=======================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 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 March 31, 1999

                                       OR

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

  For the transition period from                  to

Commission      Registrant, State of Incorporation,      I.R.S. Employer
   File            Address, and Telephone Number         Identification
  Number                                                      No.
----------  ------------------------------------------  ----------------
 1-9120          PUBLIC SERVICE ENTERPRISE GROUP          22-2625848
                            INCORPORATED
                   (A New Jersey Corporation)
                          80 Park Plaza
                          P.O. Box 1171
                  Newark, New Jersey 07101-1171
                          973 430-7000
                       http://www.pseg.com

  1-973      PUBLIC SERVICE ELECTRIC AND GAS COMPANY      22-1212800
                   (A New Jersey Corporation)
                          80 Park Plaza
                          P.O. Box 570
                  Newark, New Jersey 07101-0570
                          973 430-7000

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes X No ___


The   number  of   shares  outstanding  of  Public    Service  Enterprise  Group
Incorporated's  sole class of common stock, as of the latest  practicable  date,
was as follows:

                     Class: Common Stock, without par value
                   Outstanding at April 30, 1999: 219,563,008

As of April 30, 1999,  Public  Service  Electric and Gas Company had issued and
outstanding   132,450,344  shares  of  common  stock,   without  nominal  or par
value,  all of which were privately held,  beneficially  and of record by Public
Service Enterprise Group Incorporated.


<PAGE>

             ======================================================
                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             ======================================================
                                TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

   Item 1. Financial Statements
                                                                        Page
                                                                        ----
     Public Service Enterprise Group Incorporated (PSEG):

       Consolidated Statements of Income for the Three
       Months Ended March 31, 1999 and 1998............................   1

       Consolidated Balance Sheets as of March 31, 1999
       and December 31, 1998...........................................   2

       Consolidated Statements of Cash Flows for the Three
       Months Ended March 31, 1999 and 1998............................   4

     Public Service Electric and Gas Company (PSE&G):

       Consolidated Statements of Income for the Three
       Months Ended March 31, 1999 and 1998............................   5

       Consolidated Balance Sheets as of March 31, 1999
       and December 31, 1998...........................................   6

       Consolidated Statements of Cash Flows for the Three
       Months Ended March 31, 1999 and 1998............................   8

     Notes to Consolidated Financial Statements-- PSEG.................   9

     Notes to Consolidated Financial Statements-- PSE&G................  23

   Item 2. Management's Discussion and Analysis of Financial
           Condition and Results of Operations
       PSEG ...........................................................  24
       PSE&G...........................................................  36

   Item 3. Qualitative and Quantitative Disclosures About Market Risk..  37

PART II.  OTHER INFORMATION

   Item 1. Legal Proceedings...........................................  38

   Item 4. Submission of Matters to a Vote of Security Holders.........  39

   Item 5. Other Information...........................................  39

   Item 6. Exhibits and Reports on Form 8-K............................  41

   Signatures -- PSEG..................................................  42
   Signatures -- PSE&G.................................................  42


<PAGE>
             ======================================================
                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             ======================================================
                          PART I. FINANCIAL INFORMATION

                          ITEM 1. FINANCIAL STATEMENTS

<PAGE>
<TABLE>
                  
                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                        CONSOLIDATED STATEMENTS OF INCOME
                (Millions of Dollars, except for Per Share Data)
<CAPTION>


                                                                                        For the Quarters Ended
                                                                                               March 31,
                                                                                    -------------------------------
                                                                                        1999               1998
                                                                                    ------------        -----------
<S>                                                                                  <C>                <C>         
OPERATING REVENUES
       Electric                                                                      $      966         $      902
       Gas                                                                                  700                612
       Nonutility Activities                                                                129                145
                                                                                     -----------        -----------
              Total Operating Revenues                                                    1,795              1,659
                                                                                     -----------        -----------
OPERATING EXPENSES
Net Interchanged Power and Fuel for Electric Generation                                     225                219
Gas Purchased                                                                               449                416
Operation and Maintenance                                                                   438                357
Depreciation and Amortization                                                               166                157
Taxes (Note 6)
       Income Taxes                                                                         143                132
       Other                                                                                 56                 61
                                                                                     -----------        -----------
              Total Operating Expenses                                                    1,477              1,342
                                                                                     -----------        -----------
OPERATING INCOME                                                                            318                317
                                                                                     -----------        -----------
OTHER INCOME AND DEDUCTIONS                                                                   6                  7
                                                                                     -----------        -----------
INCOME BEFORE INTEREST CHARGES AND
  DIVIDENDS ON PREFERRED SECURITIES                                                         324                324
                                                                                     -----------        -----------
INTEREST CHARGES AND PREFERRED SECURITIES DIVIDENDS
       Interest Expense                                                                     114                121
       Allowance for Funds Used During Construction - Debt and
         Capitalized Interest                                                                (2)                (4)
       Preferred Securities Dividend Requirements of Subsidiaries                            24                 16
                                                                                     -----------        -----------
         Total Interest Charges and Preferred Securities Dividends                          136                133
                                                                                     -----------        -----------
NET INCOME                                                                           $      188         $      191
                                                                                     ===========        ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (000's)                                      222,703            231,958

EARNINGS PER SHARE (Basic and Diluted)                                               $     0.85         $     0.82
                                                                                     ===========        ===========
DIVIDENDS PAID PER SHARE OF COMMON STOCK                                             $     0.54         $     0.54
                                                                                     ===========        ===========
 See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                           CONSOLIDATED BALANCE SHEETS
                                     ASSETS
                              (Millions of Dollars)

<CAPTION>

                                                                                March 31,       December 31,
                                                                                 1999               1998
                                                                             --------------   -----------------
<S>                                                                               <C>                 <C>     
UTILITY PLANT - Original cost
  Electric                                                                        $ 14,234            $ 14,164
  Gas                                                                                2,895               2,878
  Common                                                                               435                 433
                                                                             --------------   -----------------
       Total                                                                        17,564              17,475
  Less: Accumulated depreciation and amortization                                    7,222               7,048
                                                                             --------------   -----------------
       Net                                                                          10,342              10,427
  Nuclear Fuel in Service, net of accumulated amortization -
     1999, $325; 1998, $312                                                            175                 187
                                                                             --------------   -----------------
       Net Utility Plant in Service                                                 10,517              10,614
  Construction Work in Progress, including Nuclear Fuel in
    Process - 1999, $77; 1998, $72                                                     214                 219
  Plant Held for Future Use                                                             21                  24
                                                                             --------------   -----------------
       Net Utility Plant                                                            10,752              10,857
                                                                             --------------   -----------------
INVESTMENTS AND OTHER NONCURRENT ASSETS
 Long-Term Investments, net of amortization - 1999, $30; 1998,
    $28, and net of valuation allowances - 1999, $14; 1998, $18                      2,946               3,034
 Nuclear Decommissioning and Other Special Funds                                       667                 649
 Other Noncurrent Assets,  net of amortization - 1999, $29; 1998,
    $29, and net of valuation allowances - 1999, $10; 1998, $10                        157                 150
                                                                             --------------   -----------------
       Total Investments and Other Noncurrent Assets                                 3,770               3,833
                                                                             --------------   -----------------
CURRENT ASSETS
  Cash and Cash Equivalents                                                             69                 140
  Accounts Receivable:
    Customer Accounts Receivable                                                       669                 506
    Other Accounts Receivable                                                          209                 219
    Less: Allowance for Doubtful Accounts                                               54                  38
  Unbilled Revenues                                                                    192                 255
  Fuel, at average cost                                                                204                 331
  Materials and Supplies, at average cost, net of
    valuation reserves - 1999, $12; 1998, $12                                          176                 167
  Miscellaneous Current Assets                                                          78                  93
                                                                             --------------   -----------------
       Total Current Assets                                                          1,543               1,673
                                                                             --------------   -----------------
DEFERRED DEBITS (Note 3)
  SFAS 109 Income Taxes                                                                690                 704
  OPEB Costs                                                                           265                 270
  Demand Side Management Costs                                                         143                 150
  Environmental Costs                                                                  126                 139
  Unamortized Loss on Reacquired Debt and Debt Expense                                 131                 135
  Other                                                                                230                 236
                                                                             --------------   -----------------
       Total Deferred Debits                                                         1,585               1,634
                                                                             --------------   -----------------
TOTAL                                                                             $ 17,650            $ 17,997
                                                                             ==============   =================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                           CONSOLIDATED BALANCE SHEETS
                         CAPITALIZATION AND LIABILITIES
                              (Millions of Dollars)

<CAPTION>
                                                                              March 31,       December 31,
                                                                                1999              1998
                                                                             ------------    ---------------
<S>                                                                              <C>                <C>    
CAPITALIZATION
 Common Stockholders' Equity:
    Common Stock, issued; 231,957,608 shares                                     $ 3,603            $ 3,603
    Treasury Stock, at cost; 1999 - 11,326,200 shares,
       1998 - 5,314,100 shares                                                      (442)              (207)
    Retained Earnings                                                              1,816              1,748
    Accumulated Other Comprehensive Income                                          (171)               (46)
                                                                             ------------    ---------------
       Total Common Stockholders' Equity                                           4,806              5,098
  Subsidiaries' Preferred Securities:
    Preferred Stock Without Mandatory Redemption                                      95                 95
    Preferred Stock With Mandatory Redemption                                         75                 75
    Guaranteed Preferred Beneficial Interest in Subordinated
       Debentures (Note 5)                                                         1,038              1,038
  Long-Term Debt                                                                   4,912              4,763
                                                                             ------------    ---------------
       Total Capitalization                                                       10,926             11,069
                                                                             ------------    ---------------
OTHER LONG-TERM LIABILITIES
  Accrued OPEB                                                                       357                344
  Environmental Costs  (Note 4)                                                       83                 84
  Capital Lease Obligations                                                           50                 50
  Other                                                                               76                 65
                                                                             ------------    ---------------
       Total Other Long-Term Liabilities                                             566                543
                                                                             ------------    ---------------
CURRENT LIABILITIES
  Long-Term Debt due within one year                                                 372                418
  Commercial Paper and Loans                                                         724              1,056
  Accounts Payable                                                                   504                655
  Accrued Taxes                                                                      262                 41
  Other                                                                              413                288
                                                                             ------------    ---------------
       Total Current Liabilities                                                   2,275              2,458
                                                                             ------------    ---------------
DEFERRED CREDITS
  Income Taxes                                                                     3,310              3,384
  Investment Tax Credits                                                             319                322
  Other                                                                              254                221
                                                                             ------------    ---------------
       Total Deferred Credits                                                      3,883              3,927
                                                                             ------------    ---------------
COMMITMENTS AND CONTINGENT LIABILITIES  (Note 4)                                       -                  -
                                                                             ------------    ---------------
TOTAL                                                                           $ 17,650           $ 17,997
                                                                             ============    ===============
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
                  
                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Millions of Dollars)
<CAPTION>

                                                                                 For the Quarters Ended
                                                                                       March 31,
                                                                                 -----------------------
                                                                                   1999         1998
                                                                                 ---------    ----------
<S>                                                                                 <C>           <C>  
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                                                        $ 188         $ 191
  Adjustments to reconcile net income to net cash flows from
   operating activities:
    Depreciation and Amortization                                                     166           157
    Recovery of Electric Energy and Gas Costs - net                                    89            28
    Provision for Deferred Income Taxes - net                                         (70)           (1)
    Unrealized Gains on Investments                                                   (24)          (35)
    Proceeds from Leasing Activities                                                  (14)          (59)
    Changes in certain current assets and liabilities:
     Net change in Accounts Receivable and Unbilled Revenues                          (74)           48
     Net change in Inventory - Fuel and Materials and Supplies                        118           136
     Net change in Accounts Payable                                                  (151)          (73)
     Net change in Accrued Taxes                                                      221           184
     Net change in Other Current Assets and Liabilities                               140           (13)
    Other                                                                              25            23
                                                                                 ---------    ----------
       Net Cash Provided By Operating Activities                                      614           586
                                                                                 ---------    ----------
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Utility Plant, excluding AFDC                                          (79)          (81)
  Net change in Long-Term Investments                                                  (3)           45
  Contribution to Decommissioning Funds and Other Special Funds                       (12)          (29)
  Other                                                                                (7)          (17)
                                                                                 ---------    ----------
       Net Cash Used In Investing Activities                                         (101)          (82)
                                                                                 ---------    ----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net change in Short-Term Debt                                                      (332)         (478)
  Issuance of Long-Term Debt                                                          252             -
  Redemption of Long-Term Debt                                                       (149)         (122)
  Issuance of Preferred Securities                                                      -           225
  Purchase of Treasury Stock                                                         (235)            -
  Cash Dividends Paid on Common Stock                                                (120)         (125)
  Other                                                                                 -           (10)
                                                                                 ---------    ----------
       Net Cash Used In Financing Activities                                         (584)         (510)
                                                                                 ---------    ----------
Net Change In Cash And Cash Equivalents                                               (71)           (6)
Cash And Cash Equivalents At Beginning Of Period                                      140            83
                                                                                 ---------    ----------
Cash And Cash Equivalents At End Of Period                                           $ 69          $ 77
                                                                                 =========    ==========
Income Taxes Paid                                                                    $   1         $  50
Interest Paid                                                                        $ 107         $ 109

See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                        CONSOLIDATED STATEMENTS OF INCOME
                              (Millions of Dollars)



<CAPTION>
                                                                                        For the Quarters Ended
                                                                                               March 31,
                                                                                      ----------------------------
                                                                                        1999              1998
                                                                                      ----------        ----------
<S>                                                                                   <C>               <C>      
OPERATING REVENUES
       Electric                                                                       $     966         $     902
       Gas                                                                                  700               612
                                                                                      ----------        ----------
              Total Operating Revenues                                                    1,666             1,514
                                                                                      ----------        ----------
OPERATING EXPENSES
Net Interchanged Power and Fuel for Electric Generation                                     221               216
Gas Purchased                                                                               424               391
Operation and Maintenance                                                                   394               323
Depreciation and Amortization                                                               165               152
Taxes (Note 6)
       Income Taxes                                                                         133               115
       Other                                                                                 56                58
                                                                                      ----------        ----------
              Total Operating Expenses                                                    1,393             1,255
                                                                                      ----------        ----------
OPERATING INCOME                                                                            273               259
                                                                                      ----------        ----------

