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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, 2006                                         
|           |                                                                                             
|           | OR                                                                                          
|           |                                                                                             
|o          | TRANSITION
  REPORT PURSUANT TO SECTION 13 OR
  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|           |                                                                                             
|           | For the transition period
  from ___________ to ___________                                 

|                         |  |                                                                                                                                                  |  |                                     
|------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------
|Commission
  File Number |  | Registrant, State of Incorporation,
  Address, and Telephone Number                                                                              |  | I.R.S. Employer
  Identification No.
|                         |  |                                                                                                                                                  |  |                                     
|                         |  |                                                                                                                                                  |  |                                     
|333-127545               |  | PSE&G Transition Funding II LLC                                                                                                                  |  | Applied For                         
|                         |  | (A Delaware limited liability company)
  80 Park Plaza  T4D 
  P.O. Box 1171
  Newark, New Jersey 07101-1171
  973 297-2227 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
o

Indicate by
check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and
large accelerated filer in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated
filer o   Accelerated filer o   Non-accelerated filer x

Indicate by
check mark whether any of the registrants is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes  o   No
x

Registrant is
a wholly owned subsidiary of Public Service Electric and Gas Company.
Registrant meets the conditions set forth in General Instruction H(1) (a) and
(b) of Form 10-Q and is filing this Form 10-Q with the reduced disclosure
format authorized by General Instruction H.

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TABLE OF CONTENTS

|                              |                                                                                         |                                                               |     
|----------------------------- | --------------------------------------------------------------------------------------- | ------------------------------------------------------------- | ----
|                              |                                                                                         |                                                               | PAGE
|                              |                                                                                         |                                                               |     
|                             
|FORWARD-LOOKING STATEMENTS    | ii                                                                                     
|                              |                                                                                         |                                                               |     
|PART I. FINANCIAL INFORMATION |                                                                                        
|                              |                                                                                         |                                                               |     
|Item 1.                       | Condensed Financial Statements                                                          | 1                                                            
|                              | Notes to Condensed Financial Statements                                                 |                                                              
|                              |                                                                                         | Note 1. Organization and Basis of Presentation                | 4   
|                              |                                                                                         | Note 2. The Bonds                                             | 5   
|                              |                                                                                         | Note 3. Significant Agreements and Related Party Transactions | 5   
|                              |                                                                                         |                                                               |     
|Item 2.                       | Managements Discussion and Analysis of Financial Condition and
  Results of Operations | 6                                                            
|                              |                                                                                         | Results of Operations                                         | 6   
|                              |                                                                                         | Liquidity and Capital Resources                               | 6   
|                              |                                                                                         |                                                               |     
|Item 3.                       | Qualitative and Quantitative Disclosures About Market Risk                              | 7                                                            
|                              |                                                                                         |                                                               |     
|Item 4.                       | Controls and Procedures                                                                 | 7                                                            
|                              |                                                                                         |                                                               |     
|PART II. OTHER INFORMATION    |                                                                                        
|                              |                                                                                         |                                                               |     
|Item 1.                       | Legal Proceedings                                                                       | 8                                                            
|                              |                                                                                         |                                                               |     
|Item 6.                       | Exhibits                                                                                | 8                                                            
|                              |                                                                                         |                                                               |     
|Signature                     | 9                                                                                      

i

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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,
anticipate, intend, estimate, believe, expect, plan,
potential,
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.

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: state and
federal legal or regulatory developments; national or regional economic
conditions; market demand and prices for energy; customer conservation;
distributed generation technology; weather variations affecting customer energy
usage; the effect of continued electric industry restructuring; operating
performance of Public Service Electric and Gas Companys facilities and third
party suppliers; and the payment patterns of customers including the rate of
delinquencies.

ii

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PART I.  FINANCIAL INFORMATIONITEM 1.
FINANCIAL STATEMENTS

PSE&G TRANSITION FUNDING II LLC
CONDENSED STATEMENTS OF OPERATIONS
(Thousands of Dollars)
(Unaudited)

