FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998

                                       OR

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


          For the transition period from ____________ to _____________

                          Commission file number 0-7812


                         PENNSYLVANIA ENTERPRISES, INC.
             (Exact name of registrant as specified in its charter)


         Pennsylvania                                  23-1920170
(State or other jurisdiction of            (IRS Employer Identification No.)
incorporation or organization)

             One PEI Center
      Wilkes-Barre, Pennsylvania                      18711-0601
(Address of principal executive offices)              (Zip Code)

                                 (717) 829-8843
               (Registrant's telephone number including area code)



    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 __

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

    Registrant had 10,195,434 shares of common stock, no par value,  outstanding
as of October 30, 1998.

<PAGE>


                         PENNSYLVANIA ENTERPRISES, INC.

                                TABLE OF CONTENTS


                                                                         PAGE

PART I.        FINANCIAL INFORMATION

    Item 1.      Financial Statements

    Consolidated Statements of Income for the three and nine months
      ended September 30, 1998 and 1997...............................       2

    Consolidated Balance Sheets as of September 30, 1998
      and December 31, 1997...........................................       3

    Consolidated Statements of Cash Flows for
      the nine months ended September 30, 1998 and 1997...............       5

    Notes to Consolidated Financial Statements........................       6

    Item 2.      Management's Discussion and Analysis of Financial
                    Condition and Results of Operations...............      10



PART II.  OTHER INFORMATION

    Item 6.      Exhibits and Reports on Form 8-K.....................      18



<PAGE>
                          PART I. FINANCIAL INFORMATION

                 PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                    Three Months Ended             Nine Months Ended
                                                                      September 30,                  September 30,
                                                               ----------------------------   ---------------------------
                                                                   1998           1997*           1998          1997*
                                                               -------------   ------------   -------------  ------------
                                                                                 (Thousands of Dollars)
OPERATING REVENUES:
     Energy products and services -
<S>                                                            <C>             <C>             <C>             <C>         
         Regulated .........................................   $     15,177    $     16,276    $    105,187    $    129,425
         Nonregulated ......................................          8,112           4,589          25,254          18,015
     Pipeline construction and services ....................          3,611           3,344           9,219           8,124
                                                               ------------    ------------    ------------    ------------
             Total operating revenues ......................         26,900          24,209         139,660         155,564
                                                               ------------    ------------    ------------    ------------

OPERATING EXPENSES:
     Cost of gas and other energy ..........................         13,105          11,089          77,752          90,523
     Operation and maintenance .............................         11,681          11,088          34,038          32,396
     Depreciation ..........................................          2,691           2,367           7,902           7,045
     Income taxes ..........................................         (2,098)         (2,064)          1,365           3,618
     Taxes other than income taxes .........................          1,780           2,020           8,757           9,684
                                                               ------------    ------------    ------------    ------------
         Total other operating expenses ....................         27,159          24,500         129,814         143,266
                                                               ------------    ------------    ------------    ------------

OPERATING INCOME (LOSS) ....................................           (259)           (291)          9,846          12,298
OTHER INCOME, NET ..........................................            635             667           1,570           1,395
                                                               ------------    ------------    ------------    ------------
INCOME BEFORE INTEREST CHARGES .............................            376             376          11,416          13,693
                                                               ------------    ------------    ------------    ------------

INTEREST CHARGES:
    Interest on long-term debt .............................          2,668           2,238           7,701           6,379
    Other interest .........................................            138             230             407             631
    Allowance for borrowed funds used during construction ..            (38)            (45)            (90)           (144)
                                                               ------------    ------------    ------------    ------------
       Total interest charges ..............................          2,768           2,423           8,018           6,866
                                                               ------------    ------------    ------------    ------------

INCOME (LOSS) BEFORE SUBSIDIARY'S PREFERRED
    STOCK DIVIDENDS ........................................         (2,392)         (2,047)          3,398           6,827
SUBSIDIARY'S PREFERRED STOCK DIVIDENDS .....................            319             320             961             991
                                                               ------------    ------------    ------------    ------------
NET INCOME (LOSS) ..........................................   $     (2,711)   $     (2,367)   $      2,437    $      5,836
                                                               ============    ============    ============    ============

BASIC EARNINGS (LOSS) PER SHARE OF
      COMMON STOCK:
     Before discount on repurchase of subsidiary's preferred
         stock .............................................   $      (0.27)   $      (0.24)   $       0.25    $       0.61
     Discount on repurchase of subsidiary's preferred stock            --              --              --              0.08
                                                               ------------    ------------    ------------    ------------
     Earnings (loss) per share of common stock .............   $      (0.27)   $      (0.24)   $       0.25    $       0.69
                                                               ============    ============    ============    ============

DILUTED EARNINGS (LOSS) PER SHARE OF
      COMMON STOCK:
     Before discount on repurchase of subsidiary's preferred
         stock .............................................   $      (0.27)   $      (0.24)   $       0.24    $       0.60
     Discount on repurchase of subsidiary's preferred stock            --              --              --              0.08
                                                               ------------    ------------    ------------    ------------
     Earnings (loss) per share of common stock .............   $      (0.27)   $      (0.24)   $       0.24    $       0.68
                                                               ============    ============    ============    ============

WEIGHTED AVERAGE NUMBER OF SHARES
     OUTSTANDING:
           Basic ...........................................     10,062,702       9,669,614       9,906,282       9,643,088
                                                               ============    ============    ============    ============
           Diluted .........................................     10,141,608       9,800,192       9,989,804       9,711,219
                                                               ============    ============    ============    ============

CASH DIVIDENDS PER SHARE ...................................   $       0.30    $       0.30    $       0.90    $       0.89
                                                               ============    ============    ============    ============

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.
</TABLE>

*  Restated to conform to 1998 presentation.
<PAGE>
                 PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                        September 30, December 31,
                                                             1998         1997
                                                        ------------ -------------
                                                          (Thousands of Dollars)
ASSETS