OTHER INCOME AND DEDUCTIONS                                                                   3                 2
                                                                                      ----------        ----------
INCOME BEFORE INTEREST CHARGES AND
  DIVIDENDS ON PREFERRED SECURITIES                                                         276               261
                                                                                      ----------        ----------

INTEREST CHARGES AND PREFERRED SECURITIES DIVIDENDS
       Interest Expense                                                                      95                96
       Allowance for Funds Used During Construction - Debt                                   (2)               (3)
       Preferred Securities Dividend Requirements of Subsidiaries                            11                11
                                                                                      ----------        ----------
         Total Interest Charges and Preferred Securities Dividends                          104               104
                                                                                      ----------        ----------
NET INCOME                                                                                  172               157
                                                                                      ----------        ----------
Preferred Stock Dividend Requirements                                                         3                 2
                                                                                      ----------        ----------
EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE
  GROUP INCORPORATED                                                                  $      169        $      155
                                                                                      ==========        ==========

See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                           CONSOLIDATED BALANCE SHEETS
                                     ASSETS
                              (Millions of Dollars)

<CAPTION>


                                                                               March 31,           December 31,
                                                                                 1999                  1998
                                                                           ----------------     -----------------
<S>                                                                                <C>                   <C>     
UTILITY PLANT - Original cost
  Electric                                                                         $ 14,234              $ 14,164
  Gas                                                                                 2,895                 2,878
  Common                                                                                435                   433
                                                                            ----------------     -----------------
       Total                                                                         17,564                17,475
  Less: Accumulated depreciation and amortization                                     7,222                 7,048
                                                                            ----------------     -----------------
       Net                                                                           10,342                10,427
  Nuclear Fuel in Service, net of accumulated amortization -
     1999, $325; 1998, $312                                                             175                   187
                                                                            ----------------     -----------------
       Net Utility Plant in Service                                                  10,517                10,614
  Construction Work in Progress, including Nuclear Fuel in
    Process - 1999, $77; 1998, $72                                                      214                   219
  Plant Held for Future Use                                                              21                    24
                                                                            ----------------     -----------------
       Net Utility Plant                                                             10,752                10,857
                                                                            ----------------     -----------------
INVESTMENTS AND OTHER NONCURRENT ASSETS
  Long-Term Investments                                                                  69                    65
  Nuclear Decommissioning and Other Special Funds                                       667                   649
  Other Noncurrent Assets                                                                32                    46
                                                                            ----------------     -----------------
       Total Investments and Other Noncurrent Assets                                    768                   760
                                                                            ----------------     -----------------
CURRENT ASSETS
  Cash and Cash Equivalents                                                              15                    42
  Accounts Receivable:
    Customer Accounts Receivable                                                        608                   451
    Other Accounts Receivable                                                           152                   178
    Less: Allowance for Doubtful Accounts                                                40                    34
  Unbilled Revenues                                                                     192                   255
  Fuel, at average cost                                                                 204                   331
  Materials and Supplies, at average cost, net of
    valuation reserves - 1999, $12; 1998, $12                                           176                   165
  Miscellaneous Current Assets                                                           61                    84
                                                                            ----------------     -----------------
       Total Current Assets                                                           1,368                 1,472
                                                                            ----------------     -----------------
DEFERRED DEBITS (Note 3)
  SFAS 109 Income Taxes                                                                 690                   704
  OPEB Costs                                                                            265                   270
  Demand Side Management Costs                                                          143                   150
  Environmental Costs                                                                   126                   139
  Unamortized Loss on Reacquired Debt and Debt Expense                                  131                   135
  Other                                                                                 194                   182
                                                                            ----------------     -----------------
       Total Deferred Debits                                                          1,549                 1,580
                                                                            ----------------     -----------------
TOTAL                                                                              $ 14,437              $ 14,669
                                                                            ================     =================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                           CONSOLIDATED BALANCE SHEETS
                         CAPITALIZATION AND LIABILITIES
                              (Millions of Dollars)
<CAPTION>

                                                                            March 31,       December 31,
                                                                               1999             1998
                                                                           -------------   ----------------
<S>                                                                             <C>                <C>    
CAPITALIZATION
  Common Stockholder's Equity:
    Common Stock, issued; 132,450,344 shares                                    $ 2,563            $ 2,563
    Contributed Capital                                                             594                594
    Retained Earnings                                                             1,278              1,386
    Accumulated Other Comprehensive Income                                           (3)                (3)
                                                                           -------------   ----------------
       Total Common Stockholder's Equity                                          4,432              4,540
  Preferred Stock Without Mandatory Redemption                                       95                 95
  Preferred Stock  With Mandatory Redemption                                         75                 75
  Subsidiaries' Preferred Securities:
    Guaranteed Preferred Beneficial Interest in Subordinated
      Debentures (Note 5)                                                           513                513
  Long-Term Debt                                                                  3,946              4,045
                                                                           -------------   ----------------
       Total Capitalization                                                       9,061              9,268
                                                                           -------------   ----------------
OTHER LONG-TERM LIABILITIES
  Accrued OPEB                                                                      357                344
  Environmental Costs  (Note 4)                                                      83                 84
  Capital Lease Obligations                                                          50                 50
  Other                                                                              76                 65
                                                                           -------------   ----------------
       Total Other Long-Term Liabilities                                            566                543
                                                                           -------------   ----------------
CURRENT LIABILITIES
  Long-Term Debt due within one year                                                200                100
  Commercial Paper and Loans                                                        571                850
  Accounts Payable                                                                  382                565
  Accounts Payable - Associated Companies                                           170                 46
  Accrued Taxes                                                                     108                 30
  Other                                                                             365                223
                                                                           -------------   ----------------
       Total Current Liabilities                                                  1,796              1,814
                                                                           -------------   ----------------
DEFERRED CREDITS
  Income Taxes                                                                    2,474              2,533
  Investment Tax Credits                                                            310                313
  Other                                                                             230                198
                                                                           -------------   ----------------
       Total Deferred Credits                                                     3,014              3,044
                                                                           -------------   ----------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 4)                                       -                  -
                                                                           -------------   ----------------
TOTAL                                                                          $ 14,437           $ 14,669
                                                                           =============   ================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
                                     
                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Millions of Dollars)
<CAPTION>

                                                                                 For the Quarters Ended
                                                                                       March 31,
                                                                                 -----------------------
                                                                                   1999         1998
                                                                                 ---------    ----------
<S>                                                                                 <C>           <C>  
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                                                        $ 172         $ 157
  Adjustments to reconcile net income to net cash flows from
   operating activities:
    Depreciation and Amortization                                                     165           152
    Recovery of Electric Energy and Gas Costs - net                                    89            28
    Provision for Deferred Income Taxes - net                                         (59)           (1)
    Changes in certain current assets and liabilities:
     Net change in Accounts Receivable and Unbilled Revenues                          (62)           38
     Net change in Inventory - Fuel and Materials and Supplies                        116           136
     Net change in Accounts Payable                                                   (59)          (13)
     Net change in Accrued Taxes                                                       78            82
     Net change in Other Current Assets and Liabilities                               165            28
    Other                                                                               7            26
                                                                                 ---------    ----------
       Net Cash Provided By Operating Activities                                      612           633
                                                                                 ---------    ----------
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Utility Plant, excluding AFDC                                          (79)          (81)
  Contribution to Decommissioning Funds and Other Special Funds                       (12)          (29)
  Other                                                                                10            (7)
                                                                                 ---------    ----------
       Net Cash Used In Investing Activities                                          (81)         (117)
                                                                                 ---------    ----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net change in Short-Term Debt                                                      (279)         (284)
  Redemption of Long-Term Debt                                                          -          (104)
  Cash Dividends Paid                                                                (277)         (127)
  Other                                                                                (2)            -
                                                                                 ---------    ----------
       Net Cash Used In Financing Activities                                         (558)         (515)
                                                                                 ---------    ----------
Net Change In Cash And Cash Equivalents                                               (27)            1
Cash And Cash Equivalents At Beginning Of Period                                       42            17
                                                                                 ---------    ----------
Cash And Cash Equivalents At End of Period                                           $ 15         $  18
                                                                                 =========    ==========
Income Taxes Paid                                                                    $  1         $  28
Interest Paid                                                                        $ 98         $ 105

See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>

             ======================================================
                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             ======================================================

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Basis of Presentation/Summary of Significant Accounting Policies

Basis of Presentation

     The financial statements included herein have been prepared pursuant to the
rules and regulations of the Securities and Exchange  Commission (SEC).  Certain
information  and note  disclosures  normally  included in  financial  statements
prepared in accordance with generally accepted  accounting  principles have been
condensed or omitted  pursuant to such rules and  regulations.  However,  in the
opinion of  management,  the  disclosures  are adequate to make the  information
presented not misleading.  These consolidated  financial statements and Notes to
Consolidated Financial Statements (Notes) should be read in conjunction with the
Registrant's Notes contained in the 1998 Annual Report on Form 10-K. These Notes
update and supplement matters discussed in the 1998 Annual Report on Form 10-K.

     The unaudited  financial  information  furnished  reflects all  adjustments
which are, in the opinion of  management,  necessary to fairly state the results
for the interim periods presented. The year-end consolidated balance sheets were
derived from the audited consolidated  financial statements included in the 1998
Annual Report on Form 10-K. Certain  reclassifications of prior period data have
been made to conform with the current presentation.

Summary of Significant Accounting Policies

     Effective  January 1, 1999,  Public Service  Enterprise Group  Incorporated
(PSEG) and Public  Service  Electric and Gas Company  (PSE&G)  adopted  Emerging
Issues Task Force (EITF) Issue No. 98-10,  "Accounting for Contracts Involved in
Energy Trading and Risk Management Activities" (EITF 98-10). EITF 98-10 requires
that energy trading contracts be marked to market with gains and losses included
in earnings and separately  disclosed in the financial  statements or footnotes.
Previously,  the gains and losses  associated with those contracts were recorded
upon  settlement.  The adoption of EITF 98-10 did not have a material  impact on
the financial  condition,  results of  operations  and net cash flows of PSEG or
PSE&G.

     Effective  January 1, 1999,  PSEG and PSE&G  adopted  Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" (SOP 98-1),  which provides criteria for capitalizing  certain
internal-use  software  costs.  The adoption of SOP 98-1 did not have a material
impact on the financial  condition,  results of operations and net cash flows of
PSEG or PSE&G.

     Effective  January 1, 1999, PSEG and PSE&G adopted SOP 98-5,  "Reporting on
the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires the expensing of
the  costs  of  start-up  activities  as  incurred.   Additionally,   previously
capitalized  start-up  costs must be  written  off as a  Cumulative  Effect of a
Change in Accounting Principle. The adoption of SOP 98-5 did not have a material
impact on the financial  condition,  results of operations and net cash flows of
PSEG or PSE&G.

Note 2.  Regulatory Issues

New Jersey Energy Master Plan Proceedings and Summary Order

     In 1998 and continuing into 1999, energy industry  restructuring  continued
to advance  in New  Jersey.  In 1998,  evidentiary  hearings  related to PSE&G's
proposal in connection with the New Jersey Board of Public  Utilities' (BPU) New
Jersey Energy Master Plan (Energy  Master Plan) were completed and the Office of
Administrative Law filed its decision providing recommendations on such proposal
to the BPU.  In  January  1999,  the State  Legislature  passed  the New  Jersey
Electric Discount and Competition Act (Energy  Competition Act) which was signed
into law by the  Governor on February 9, 1999.  Among other  things,  the Energy


<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Competition  Act  provides  that all New Jersey  retail electric  customers  may
select  their  electric  supplier  commencing  August 1, 1999 and all New Jersey
retail gas  customers  may select their gas  suppliers  commencing  December 31,
1999,  thus fully opening the New Jersey energy  markets to customer  choice and
competition.

     The  Energy  Competition  Act  provides  the  BPU  requisite  authority  to
implement  certain aspects of retail electric and gas competition in New Jersey.
The BPU is currently engaged in proceedings to implement the Energy  Competition
Act,  the  result  of which  will  fundamentally  change  the  electric  and gas
industries in New Jersey by, among other things,  introducing retail competition
to replace the monopoly  structure of regulated  public  utilities,  potentially
requiring  or  resulting  in the  separation  or  sale  of  utilities'  electric
generation-related  assets and establishing a number of generic rules related to
deregulation,  including governing regulated utilities' relationships with their
affiliates.

     Under the Energy  Competition  Act, the  distribution  business will remain
regulated by the BPU. The  transmission  business  will remain  regulated by the
Federal  Energy  Regulatory  Commission  (FERC).  With  deregulation,   electric
generation  will become a  competitive  business.  Succeeding  as a  competitive
generator  will  depend on many  factors  such as fuel  cost,  production  costs
including  labor  cost,   environmental   constraints   and  related   expenses,
transmission  availability and rates,  marketing ability and quality of service,
among others. The final outcome of these proceedings will have a profound effect
on PSEG and PSE&G.

     A proposed  amendment to the Energy Competition Act was introduced on March
22,  1999 under  which the BPU would be required  to  establish  power  emission
standards  that  every  seller  of  energy  in New  Jersey  would  have to meet.
Investment  in energy  efficiency  projects and  renewable  energy would also be
mandated if this bill were to be passed into law. PSEG and PSE&G cannot  predict
the outcome of this matter or its potential impacts.

     On February 11, 1999, the BPU adopted a schedule for the resolution of each
New Jersey electric  utility's  filings for rate  unbundling,  stranded cost and
restructuring  proceedings  pursuant to the Energy Competition Act. With respect
to PSE&G, the BPU encouraged the parties to the case to undertake discussions in
an attempt to reach  consensus on the litigated  issues in the rate  unbundling,
stranded cost and, on limited issues,  the restructuring  proceedings.  On March
17, 1999, PSE&G, together with seven other parties, filed a proposed stipulation
(PSE&G  Stipulation) with regard to these proceedings with the BPU. On March 29,
1999, the Office of the Ratepayer Advocate, together with certain other parties,
filed their proposal with regard to these  proceedings.  On April 7, 1999, PSE&G
filed its response to the Ratepayer Advocate's proposal.  On April 21, 1999, the
BPU rendered its oral and written summary decision  regarding Energy Master Plan
matters  (Summary  Order),  but  indicated  that it would issue a more  detailed
Decision  and Order  (Decision  and Order) in these  matters in the near  future
which will provide a full  discussion of the issues as well as the reasoning for
the BPU's  determinations.  The Energy  Competition Act, the BPU's Summary Order
and the related BPU proceedings are hereinafter referred to as the Energy Master
Plan Proceedings.