|                                             |  |                                          |        |                                             |   |      |   |      |        |   |   |      |  
|-------------------------------------------- |  | ---------------------------------------- | ------ | ------------------------------------------- | - | ---- | - | ---- | ------ | - | - | ---- | -
|                                             |  | For the Quarters
  Ended
  September 30, |        | For the Nine
  Months Ended
  September 30, |  
|                                             |  |                                          |        |                                             |  
|                                             |  | 2006                                     |        | 2005                                        |   | 2006 |   | 2005 |       
|                                             |  |                                          |        |                                             |   |      |   |      |       
|REVENUES                                     |  | $                                        | 3,725  |                                             | $ | 2    |   | $    | 9,759  |   | $ | 2    |  
|EXPENSES                                     |  |                                          |        |                                             |   |      |   |      |        |   |   |      |  
|Amortization of Bondable Transition
Property |  |                                          | 2,644  |                                             |   | (102 | ) |      | 6,331  |   |   | (102 | )
|Servicing and Administrative Fees            |  |                                          | 13     |                                             |   | 4    |   |      | 178    |   |   | 4    |  
|                                             |  |                                          |        |                                             |   |      |   |      |        |   |   |      |  
|Total Expenses                               |  |                                          | 2,657  |                                             |   | (98  | ) |      | 6,509  |   |   | (98  | )
|                                             |  |                                          |        |                                             |   |      |   |      |        |   |   |      |  
|OPERATING INCOME                             |  |                                          | 1,068  |                                             |   | 100  |   |      | 3,250  |   |   | 100  |  
|Interest Income                              |  |                                          | 29     |                                             |   |     |   |      | 102    |   |   |     |  
|Interest Expense                             |  |                                          | (1,090 | )                                           |   | (100 | ) |      | (3,333 | ) |   | (100 | )
|                                             |  |                                          |        |                                             |   |      |   |      |        |   |   |      |  
|NET INCOME                                   |  | $                                        | 7      |                                             | $ |     |   | $    | 19     |   | $ |     |  
|                                             |  |                                          |        |                                             |   |      |   |      |        |   |   |      |  

See
Notes to Condensed Financial Statements.

1

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PSE&G TRANSITION FUNDING II LLC
CONDENSED BALANCES SHEET
(Thousands of Dollars)
(Unaudited)

|                                        |  |                       |         |                     |   |         | 
|--------------------------------------- |  | --------------------- | ------- | ------------------- | - | ------- | 
|                                        |  | September 30, 
  2006 |         | December 31,
  2005 |  
|                                        |  |                       |         |                     |  
|ASSETS                                  |  |                       |         |                     |   |         | 
|Current Assets:                         |  |                       |         |                     |   |         | 
|Cash                                    |  | $                     | 24      |                     | $ | 5       | 
|Receivable from Member                  |  |                       | 2,886   |                     |   | 2,405   | 
|Receivable from Affiliate               |  |                       |        |                     |   | 1,198   | 
|Restricted Cash                         |  |                       | 3,802   |                     |   |        | 
|                                        |  |                       |         |                     |   |         | 
|Total Current Assets                    |  |                       | 6,712   |                     |   | 3,608   | 
|                                        |  |                       |         |                     |   |         | 
|                                        |  |                       |         |                     |   |         | 
|Noncurrent Assets:                      |  |                       |         |                     |   |         | 
|Restricted Cash                         |  |                       | 514     |                     |   | 514     | 
|Bondable Transition Property            |  |                       | 93,991  |                     |   | 100,322 | 
|                                        |  |                       |         |                     |   |         | 
|Total Noncurrent Assets                 |  |                       | 94,505  |                     |   | 100,836 | 
|                                        |  |                       |         |                     |   |         | 
|TOTAL ASSETS                            |  | $                     | 101,217 |                     | $ | 104,444 | 
|                                        |  |                       |         |                     |   |         | 
|                                        |  |                       |         |                     |   |         | 
|LIABILITIES                             |  |                       |         |                     |   |         | 
|Current Liabilities:                    |  |                       |         |                     |   |         | 
|Current Portion of Long-Term Debt       |  | $                     | 8,698   |                     | $ | 7,705   | 
|Accrued Interest                        |  |                       | 1,284   |                     |   | 1,225   | 
|                                        |  |                       |         |                     |   |         | 
|Total Current Liabilities               |  |                       | 9,982   |                     |   | 8,930   | 
|                                        |  |                       |         |                     |   |         | 
|                                        |  |                       |         |                     |   |         | 
|Long-Term Debt                          |  |                       | 90,697  |                     |   | 94,995  | 
|                                        |  |                       |         |                     |   |         | 
|                                        |  |                       |         |                     |   |         | 
|TOTAL
  LIABILITIES                     |  |                       | 100,679 |                     |   | 103,925 | 
|                                        |  |                       |         |                     |   |         | 
|                                        |  |                       |         |                     |   |         | 
|MEMBERS EQUITY                         |  |                       |         |                     |   |         | 
|Contributed Capital                     |  |                       | 514     |                     |   | 514     | 
|Retained Earnings                       |  |                       | 24      |                     |   | 5       | 
|                                        |  |                       |         |                     |   |         | 
|Total Members Equity                   |  |                       | 538     |                     |   | 519     | 
|                                        |  |                       |         |                     |   |         | 
|TOTAL
  LIABILITIES AND MEMBERS EQUITY |  | $                     | 101,217 |                     | $ | 104,444 | 
|                                        |  |                       |         |                     |   |         | 

See Notes to
Condensed Financial Statements.