UTILITY PLANT:
<S>                                                        <C>          <C>      
      At original cost .................................   $ 369,232    $ 351,106
      Accumulated depreciation .........................     (94,826)     (88,129)
                                                           ---------    ---------
                                                             274,406      262,977
                                                           ---------    ---------

OTHER PROPERTY AND INVESTMENTS:
      Nonutility property and equipment ................      29,144       16,335
      Accumulated depreciation .........................      (5,475)      (4,875)
      Other ............................................       2,352        2,171
                                                           ---------    ---------
                                                              26,021       13,631
                                                           ---------    ---------

CURRENT ASSETS:
      Cash and cash equivalents ........................         432        2,202
      Restricted cash - common stock subscribed (Note 3)         487         --
      Accounts receivable -
          Customers ....................................      15,056       28,681
          Others .......................................         876          850
          Reserve for uncollectible accounts ...........      (1,521)      (1,340)
      Unbilled revenues ................................       3,111       12,108
      Materials and supplies, at average cost ..........       3,419        3,110
      Gas held by suppliers, at average cost ...........      26,482       21,933
      Deferred cost of gas and supplier refunds, net ...      11,540        6,316
      Prepaid expenses and other .......................       4,022        1,686
                                                           ---------    ---------
                                                              63,904       75,546
                                                           ---------    ---------

DEFERRED CHARGES:
     Regulatory assets -
         Deferred taxes collectible ....................      31,109       30,592
         Other .........................................       6,579        4,415
     Unamortized debt expense ..........................       1,101        1,361
     Other .............................................         250          308
                                                           ---------    ---------
                                                              39,039       36,676
                                                           ---------    ---------


TOTAL ASSETS ...........................................   $ 403,370    $ 388,830
                                                           =========    =========

The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

<PAGE>
                 PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                    September 30, December 31,
                                                        1998         1997
                                                     ----------   ---------
                                                      (Thousands of Dollars)

CAPITALIZATION AND LIABILITIES

CAPITALIZATION:
<S>                                         <C>       <C>        <C>     
      Common shareholders' investment (Note 3) ....   $125,167   $122,105
      Preferred stock of PG Energy -
           Not subject to mandatory redemption, net      4,839     15,864
           Subject to mandatory redemption ........        560        640
      Long-term debt ..............................     95,000    127,000
                                                      --------   --------
                                                       225,566    265,609
                                                      --------   --------

CURRENT LIABILITIES:
      Current portion of long-term debt ...........     67,697     24,776
      Preferred stock subject to repurchase or
          mandatory redemption ....................     11,057         80
      Notes payable ...............................      3,270      2,170
      Accounts payable ............................     20,164     18,448
      Accrued general business and realty taxes ...        646      2,953
      Accrued income taxes ........................      1,362      4,618
      Accrued interest ............................      1,221      1,783
      Accrued natural gas transition costs ........        281      1,087
      Other .......................................      1,868      1,722
                                                      --------   --------
                                                       107,566     57,637
                                                      --------   --------

DEFERRED CREDITS:
      Deferred income taxes .......................     55,364     52,511
      Unamortized investment tax credits ..........      4,467      4,596
      Operating reserves ..........................      2,578      2,825
      Other .......................................      7,829      5,652
                                                      --------   --------
                                                        70,238     65,584
                                                      --------   --------

COMMITMENTS AND CONTINGENCIES (Note 5)





TOTAL CAPITALIZATION AND LIABILITIES ..............   $403,370   $388,830
                                                      ========   ========


The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

<PAGE>
                                 PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

                                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                     Nine Months Ended
                                                                                       September 30,
                                                                                   ----------------------
                                                                                      1998       1997
                                                                                   ----------  ---------
                                                                                   (Thousands of Dollars)

CASH FLOW FROM OPERATING ACTIVITIES:
<S>                                                                                <C>         <C>     
      Net income ...............................................................   $  2,437    $  5,836
      Gain on sales of nonutility property .....................................     (2,275)       (701)
      Effects of noncash charges to income -
          Depreciation .........................................................      7,970       7,095
          Deferred income taxes, net ...........................................      2,336         715
          Provisions for self insurance ........................................        560         630
          Other, net ...........................................................      1,576       1,603
      Changes in  working  capital,  exclusive  of cash and  current  portion of
           long-term debt and preferred stock -
               Receivables and unbilled revenues ...............................     22,777      16,221
               Gas held by suppliers ...........................................     (4,549)     (5,705)
               Accounts payable ................................................       (373)     (6,568)
               Deferred cost of gas and supplier refunds, net ..................     (6,030)     10,316
               Other current assets and liabilities, net .......................     (8,624)        (39)
      Other operating items, net ...............................................     (1,954)       (335)
                                                                                   --------    --------
                Net cash provided by continuing operations .....................     13,851      29,068
      Net cash used for discontinued operations, principally for the payment
           of income taxes .....................................................       --       (13,655)
                                                                                   --------    --------
               Net cash provided by operating activities .......................     13,851      15,413
                                                                                   --------    --------

CASH FLOW FROM INVESTING ACTIVITIES:
      Additions to utility plant ...............................................    (19,955)    (22,810)
      Additions to nonutility property .........................................    (13,179)     (2,172)
      Proceeds from the sales of nonutility property ...........................      2,855         746
      Acquisition of regulated business ........................................       --        (2,019)
      Other, net ...............................................................         55          (3)
                                                                                   --------    --------
               Net cash used for investing activities ..........................    (30,224)    (26,258)
                                                                                   --------    --------