     The  Summary  Order  adopted  the  PSE&G   Stipulation  with  the  specific
modifications and clarifications as set forth below:

     Transition Period

     PSE&G's Proposed Stipulation as Adopted:

     o    A four-year  transition  period will begin August 1, 1999 and end July
          31, 2003. During this transition period,  rates will be capped for all
          customers who remain with PSE&G.


<PAGE>


     Rate Reductions

     PSE&G's Proposed Stipulation:

     o    Customers  would receive the following  reductions  from current rates
          through July 2003 according to this schedule:

              August 1, 1999:  5%
              January 1, 2000: increasing to 7%, depending on timing of
                               securitization
              August 1, 2001:  increasing to 8.25%
              August 1, 2002:  increasing to 13.9% average (10% off rates in
                               effect in April 1997)

         All rate reductions  after the initial 5% reduction would be contingent
         on PSE&G's  implementing a BPU order  providing for  securitization  of
         $2.475 billion of  generation-related  stranded costs, plus transaction
         costs, and  establishing a securitization  bond charge under the Energy
         Competition Act.

     BPU Modifications:

     o    Customers are to receive rate reductions of:

              August 1, 1999:   5%
              January 1, 2000:  increasing to 7%
              August 1, 2001:   increasing to 9%
              August 1, 2002:   increasing to 13.9% average (10% off rates in 
                                effect in April 1997)

         The BPU  rejected  PSE&G's  request  that all further  rate  reductions
         beyond the initial 5% be conditioned upon  securitization.  The BPU, in
         finding  that  the 2000 and 2001  incremental  rate  reductions  assume
         achievement of 2% overall savings from  securitization  (in addition to
         the  1%  assumed  in  the  initial  5%  reduction)   conditioned  these
         additional    interim   rate   reductions   upon    implementation   of
         securitization,  but  found  however,  that the  final  aggregate  rate
         reduction  in 2002 of 13.9% is required by the  legislation  and is not
         contingent on the implementation of securitization.

     Shopping Credits

     PSE&G's Proposed Stipulation as Adopted:

     o    Shopping  credits will be established  for four years and will include
          cost of energy, capacity,  transmission,  ancillary services,  losses,
          taxes and a retail adder.  The average  overall annual credits will be
          as follows:

              1999:    4.95 cents per kilowatt hour (kWh)
              2000:    5.03 cents per kWh
              2001:    5.06 cents per kWh
              2002:    5.10 cents per kWh
              2003:    5.10 cents per kWh

     Stranded Costs

     PSE&G's Proposed Stipulation:

     o    Generation-related   stranded  costs  would  be  established  at  $3.3
          billion, net of tax, of which $2.475 billion plus transaction costs of
          up to $125 million would be  securitized.  As a result of negotiation,
          PSE&G would reduce the  unsecuritized  portion by $225 million.  PSE&G
          would then have the opportunity to recover the remaining $600 million,
          net of tax, over the  four-year  transition  period.  The $600 million
          would be recovered  by various  means,  including  an explicit  market
          transition charge (MTC). There would be a reconciliation  mechanism to
          insure that PSE&G does not recover more than $600 million, net of tax.

     BPU Modifications:

     o    The BPU  concluded  that PSE&G should be provided the  opportunity  to
          recover  up to  $2.94  billion  net of  tax  stranded  costs,  through
          securitization  of $2.4  billion and an  opportunity  to recover up to
          $540 million of its unsecuritized generation-related stranded costs on
          present value basis net of tax. The stranded costs recovery is subject
          to a true up on the collection of the unsecuritized generation-related
          stranded costs.

         Additionally,  PSE&G  cannot  use  the  overrecovery  in  the  Electric
         Levelized Energy Adjustment Clause (LEAC) as of July 31, 1999, expected
         to be  approximately  $60 million,  net of tax, as a  mitigation  tool.
         Instead,  PSE&G must return the  overrecovery  amount to  ratepayers by
         applying the overrecovery as a credit to the starting  deferred balance
         of the non-utility  generation market transition clause (NTC) to offset
         stranded costs otherwise recoverable from ratepayers.

     Securitization

     PSE&G's Proposed Stipulation:

     o    PSE&G  would be  allowed  to issue a total  of up to $2.6  billion  of
          transition  bonds to be amortized over a 15-year period.  A transition
          bond charge would be collected  from  customers via a per kWh or wires
          charge.  This would be trued-up at least  annually.  Net proceeds from
          this  securitization  of stranded  costs would be used to refinance or
          retire  debt  and/or  equity.  The  resulting  savings  from this bond
          financing must be returned to customers.

     BPU Modifications:

     o    The BPU will issue a financing  order,  consistent with the provisions
          of the  Energy  Competition  Act,  to  authorize  PSE&G to issue up to
          $2.525 billion of transition bonds representing $2.4 billion of net of
          tax generation-related stranded costs and an estimated $125 million of
          transaction costs. The taxes related to securitization,  which reflect
          the grossed up revenue  requirements  associated with the $2.4 billion
          in  net  of tax  stranded  costs  being  securitized,  are  legitimate
          recoverable  stranded  costs,  however  they  should not be  collected
          through  the  transition  bond  charge;  rather,  such taxes  shall be
          collected  via a separate MTC. The duration of this separate MTC shall
          be 15 years,  identical to the duration of the transition bond charge.
          The BPU clarified the language  concerning the use of the net proceeds
          of  securitization  to indicate that the  refinancing or retirement of
          debt  and/or   equity  shall  be  done  in  a  manner  that  will  not
          substantially alter PSE&G's overall capital structure.

     Transfer of Generation-Related Assets

     PSE&G's Proposed Stipulation:

     o    PSE&G would be required to separate its  transmission and distribution
          assets  from its  generation-related  assets.  Its  generation-related
          assets would be transferred to a separate  generation  company (Genco)
          to be owned  by  PSE&G's  parent  holding  company,  PSEG.  Given  the
          resolution of stranded  costs,  the proposed  transfer price of $2.368
          billion  was  intended  to ensure  that PSE&G  receives  full and fair
          recompense  for these assets.  Genco would become an exempt  wholesale
          generator   (EWG)   upon   receipt   of   FERC   approval.    If   the
          generation-related  assets  are  sold  to a  third  party  during  the
          four-year transition period, any gains would be shared equally between
          customers and shareholders, subject to BPU approval.

     BPU Modifications:

     o    The BPU directed the establishment of a separate company (i.e., Genco)
          by PSEG to sell  generation  output in the wholesale  marketplace  and
          also ordered PSE&G to transfer its  generation-related  assets to such
          separate  unregulated  subsidiary  at a price of $2.443  billion.  Any
          gains  resulting from the sale of the  transferred  generation-related
          assets to a third  party which  occurs  within five years of August 1,
          1999,  rather  than  within  the  four  years  proposed  in the  PSE&G
          stipulation,   will  be  shared  50  -  50  between   ratepayers   and
          shareholders.

     Basic Generation Service

     PSE&G's Proposed Stipulation:

     o    Through a contract with Genco,  PSE&G would  provide basic  generation
          service  (BGS) for the first three years and would not promote it as a
          competitive alternative. BGS would be competitively bid for the fourth
          year and annually thereafter.

     BPU Modifications:

     o    The BPU approved PSE&G's proposal on basic  generation,  but clarified
          that any payments to PSE&G resulting from BGS being bid out for year 4
          of the  transition  period shall be credited to the deferred  societal
          benefit costs (SBC) balance for purposes of establishing  the SBC rate
          in year 5, and shall in no event be  retained  by PSE&G or remitted to
          Genco    or    otherwise    utilized    to    recover    unsecuritized
          generation-related stranded costs.

     Electric Distribution Depreciation

     PSE&G's Proposed Stipulation as Adopted:

     o    PSE&G  is  required  to  reduce  its  depreciation   reserve  for  its
          distribution  assets by  $568.7  million  which  will be  achieved  by
          amortizing its excess electric distribution  depreciation reserve over
          the period of January 1, 2000 to July 31, 2003.

     Societal Benefit and Other Costs

     PSE&G's Proposed Stipulation as Adopted:

     o    SBC and  above  market  stranded  costs  associated  with  non-utility
          generation will be collected through clause mechanisms; SBC level will
          remain constant through the transition  period;  deferred  accounting,
          including interest on any over/underrecoveries,  will be used; and the
          clauses will be reset annually  thereafter.  The clause  mechanism for
          the above market  stranded NTC will be initially set at the 1999 level
          of $183 million annually and will also use deferred  accounting on any
          over/underrecoveries.   Any  non-  utility  generator  (NUG)  contract
          buyouts  will also be  charged  to the NTC  clause  and be  subject to
          deferred  accounting.  The clause mechanism for societal benefits will
          include  costs  related  to:  1) social  programs  which  include  the
          universal  service fund; 2) nuclear plant  decommissioning;  3) demand
          side management (DSM) program;  4) manufactured gas plant  remediation
          and 5) consumer education.

     Upon the issuance of the Decision and Order,  PSE&G will no longer meet the
requirements  of  Statement  of  Financial   Accounting   Standards  (SFAS)  71,
"Accounting  for the Effects of Certain Types of  Regulation"  (SFAS 71) for the
electric  generation  portion of its  business.  Pending the BPU's final written
order,  PSE&G anticipates that it will be required to record a net extraordinary
charge to earnings,  in the range of $500 million to $700 million, in the second
quarter of 1999 to reflect its unrecoverable costs.

     Pending issuance of the Decision and Order, PSEG and PSE&G cannot determine
the applicability and impact of other regulatory and/or legal requirements which
may also be triggered by the implementation of the Decision and Order. These may
include  actions  in the areas of  corporate  finance,  tax,  environmental  and
nuclear.  PSEG and PSE&G cannot  predict  whether any appeals will be filed with
respect to the  Decision  and Order,  once issued,  within the  applicable  time
period.

     Additionally,  the BPU is  expected  to issue a series of orders  that will
decide generic issues related to  deregulation  of the electric and gas industry
in the State. Proposed standards were issued by the BPU for comment on March 31,
1999.  These include  affiliate  relationships  (including fair  competition and
affiliate transactions),  environmental issues, anti-slamming and accounting and
reporting standards. Hearings on these proposed standards were held during April
1999 and an order is expected in the second quarter of 1999.

Gas Unbundling

     The Energy Competition Act requires that all residential customers have the
ability to choose a competitive  gas supplier by December 31, 1999. As a result,
on March 17, 1999, the BPU issued its Order requiring each public gas utility to
submit a rate unbundling filing.

     The BPU established a gas rate unbundling filing deadline of April 30, 1999
to include the following:

     o    A proposed basic supply rate(s) applicable to each customer class.

     o    A proposed  unbundled  billing  credit(s)  applicable to customers who
          receive billing services from a third party.

     o    A separate  SBC to recover all  Remediation  Adjustment  Clause  (RAC)
          expenses,  DSM program expenses and other expenses reasonably incurred
          and currently in rates  recoverable via the SBC pursuant to the Energy
          Competition Act.

     o    A proposed regulatory asset charge, if applicable.

     o    A proposed transportation rate.

     On April 30, 1999,  PSE&G filed its gas unbundling  compliance  filing with
the BPU as required by the BPU's March 17, 1999 Order. As required,  this filing
continues  and completes the  unbundling of PSE&G's gas rates.  Unbundled  rates
were  developed  for  PSE&G's   remaining   bundled  gas  Rate  Schedules:   RSG
(Residential Service Gas), SLG (Street Lighting Gas Service),  CFG (Cogeneration
Firm Gas Service) and UVNG (Uncompressed  Vehicular Natural Gas Service).  These
bundled  rates will cease to exist when the new  applicable  unbundled  FT (Firm
Transportation) and CS (Firm Commodity Service) rates are approved. PSE&G cannot
predict the outcome of this proceeding.

     Hearings are  expected in September  1999 with the BPU expected to render a
decision by the end of November  1999. The Energy  Competition  Act also applies
similar  rules  to the  gas  industry  as to the  electric  industry  addressing
affiliate relations, consumer protections, among others.

Unbundled Gas Transportation Tariffs

     On  December  22,  1998,  PSE&G,  the BPU and the  Office of the  Ratepayer
Advocate executed an Interim  Stipulation for Phase I of PSE&G's Residential Gas
Transportation  Program (Program).  In accordance with the Interim  Stipulation,
residential  customers  would  not be  eligible  to  register  (sign up) for the
Program  until  60  days  after  the  BPU's  Decision  and  Order.  The  Interim
Stipulation  mandates that  residential  customers who return to PSE&G's bundled
sales  service  after  a  designated   period  would  be  served  gas  which  is
market-priced under PSE&G's Market Price Gas Service (MPGS) tariff. On April 28,
1999, the BPU made the Interim Stipulation final.

<PAGE>
Electric Levelized Energy Adjustment Clause (LEAC)

     To the extent fuel  revenue and expense  flow  through the LEAC  mechanism,
variances in fuel revenues and expenses offset and thus have no direct effect on
earnings.  Once the LEAC  mechanism is  eliminated  when the  transition  period
commences  on  August  1,  1999,  earnings  volatility  may  increase  since the
unregulated  generation  portion of PSEG's business will bear the full risks and
rewards of changes in nuclear and fossil  generating  fuel costs and replacement
power  costs.  For  further  discussion,  see  New  Jersey  Energy  Master  Plan
Proceedings  and  Summary  Order  above  and  Note  3.  Regulatory   Assets  and
Liabilities.

Other Regulatory Issues

     Interim Competitive Transition Charge (ICTC)

     In  September  1996,  PSE&G filed a petition  with the BPU to  establish an
ICTC, or exit fee, which would be designed to recover stranded costs which would
result from a customer leaving PSE&G's system as a full  requirements  customer.
The Energy Competition Act does not require that on-site generators pay any fees
equivalent to the SBC or recovery of utility  stranded costs (market  transition
charge or transition  bond charges)  provided that the energy load served by the
on-site  generators  does not reduce the utility's  distributed  kilowatt  hours
below 92.5% of the kilowatt  hours  distributed  by the utility in 1999. If that
trigger is exceeded, then on-site generators will pay such charges. On March 31,
1999,  the BPU  issued an Order of  Dismissal  regarding  the issue of exit fees
since the language  incorporated into the Energy Competition Act established the
procedures necessary to assess an exit fee. This Order dismissed the petition of
PSE&G and related outstanding motions.  This Order also closes the BPU's generic
exit fee proceeding and all motions related thereto.