2

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PSE&G TRANSITION FUNDING II LLC
CONDENSED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)

|                                                                                   |  |                                           |        |      |   |          |  
|---------------------------------------------------------------------------------- |  | ----------------------------------------- | ------ | ---- | - | -------- | -
|                                                                                   |  | For the Nine Months Ended
  September 30. |       
|                                                                                   |  | 2006                                      |        | 2005 |  
|                                                                                   |  |                                           |        |      |  
|CASH FLOWS
  FROM OPERATING ACTIVITIES                                             |  |                                           |        |      |   |          |  
|Net income                                                                         |  | $                                         | 19     |      | $ |         |  
|Adjustments to reconcile net income to net
  cash flows from operating activities: |  |                                           |        |      |   |          |  
|Amortization of Bondable Transition
  Property                                     |  |                                           | 6,331  |      |   | (102     | )
|Net Changes in Certain Current Assets and
  Liabilities:                           |  |                                           |        |      |   |          |  
|Receivable from Member                                                             |  |                                           | (481   | )    |   | (2       | )
|Receivable from Affiliate                                                          |  |                                           | 1,198  |      |   |         |  
|Accounts Payable                                                                   |  |                                           |       |      |   | 4        |  
|Accrued Interest                                                                   |  |                                           | 59     |      |   | 100      |  
|                                                                                   |  |                                           |        |      |   |          |  
|Net Cash Provided By Operating
Activities                                          |  |                                           | 7,126  |      |   |         |  
|                                                                                   |  |                                           |        |      |   |          |  
|                                                                                   |  |                                           |        |      |   |          |  
|CASH FLOWS
  FROM INVESTING ACTIVITIES                                             |  |                                           |        |      |   |          |  
|Restricted Cash                                                                    |  |                                           | (3,802 | )    |   | (514     | )
|Purchase of Bondable Transition Property                                           |  |                                           |       |      |   | (102,700 | )
|                                                                                   |  |                                           |        |      |   |          |  
|Net Cash Used In Investing Activities                                              |  |                                           | (3,802 | )    |   | (103,214 | )
|                                                                                   |  |                                           |        |      |   |          |  
|                                                                                   |  |                                           |        |      |   |          |  
|CASH FLOWS
  FROM FINANCING ACTIVITIES                                             |  |                                           |        |      |   |          |  
|Proceeds from the Issuance of Long-Term
  Debt                                     |  |                                           |       |      |   | 102,700  |  
|Repayment of Long-Term Debt                                                        |  |                                           | (3,305 | )    |   |         |  
|Contributed Capital                                                                |  |                                           |       |      |   | 514      |  
|                                                                                   |  |                                           |        |      |   |          |  
|Net Cash Used In Financing Activities                                              |  |                                           | (3,305 | )    |   | 103,214  |  
|                                                                                   |  |                                           |        |      |   |          |  
|Net Change
  in Cash and Cash Equivalents                                          |  |                                           | 19     |      |   |         |  
|Cash and
  Cash Equivalents at Beginning of Period                                 |  |                                           | 5      |      |   |         |  
|                                                                                   |  |                                           |        |      |   |          |  
|Cash and
  Cash Equivalents at End of Period                                       |  | $                                         | 24     |      | $ |         |  
|                                                                                   |  |                                           |        |      |   |          |  
|                                                                                   |  |                                           |        |      |   |          |  
|Interest
  Paid                                                                    |  | $                                         | 3,274  |      | $ |         |  

See Notes to
Condensed Financial Statements.

3

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NOTES TO
CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Organization and Basis of
Presentation

Organization

Unless
the context otherwise indicates, all references to Transition Funding II,
we, us or our herein mean PSE&G Transition Funding II LLC, a Delaware
limited liability company located at 80 Park Plaza, Newark, New Jersey 07102.