CASH FLOW FROM FINANCING ACTIVITIES:
      Issuance of long-term debt ...............................................       --        25,000
      Issuance of common stock .................................................      9,049       1,861
      Common stock subscribed, net .............................................        487        --
      Repurchase of subsidiary's preferred stock ...............................       (128)     (3,137)
      Dividends on common stock ................................................     (8,926)     (8,583)
      Net increase (decrease) in bank borrowings ...............................     14,110      (5,021)
      Other, net ...............................................................         11         700
                                                                                   --------    --------
               Net cash used for financing activities ..........................     14,603      10,820
                                                                                   --------    --------

NET DECREASE IN CASH AND CASH EQUIVALENTS ......................................     (1,770)        (25)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .................................      2,202       1,126
                                                                                   --------    --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .....................................   $    432    $  1,101
                                                                                   ========    ========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
    Cash paid during the period for:
         Interest (net of amount capitalized) ..................................   $  8,178    $  6,000
                                                                                   ========    ========
         Income taxes ..........................................................   $  2,679    $ 15,197
                                                                                   ========    ========

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.
</TABLE>


<PAGE>

                 PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       Nature of the Business. Pennsylvania Enterprises, Inc. (the "Company") is
a holding company which, through its subsidiaries,  is engaged in both regulated
and nonregulated activities. The Company's regulated activities are conducted by
its principal  subsidiary,  PG Energy Inc.  ("PG  Energy"),  a regulated  public
utility,  and  PG  Energy's  wholly-owned  subsidiary,   Honesdale  Gas  Company
("Honesdale"),  also a regulated  public  utility which was acquired on February
14,  1997.  Together  PG  Energy  and  Honesdale  distribute  natural  gas  to a
thirteen-county area in northeastern Pennsylvania, a territory that includes the
cities of  Scranton,  Wilkes-Barre  and  Williamsport.  In 1997,  PG Energy  and
Honesdale   collectively  accounted  for  approximately  84%  of  the  Company's
operating revenues.

       The Company,  through its other  subsidiaries,  PG Energy  Services  Inc.
("Energy  Services"),  PEI Power Corporation  ("Power Corp") which was formed in
October,  1997, Theta Land Corporation ("Theta") and Keystone Pipeline Services,
Inc. ("Keystone"),  a wholly-owned  subsidiary of Energy Services, is engaged in
various  nonregulated  activities.  These activities include the sale of natural
gas, propane,  electricity and other energy-related  products and services;  the
construction,  maintenance and rehabilitation of utility  facilities,  primarily
natural gas  distribution  pipelines;  and the sale of property for residential,
commercial and other development. In the fourth quarter of 1997, Energy Services
began marketing  electricity and other products and services,  under the name PG
Energy PowerPlus, in 26 counties in northeastern and central Pennsylvania. Power
Corp, an exempt wholesale  electricity  generator,  began generating and selling
electricity in July,  1998, upon completion of modifications to its cogeneration
facility that enable it to burn both natural gas and methane.

       Principles  of  Consolidation.   The  consolidated  financial  statements
include the  accounts of the Company  and its  subsidiaries,  PG Energy,  Energy
Services (including Keystone),  Power Corp and Theta. The consolidated financial
statements also include the accounts of Honesdale  beginning  February 14, 1997,
the date Honesdale was acquired by PG Energy. All material intercompany accounts
have been eliminated in consolidation.

       Both PG Energy and Honesdale  (collectively referred to as the "Regulated
Subsidiaries")  are  subject  to the  jurisdiction  of the  Pennsylvania  Public
Utility Commission (the "PPUC") for rate and accounting purposes.  The financial
information  of  the  Regulated  Subsidiaries  that  is  incorporated  in  these
consolidated financial statements has been prepared in accordance with generally
accepted accounting principles, including the provisions of Financial Accounting
Standards  Board ("FASB")  Statement 71,  "Accounting for the Effects of Certain
Types  of  Regulation,"  which  give  recognition  to the  rate  and  accounting
practices of regulatory agencies such as the PPUC.

       Interim  Financial   Statements.   The  interim  consolidated   financial
statements  included  herein have been  prepared by the Company  without  audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain  information  and footnote  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,  although
the Company  believes that the  disclosures are adequate to make the information
presented not misleading.

       The results for the interim  periods are not indicative of the results to
be expected for the year,  primarily due to the effect of seasonal variations in
weather on the sale of natural gas. However,  in the opinion of management,  all
adjustments,  consisting of only normal recurring accruals, necessary to present
fairly  the  results  for  the  interim  periods  have  been  reflected  in  the
consolidated  financial  statements.  It is  suggested  that these  consolidated
financial  statements be read in  conjunction  with the  consolidated  financial
statements and the notes thereto  included in the Company's latest annual report
on Form 10-K.

       Use of Accounting  Estimates.  The preparation of financial statements in
conformity with generally accepted accounting  principles requires management to
make estimates and  assumptions  that affect the reported  amounts of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting period.  These estimates involve judgments with respect to,
among other things, various future economic factors and regulatory matters which
are  difficult to predict and are beyond the control of the Company.  Therefore,
actual amounts could differ from these estimates.

(2)    RATE MATTERS

       Rate Increase.  By Order adopted  December 19, 1996, the PPUC approved an
overall 5.3%  increase in PG Energy's  base gas rates,  designed to produce $7.5
million of additional  annual  revenue,  effective  January 15, 1997.  Under the
terms of the Order, the billing for the impact of the rate increase  relative to
PG Energy's  residential  heating customers,  which totaled $2.4 million through
June 30, 1997, was deferred, without carrying charges, until July, 1997.

       Gas Cost Adjustments.  The provisions of the Pennsylvania  Public Utility
Code require that the tariffs of local gas  distribution  companies  ("LDCs") be
adjusted on an annual basis,  and, in the case of larger LDCs such as PG Energy,
on an interim  basis when  circumstances  dictate,  to reflect  changes in their
purchased gas costs. The procedure  includes a process for the reconciliation of
actual gas costs incurred and actual revenues received and also provides for the
refund of any  overcollections,  plus interest thereon, or the recoupment of any
undercollections of gas costs.