Note 3. Regulatory Assets and Liabilities

     Regulatory  assets and  liabilities  are  recorded in  accordance  with the
provisions  of SFAS 71. In  general,  SFAS 71  recognizes  that  accounting  for
rate-regulated enterprises should reflect the relationship of costs and revenues
as  determined  by  regulators.  As a  result,  a  regulated  utility  may defer
recognition of costs (a regulatory asset) or recognize obligations (a regulatory
liability) if it is probable that, through the ratemaking process, there will be
a  corresponding  increase  or  decrease  in  revenues.  Accordingly,  PSE&G has
deferred certain costs,  which are being amortized over various periods.  To the
extent  that  collection  of such costs or payment of  liabilities  is no longer
probable  as a result  of  changes  in  regulation  and/or  PSE&G's  competitive
position,  the  associated  regulatory  asset or  liability  will be  charged or
credited to income.  Once the BPU issues its written  Decision  and Order in the
Energy Master Plan  Proceedings,  PSE&G will no longer meet the requirements for
application of SFAS 71 for its then  deregulated  operations.  For discussion of
the  Energy  Master  Plan  Proceedings,  see Note 2.  Regulatory  Issues.  It is
expected  that the existing  regulatory  assets will  continue in the  regulated
portion of PSE&G's  business and will  continue to be subject to SFAS 71, except
as follows:

     o    the SFAS 109,  "Accounting for Income Taxes," deferred tax assets will
          be  written  down to the  extent  they  relate  to  generation-related
          stranded costs;

     o    unamortized  debt expense and loss on reacquired debt may  be affected
          to the extent the debt related to such amounts is retired; and

     o    the LEAC will be discontinued as discussed below.

     Overrecovered Electric Energy  Costs/Under(over)recovered  Gas Costs: PSE&G
will continue to follow deferred accounting  treatment for the LEAC through July
31, 1999.  Per the Summary  Order,  the  overrecovered  balance as of that date,
expected to be  approximately  $100 million  ($60  million net of tax),  will be
applied  as a credit  to the  starting  deferred  balance  of the NTC to  offset
stranded costs otherwise recoverable from ratepayers.

                                                March 31,          December 31,
                                              ----------------------------------
                                                  1999                1998
                                              --------------      --------------
Under(over)recovered Gas Costs                    $(14)               $35
Overrecovered Electric Energy Costs                (80)               (39)



Note 4.  Commitments and Contingent Liabilities

Nuclear Operating Performance Standard (OPS)

     PECO Energy  Company (PECO  Energy),  Delmarva Power & Light Company (DP&L)
and PSE&G,  three of the co-owners of the Salem Nuclear Generating Station Units
1 and 2 (Salem) and the Peach Bottom  Atomic Power  Station Units 2 and 3 (Peach
Bottom),  have agreed to an OPS through  December 31, 2011 for Salem and through
December  31, 2007 for Peach  Bottom.  Under the OPS,  the  station  operator is
required to make payments to the non-operating  owners (excluding  Atlantic City
Electric  Company)  commencing  in  January  2001 if the  three-year  historical
average net maximum dependable  capacity factor for that station,  calculated as
of December 31 of each year commencing with December 31, 2000,  falls below 40%.
Any such  payment is limited to a maximum of $25 million  per year.  The parties
have further agreed to forego litigation in the future, except for limited cases
in which  the  operator  would be  responsible  for  damages  of no more than $5
million per year.

Year 2000

     Many of PSEG's and PSE&G's systems,  which include  information  technology
applications, plant control and telecommunications  infrastructure systems, must
be modified due to computer  program  limitations  in  recognizing  dates beyond
1999.  Management  estimates the total cost related to Year 2000  readiness will
approximate  $83 million,  to be incurred  from 1997 through  2001,  of which $8
million was incurred in 1997, $27 million was incurred in 1998 and approximately
$36 million is expected to be incurred in 1999.  $5 million was  incurred in the
quarter  ended  March 31,  1999.  A portion  of these  costs is not likely to be
incremental to PSEG or PSE&G, but rather,  represents a redeployment of existing
personnel/resources.

     The  schedule  to replace  certain  systems was  accelerated  for Year 2000
purposes.  Analysis of these systems is continuing and costs  identified to date
are  approximately  $5 million,  which are not included in the estimates  above.
Additionally,  PSE&G is continuing its  installation  of programs (SAP) from SAP
America,  Inc. to replace certain major business systems. SAP America,  Inc. has
represented that SAP is Year 2000 compliant,  and thus, installation of SAP will
eliminate the need to modify those  business  systems for Year 2000  compliance.
The phased  implementation of SAP is scheduled to be completed before January 1,
2000. The cost of  implementing  SAP is not included in the above cost estimates
since SAP implementation has not been accelerated for Year 2000 purposes.

     If PSEG,  PSE&G,  their  domestic  and  international  subsidiaries,  other
members of the PJM Interconnection, L.L.C. (PJM), PJM trading partners supplying
power through PJM, PSEG's or PSE&G's  critical  vendors and/or  customers or the
capital markets are unable to meet the Year 2000 deadline,  such inability could
have a material  adverse  impact on PSEG's  and  PSE&G's  operations,  financial
condition, results of operations and net cash flows.

Construction and Fuel Supplies

     PSE&G  has  substantial  commitments  as part of its  ongoing  construction
program,   which  include  capital   requirements  for  nuclear  fuel.   PSE&G's
construction  program is  continuously  reviewed and  periodically  revised as a
result of changes in economic  conditions,  revised  load  forecasts,  scheduled
retirement dates of existing facilities, business strategies, site changes, cost
escalations under construction contracts, requirements of regulatory authorities
and laws,  the timing of and amount of  electric  and gas rate  changes  and the
ability of PSE&G to raise  necessary  capital.  The outcome of the Energy Master
Plan  Proceedings  and the use of  alternative  sources of generation may impact
PSE&G's construction program.

    PSE&G's  construction  expenditures are expected to aggregate  approximately
$2.8 billion  during the years 1999 through 2003.  The estimate of  construction
requirements  is  based  on  expected  project  completion  dates  and  includes
anticipated escalation due to inflation of approximately 3% annually. Therefore,
construction delays or higher inflation levels could cause significant increases
in these amounts. The Summary Order has directed that PSE&G's generation-related
assets be separated from its transmission and distribution assets. The breakdown
of anticipated construction  expenditures between these businesses has yet to be
determined.  For  discussion  of the Energy  Master Plan  Proceedings  and their
potential impacts, see Note 2. Regulatory Issues.

    PSE&G does not presently anticipate any difficulties in obtaining sufficient
fuel for electric  generation  or adequate  gas  supplies  during the years 1999
through 2003.

Site Restorations and Other Environmental Costs

    It is  difficult to estimate the future  financial  impact of  environmental
laws,  including  potential  liabilities.  PSEG and PSE&G  accrue  environmental
liabilities  when it is probable  that a  liability  has been  incurred  and the
amount  of the  liability  is  reasonably  estimable.  Depending  on  the  site,
provisions  for  estimated  losses  from  environmental  remediation  are  based
primarily on internal and third-party environmental studies, estimates as to the
number and participation level of any other Potentially Responsible Parties, the
extent of the  contamination and the nature of required remedial and restoration
actions.

Hazardous Waste

    Certain Federal and state laws authorize the U.S.  Environmental  Protection
Agency (EPA) and the New Jersey Department of Environmental  Protection (NJDEP),
among other agencies,  to issue orders and bring  enforcement  actions to compel
responsible parties to investigate and take remedial actions at any site that is
determined  to  present  an actual or  potential  threat to human  health or the
environment  because of an actual or threatened release of one or more hazardous
substances.  Because of the nature of PSE&G's business, including the production
of electricity,  the distribution of gas and, formerly,  the manufacture of gas,
various by-products and substances are or were produced or handled which contain
constituents classified as hazardous.  PSE&G generally provides for the disposal
or processing  of such  substances  through  licensed  independent  contractors.
However,  these  statutory  provisions  impose joint and several  responsibility
without regard to fault on all responsible parties,  including the generators of
the hazardous  substances,  for certain  investigative  and remediation costs at
sites where these  substances  were  disposed  of or  processed.  PSE&G has been
notified  with  respect  to a number  of such  sites and the  investigation  and
remediation of these potentially hazardous sites is receiving attention from the
government agencies involved.  Generally,  actions directed at funding such site
investigations  and  remediation  include  all  suspected  or known  responsible
parties. Based on current information, except as discussed below with respect to
its manufactured gas plant Remediation Program, PSEG and PSE&G do not expect its
expenditures  for any such site,  individually  or all such current sites in the
aggregate,  to  have a  material  effect  on  financial  condition,  results  of
operations and net cash flows.

    The NJDEP has recently revised regulations concerning site investigation and
remediation.   These  regulations  will  require  an  ecological  evaluation  of
potential   injuries  to  natural   resources  in  connection  with  a  remedial
investigation  of contaminated  sites.  The NJDEP is presently  working with the
utility industry to develop procedures for implementing these regulations. These
regulations may substantially increase the costs of remedial  investigations and
remediations,  where  necessary,  particularly at sites situate on surface water
bodies. PSE&G and predecessor companies owned and/or operated certain facilities
situate on surface water  bodies,  certain of which are currently the subject of
remedial activities. The financial impact of these regulations on these projects
is not currently  estimable.  PSE&G does not anticipate that the compliance with
these regulations will have a material adverse effect on its financial position,
results of operations or net cash flows.

PSE&G Manufactured Gas Plant Remediation Program

     In 1988,  NJDEP  notified  PSE&G that it had identified the need for PSE&G,
pursuant  to  a  formal  arrangement,  to  systematically  investigate  and,  if
necessary,  resolve environmental concerns extant at PSE&G's former manufactured
gas plant sites. To date, NJDEP and PSE&G have identified 38 former manufactured
gas plant  sites.  PSE&G is  currently  working  with  NJDEP  under a program to
assess, investigate and, if necessary, remediate environmental concerns at these
sites.  The Remediation  Program is  periodically  reviewed and revised by PSE&G
based on regulatory  requirements,  experience with the Remediation  Program and
available remediation  technologies.  The cost of the Remediation Program cannot
be  reasonably  estimated,  but  experience  to date  indicates  that  costs  of
approximately  $20 million per year could be incurred  over a period of about 30
years  and that the  overall  cost  could be  material  to  PSEG's  and  PSE&G's
financial  condition,  results  of  operations  and net cash  flows.  The Energy
Competition Act provides for the continuation of RAC programs. The Summary Order
provides for the recovery of costs for RAC is to be through the SBC.

Air Pollution Control

     In June 1998,  NJDEP  adopted  regulations  implementing  a  memorandum  of
understanding  among  11  Northeastern  states  and the  District  of  Columbia,
establishing a regional plan for reducing  nitrogen  oxide (NOx)  emissions from
utility  and large  industrial  boilers.  The  extent of  investment  in control
technologies, operational changes and purchases of allowances required to comply
with these  regulations  will be  directly  related to the number of  allowances
PSE&G receives.  PSE&G received a preliminary  allocation of allowances in March
1999,  indicating  sufficient  allowances  through the summer of 1999. The final
allocation  will be  determined  in  accordance  with the NJDEP  regulations  in
November 1999 which is subsequent to the May 1 through September 30, 1999 period
governed by the  regulations.  PSE&G has  attempted to minimize the  uncertainty
associated  with the timing of the final  allocation by  purchasing  allowances,
upgrading  control  technologies and estimating the expected  allocation with as
much precision as is practicable using available data.  PSE&G's present analysis
leads it to believe  that the  potential  costs for  purchasing  additional  NOx
budget  allowances should not exceed a total of $10 million through December 31,
2002. Expenditures associated with installing control technology could result in
an additional $72 million.  However,  PSE&G is currently analyzing  alternatives
which could preclude the necessity of capital improvements.

Passaic River Site

     The EPA has  determined  that a six mile  stretch of the  Passaic  River in
Newark,  New Jersey is a "facility" within the meaning of that term under CERCLA
and that, to date, at least thirteen  corporations may be potentially liable for
performing   required  remedial  actions  to  address  potential   environmental
pollution at the facility.  The EPA anticipates  identifying  other  potentially
responsible  parties (PRP). One PRP  (Cooperating  Party) entered into a consent
decree with the EPA in 1994  obligating  it to conduct a remedial  investigation
and  feasibility  study of available and applicable  corrective  actions for the
site. The Cooperating Party has reported that it has incurred  approximately $35
million to date in  connection  with the  implementation  of  required  remedial
actions  for the site.  Future  costs for  prospective  remedial  actions may be
material to PSE&G.

     In a  separate  matter,  PSE&G and  certain  of its  predecessors  operated
industrial  facilities  at  properties  along the stretch of the  Passaic  River
designated  as the  site.  In April  1996,  the EPA  directed  PSE&G to  provide
information concerning the nature and quantity of raw materials, by-products and
wastes which may have been generated,  treated, stored or disposed at certain of
these facilities. The facilities are PSE&G's former Harrison Gas Plant and Essex
Generating  Station.  PSE&G  submitted  responses  to the EPA requests for these
sites in August 1996. In July 1997,  the EPA named PSE&G as a PRP for this site.
PSE&G cannot  predict  what action,  if any, the EPA or any third party may take
against PSE&G with respect to this site, or in such event,  what costs PSE&G may
incur to address any such claims. However, such costs may be material.

Note 5.  Financial Instruments and Risk Management

     PSEG's  operations  give rise to exposure to market  risks from  changes in
commodity prices, interest rates, foreign currency exchange rates and securities
prices. PSEG's policy is to use derivative financial instruments for the purpose
of managing market risk consistent with its business plans and prudent  business
practices.

Commodity Instruments--PSE&G

     At March 31, 1999 and December 31, 1998,  PSE&G held or issued  instruments
that  reduce  exposure  to market  fluctuations  from  factors  such as weather,
environmental policies,  changes in demand, changes in supply, state and Federal
regulatory  policies and other events.  These  instruments,  in conjunction with
owned  electric  generating  capacity  and physical  gas supply  contracts,  are
designed  to  cover  estimated  electric  and gas  customer  commitments.  PSE&G
currently has levelized energy adjustment  clauses,  LEAC and LGAC, in place for
both  electricity and natural gas pursuant to BPU orders.  For discussion of the
LEAC and the LGAC and their current and proposed  status under the Energy Master
Plan  Proceedings,  see Note 2. Regulatory  Issues and Note 3. Regulatory Assets
and Liabilities.  These clauses were established to minimize the impact of major
commodity  price  swings  on  energy  cost to  customers.  PSE&G  uses  futures,
forwards,  swaps and  options  to manage and hedge  price risk  related to these
market exposures.