We
were formed under the laws of the State of Delaware on July 18, 2005
and operate pursuant to a limited liability company agreement with Public
Service Electric and Gas Company (PSE&G) as our sole member. PSE&G is
an operating electric and gas utility and is a wholly owned subsidiary of
Public Service Enterprise Group Incorporated (PSEG).

The
Electric Discount and Energy Competition Act, enacted in the State of New
Jersey in February 1999 and amended in September 2002 (Competition Act),
authorizes electric public utilities, such as PSE&G, to recover, among
other costs, basic generation service (BGS) transition costs. BGS transition
costs represent the amount by which a public utilitys cost of supplying BGS
exceeds the net revenues received by the public utility for providing such
service during a four-year transition period ended July 31, 2003. BGS is a
regulated electric generation service provided to any electric utility consumer
that has not chosen an alternative power supplier. A public utility may recover
BGS transition costs through an irrevocable non-bypassable charge called a BGS
transition bond charge (TBC) that is assessed on all retail electric consumers.
The Competition Act permits special purpose entities formed by electric public
utilities to issue debt securities secured by the right to receive revenues
arising from the TBC.

We
were organized for the sole purpose of purchasing and owning the BGS bondable
transition property (BTP) of PSE&G, issuing transition bonds (Bonds),
pledging our interest in BTP and other collateral to a debt/security trustee
(Trustee) to collateralize the Bonds, and performing activities that are
necessary, suitable or convenient to accomplish these purposes.

BTP
represents the irrevocable right of PSE&G, or its successor or assignee, to
collect a TBC pursuant to a bondable stranded cost rate order (Finance Order),
which was issued on July 12, 2005 by the New Jersey Board of Public Utilities
(BPU) in accordance with the Competition Act. These orders are a matter of
public record and are available from the BPU. The Finance Order authorizes the
TBC to be sufficient to recover the $102.7 million aggregate principal amount
of Bonds, plus an amount sufficient to provide for any credit enhancement, to
fund any reserves and to pay interest, redemption premiums, if any, servicing
fees and other expenses relating to the Bonds.

Our
organizational documents require us to operate in a manner so that we should
not be consolidated in the bankruptcy estate of PSE&G in the event
PSE&G becomes subject to a bankruptcy proceeding.

As
previously disclosed, on December 20, 2004, PSEG entered into an agreement
and plan of merger with Exelon Corporation providing for a merger of PSEG with
and into Exelon. On September 14, 2006, PSEG received from Exelon a formal
notice of termination of the Merger under the provisions of the Merger
Agreement.

Basis of Presentation

The
Condensed Financial Statements included herein have been prepared pursuant to
the rules and regulations of the SEC for Quarterly Reports on Form 10-Q.
Certain information and note disclosures normally included in financial
statements prepared in accordance with Generally Accepted Accounting Principles
in the United States of America (GAAP) have been condensed or omitted pursuant
to such rules and regulations. In the opinion of management, the disclosures
are adequate to make the information presented not misleading. These Condensed
Financial Statements and Notes to Condensed Financial Statements (Notes) should
be read in conjunction with and update and supplement matters discussed in our
2005 Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q for the
quarters ended March 31, 2006 and June 30, 2006.

4

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NOTES
TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

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. The year-end Condensed Balance Sheet was
derived from the audited financial statements included in our 2005 Annual
Report on Form 10-K.

Note 2. The Bonds

On
September 23, 2005, we issued $102.7 million of Bonds in four classes with
maturities ranging from two years to nine years. The net proceeds of the issuance
were remitted to PSE&G as consideration for the BTP.

Under
applicable law, the Bonds are not an obligation of PSE&G or secured by the
assets of PSE&G, but rather the Bonds are only recourse to us and are
collateralized on a pro rata basis by the BTP and our equity and assets. TBC
collections are deposited at least monthly by PSE&G with the Trustee and
are used to pay our expenses, to pay our debt service on the Bonds and to fund
any credit enhancement for the Bonds. We have also pledged the capital contributed
by PSE&G to secure the debt service requirements of the Bonds. The debt
service requirements include a capital subaccount and a reserve subaccount,
which are available to bond holders. Any amounts collateralizing the Bonds will
be returned to PSE&G upon payment of the Bonds.