       In accordance with these  procedures PG Energy has been permitted to make
the following  changes since January 1, 1997, to the gas costs  contained in its
tariff rates:

                               Change in                    Calculated
     Effective               Rate per MCF               Increase (Decrease)
       Date               From            To             in Annual Revenue
-------------------    ----------    -----------     -------------------------

September 1, 1998       $ 4.18           $ 4.25            $ 1,900,000
June 1, 1998              3.95             4.18              5,800,000
March 1, 1998             4.05             3.95             (2,100,000)
December 1, 1997          4.49             4.05            (12,100,000)
March 1, 1997             4.18             4.49              8,300,000

       The changes in gas rates on account of purchased gas costs have no effect
on earnings since the change in revenue is offset by a  corresponding  change in
the cost of gas.

(3)    RESTRICTED CASH - COMMON STOCK SUBSCRIBED

       The Company  reinstated  its Customer  Stock Purchase Plan (the "Customer
Plan")  effective  February 4, 1998. The Customer Plan provides the  residential
customers  of all  the  Company's  subsidiaries  with  a  method  of  purchasing
newly-issued  shares of the  Company's  common  stock at a 5% discount  from the
market price. On October 1, 1998, the Company issued 20,401 shares of its common
stock for an  aggregate  consideration  of  $483,000  with  respect to  payments
received  pursuant to the  Customer  Plan during the  subscription  period ended
September 30, 1998. Such payments are reflected  under the captions  "Restricted
cash - common stock subscribed" and "Common  shareholders'  investment" in these
consolidated financial statements as of September 30, 1998.

(4)    ACCOUNTING CHANGES

       Reporting  Comprehensive  Income.  Effective January 1, 1998, the Company
adopted the provisions of FASB Statement 130 "Reporting  Comprehensive  Income."
However,  because there were no items comprising other comprehensive income, the
adoption of FASB 130 has no effect on the Company's financial statements for the
periods ended September 30, 1998.

       Disclosures about Segments of an Enterprise and Related  Information.  In
June, 1997, FASB Statement 131, "Disclosures about Segments of an Enterprise and
Related  Information"  was issued.  The provisions of this statement,  which are
effective  for  fiscal  years  beginning  after  December  15,  1997,  establish
standards for reporting information about operating segments in annual financial
statements and selected segment  information in interim financial reports issued
to  shareholders.  The  Company  will  adopt the  reporting  provisions  of FASB
Statement 131 in the fourth quarter of 1998.

       Accounting for Derivative  Instruments  and Hedging  Activities.  In June
1998,  FASB Statement 133,  "Accounting  for Derivative  Instruments and Hedging
Activities" was issued.  The provisions of this  statement,  which are effective
for fiscal  quarters  beginning  after June 15, 1999,  establish  accounting and
reporting  standards for derivative  instruments,  including certain  derivative
instruments embedded in other contracts,  and for hedging activities.  While the
Company generally has not used derivative  instruments,  it expects to adopt, to
the extent necessary,  the provisions of FASB Statement 133 in the third quarter
of 1999. The impact of such adoption on the Company's future financial condition
and results of  operations  will depend upon a number of factors,  including the
extent to which the Company may use derivative instruments,  and the designation
and effectiveness of such derivative hedging market risk.

(5)    COMMITMENTS AND CONTINGENCIES

       Environmental  Matters. PG Energy, like many gas distribution  companies,
once utilized  manufactured  gas plants in connection with providing gas service
to its  customers.  None of these plants has been in operation  since 1972,  and
several of the plant  sites are no longer  owned by PG Energy.  Pursuant  to the
Comprehensive  Environmental  Response,  Compensation  and Liability Act of 1980
("CERCLA"),  PG  Energy  filed  notices  with the  United  States  Environmental
Protection  Agency (the "EPA") with respect to the former  plant sites.  None of
the sites is or was formerly on the proposed or final National  Priorities List.
The EPA has conducted site inspections and made preliminary  assessments of each
site  and  has   concluded   that  no  further   remedial   action  is  planned.
Notwithstanding  this determination by the EPA, some of the sites may ultimately
require remediation.  One site that was owned by PG Energy from 1951 to 1967 and
at which it operated a  manufactured  gas plant from 1951 to 1954 was subject to
remediation  in 1996. The  remediation at this site,  which was performed by the
party from whom PG Energy  acquired  the site in 1951,  required  the removal of
materials from two former gas holders. The cost of such remediation is purported
to  have  been  approximately  $525,000,  of  which  the  party  performing  the
remediation is seeking to recover a portion from PG Energy. PG Energy,  however,
believes that any liability it may have with respect to such  remediation  would
be considerably less than the amount that the other party is seeking.  While the
final resolution of the matter is uncertain,  PG Energy does not believe that it
will  have  any  material  impact  on  its  financial  position  or  results  of
operations.  Although the  conclusion by the EPA that it  anticipates no further
remedial  action  with  respect  to  the  sites  at  which  PG  Energy  operated
manufactured gas plants does not constitute a legal prohibition  against further
regulatory  action  under CERCLA or other  applicable  federal or state law, the
Company  does not  believe  that  additional  costs,  if any,  related  to these
manufactured  gas plant sites would be  material  to its  financial  position or
results of  operations  since  environmental  remediation  costs  generally  are
recoverable through rates over a period of time.