     At March 31, 1999, PSE&G had outstanding  commodity  financial  instruments
with a  notional  contract  quantity  of 0.7  million  megawatt-hours  (MWH)  of
electricity  and 67.9 million MMBTU (million  British  thermal units) of natural
gas. At December 31, 1998, PSE&G had outstanding commodity financial instruments
with a notional  contract  quantity of 1.6 million MWH of  electricity  and 65.2
million MMBTU of natural gas. Notional amounts are indicative only of the volume
of activity and are not a measure of market risk.

     As  discussed  in Note 1.  Basis  of  Presentation/Summary  of  Significant
Accounting Policies,  PSE&G implemented EITF 98-10 effective January 1, 1999. As
a result,  PSE&G's energy trading  contracts were marked to market and gains and
losses from such  contracts were included in earnings.  In 1998 and prior,  such
gains and losses were recorded upon settlement of the contracts.  PSE&G recorded
$11  million  and $5 million of gains in the  quarters  ended March 31, 1999 and
1998, respectively.

Natural Gas Hedging--PSEG Energy Holdings Inc. (Energy Holdings)

     As of March 31, 1999 and December 31, 1998, PSEG Energy  Technologies  Inc.
(Energy  Technologies),  a  wholly-owned  subsidiary  of  Energy  Holdings,  had
outstanding  futures contracts to buy natural gas related to fixed-price natural
gas sales  commitments.  Such contracts hedged  approximately 91% and 90% of its
fixed  price  sales  commitments  at March  31,  1999  and  December  31,  1998,
respectively.  As of March 31, 1999 and December 31, 1998,  Energy  Technologies
had a net  unrealized  hedge loss of  approximately  $1 million  and $5 million,
respectively.

Foreign Currencies--Energy Holdings

     PSEG Global Inc.  (Global),  a wholly-owned  subsidiary of Energy Holdings,
had consolidated non-recourse debt of $119 million as of March 31, 1999 which is
denominated  in the  Brazilian  Real that is indexed  to a basket of  currencies
including U.S. dollars.  As a result, it is subject to foreign currency exchange
rate risk due to the effect of  exchange  rate  movements  between  the  indexed
foreign currencies and the Brazilian Real and between the Brazilian Real and the
U.S. Dollar.  Exchange rate changes ultimately impact the debt level outstanding
in the  denominated  currency  and result in foreign  currency  transactions  in
accordance  with current  accounting  guidance.  Any related  transaction  gains
(losses)  resulting  from such exchange rate changes are included in determining
net  income  for the period  and  amounted  to a $4 million  gain in each of the
quarters ended March 31, 1999 and 1998.

     In January  1999,  Brazil  abandoned its managed  devaluation  strategy and
allowed its currency,  the Real, to float against other currencies.  As of March
31, 1999, the Real has devalued  approximately 30% against the U.S. dollar since
December 31, 1998  resulting in a charge of $164 million to  cumulative  foreign
currency translation  adjustment (a separate component of stockholders' equity).
Net foreign currency devaluations,  caused primarily by the Brazilian Real, have
reduced  Global's  total  assets by $168  million  as of March 31,  1999 with an
offsetting charge to cumulative foreign currency  translation  adjustment.  PSEG
cannot  predict to what extent,  if any,  further  devaluation  may occur,  and,
therefore,  cannot predict the impact of potential  devaluation of currencies on
PSEG's results of operations,  financial condition and net cash flows.  However,
assuming no further significant devaluation, PSEG does not expect this to have a
material adverse effect on its 1999 results of operations,  financial  condition
or net cash flows. For additional information, see Note 7. Financial Information
by Business Segments of Notes.

     As PSEG increases its international  investments,  the financial statements
of PSEG will be increasingly affected by changes in the global economy.

Nuclear Decommissioning Trust Funds

     Contributions made to the Nuclear  Decommissioning Trust Funds are invested
in debt and equity securities. The carrying value of these funds of $539 million
and $524  million  approximates  the fair market  value as of March 31, 1999 and
December 31, 1998, respectively.

Equity Securities--Energy Holdings

     PSEG  Resources  Inc.  (Resources),  a  wholly-owned  subsidiary  of Energy
Holdings,  has  investments  in equity  securities  and  partnerships,  in which
Resources is a limited  partner,  which invest in equity  securities.  Resources
carries its investments in equity  securities at their approximate fair value as
of the reporting date. Consequently,  the carrying value of these investments is
affected  by changes in the market  prices of the  underlying  securities.  Fair
value  is  determined  by  adjusting  the  market  value of the  securities  for
liquidation and market  volatility  factors,  where  appropriate.  The aggregate
amount of such investments  which have available market prices at March 31, 1999
and  December  31, 1998 was $223  million and $204  million,  respectively.  The
portfolio has exposure to market price risk. As such, a sensitivity analysis has
been  prepared to estimate  Energy  Holdings'  exposure to market  volatility of
these  investments.  The  potential  change  in  fair  value  resulting  from  a
hypothetical 10% change in quoted market prices of these investments amounted to
$18 million at March 31, 1999 and $17 million at December 31, 1998.

Note 6.  Income Taxes

     PSEG's effective income tax rate is as follows:

                                                         Quarter Ended
                                                           March 31,
                                                     -----------------------
                                                       1999         1998
                                                     ----------    ---------

Federal tax provision at statutory rate                 35.0%        35.0%
New Jersey Corporate Business Tax, net of Federal        5.9%         5.9%
benefit
Other-- net                                              2.1%         0.2%
                                                     ----------    ---------
     Effective Income Tax Rate                          43.0%        41.1%
                                                     ==========    =========



<PAGE>

Note 7.  Financial Information by Business Segments

     The reportable segments disclosed herein were determined based on a variety
of factors  including the regulatory  environment  and the types of products and
services  offered.  With the transition  into a deregulated  environment,  it is
likely that this basis of segment reporting will change.

     Information related to the segments of PSEG's business is detailed below:

<TABLE>
<CAPTION>

                                                                                        Other
                                                                                     Non-utility   Consolidated
(Millions of Dollars)                           Electric      Gas       Resources  Activities (A)     Total
                                                -----------------------------------------------------------------
<S>                                                  <C>        <C>          <C>            <C>          <C>   
For the Quarter Ended March 31, 1999:
    Total Operating Revenues..................       $966       $700         $46            $83          $1,795
    Segment Net Income (Loss).................       $105        $67         $19           $(3)            $188
                                                =========== ========== ===========   ============      ==========

For the Quarter Ended March 31, 1998:
    Total Operating Revenues..................       $902       $612         $70            $75          $1,659
    Segment Net Income (Loss).................       $109        $48         $36           $(2)            $191
                                                =========== ========== ===========   ============      ==========


As of March 31, 1999:
    Total Assets..............................    $11,997     $2,440      $1,833         $1,380         $17,650

As of December 31, 1998:
    Total Assets..............................    $12,200     $2,469      $1,809         $1,519         $17,997

<FN>
(A)    Other  Non-utility  Activities  include  amounts  applicable to PSEG, the
       parent corporation, and Energy Holdings, excluding Resources.
</FN>
</TABLE>

Geographic  information for PSEG is disclosed below. PSE&G does not have foreign
investments or operations.

<TABLE>
<CAPTION>

                                              Revenues (1)                          Identifiable Assets
                                          Quarter ended March 31,                   March 31, December 31,
                                      -------------------------------        ---------------------------------
                                          1999              1998                   1999              1998
                                      -------------    --------------        --------------     --------------
<S>                                        <C>              <C>                   <C>               <C>    
United States                              $1,768           $1,635                $16,169           $16,387
Foreign Countries (2)                          27               24                  1,481             1,610
                                        ---------        ---------             ----------           -------
              Total                        $1,795           $1,659                $17,650           $17,997
                                        =========        =========             ==========           =======

Identifiable investments in Foreign Countries include amounts from:
      Argentina                                                                      $309              $307
      Brazil (3)                                                                     $338              $482
      Netherlands                                                                    $404              $400
---------------------------------------------------------------------------------------------------------------

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

     (2)  Total assets are net of foreign  currency  translation  adjustment  of
          $(168)  million as of March 31, 1999 and $(43)  million as of December
          31, 1998.

     (3)  Amount is net of foreign  currency  translation  adjustment  of $(164)
          million  as of March 31,  1999 and $(39)  million as of  December  31,
          1998.
</FN>
</TABLE>
<PAGE>
Note 8.  Accounting Matters

     In June  1998,  the  FASB  issued  SFAS  133,  "Accounting  for  Derivative
Instruments and Hedging Activities" (SFAS 133), which is effective for financial
statements  for all fiscal  quarters of fiscal  years  beginning  after June 15,
1999.  SFAS 133  establishes  accounting and reporting  standards for derivative
instruments  and hedging  activities.  It requires  an entity to  recognize  all
derivatives, within the scope of this statement, as assets or liabilities on the
balance  sheet at fair  value.  Also,  derivatives  that are not hedges  must be
adjusted to fair value through  income.  If a derivative is a hedge,  changes in
the fair value of the  derivative  will  either be offset  against the change in
fair value of the hedged asset, liability or firm commitment through earnings or
be recognized in other comprehensive  income until the hedged item is recognized
in earnings,  depending on the nature of the hedge. The ineffective portion of a
hedge will be immediately  recognized in earnings.  PSEG and PSE&G are currently
evaluating the impact of SFAS 133 and developing an implementation plan.

Note 9.  Comprehensive Income

<TABLE>
<CAPTION>
Comprehensive Income, Net of Tax:

                                                                  Three Months Ended
                                                                      March 31,
                                                             -----------------------------
                                                                1999             1998
                                                             -----------      ------------
                                                                  (Millions of Dollars)
<S>                                                                <C>               <C> 
     Net income..........................................          $188              $191
     Foreign currency translation, net of tax of $(14) and                               
     $(1) for 1999 and 1998, respectively ...............         (125)               (6)
                                                             -----------      ------------
     Comprehensive income................................           $63              $185
                                                             ===========      ============

</TABLE>


<PAGE>
             ======================================================
                  PUBLIC SERVICE ELECTRIC AND GAS COMPANY
             ======================================================

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       

     The Notes to Consolidated  Financial Statements of PSEG are incorporated by
reference insofar as they relate to PSE&G and its subsidiaries:

       Note 1.  Basis of Presentation/Summary of Significant Accounting Policies
       Note 2.  Regulatory Issues
       Note 3.  Regulatory Assets and Liabilities
       Note 4.  Commitments and Contingent Liabilities
       Note 5.  Financial Instruments and Risk Management
       Note 7.  Financial Information by Business Segments
       Note 8.  Accounting Matters

Note 6.  Income Taxes

     PSE&G's effective income tax rate is as follows:
<TABLE>
<CAPTION>


                                                                        Quarter Ended
                                                                          March 31,
                                                                    -----------------------
                                                                     1999          1998
                                                                    ---------     ---------
<S>                                                                   <C>           <C>  
Federal tax provision at statutory rate.........................      35.0%         35.0%
New Jersey Corporate Business Tax, net of Federal benefit.......       5.9%          5.9%
Other-- net.....................................................       2.9%          1.8%
                                                                    ---------     ---------
     Effective Income Tax Rate...................................     43.8%         42.7%
                                                                    =========     =========
</TABLE>

Note 9.  Comprehensive Income

     Effective January 1, 1998, PSE&G adopted SFAS 130, "Reporting Comprehensive
Income,"  which  requires  companies  to report all  changes in equity  during a
period, except those resulting from investment by and distribution to owners, in
a financial  statement for the period in which the changes are  recognized.  For
the quarters ended March 31, 1999 and 1998, PSE&G's comprehensive income equaled
the consolidated net income of PSE&G.


<PAGE>
             ======================================================
                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             ======================================================
       
                 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS


     Following  are the  significant  changes  in or  additions  to  information
reported in the Public Service Enterprise Group Incorporated  (PSEG) 1998 Annual
Report on Form 10-K  affecting  the  consolidated  financial  condition  and the
results of operations of PSEG and its  subsidiaries.  This discussion  refers to
the  Consolidated  Financial  Statements   (Statements)  and  related  Notes  to
Consolidated  Financial  Statements  (Notes)  of  PSEG  and  should  be  read in
conjunction with such Statements and Notes.

Overview and Future Outlook

     On  February  9,  1999,  the  New  Jersey  Electric   Discount  and  Energy
Competition Act (Energy  Competition Act) was enacted.  It provides that all New
Jersey retail electric  customers may select their electric supplier  commencing
August 1, 1999 and all New Jersey  retail  gas  customers  may select  their gas
supplier  commencing December 31, 1999, thus fully opening the New Jersey energy
markets to competition.

     The New Jersey Board of Public Utilities (BPU) has been conducting  related
proceedings  pursuant to the New Jersey Energy Master Plan (Energy Master Plan).
On April 21, 1999 the BPU issued a Summary Order  (Summary  Order) which adopted
PSE&G's previously filed proposed  stipulation (PSE&G  Stipulation) with certain
modifications and clarifications (see Note 2. Regulatory Issues of Notes).

     In its Summary Order, the BPU indicated that it would issue a more detailed
Decision  and Order  (Decision  and Order) in these  matters in the near future.
Once such order is provided,  PSE&G will discontinue application of Statement of
Financial Accounting Standards (SFAS) 71, "Accounting for the Effects of Certain
Types of  Regulation"  (SFAS 71),  for the  electric  generation  portion of its
business  and will  record  the  appropriate  accounting  entries  at that time.
Pending  the  BPU's  final  written  order,  PSE&G  anticipates  that it will be
required to record a net  extraordinary  charge to earnings in the range of $500
million  to  $700  million,  in the  second  quarter  of  1999  to  reflect  its
unrecoverable  costs. It is also  anticipated that the BPU will issue additional
rulings on generic issues for the industry (e.g.,  affiliate  standards) as well
as  matters   specific  to  PSE&G   (e.g.,   a  financing   order  to  implement
securitization).  For further  discussion of the  aforementioned BPU activities,
the Energy  Competition  Act and the  Summary  Order  (the  Energy  Master  Plan
Proceedings) as well as the gas unbundling  proceedings,  see Note 2. Regulatory
Issues of Notes.