The
significant terms of the Bonds issued by us, and the amounts outstanding, as of
September 30, 2006 are as follows:

|          |  |                               |             |                 |      |                                                             |  |                                 |           |                                    |   |                                  |  |                         |            |  |          |  |          | 
|--------- |  | ----------------------------- | ----------- | --------------- | ---- | ----------------------------------------------------------- |  | ------------------------------- | --------- | ---------------------------------- | - | -------------------------------- |  | ----------------------- | ---------- |  | -------- |  | -------- | 
|          |  | Initial
  Principal
  Balance |             | Interest
  Rate |      | Payments
  Made on Bonds 
  Through 
  September 30,
  2006 |  | Current
  Portion
  Outstanding |           | Noncurrent
  Portion
  Outstanding |   | Final/
  Expected
  Payment Date |  | Final
  Maturity
  Date |           
|          |  |                               |             |                 |      |                                                             |  |                                 |           |                                    |   |                                  |  |                         |           
|Class A-1 |  | $                             | 25,200,000  |                 | 4.18 | %                                                           |  | $                               | 3,304,312 |                                    | $ | 8,698,667                        |  | $                       | 13,197,021 |  | 12/15/08 |  | 12/15/10 | 
|Class A-2 |  |                               | 35,000,000  |                 | 4.34 | %                                                           |  |                                 |          |                                    |   |                                 |  |                         | 35,000,000 |  | 6/15/12  |  | 6/16/14  | 
|Class A-3 |  |                               | 20,000,000  |                 | 4.49 | %                                                           |  |                                 |          |                                    |   |                                 |  |                         | 20,000,000 |  | 12/16/13 |  | 12/15/15 | 
|Class A-4 |  |                               | 22,500,000  |                 | 4.57 | %                                                           |  |                                 |          |                                    |   |                                 |  |                         | 22,500,000 |  | 6/15/15  |  | 6/15/17  | 
|          |  |                               |             |                 |      |                                                             |  |                                 |           |                                    |   |                                  |  |                         |            |  |          |  |          | 
|Total     |  | $                             | 102,700,000 |                 |      |                                                             |  | $                               | 3,304,312 |                                    | $ | 8,698,667                        |  | $                       | 90,697,021 |  |          |  |          | 
|          |  |                               |             |                 |      |                                                             |  |                                 |           |                                    |   |                                  |  |                         |            |  |          |  |          | 

Note 3. Significant
Agreements and Related Party Transactions

Under
  the servicing agreement entered into by PSE&G and us, concurrently with
  the issuance of the Bonds, PSE&G, as servicer, is required to manage and
  administer our BTP and to collect the TBC on our behalf. Under the Finance Order,
  PSE&G withholds from the TBC collections an annual servicing fee equal to
  0.05% of the initial balance of Bonds issued. In addition we pay miscellaneous
  operating expenses to PSE&G up to $100 thousand per quarter, administration
  fees up to $31 thousand per quarter and trustee fees up to $4 thousand per quarter.
  Servicing and administrative fees for the quarter and nine months ended September
  30, 2006 were approximately $13 thousand and $178 thousand, respectively. Servicing
  and administrative fees for the period ended September 30, 2005 were approximately
  $4 thousand.

As
  of September 30, 2006 and December 31, 2005, we had a receivable from our sole
  member, PSE&G, of approximately $2,886 thousand and $2,405 thousand, respectively,
  relating to TBC billings. As of December 31, 2005, we had a receivable of approximately
  $1,198 thousand for funds deposited with our affiliate, PSE&G Transition
  Funding LLC, which was paid during the first quarter of 2006.

5

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

Unless
the context otherwise indicates, all references to Transition Funding II, we,
us or our herein mean PSE&G Transition Funding II LLC, a Delaware
limited liability company located at 80
Park Plaza, Newark, New Jersey 07102.

Following
are the significant changes in or additions to information reported in our 2005
Annual Report on Form 10K and March 31, 2006 Form 10-Q affecting the financial
condition and the results of our operations. This discussion refers to our
Condensed Financial Statements (Statements) and related Notes to Condensed
Financial Statements (Notes) and should be read in conjunction with such
Statements and Notes. The following analysis of the financial condition and our
results of operations is in an abbreviated format pursuant to General
Instruction H of Form 10-Q.

As
previously disclosed, on December 20, 2004, PSEG entered into an agreement
and plan of merger with Exelon Corporation providing for a merger of PSEG with
and into Exelon. On September 14, 2006, PSEG received from Exelon a formal
notice of termination of the Merger under the provisions of the Merger
Agreement.