<PAGE>


                 PENNSYLVANIA ENTERPRISES, INC AND SUBSIDIARIES

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

RESULTS OF OPERATIONS

       The following table expresses certain items in the Company's consolidated
statements of income as percentages of operating  revenues for each of the three
and nine-month periods ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>

                                                   Three Months Ended              Nine Months Ended
                                                     September 30,                   September 30,
                                            -----------------------------    ------------------------------
                                               1998              1997           1998               1997
                                            -----------       -----------    ------------       -----------

OPERATING REVENUES:
    Energy products and services -
<S>                                               <C>               <C>          <C>               <C>   
        Regulated                                 56.4 %            67.2 %       75.3 %            83.2 %
        Nonregulated                              30.2              19.0         18.1              11.6
    Pipeline construction and services            13.4              13.8          6.6               5.2
                                                 -----             -----        -----             -----
             Total operating revenues            100.0             100.0        100.0             100.0
                                                 -----             -----        -----             -----

OPERATING EXPENSES:
    Cost of gas and other energy                  48.8              45.8         55.7              58.2
    Operation and maintenance                     43.4              45.8         24.4              20.8
    Depreciation                                  10.0               9.8          5.6               4.6
    Income taxes                                  (7.8)             (8.5)         1.0               2.3
    Taxes other than income taxes                  6.6               8.3          6.3               6.2
                                                 -----             -----        -----              -----
        Total operating expenses                 101.0             101.2         93.0              92.1
                                                 -----             -----        -----              -----

OPERATING INCOME                                  (1.0)             (1.2)         7.0               7.9

OTHER INCOME, NET                                  2.4               2.7          1.1               0.9

INTEREST CHARGES                                 (10.3)            (10.0)        (5.7)             (4.4)

SUBSIDIARY'S PREFERRED
      STOCK DIVIDENDS                             (1.2)             (1.3)        (0.7)             (0.6)
                                                  -----             -----        -----             -----

NET INCOME (LOSS)                                (10.1)%            (9.8)%        1.7%              3.8%
                                                 ======             =====        =====             =====
</TABLE>

     o Three Months Ended  September 30, 1998,  Compared With Three Months Ended
September 30, 1997

       Operating  Revenues.  Operating  revenues  increased $2.7 million (11.1%)
from $24.2  million for the quarter  ended  September 30, 1997, to $26.9 million
for the quarter ended September 30, 1998,  largely as a result of a $3.5 million
(76.8%)  increase in revenues from  nonregulated  energy  products and services,
including a $2.2 million (49.7%) increase in gas sales and services by PG Energy
Services Inc. ("Energy Services"),  a nonregulated affiliate of the Company, and
$832,000 attributable to the generation and sale of electric energy by PEI Power
Corporation ("Power Corp"), a nonregulated  affiliate of the Company which began
generating and selling  electricity in July, 1998. The impact of these increases
was partially  offset by a $1.1 million  (6.8%)  decrease in operating  revenues
from regulated energy products and services, namely, the sale and transportation
of natural gas.

       Operating  revenues from regulated energy products and services decreased
$1.1 million (6.8%) from $16.3 million for the quarter ended September 30, 1997,
to $15.2 million for the quarter ended September 30, 1998, primarily as a result
of a 50 million  cubic feet  (4.0%)  decrease  in natural gas sales by PG Energy
Inc. ("PG Energy") to its residential  and commercial  heating  customers.  This
reduction in sales was  attributable to warmer than normal  temperatures  during
the third  quarter of 1998 and colder than normal  temperatures  during the same
period in 1997, as well as lower levels in PG Energy's gas cost rate (see "-Rate
Matters").  The number of heating  degree days  decreased by 97 (46.2%) from 210
(175.0%  of normal)  during  the third  quarter of 1997 to 113 (94.2% of normal)
during the third quarter of 1998.

       The $2.2 million (49.7%)  increase in Energy  Services'  nonregulated gas
sales and services,  from $4.5 million for the quarter ended September 30, 1997,
to $6.8 million for the quarter  ended  September  30, 1998,  was  primarily the
result of a 1.1 million  cubic feet (73.2%)  increase in sales of natural gas by
Energy Services during the quarter.

       Operating Expenses. Operating expenses, including depreciation and income
taxes,  increased $2.7 million  (10.9%) from $24.5 million for the third quarter
of 1997 to $27.2  million  for the third  quarter of 1998.  As a  percentage  of
operating  revenues,  total operating  expenses  decreased  slightly from 101.2%
during the third quarter of 1997 to 101.0% during the third quarter of 1998.

       The cost of gas and other  energy  increased  $2.0  million  (18.2%) from
$11.1  million  for the third  quarter  of 1997 to $13.1  million  for the third
quarter of 1998,  primarily because of the  aforementioned  increase in sales by
Energy  Services  and the sales of Power Corp since it began  operating in July,
1998. The effects of these  increases  were partially  offset by the decrease in
the volume of natural gas sold by PG Energy to its  residential  and  commercial
heating  customers  and lower  levels in PG  Energy's  gas cost rate (see "-Rate
Matters").

       Other than the cost of gas and other energy and income  taxes,  operating
expenses  increased by $677,000  (4.4%) from $15.5 million for the third quarter
of 1997 to $16.2  million  for the third  quarter  of 1998.  This  increase  was
largely  attributable to a $593,000 (5.3%) increase in operation and maintenance
expense,  primarily as a result of increased  payroll and other costs associated
with the expansion of the Company's nonregulated  activities.  Also contributing
to the higher operating expenses was a $324,000 (13.7%) increase in depreciation
expense,  primarily  because of additions to utility plant. The effects of these
increases were partially  offset by a $240,000  (11.9%)  decrease in taxes other
than income taxes  resulting from a lower level of gross receipts tax because of
the  decreased  sales by PG Energy and Honesdale  Gas Company  ("Honesdale"),  a
wholly-owned regulated subsidiary of PG Energy.

       Operating  Income  (Loss).  As a result of the above,  the operating loss
decreased by $32,000  (11.0%) from  $291,000  for the  three-month  period ended
September 30, 1997, to $259,000 for the  three-month  period ended September 30,
1998,  and also decreased as a percentage of total  operating  revenues for such
periods from 1.2% in the three-month period ended September 30, 1997, to 1.0% in
the three-month period ended September 30, 1998.