     These decisions will fundamentally change the energy industry in New Jersey
and will  result in  competitive  markets  for  electric  and gas supply and for
customer services while the transmission and distribution businesses will remain
regulated.  As  set  forth  in  the  Summary  Order,  PSE&G  will  transfer  its
generation-related  assets to a separate  generation company (i.e., Genco) which
will be owned by PSEG. In addition to the approval  received from the BPU, Genco
will need  approvals  from a number of other  regulators,  including the Federal
Energy  Regulatory  Commission  (FERC) (to be recognized as an exempt  wholesale
generator  (EWG)) and the Nuclear  Regulatory  Commission (NRC) (to transfer its
licenses)  and will have to resolve a number of other  issues  related to taxes,
environmental  restrictions  and PSE&G's  Mortgage  Indenture (see Liquidity and
Capital Resources and Note 2. Regulatory Issues of Notes). PSEG and PSE&G cannot
determine  the  applicability  and  impact  of  other  regulatory  and/or  legal
requirements,  which may also be triggered by the implementation of the Decision
and Order.

     As set forth in the Summary Order, Genco will provide PSE&G with the energy
required  to meet its basic  generation  service  (BGS)  obligation.  Genco will
provide BGS at the  contracted  rate for the first three years of the transition
period.  BGS  will be  competitively  bid  for  the  fourth  year  and  annually
thereafter. To the extent Genco produces less energy than required under the BGS
contract  with  PSE&G,  Genco's  earnings  will be  exposed  to the risks of the
competitive market for the difference between the market rate for energy and the
BGS contract rate (see PJM Interconnection, L.L.C. (PJM)).

     PSEG has been engaged in the  competitive  energy  business for a number of
years through  certain of its  non-utility  subsidiaries.  Due to the regulatory
changes outlined above, in the future,  competitive businesses will constitute a
larger portion of PSEG's activities.  As the unregulated portion of the business
continues  to grow,  potential  financial  risks and  rewards  will be  greater,
financial  requirements  will  change,  and  the  volatility  of  earnings  will
increase.  The pending regulatory decisions and the business experience PSEG has
acquired  in  operating   non-regulated  energy  business  will  be  significant
components in determining future success.

     PSEG and PSE&G  believe  that the final  outcome of the Energy  Master Plan
Proceedings  will involve a fundamental  change in the way their  businesses are
conducted.  These changes may impact financial operating trends and could result
in  earnings  volatility,  write down of asset  values,  reduction  in  dividend
payments and adverse impacts on revenues due to the mandated  electric rate cut,
electric and gas retail choice and fuel and energy price risks.  However,  based
on its analysis of the Summary Order,  PSEG believes that its dividend  payments
can be  maintained  at their  current  level.  Additionally,  PSE&G is  actively
seeking regulatory and operational  changes that will allow it to provide energy
services in a safe and reliable  manner at  competitive  prices while  achieving
strong financial performance.

     Many  forces are  reshaping  how the utility  industry  meets the needs and
expectations of its customers and shareholders.  Profound changes in the way the
industry is regulated are affecting how PSEG conducts business and its financial
prospects in the future.  Competitive  changes in the utility industry continued
to occur in 1998 and will continue to occur in 1999.

     Going  forward,  PSEG will  continue to pursue its  strategies  to grow its
family of businesses.  As previously  reported,  more emphasis will be placed on
finding  opportunities for expansion outside of its traditional utility services
and markets.  PSEG's  unregulated  generation  business  strategy is to size its
fleet to take advantage of market  opportunities,  while seeking to increase its
value and manage  commodity price risk through its wholesale  trading  activity.
PSEG  will  also  consider   opportunities   for  expansion   through   business
combinations.  PSE&G's  transmission  and  distribution  strategy,  both gas and
electric, is to provide cost-effective, high quality service. PSEG Global Inc.'s
(Global)  strategy is to invest in both generation and  distribution  facilities
worldwide  with the goal of creating  long-term  value.  PSEG  Resources  Inc.'s
(Resources)  strategy is to  continue  focusing  on passive  investments  in the
energy sector  worldwide  seeking to provide  earnings and economic value.  PSEG
Energy Technologies Inc.'s (Energy Technologies)  strategy is to expand upon the
current  energy  related  services  it  provides to  industrial  and  commercial
customers to create  long-term  value and to  participate  in the retail  energy
marketplace.

     To the  extent  that  the  discussion  that  follows  reports  on  business
conducted  under full monopoly  regulation of the utility  business,  it must be
understood  that such  business will change during 1999 and beyond and that past
results are not  necessarily  an  indication  of future  business  prospects  or
financial results.

Results of Operations

     Basic and diluted  earnings per share of PSEG common stock  (Common  Stock)
were $0.85 for the quarter  ended March 31,  1999,  representing  an increase of
$0.03 or 4% per share from the comparable 1998 period.

     PSE&G's  contribution to earnings per share of Common Stock for the quarter
ended  March 31, 1999  increased  $0.06 from the  comparable  1998  period.  The
increase  for the quarter  ended March 31, 1999 was  primarily  due to increased
sales of gas and electricity  resulting from considerably  colder weather in the
first quarter of 1999 augmented by positive  economic  factors in New Jersey and
profits  realized from wholesale energy  activities.  The increase was partially
offset by higher operating expenses, including higher transmission, distribution
and wholesale energy costs than those incurred in the first quarter of 1998.

     PSEG Energy Holdings Inc.'s (Energy Holdings)  contribution to earnings per
share of Common Stock for the quarter ended March 31, 1999 decreased  $0.07 from
the  comparable  1998  period,  primarily  due to lower  income from  Resources'
financial investment portfolio in the first quarter of 1999.

     As a result of PSEG's  stock  repurchase  program  which began in September
1998,  earnings per share of Common  Stock for the quarter  ended March 31, 1999
increased $0.04 from the comparable 1998 period.  A total of 11.3 million shares
were  repurchased  at a cost of $442 million  under this program as of March 31,
1999.

PSE&G -- Revenues

     Certain of the below listed year to year variances did not impact  earnings
as there was an offsetting  variance in expense.  To the extent fuel revenue and
expense flowed through the Electric  Levelized Energy  Adjustment  Clause (LEAC)
and the Levelized Gas  Adjustment  Clause (LGAC)  mechanisms,  variances in fuel
revenues and expenses  offset and thus have no direct effect on earnings.  These
include base fuel revenues, demand side management (DSM) revenue and Remediation
Adjustment Charge (RAC) revenue.  In 1999, the LEAC mechanism will be eliminated
as a result of the Energy Master Plan  Proceedings.  This may increase  earnings
volatility since PSEG will bear the full risks and rewards of changes in nuclear
and  fossil  generating  fuel costs and  replacement  power  costs.  See Note 2.
Regulatory  Issues and Note 3. Regulatory  Assets and Liabilities of Notes for a
discussion  of LEAC,  LGAC,  RAC and DSM and their  current and proposed  status
under the Energy Master Plan Proceedings.

     Electric

     Revenues  increased  $64 million or 7% for the quarter ended March 31, 1999
from the comparable  period in 1998 primarily due to higher sales resulting from
colder  weather in the first  quarter of 1999  augmented  by  positive  economic
factors  in New  Jersey  as well  as  profits  realized  from  wholesale  energy
activities.  Additionally,  DSM revenues  were higher in the quarter ended March
31, 1999 than in the comparable 1998 period.

     Gas

     Revenues  increased $88 million or 14% for the quarter ended March 31, 1999
from the  comparable  period in 1998.  The increase was  primarily due to colder
weather in the first quarter of 1999. Additionally,  DSM revenues were higher in
the quarter ended March 31, 1999 than in the comparable 1998 period.

PSE&G -- Expenses

     Net Interchanged Power and Fuel for Electric Generation

     Net  Interchanged  Power  and Fuel for  Electric  Generation  increased  $5
million or 2% for the  quarter  ended March 31,  1999 from the  comparable  1998
period  primarily due to increased  sales of electricity  resulting in increased
purchases of fuel for electric  generation  and  purchases of power from the PJM
Interconnection, L.L.C. (PJM) pool.

     As previously reported,  during the summer of 1998, the eastern electricity
commodity markets  experienced  severe  volatility  resulting from extremely hot
weather and electric capacity and energy shortages in the Midwest.  PSE&G cannot
predict  whether  similar events  leading to extreme price  movements will occur
again.  Given  the  impending  elimination  of  the  LEAC,  the  lifting  of the
requirements  that  electric  energy  offered  for  sale in PJM not  exceed  the
variable cost of producing such energy and that such transactions are now capped
at $1,000 per megawatt hour (see Competitive Environment),  the absence of a PJM
price cap in  situations  involving  emergency  purchases  and the potential for
plant outages,  extreme price  movements could occur which could have a material
impact on PSEG's financial condition,  results of operations and net cash flows.
For a discussion  of market  risks,  see Item 3.  Qualitative  and  Quantitative
Disclosures About Market Risk.


<PAGE>


     Gas Purchased

     Gas  Purchased  increased $33 million or 8% for the quarter ended March 31,
1999 from the  comparable  1998 period  primarily due to increased  sales of gas
resulting from colder weather in the first quarter of 1999.

     Operation and Maintenance

     Operation  and  Maintenance  expense  increased  $71 million or 22% for the
quarter ended March 31, 1999 from the comparable  1998 period.  The increase was
primarily due to higher costs related to wholesale  power  activities and higher
transmission  and  distribution  costs,  including  higher  material and outside
services in 1999 and increased PJM restructuring expenses. Additionally,  higher
Other Post  Employment  Benefits (OPEB) costs were incurred in the quarter ended
March 31, 1999 than in the  comparable  1998 period.  Also, in the quarter ended
March 31, 1999, there was higher DSM recovery resulting in a greater recognition
of previously deferred expenses.  These increases were partially offset by lower
nuclear  operation and maintenance costs in 1999 due to restart expenses in 1998
for Salem.

     With an increasingly  competitive energy market as an outcome of the Energy
Master Plan Proceedings and energy industry  restructuring,  the composition and
level of Operation and Maintenance expense is likely to change.

     Income Taxes

     Income Taxes  increased  $18 million or 16% for the quarter ended March 31,
1999 from the comparable  1998 period.  This increase is primarily due to higher
pre-tax operating income.

Year 2000 Expenses -- PSEG and PSE&G

     For a  discussion  of Year  2000  expenses,  see  Note 4.  Commitments  and
Contingent Liabilities of Notes and Year 2000 Readiness Disclosure, below.

Energy Holdings -- Earnings/(Losses)

                                                            Increase (Decrease)
                                                          ----------------------
                                                                Quarter Ended
                                                                  March 31,
                                                                1999 vs. 1998
                                                          ----------------------
                                                           (Millions of Dollars)
     PSEG Resources Inc. (Resources)                               $  (18)
     PSEG Global Inc. (Global)                                         --
     PSEG Energy Technologies Inc. (Energy Technologies)                1
     Enterprise Group Development Corporation                          --
                                                               ------------
                                Total                              $  (17)
                                                               ============

     Energy Holdings had net earnings of $19 million for the quarter ended March
31, 1999  compared  to net  earnings of $36 million for the same period in 1998,
representing a decrease of $17 million. Energy Holdings' earnings were primarily
those of Resources.  The decrease in Energy Holdings' earnings was primarily due
to  Resources'  lower income in the quarter  ended March 31, 1999 as compared to
the  quarter  ended  March  31,  1998 due to less  income  from  investments  in
leveraged  buyout funds and limited  partnerships in 1999,  primarily due to the
sale of  securities  in the prior year,  and lower  realized  gains in the first
quarter of 1999  resulting  from the exercise of an early  buyout  option by the
lessee in a  leveraged  lease in the first  quarter of 1998.  The  decrease  was
partially  offset by income in the quarter  ended  March 31,  1999 from  several
leveraged leases entered into subsequent to March 31, 1998.

Liquidity and Capital Resources

     PSEG and PSE&G

     PSEG is an exempt  public  utility  holding  company  and, as such,  has no
operations of its own. The following  discussion of PSEG's liquidity and capital
resources  is on a  consolidated  basis,  noting the uses and  contributions  of
PSEG's two direct operating subsidiaries, PSE&G and Energy Holdings.

     PSEG and PSE&G believe that the  deregulation of the utility  industry will
impact the  sources and uses of cash in 1999 and  beyond.  Also,  as a result of
deregulation and the related corporate  structure  reorganizations,  the capital
structure of PSEG and PSE&G will likely  change.  The BPU, in its Summary Order,
stated  that the use of the net  proceeds of  securitization  shall be done in a
manner that will not substantially alter PSE&G's overall capital structure.

     It is anticipated that PSE&G will receive  securitization  proceeds of $2.4
billion (net of tax and  transaction  costs).  The right of PSE&G to receive the
bondable  transition  charge  pursuant  to  the  securitization  transaction  is
property  subject to the lien of PSE&G's  Mortgage  Indenture.  The  proceeds of
securitization  will be deposited  with the Mortgage  Trustee to comply with the
property  release  provisions of the Mortgage.  PSE&G can utilize one or more of
the following, at its option, with respect to these proceeds:

     o    Withdraw   funds  for  corporate   use  by  utilizing   additions  and
          improvements.  These funds could be used to purchase  Common Stock, or
          purchase,  tender or redeem outstanding  Mortgage Bonds under existing
          applicable optional redemption provisions.

     o    Direct  the  Trustee  to  invest  the  proceeds  in  U.S.   Government
          Securities.

     o    Direct the Trustee to  purchase  Mortgage  Bonds at the lowest  prices
          obtainable, not exceeding the lowest amount at which any such Mortgage
          Bond then  outstanding may then be by its terms  redeemable  (e.g., at
          par or  below).  If the  Trustee is unable so to  purchase  sufficient
          Mortgage Bonds to exhaust such proceeds deposited with it, the balance
          may be applied  towards the redemption of eligible  series of Mortgage
          Bonds pro rata at par.

     Unless PSE&G affirmatively chooses an option within two years of deposit of
the funds, the Trustee is required to undertake par redemptions. All outstanding
Mortgage Bonds, except for each of the series of Pollution Control Bonds and two
series of coupon  Bonds are eligible  for such  redemption  at their par special
redemption  price,  as provided in the Mortgage  Indenture  and each  respective
Supplemental Indenture.