On
September 23, 2005, we issued $102.7 million of transition bonds in four
classes with maturities ranging from two years to nine years. The net proceeds
of the issuance were utilized to acquire Public Service Electric and Gas
Companys (PSE&G) property right in the BGS transition bond charge (TBC). We
use collections of the TBC to make scheduled principal and interest payments on
the transition bonds and to cover any additional administrative costs.

RESULTS
OF OPERATIONS

For
the quarter ended September 30, 2006, we recorded revenue generated from TBC of
approximately $3,725 thousand, amortization
expense of approximately $2,644 thousand, Servicing and Administrative Fees of
approximately $13 thousand, Interest Expense of approximately $1,090 thousand
and Interest Income of approximately $29 thousand. For the nine months ended
September 30, 2006, we recorded revenue generated from TBC of approximately $9,759
thousand, amortization expense
of approximately $6,331 thousand, Servicing and Administrative Fees of
approximately $178 thousand, Interest Expense of approximately $3,333 thousand
and Interest Income of approximately $102 thousand.

Our
operations commenced during the quarter ended September 30, 2005 in conjunction
with the issuance of the $102.7 million of transition bonds on September 23,
2005 and therefore, results of operations were minimal during that period. For
the quarter and nine months ended September 30, 2005 we recorded revenue
generated from TBC of approximately $2 thousand, amortization expense of approximately $(102) thousand, Servicing
and Administrative Fees of approximately $4 thousand and Interest Expense of
approximately $100 thousand.

As
a regulated entity, our amortization expense fluctuates with changes in revenue
and interest expense. We defer any over or under collection of expense to
match against future revenues. In January 2006, as a result of the annual
true-up approved by the State of New Jersey Board of Public Utilities (BPU),
the TBC (exclusive of sales and use tax) decreased to 0.0293 cents per
Kilowatt-hour (kWh) as compared to 0.0295 cents per kWh charged in 2005.

LIQUIDITY
AND CAPITAL RESOURCES

The
principal amount of the Bonds, interest and fees are being recovered through
the TBC. As part of PSE&Gs responsibility as Servicer under the Servicing
Agreement, PSE&G will remit the TBC collections to the Trustee to make
scheduled payments on the Bonds.

Payment of
bond principal, interest and all related expenses were made by the Trustee on
June 15, 2006 totaled approximately $7 million.

6

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ITEM
3.  QUALITATIVE AND QUANTITATIVE
DISCLOSURES ABOUT MARKET RISK

We
are not subject to risk of fluctuating interest rates as all four classes of
Bonds were issued with fixed interest rates.

ITEM
4.  CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We
have established and maintain disclosure controls and procedures which are
designed to provide reasonable assurance that material information is made
known to the Chief Executive Officer and Chief Financial Officer by others
within the entity. We have established a disclosure committee which is made up
of several key management employees and which reports directly to the Chief
Financial Officer and Chief Executive Officer. The committee monitors and
evaluates the effectiveness of these disclosure controls and procedures. The
Chief Financial Officer and Chief Executive Officer has evaluated the
effectiveness of the disclosure controls and procedures as of September 30,
2006 and, based on this evaluation, has concluded that the disclosure controls
and procedures were effective in providing reasonable assurance during the
period covered in this quarterly report.

Internal Controls

There
have been no changes in our internal controls over financial reporting during
the quarter ended September 30, 2006 that have materially affected or are
reasonably likely to materially affect our internal controls over financial
reporting.

7

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PART II.  OTHER
INFORMATION

ITEM 1.  LEGAL
PROCEEDINGS

None.

ITEM 6.
EXHIBITS

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

|               |  |                                                                                                                                                                                                          
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Document                                                                                                                                                                                                 
|               |  |                                                                                                                                                                                                          
|31             |  | Certification by Robert E. Busch, Chief Executive
  Officer and Chief Financial Officer of PSE&G Transition Funding II LLC
  Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934  
|               |  |                                                                                                                                                                                                          
|32             |  | Certification by Robert E. Busch, Chief Executive
  Officer and Chief Financial Officer of PSE&G Transition Funding II LLC
  Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code

8

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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.

|                                 
|---------------------------------
|PSE&G
  TRANSITION FUNDING II LLC
|(Registrant)                     

|                                 |  |                      
|-------------------------------- |  | ---------------------
|By:                              |  | /s/  Patricia A. Rado
|                                 | 
|Patricia A. Rado                
|Controller                      
|(Principal Accounting
  Officer)
|                                
|Date: November 13, 2006          | 
|                                 | 

9

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