       Interest Charges.  Interest charges increased  $345,000 (14.2%) from $2.4
million for the third  quarter of 1997 to $2.8 million for the third  quarter of
1998. This increase was largely attributable to a higher level of long-term debt
outstanding in 1998.

       Net Income  (Loss).  The increase of $344,000 in the net loss,  from $2.4
million for the third  quarter of 1997 to $2.7 million for the third  quarter of
1998,  and the $.03 per share  increase in both the basic and  diluted  loss per
share of common stock, from $.24 per share for the third quarter of 1997 to $.27
per  share  for the  third  quarter  of 1998,  were  principally  the  result of
operating income remaining relatively static while interest charges increased.

     o Nine Months Ended  September  30, 1998,  Compared  With Nine Months Ended
September 30, 1997

       Operating  Revenues.  Operating  revenues decreased $15.9 million (10.2%)
from $155.6  million for the  nine-month  period ended  September  30, 1997,  to
$139.7 million for the nine-month period ended September 30, 1998,  largely as a
result of a $24.2 million (18.7%) decrease in operating  revenues from regulated
energy products and services, the impact of which was partially offset by a $7.2
million (40.2%) increase in operating revenues from nonregulated energy products
and  services,  including  a $5.5  million  (30.6%)  increase  in gas  sales and
services by Energy  Services,  $832,000 of electric  energy  sales by Power Corp
since July, 1998, when it began generating and selling  electricity,  and a $1.1
million (13.5%) increase in the pipeline  construction and services  revenues of
Keystone Pipeline Services, Inc., a nonregulated subsidiary of Energy Services.

       Operating  revenues from regulated energy products and services decreased
$24.2  million  (18.7%)  from $129.4  million for the  nine-month  period  ended
September 30, 1997, to $105.2 million for the nine-month  period ended September
30, 1998, primarily as a result of a 2.5 billion cubic feet (16.7 %) decrease in
natural  gas  sales by PG  Energy  to its  residential  and  commercial  heating
customers.  This  reduction  in sales was  attributable  to warmer  than  normal
weather  during the period and lower  levels in PG  Energy's  gas cost rate (see
"-Rate  Matters").  The number of heating  degree days  decreased by 867 (20.8%)
from  4,165  (102.2% of  normal)  during the first nine  months of 1997 to 3,298
(80.9% of normal) during the first nine months of 1998.

       The $5.5 million increase in Energy Services'  nonregulated gas sales and
services from $17.9 million for the nine-month  period ended September 30, 1997,
to $23.4  million for the  nine-month  period  ended  September  30,  1998,  was
primarily  the result of a 2.4 million  cubic feet (47.5%)  increase in sales of
natural gas by Energy Services during the period.

       Operating Expenses. Operating expenses, including depreciation and income
taxes,  decreased  $13.5 million  (9.4%) from $143.3  million for the nine-month
period ended  September 30, 1997, to $129.8  million for the  nine-month  period
ended September 30, 1998. As a percentage of operating revenues, total operating
expenses  increased from 92.1% during the nine-month  period ended September 30,
1997, to 93.0% during the nine-month period ended September 30, 1998, because of
the lower level of operating revenues.

       The cost of gas and other energy  decreased  $12.8  million  (14.1%) from
$90.5  million for the  nine-month  period ended  September  30, 1997,  to $77.8
million for the nine-month period ended September 30, 1998, primarily because of
the aforementioned  decrease in sales to PG Energy's  residential and commercial
heating  customers  and lower  levels in PG  Energy's  gas cost rate (see "-Rate
Matters").  The effects of these factors were partially  offset by the increased
sales of Energy Services and the sales by Power Corp.

       Other than the cost of gas and other energy and income  taxes,  operating
expenses  increased by $1.6 million (3.2%) from $49.1 million for the nine-month
period ended  September  30, 1997, to $50.7  million for the  nine-month  period
ended  September  30, 1998.  This  increase was largely  attributable  to a $1.6
million (5.1%) increase in operation and maintenance expense,  primarily because
of  increased  payroll  and other costs  associated  with the  expansion  of the
Company's   nonregulated   activities  and  an  $857,000   (12.2%)  increase  in
depreciation  expense,  primarily as a result of additions to utility plant. The
impact of these increases was partially  offset by a $927,000 (9.6%) decrease in
taxes other than income taxes resulting from a lower level of gross receipts tax
because of the decreased sales by PG Energy and Honesdale.

       Income taxes  decreased  $2.3  million  (62.3%) from $3.6 million for the
nine-month  period ended  September 30, 1997, to $1.4 million for the nine-month
period ended September 30, 1998, due to a decrease in income before income taxes
(for this purpose, operating income net of interest charges).

       Operating  Income.  As a result of the above,  primarily  the decrease in
sales by PG Energy,  operating  income  decreased by $2.5  million  (19.9%) from
$12.3  million for the  nine-month  period ended  September  30,  1997,  to $9.8
million for the nine-month  period ended  September 30, 1998, and also decreased
as a percentage  of total  operating  revenues for such periods from 7.9% in the
nine-month  period ended  September 30, 1997, to 7.0% in the  nine-month  period
ended September 30, 1998.

       Interest  Charges.  Interest charges  increased $1.2 million (16.8%) from
$6.9 million for the nine-month period ended September 30, 1997, to $8.0 million
for the nine-month  period ended  September 30, 1998.  This increase was largely
attributable to a higher level of long-term debt outstanding in 1998.

       Net Income  (Loss).  The decrease in net income of $3.4  million  (58.2%)
from $5.8 million for the  nine-month  period ended  September 30, 1997, to $2.4
million for the  nine-month  period ended  September 30, 1998, was the result of
the matters discussed above,  principally the decrease in sales by PG Energy and
the increase in interest charges,  the effects of which were partially offset by
decreased  operating expenses.  The same factors,  along with the inclusion of a
$.08 per share discount on the repurchase of preferred stock in 1997,  accounted
for the decrease in both basic and diluted earnings per share of common stock of
$.44 per share for the nine-month period ended September 30, 1998.