     Generation  assets which have been directed by the BPU to be transferred to
a separate  unregulated  subsidiary  of PSEG are also subject to the lien of the
Mortgage  Indenture.  Proceeds of that sale will likewise be deposited  with the
Trustee.  PSE&G has the same options with regard to those  proceeds as discussed
above in connection with securitization.  Transfer of generation assets requires
PSE&G to obtain various additional Federal and State regulatory approvals.  

     PSE&G has not yet made a  decision  as to the extent to which it will elect
to redeem such eligible  Mortgage Bonds at par. Such decision will be based upon
the final Decision and Order,  financial  conditions at the time of the decision
and other  factors.  At March 31, 1999,  PSE&G had a total of $4.149  billion of
Mortgage  Bonds  outstanding,  of which $3.354  billion are eligible for special
redemption  at par.  $780 million of Pollution  Control Bonds and $15 million of
coupon Bonds are not eligible for this special redemption.

     Going forward,  cash generated from PSE&G's regulated  business is expected
to provide  the  majority  of the funds for PSE&G's  regulated  business  needs.
Genco's  capital  needs will be dictated by its strategy to size its  generation
fleet,   but will likely  require cash  generated  from  operations and external
financings.  Energy Holdings' growth will be funded through external  financings
and cash generated  from  operations.  Financing  activity at the parent company
level is  currently  limited to funding  PSEG's stock  repurchase  program on an
interim basis primarily from external  financings.  However,  PSEG  periodically
reassesses its financial needs and could make additional equity infusions in its
subsidiaries if investment opportunities are presented.

     As  previously  reported,   on  September  15,  1998,  in  anticipation  of
securitization  of PSE&G's  stranded costs afforded by the then proposed  Energy
Competition  Act, the Board of Directors of PSEG authorized the repurchase of up
to 10 million shares of Common Stock. Under the authorization,  repurchases were
made in the open market at the discretion of PSEG. The  repurchased  shares have
been held as treasury  stock.  On February 16,  1999,  the Board of Directors of
PSEG authorized the expansion of the repurchase program up to an aggregate of 20
million shares under  substantially the same terms and conditions as the program
which  began  in  September  1998.  At March  31,  1999,  PSEG  had  repurchased
approximately  11.3 million  shares of Common  Stock at a cost of $442  million,
under these  authorizations.  As of April 30, 1999, PSEG had repurchased a total
of  approximately  12.4 million shares at a cost of  approximately  $484 million
under this program.

     Dividend  payments  on Common  Stock  were  $0.54  per  share  and  totaled
approximately $120 million and $125 million for the three months ended March 31,
1999 and 1998, respectively. Amounts and dates of such dividends on Common Stock
as may be declared  in the future  will  necessarily  be  dependent  upon PSEG's
future earnings, cash flows, financial  requirements,  the outcome of the Energy
Master Plan Proceedings (see Note 2. Regulatory Issues of Notes), the receipt of
dividend payments from its subsidiaries and other factors. Since 1986, PSE&G has
made  regular  cash  payments to PSEG in the form of  dividends  on  outstanding
shares of PSE&G's  common stock.  PSEG has not  increased its dividend  rates in
seven years in order to retain additional capital for reinvestment and to reduce
its payout ratio.

     PSE&G paid common stock  dividends of $274 million and $125 million to PSEG
during the quarters ended March 31, 1999 and 1998,  respectively.  These amounts
were used to fund  PSEG's  Common  Stock  dividends,  and in 1999,  to support a
portion of its stock repurchase program.  Changes in PSE&G's financial condition
that could result from the Energy Master Plan Proceedings  could have a material
adverse  effect on PSEG's  ability to maintain  the  dividend at PSEG's  current
level.  However,  based on its analysis of the Summary Order, PSEG believes that
its dividend  payments can be maintained at their current level.  For discussion
of the Energy Master Plan  Proceedings,  see Note 2. Regulatory Issues of Notes.
Due to the growth in Energy  Holdings  investment  activities,  no  dividends on
Energy Holdings' common stock were paid in the quarters ended March 31, 1999 and
1998.

     PSEG and PSE&G, respectively,  have issued Deferrable Interest Subordinated
Debentures in connection  with the issuance of their  respective  tax deductible
preferred  securities.  If,  and for as long as,  payments  on those  Deferrable
Interest  Subordinated  Debentures  have  been  deferred,  or PSEG or PSE&G  has
defaulted on the applicable  indenture related thereto or its guarantee thereof,
neither PSEG nor PSE&G may pay any dividends on its common or preferred stock.

     As of March 31, 1999,  PSEG's capital  structure  consisted of 44.0% common
equity,  44.9%  long-term  debt and 11.1%  preferred  stock and other  preferred
securities.

     As a result  of the 1992  focused  audit of PSEG's  non-utility  businesses
(Focused  Audit),  the BPU approved a plan which,  among other things,  provides
that:  (1) PSEG will not permit  Energy  Holdings'  non-utility  investments  to
exceed 20% of PSEG's  consolidated  assets without prior notice to the BPU (such
investments  at March 31,  1999 were  approximately  18% of PSEG's  consolidated
assets);  (2) the PSE&G Board of Directors will provide an annual  certification
that the business and  financing  plans of Energy  Holdings  will not  adversely
affect  PSE&G;  (3) PSEG will (a) limit debt  supported by the minimum net worth
maintenance agreement between PSEG and PSEG Capital to $650 million and (b) make
a good-faith effort to eliminate such support over a six to ten year period from
April 1993; and (4) Energy  Holdings will pay PSE&G an affiliation  fee of up to
$2 million a year to be applied by PSE&G through its LGAC and its LEAC to reduce
utility  rates.  PSEG and  Energy  Holdings  and its  subsidiaries  continue  to
reimburse  PSE&G for the costs of all services  provided to them by employees of
PSE&G.

     As a result of the final outcome of the Energy Master Plan  Proceedings and
accounting  impacts  resulting  from  the  deregulation  of  the  generation  of
electricity  and  the  unbundling  of the  utility  business  referenced  above,
modifications will be required to certain of the restrictions  agreed to by PSEG
with the BPU in response to the Focused  Audit.  PSEG believes that these issues
will be  satisfactorily  resolved.  For  discussion  of the Energy  Master  Plan
Proceedings and potential impacts see Note 2. Regulatory Issues of Notes.

     Energy Holdings

     As noted above,  Global,  Resources and Energy Technologies are expected to
provide  long-term growth for Energy Holdings and PSEG.  Resources'  investments
are designed to produce immediate  earnings and cash flows,  which enable Global
and Energy  Technologies  to focus on longer-term  growth.  During the next five
years,  Energy Holdings'  capital  requirements are expected to be provided from
additional  debt  financing,  equity  from  PSEG and  operating  cash  flows.  A
significant portion of Global's growth is expected to occur  internationally due
to the current and anticipated  growth in electric  capacity required in certain
regions of the world.  Resources will continue its focus on investments  related
to energy  infrastructure.  Energy  Technologies  is expected to expand upon the
current  energy  related  services  being  provided to industrial and commercial
customers.

     For a  discussion  of the source of Energy  Holdings'  funds,  see External
Financings.  Over the next several years,  Energy Holdings and its  subsidiaries
will be required to refinance  their maturing debt and provide  additional  debt
and equity  financing for growth.  Any inability to obtain  required  additional
external  capital  or  to  extend  or  replace  maturing  debt  and/or  existing
agreements at current levels and reasonable interest rates may affect PSEG's and
Energy Holdings' financial condition,  results of operations and net cash flows.
As of March 31, 1999 and 1998,  Energy  Holdings'  embedded  cost of debt of its
finance subsidiaries was approximately 6.64% and 7.91%, respectively.

     Capital Requirements

     Capital  resources and capital  requirements  will be affected by the final
outcome of the Energy Master Plan Proceedings. For a discussion of the potential
impact of the  Energy  Master  Plan  Proceedings  on PSE&G's  future  prospects,
including  financial  condition,  results of operations and net cash flows,  see
Note 2. Regulatory Issues of Notes.

     PSEG

     Beginning in December  1998,  PSEG has entered  into  contracts to purchase
combustion  turbines.  PSEG's  commitment under these contracts is approximately
$392 million to be expended  between  December 1998 and December  2001.  Through
April 30,  1999,  payments of  approximately  $25 million  were made under these
contracts.

     PSE&G

     For the quarter ended March 31, 1999,  PSE&G had utility  plant  additions,
including  Allowance for Funds Used During  Construction,  of $81 million,  a $3
million decrease from the corresponding 1998 period.

     Dependent upon the final outcome of the Energy Master Plan  Proceedings and
the  Decision  and  Order,  PSE&G's  regulated  business  expects  to be able to
internally  generate the majority of its construction  and capital  requirements
over the next five years,  assuming adequate and timely recovery of costs, as to
which no assurances can be given, with the balance to be provided by issuance of
debt to  replace  maturities.  The  unregulated  generation  portion  of PSE&G's
current  operations (i.e.,  Genco) may incur capital  requirements  based on its
growth strategy.  For discussion of the Energy Master Plan Proceedings and their
potential  impacts,  see Note 2. Regulatory  Issues and Note 4.  Commitments and
Contingent Liabilities of Notes.


<PAGE>


     Energy Holdings

         Global

     In April 1999, Global, with a partner, entered into an agreement to jointly
acquire 90% of the outstanding shares of Chilquinta S.A. (Chilquinta Energia), a
power generation and distribution company based in Santiago, Chile under a 50/50
partnership.  Global will pay $255 million for an approximately  45% interest in
the company which includes holdings of distribution assets in Chile and Peru and
2,100  megawatts of  generating  capacity in Argentina.  Additional  acquisition
financing will be provided by $320 million of non-recourse debt. The acquisition
increases PSEG's worldwide customer base by over 1 million customers. Upon final
acquisition,  Global and its  partner  will make a tender  offer to acquire  the
remaining  10%  of  Chilquinta  Energia  shares  from  other  shareholders.  The
transaction  requires  the approval of  Chilquinta  Energia's  shareholders  and
regulatory notifications in Chile. Closing is expected to occur in June 1999.

     In April 1999,  Global and Panda Energy  International  Inc. entered into a
joint venture agreement to develop a 1,000 megawatt  combined-cycle gas plant in
Guadalupe  County  in  Texas.  Global's  equity  investment  is  expected  to be
approximately  $48 million,  with the total  investment  by Global not to exceed
$125 million, including loans and guarantees.

     Global  is  currently  funding  its  equity  investment  in a 200  megawatt
gas-fired generation project in Venezuela.  Funding of approximately $70 million
for the construction of the project commenced in December 1998 and will continue
through  mid-2000.  Upon  completion,  the  project  will  distribute  energy to
approximately forty industrial customers in the northern part of Venezuela.

         Resources

     As a result of the sale of a security in April 1999, Resources, through its
beneficial  interest in the KKR Leveraged  Buyout Fund (KKR LBO Fund),  realized
proceeds  of   approximately   $59  million  and  an  after  tax  book  gain  of
approximately $12 million.

     Resources has been advised by KKR that it plans to sell a portion of one of
its security  investments  through a secondary market offering  expected to take
place in the  second  quarter  of 1999.  Contingent  on the  sale,  based on the
current  market value of the  security,  Resources  anticipates  to receive cash
proceeds of approximately $25 million.

External Financings

     The changes in the utility industry are attracting  increased  attention of
bond rating  agencies  which  regularly  assess  business and financial  matters
including  how  utility  companies  are  meeting   competition  and  competitive
initiatives,  especially as they affect potential  stranded costs.  Bond ratings
affect the cost of capital and the ability to obtain external  financing.  Given
the changes in the industry and the anticipated use of securitization, attention
and scrutiny of PSEG's and PSE&G's  competitive  strategies  by rating  agencies
will likely  continue.  These  changes  could affect the bond  ratings,  cost of
capital and market prices of the  respective  securities of both PSEG and PSE&G.
For  discussion  of the use of proceeds of  securitization,  see  Liquidity  and
Capital Resources.

     PSEG and PSE&G are analyzing  their future  capital and financing  needs in
light of securitization, the transfer of generation-related assets to a separate
generation company and their business  strategies.  However, it is expected that
following  completion  of  securitization  and  the   generation-related   asset
transfer, PSE&G and Genco will likely issue debt through the capital markets.


<PAGE>
     PSEG

     At March 31,  1999,  PSEG had a committed  $150  million  revolving  credit
facility which expires in December 2002. At March 31, 1999, PSEG had $30 million
outstanding  under this revolving credit  facility.  At March 31, 1999 and 1998,
PSEG had a $25  million  uncommitted  line of credit  with a bank.  At March 31,
1999, PSEG had no debt outstanding under this line of credit.

     PSE&G

     PSE&G has filed with the BPU for  approval to  opportunistically  refinance
essentially  all of its  long-term  debt through  January 4, 2000.  In addition,
PSE&G  will  need  to  file  a  petition  with  the  BPU  in   connection   with
securitization and for any additional debt financing needed.  PSE&G is currently
evaluating the potential uses of the proceeds of  securitization  (see Liquidity
and Capital Resources).

     Under its Mortgage,  PSE&G may issue new First and Refunding Mortgage Bonds
against  previous  additions and  improvements  and/or  retired  Mortgage  Bonds
provided  that its ratio of earnings to fixed  charges  calculated in accordance
with its  Mortgage is at least 2:1. As of March 31,  1999,  the  Mortgage  would
permit up to $3.6 billion aggregate principal amount of new Mortgage Bonds to be
issued against previous  additions and improvements.  At March 31, 1999, PSE&G's
Mortgage  coverage  ratio was  4.036:1.  PSE&G  expects to apply for and receive
necessary BPU  authorization  for external  financings to meet its  requirements
over the next five years, as needed.

     To provide  liquidity for its commercial  paper  program,  PSE&G has a $650
million revolving credit agreement expiring in June 1999, which PSE&G expects to
renew, and a $650 million revolving credit agreement  expiring in June 2002 with
a group of commercial banks,  which provide for borrowings of up to one year. On
March  31,  1999,  there  were no  borrowings  outstanding  under  these  credit
agreements.

     The BPU has authorized  PSE&G to issue and have outstanding at any one time
through  January 4, 2000, not more than $1.5 billion of short-term  obligations,
consisting of commercial  paper and other  unsecured  borrowings  from banks and
other  lenders.  On March 31, 1999,  PSE&G had $499 million of  short-term  debt
outstanding,  including $130 million borrowed against its uncommitted bank lines
of credit which lines of credit totaled $150 million as of March 31, 1999.

