and I have disclosed, based on
      our most recent evaluation, to the registrant's auditors and the audit
      committee of PSEG's Board of Directors:

      a)    all significant deficiencies in the design or operation of internal
            controls which could adversely affect the registrant's ability to
            record, process, summarize and report financial data and have
            identified any material weaknesses in internal controls; and

      b)    any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal controls; and

6.    The registrant's other certifying officer and I have indicated in this
      quarterly report whether or not there were significant changes in internal
      controls or in other factors that could significantly affect internal
      controls subsequent to the date of our most recent evaluation, including
      any corrective actions with regard to significant deficiencies and
      material weaknesses.

      Date: November 1, 2002                         /s/ E. James Ferland
                                                     ---------------------------
                                                     E. James Ferland
                                                     Chief Executive Officer


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<PAGE>

                Certification Pursuant to Rules 13a-14 and 15d-14
                       of the 1934 Securities Exchange Act

      I certify that:

1.    I have reviewed this quarterly report on Form 10-Q of PSEG Energy Holdings
      L.L.C.

2.    Based on my knowledge, this quarterly report does not contain any untrue
      statement of a material fact or omit to state a material fact necessary to
      make the statements made, in light of the circumstances under which such
      statements were made, not misleading with respect to the period covered by
      this quarterly report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this quarterly report, fairly present in all
      material respects the financial condition, results of operations and cash
      flows of the registrant as of, and for, the periods presented in this
      quarterly report;

4.    The registrant's other certifying officer and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
      have:

      a)    designed such disclosure controls and procedures to ensure that
            material information relating to the registrant, including its
            consolidated subsidiaries, is made known to us by others within
            those entities, particularly during the period in which this
            quarterly report is being prepared;

      b)    evaluated the effectiveness of the registrant's disclosure controls
            and procedures as of a date within 90 days prior to the filing date
            of this quarterly report (the "Evaluation Date"); and


      c)    presented in this quarterly report our conclusions about the
            effectiveness of the disclosure controls and procedures based on our
            evaluation as of the Evaluation Date;

5.    The registrant's other certifying officer and I have disclosed, based on
      our most recent evaluation, to the registrant's auditors and the audit
      committee of PSEG's Board of Directors:

      a)    all significant deficiencies in the design or operation of internal
            controls which could adversely affect the registrant's ability to
            record, process, summarize and report financial data and have
            identified any material weaknesses in internal controls; and

      b)    any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal controls; and

6.    The registrant's other certifying officer and I have indicated in this
      quarterly report whether or not there were significant changes in internal
      controls or in other factors that could significantly affect internal
      controls subsequent to the date of our most recent evaluation, including
      any corrective actions with regard to significant deficiencies and
      material weaknesses.

      Date: November 1, 2002                      /s/ Thomas M. O'Flynn
                                                  ------------------------------
                                                  Thomas M. O'Flynn
                                                  Chief Financial Officer


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