<PAGE>


RATE MATTERS

       Rate  Increases.  By Order adopted  December 19, 1996,  the  Pennsylvania
Public Utility  Commission (the "PPUC")  approved an overall 5.3% increase in PG
Energy's base gas rates,  designed to produce $7.5 million of additional  annual
revenue,  effective  January 15, 1997. Under the terms of the Order, the billing
for the impact of the rate increase relative to PG Energy's  residential heating
customers,  which  totaled $2.4 million  through  June 30, 1997,  was  deferred,
without carrying charges, until July, 1997.

       On March 16, 1998, PG Energy filed an  application  with the PPUC seeking
an  increase  in its base gas  rates,  designed  to  produce  $15.0  million  in
additional annual revenue,  to be effective May 15, 1998. On September 29, 1998,
PG Energy and certain  parties  filing  objections to the rate increase  request
filed a  Settlement  Petition  with the  Administrative  Law Judge  assigned  to
conduct the investigation of the rate increase request. By Order adopted October
16, 1998,  the PPUC  approved the  Settlement  Petition and granted PG Energy an
overall  4.1%  increase in its base rates,  designed to produce  $7.4 million of
additional annual revenue, effective October 17, 1998.

       Gas Cost Adjustments.  The provisions of the Pennsylvania  Public Utility
Code require that the tariffs of local gas  distribution  companies  ("LDCs") be
adjusted on an annual basis,  and, in the case of larger LDCs such as PG Energy,
on an interim  basis when  circumstances  dictate,  to reflect  changes in their
purchased gas costs. The procedure  includes a process for the reconciliation of
actual gas costs incurred and actual revenues received and also provides for the
refund of any  overcollections,  plus interest thereon, or the recoupment of any
undercollections of gas costs.

       In accordance with these procedures, PG Energy has been permitted to make
the following  changes since January 1, 1997, to the gas costs  contained in its
gas tariff rates:

                               Change in                       Calculated
    Effective                 Rate per MCF                 Increase (Decrease)
      Date                  From          To               in Annual Revenue
---------------------    -----------   ----------     -------------------------

September 1, 1998        $ 4.18           $ 4.25             $ 1,900,000
June 1, 1998               3.95             4.18               5,800,000
March 1, 1998              4.05             3.95              (2,100,000)
December 1, 1997           4.49             4.05             (12,100,000)
March 1, 1997              4.18             4.49               8,300,000

       The changes in gas rates on account of purchased gas costs have no effect
on earnings since the change in revenue is offset by a  corresponding  change in
the cost of gas.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

       The primary capital needs of the Company continue to be the funding of PG
Energy's  construction  program  and the  seasonal  funding of PG  Energy's  gas
purchases  and  increases  in its  customer  accounts  receivable.  PG  Energy's
revenues are highly seasonal and  weather-sensitive,  with  approximately 75% of
its revenues  normally  being  realized in the first and fourth  quarters of the
calendar year when the temperatures in its service area are the coldest.

       Additionally,  as  the  Company's  nonregulated  activities  continue  to
expand,  further capital will be required for those activities.  It is currently
anticipated  that such  expenditures  will be funded by a combination of capital
provided by the Company, bank borrowings and other debt financing.

       The cash flow from PG Energy's operations is generally sufficient to fund
a portion of its  construction  expenditures.  However,  to the extent  external
financing is required, it is the practice of PG Energy to use bank borrowings to
fund such  expenditures,  pending the periodic  issuance of stock and  long-term
debt. Bank borrowings are also used by PG Energy for the seasonal funding of its
gas purchases and increases in customer accounts receivable.

       In order to temporarily finance construction expenditures and to meet its
seasonal borrowing requirements,  PG Energy has made arrangements for a total of
$63.0 million of unsecured  revolving bank credit,  which is deemed adequate for
its needs.  Specifically,  PG Energy currently has six bank lines of credit with
an aggregate borrowing capacity of $63.0 million which provide for borrowings at
interest  rates  generally  less than prime and which  mature at  various  times
during 1999 and which PG Energy  intends to renew or replace as they expire.  As
of October 30, 1998, PG Energy had $38.7 million of borrowings outstanding under
these bank lines of credit.

       The Company  believes  that its  regulated  subsidiaries  will be able to
raise,  in a  timely  manner,  such  funds  as are  required  for  their  future
construction expenditures,  refinancings and other working capital requirements.
Likewise,  the Company believes that its nonregulated  subsidiaries will be able
to raise such funds as are required for their future needs.

Long-Term Debt and Capital Stock Financings

       Both  the  Company  and  its   subsidiaries,   most  notably  PG  Energy,
periodically  engage in long-term debt and capital stock  financings in order to
obtain funds required for construction expenditures, the refinancing of existing
debt and various  working capital  purposes.  No long-term debt or capital stock
financings  were  consummated  by either  the  Company  or PG Energy  during the
nine-month period ended September 30, 1998.

       The Company  also  obtains  external  funds from the sale of common stock
through its Dividend  Reinvestment  and Stock  Purchase Plan, its Customer Stock
Purchase  Plan,  its 1992 Stock  Option Plan and its  Employees'  Savings  Plan.
During 1998  (through  October 30) the Company  realized  $10.7 million from the
issuance of common stock under these plans.

Capital Expenditures and Related Financings

       Capital  expenditures  totaled $33.3 million during the first nine months
of 1998, including $20.0 million of expenditures for the construction of utility
plant and $9.1 million for the conversion of Power Corp's cogeneration plant and
construction of the related methane recovery facility.

       The  Company  estimates  that its capital  expenditures  will total $12.0
million for the remainder of the year,  consisting of $10.0 million  relative to
utility  plant and $2.0  million  with  respect  to the  Company's  nonregulated
activities.   These  capital  expenditures  will  be  financed  with  internally
generated funds and bank borrowings,  pending the periodic issuance of stock and
long-term debt.

Current Maturities of Long-Term Debt and Preferred Stock

       As of September  30,  1998,  $67.7  million of  long-term  debt and $11.1
million of PG Energy's  preferred  stock was required to be repaid within twelve
months.  The $67.7 million of long-term debt includes $20.0 million  outstanding
under the  Company's  Term Loan  Agreement  which is due on May 31, 1999,  $36.7
million  outstanding  under PG  Energy's  bank  lines of credit  which is due at
various  times  during  1999,  $10.0  million of PG Energy's  9.23% series first
mortgage  bonds which are due  September 1, 1999,  and $1.0 million  outstanding
under a Power Corp bank line of credit  which is due March 30,  1999.  The $11.1
million of PG Energy  preferred stock includes $11.0 million  relative to all of
the outstanding  shares of PG Energy's 9% cumulative  preferred stock,  $100 par
value,  which have been called for redemption on December 1, 1998, at a price of
$104 per share, plus accrued dividends.

       PG Energy, the Company and Power Corp are each intending to finance their
respective  current  maturities  of  long-term  debt and  preferred  stock  with
internally  generated funds and bank borrowings pending the periodic issuance of
long-term debt and capital stock.

Year 2000

       The Company has  performed an inventory  and  assessment  of its computer
systems  and  applications,  as well as devices  with  embedded  technology,  to
identify  year 2000 issues and to develop a plan for  addressing  those  issues.
This plan,  which was  initiated in 1996,  is scheduled to be completed by March
31, 1999, for all  applications and devices that could have a material effect on
the  Company's  operations,  and by June 30,  1999,  with  respect  to all other
issues.  The plan involves the  replacement  of certain  systems with  purchased
software,  the renovation of other systems, and the purchase of certain hardware
and other devices. The Company is utilizing both internal resources and contract
personnel to implement the plan, which is currently on schedule.  In view of the
substantial progress that has been made to date,  management does not anticipate
the  expenditures  necessary to carry out the plan will be material  relative to
the Company's financial position or results of operations.

       As key elements of its plan to address  year 2000 issues,  the Company is
in the process of  replacing  its  financial  and human  resource  systems  with
purchased  software.   The  installation  of  these  new  systems,   along  with
modifications  currently being made to the Company's customer information system
and upgrading of its operating  system  software,  will resolve the primary year
2000 issues.  The new financial and human resource systems are anticipated to be
fully tested and  operational  by January,  1999,  while the  modifications  and
testing of the customer  information  system and the  upgrading of its Company's
operating system software are now anticipated to be completed by March 31, 1999.

       The Company's plan to address year 2000 issues  includes an assessment of
its critical suppliers and vendors, and also its largest customers, to determine
their status relative to year 2000 compliance.  The Company is in the process of
surveying  approximately  200 such suppliers,  vendors and customers and to date
has not identified any situations  that would appear to pose a significant  risk
to the Company.  The Company  intends to continue  monitoring the progress being
made by its  suppliers,  vendors  and  largest  customers  relative to year 2000
compliance and will promptly initiate  appropriate  contingency  planning should
the occasion warrant.

Forward-Looking Statements

       Certain statements made above relating to plans,  conditions,  objectives
and economic  performance go beyond  historical  information  and may provide an
indication   of  future   results.   To  that  extent,   such   statements   are
forward-looking  statements  within the meaning of Section 21E of the Securities
Exchange  Act of 1934,  and each is subject to factors  that could cause  actual
results  to differ  from those in the  forward-looking  statement.  The  Company
cautions  that  assumptions,  projections,  expectations,  intentions or beliefs
about  future  events  may  and  often  do  vary  from  actual  results  and the
differences  between  assumptions,  projections,   expectations,  intentions  or
beliefs  and  actual  results  can be  material.  Accordingly,  there  can be no
assurance that actual results will not differ materially from those expressed or
implied by the forward-looking statements. The following are some of the factors
that could cause actual  achievements and events to differ materially from those
expressed  or  implied  in  such  forward-looking   statements:  the  nature  of
Pennsylvania  legislation  restructuring the natural gas industry; the impact of
year 2000  compliance;  industrial,  commercial  and  residential  growth in the
service  territories of the Company and its subsidiaries;  the weather and other
natural  phenomena;  the timing and  extent of changes in  commodity  prices and
interest rates; changes in environmental and other laws and regulations to which
the Company and its  subsidiaries  are subject or other  external  factors  over
which the Company  has no control;  growth in  opportunities  for the  Company's
nonregulated  activities;  and general  economic  conditions  and  uncertainties
relating  to such  growth  during the  periods  covered  by the  forward-looking
statements.  The  Company  undertakes  no  obligation  to  publicly  release any
revision to these forward-looking  statements to reflect events or circumstances
after the date of this filing.


<PAGE>


                           PART II. OTHER INFORMATION

Item 6.       Exhibits and Reports on Form 8-K

(a)    Exhibits

       27-1     Financial Data Schedule - - filed herewith.

(b)    Reports on Form 8-K

       No  reports  on Form 8-K were filed  during  the  quarter  for which this
report is filed.


<PAGE>


                         PENNSYLVANIA ENTERPRISES, INC.

                                   SIGNATURES

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.



                                             PENNSYLVANIA ENTERPRISES, INC.
                                                        (Registrant)


Date:  November 5, 1998             By:            /s/ Donna M. Abdalla
                                                       Donna M. Abdalla
                                                      Acting Secretary


Date: November 5, 1998              By:            /s/ John F. Kell, Jr.
                                                       John F. Kell, Jr.
                                           Vice President, Financial Services
                                            (Principal Financial Officer and
                                               Principal Accounting Officer)


<PAGE>