     PSE&G Fuel Corporation (Fuelco) has a $125 million commercial paper program
to finance a 42.49%  share of Peach  Bottom  nuclear  fuel,  supported by a $125
million  revolving credit facility with a group of banks,  which expires on June
28, 2001.  PSE&G has  guaranteed  repayment of Fuelco's  respective  obligations
under this program.  As of March 31, 1999,  Fuelco had  commercial  paper of $72
million outstanding.

     Energy Holdings

     The minimum net worth  maintenance  agreement between PSEG Capital and PSEG
provides, among other things, that PSEG (1) maintain its ownership,  directly or
indirectly,  of all  outstanding  common stock of PSEG  Capital,  (2) cause PSEG
Capital to have at all times a positive  tangible net worth of at least $100,000
and (3) make sufficient  contributions of liquid assets to PSEG Capital in order
to permit it to pay its debt  obligations.  In 1993, PSEG agreed with the BPU to
make a good-faith effort to eliminate such PSEG support within six to ten years.
Effective  January 31, 1995, PSEG Capital  notified the BPU of its intention not
to have more than $650 million of debt outstanding at any time. PSEG Capital has
a  $650  million   Medium  Term  Note  (MTN)  program  which  provides  for  the
private-placement  of MTNs without  registration.  PSEG Capital's assets consist
principally  of demand  notes of Global and  Resources.  Intercompany  borrowing
rates are  established  based upon PSEG  Capital's  cost of funds.  At March 31,
1999, PSEG Capital had total debt outstanding of $650 million,  all of which was
comprised of MTNs.

     On February  16, 1999,  PSEG Capital  issued $252 million of 6.25% MTNs due
May 2003.  The  proceeds  were used to repay $100  million of PSEG  Capital MTNs
which matured February 16, 1999 and to reduce Energy Holdings' short-term debt.

     As of March 31, 1999,  Funding had $300 million and $150 million  revolving
credit  facilities  with two groups of banks which  expire in July and  November
1999,  respectively.  Funding  makes  short-term  investments  only if the funds
cannot be employed  in  intercompany  loans.  Intercompany  borrowing  rates are
established  based upon Funding's cost of funds.  Funding is providing both long
and short-term  capital for Resources and Global and their  subsidiaries  on the
basis of an  unconditional  guaranty from Energy  Holdings,  but without  direct
support from PSEG. As of March 31, 1999,  Funding had $123 million of total debt
outstanding  under its  revolving  credit  facility.  Energy  Holdings is in the
process of refinancing and  renegotiating  these credit  facilities.  Closing is
expected in the second quarter of 1999.

     Compliance  with  applicable  financial  covenants  will depend upon future
financial  position  and  level  of  earnings  and  cash  flow,  as to  which no
assurances can be given. In addition,  Energy  Holdings'  ability to continue to
grow its  business  will  depend to a  significant  degree on PSEG's  and Energy
Holdings' ability to obtain additional financing beyond current levels. Based on
current expectations of contemplated investments in 1999, it is anticipated that
equity  from PSEG will be  required  by Energy  Holdings  in 1999 in addition to
Energy  Holdings' debt  financing.  In order for  investment  activity to exceed
current expectations due to attractive opportunities in the marketplace,  Energy
Holdings  would need to access  additional  sources of debt,  which may  include
capital markets, to fund new development activity.

     Global has certain project debt that is non-recourse to Energy Holdings and
Global which is maturing or for which principal and interest payments are due in
May  1999.  While  efforts  are  underway  to  refinance  this debt in a similar
non-recourse  capacity,  additional  capital may be required by the lenders from
the  respective  partners.  The  aggregate  amount  of such  additional  capital
required is not expected to exceed $40 million.

Foreign Operations

     In accordance with their growth strategies,  Global and Resources have made
approximately  $946 million and $696  million,  respectively,  of  international
investments.  As of March 31, 1999, foreign investments represented 8% of PSEG's
consolidated  assets  and  contributed  2% of first  quarter  1999  consolidated
revenues. Resources' international investments are primarily in leveraged leases
in the  Netherlands,  Australia and the United Kingdom with associated  revenues
denominated  in U.S.  dollars,  and,  therefore  bear no foreign  currency risk.
Global's  international  investments  are primarily in projects that generate or
distribute electricity in Brazil,  Argentina and China. As a primary vehicle for
PSEG's  growth,  Global is expected to continue to invest in  competitive  power
markets.  Where possible,  Global  structures its investments to manage the risk
associated with project development,  including foreign currency devaluation and
fluctuations.  Global has  evaluated  the current  economic  conditions in these
regions and has  determined  that its  investments  have not been  impaired.  In
evaluating its investment  decisions,  Global considers the economic,  political
and currency risks  associated  with each potential  project.  Where  warranted,
Global  assumes  a  certain  level  of  currency  devaluation  when  making  its
investment  decision.  For discussion of the  devaluation of the Brazilian Real,
see Note 5. Financial Instruments and Risk Management of Notes.

Competitive Environment

     State Regulatory Matters

     For discussions of the Energy Master Plan Proceedings,  Gas Unbundling, the
LEAC and other  rate  matters,  see Note 2.  Regulatory  Issues  of  Notes.  The
Decision  and Order  resulting  from  these  proceedings  could  have a material
adverse impact on PSEG's and PSE&G's financial condition,  results of operations
and net cash flows.


<PAGE>


     PJM Interconnection, L.L.C. (PJM)

     PSE&G is a member of PJM and  participates on the PJM Members  Committee as
part of its  governance  structure.  PSE&G is also a member of the  Mid-Atlantic
Area  Reliability  Council which provides for review and evaluation of plans for
generation and transmission facilities and other matters relevant to reliability
of the bulk electric supply systems in the Mid-Atlantic area.

     As of April 1, 1999,  FERC lifted the  requirements  that bids for electric
energy  offered for sale in the PJM  interchange  energy market from  generation
located  within the PJM  control  area shall not  exceed  the  variable  cost of
producing such energy.  FERC found that no single market  participant can unduly
influence market prices.  Additionally, a market monitoring function is provided
by the PJM Independent System Operator (ISO). Transactions that are bid into the
PJM pool are capped at $1,000 per megawatt  hour.  All power  providers are paid
the  locational   marginal  price  (LMP)  set  through  power  providers'  bids.
Furthermore,  in the event that all available  generation within the PJM control
area is insufficient to satisfy demand,  PJM may institute  emergency  purchases
from adjoining regions.  The cost of such emergency  purchases is not subject to
any  PJM  price  cap.  When  the  LEAC is  discontinued,  to the  extent  PSEG's
generation  business  (Genco) produces less energy than required under the basic
generation  service (BGS)  contract  with PSE&G,  the lifting of such caps could
present additional risks to Genco with respect to the difference between the LMP
and the BGS rate. For further discussion of price volatility of electricity, see
Qualitative and Quantitative Disclosures About Market Risk of MD&A.

     On April 13, 1999,  FERC approved PJM's market  enhancements  which provide
the ability to auction residual and released Fixed  Transmission  Rights (FTRs).
An FTR is a purchased right that can hedge against  congestion  charges incurred
on a specified  transmission  path.  An FTR  financially  binds the owner to the
congestion  activity on that path.  The path is defined as the point where power
is  synchronized  onto the PJM grid to the point where it is withdrawn.  The PJM
ISO  administers   this  system.   PSE&G  cannot  predict  the  impacts  of  PJM
implementing these market enhancements.

Year 2000 Readiness Disclosure

     Many of PSEG's and PSE&G's systems,  which include  information  technology
applications, plant control and telecommunications  infrastructure systems, must
be modified due to computer  program  limitations  in  recognizing  dates beyond
1999.  PSEG and PSE&G have had a formal  project in place  since 1997 to address
Year 2000 issues.  Based upon  project  progress to date,  all mission  critical
systems  are  expected  to be ready by  January  1,  2000.  Future  progress  is
dependent on a wide number of variables, including the continued availability of
trained resources and vendors meeting commitments to PSEG and PSE&G.

     Year 2000 Readiness Status

     PSEG and PSE&G have established a three-phase  program to achieve Year 2000
readiness.  The initial phase  (Inventory)  identifies  systems having potential
Year 2000  issues  and sets  priorities  for  assessing  and  remediating  those
systems.   The  second  phase   (Assessment)   determines  whether  systems  are
digital/date  sensitive and the extent of date related  issues.  The third phase
(Remediation/Testing) repairs programming code, upgrades or replaces systems and
validates that code repairs were implemented as intended.

     PSEG and PSE&G have  completed  required Year 2000  readiness work for more
than 85% of their  critical  systems as of March 31, 1999.  The work required by
the remaining  critical systems is expected to be completed by July 1999, except
for certain systems at PSE&G's nuclear facilities. The majority of these systems
are  scheduled  beyond July 1999 in order to  coincide  with  planned  refueling
outages  at these  facilities.  By the end of 1999,  a  majority  of PSEG's  and
PSE&G's  non-critical  systems are also  expected to be Year 2000 ready with the
remainder of such non-critical  systems to be ready in 2000. Energy Holdings and
its subsidiaries have essentially completed Inventory on all systems impacted by
Year 2000 readiness issues and substantial Assessment work has been completed on
such  systems.  Remediation/Testing  is expected to be  completed in 1999 on all
such systems.

     As previously reported, on May 11, 1998, the NRC issued a Generic Letter to
all nuclear facilities requiring submission of a written response within 90 days
of that date  which  addressed  the  status of their  Year 2000  programs.  This
response  was  required  to address the  facility's  project  scope,  assessment
process, plans for corrective actions,  quality assurance measures,  contingency
plans and  regulatory  compliance.  Additionally,  the Generic  Letter  required
submission of a written  response upon  completion of the  facility's  Year 2000
programs  or no later than July 1, 1999  confirming  their  Year 2000  readiness
status and defining when their  facilities would be Year 2000 ready. On July 23,
1998, PSE&G provided its written response to the first  requirement noted above,
outlining for the NRC its nuclear facility Year 2000 program.  In this response,
PSE&G  indicated  that  planned   implementation   will  allow  PSE&G's  nuclear
facilities to be Year 2000 ready and in compliance with the terms and conditions
of their  licenses and NRC regulation by January 1, 2000.  Additionally,  during
the week of  October  26,  1998,  the NRC  conducted  an  audit  of the  nuclear
operations'  Hope Creek Year 2000  Project.  The audit  report  states  that the
nuclear operations' Year 2000 project plan is comprehensive and is receiving the
appropriate management support and oversight. As of March 31, 1999, PSE&G's Year
2000 effort at its nuclear  facilities is on schedule to meet the NRC's response
date of July 1, 1999 and to have all mission  critical  systems ready by January
1, 2000.  Additionally,  at meetings held in March 1999, PECO again confirmed to
PSE&G that Peach  Bottom's  Year 2000 effort is on schedule to meet the required
July 1999 NRC response schedule.

     PSEG and PSE&G are  continuing  to work with their  supplier base to assess
the Year 2000  readiness  status of vendors who provide  critical  materials and
services (key vendors).  PSEG and PSE&G have  indications  from more than 80% of
their critical  vendors that they are making or have made  preparations  for the
Year 2000. To date, all critical vendors responding indicate that their business
operations  will be ready.  Strategies  are being put into place to minimize the
impact of potential vendor failures on PSEG's and PSE&G's  operations.  However,
failure of key  vendors to be Year 2000 ready could  result in material  adverse
impacts  to PSEG's  and  PSE&G's  operations,  financial  condition,  results of
operations and net cash flows.

     Year 2000 Costs

     For a discussion of Year 2000 Costs, see Note 4. Commitments and Contingent
Liabilities of Notes.

     Year 2000 Risks

     PSEG and PSE&G have identified some and will continue  working to determine
the most  reasonably  likely,  worst  case  scenarios  arising  from  Year  2000
readiness  issues.  Such  scenarios  may  include,  among  others,   significant
reductions in key  customers'  power needs due to their own Year 2000  readiness
issues or temporary  disruption of service from the effect of disruptions caused
by other entities whose electrical systems are connected to PSE&G's through PJM.
The results of such analysis will depend, in part, on the results of information
currently  being  obtained from key vendors as to their Year 2000  readiness and
the readiness of PJM and trading partners, among others.

     PSEG and PSE&G have no outstanding litigation relating to Year 2000 issues.
The likelihood of future Year 2000 related  liabilities  cannot be determined at
this  time.  PSEG and  PSE&G  have  been  subject  to the  following  Year  2000
regulatory action:

     o    The BPU has issued a specific  order  requiring  a number of  customer
          related disclosures, including bill inserts, establishment of an "800"
          number, and others.

     o    The BPU is in the process of  performing an assessment of PSE&G's Year
          2000 program.

     o    On a general level, the BPU has required PSEG and PSE&G to participate
          in periodic status meetings with other utilities.



     Contingency Plans

     PSEG and  PSE&G  have  adopted  the  North  American  Electric  Reliability
Council's (NERC) timetable,  guidelines and detailed requirements for developing
these  contingency  plans.  The planning  process is an iterative  one. PSEG and
PSE&G have completed their preliminary  contingency plans. The second version of
their  contingency  plans will be completed by June 30,  1999,  consistent  with
NERC's  timetable.  PSEG and PSE&G  conducted a limited scope  internal drill on
March 19, 1999. The scope of the drill involved  using  alternate  communication
capabilities  (i.e.,  radio) to monitor  electric  generation  and  transmission
should the public  switched phone network become  unavailable.  The drill showed
the basic  feasibility of preliminary  plans and it identified needed procedural
enhancements.

     On   April   9,   1999,   PSEG   and   PSE&G   participated   in   a   NERC
industry-coordinated  Year 2000 readiness  drill. It involved a scope similar to
the March 19,  1999 drill plus the  involvement  of PJM.  The drill had  similar
results in that it showed the basic feasibility of using the radio system and it
identified some needed procedural  enhancements.  Going forward,  PSEG and PSE&G
will build on the results of these  exercises  to  participate  in the  NERC-led
drill  on  September  9,  1999,  may  conduct  other  drills  and may use  other
communications  capabilities such as  satellite-based  telephones.  Further plan
updates will be evaluated, as needed, from September 1999 through January 2000.

     PSEG and PSE&G  expect that with  completion  of the Year 2000  project and
implementation  of programs from SAP America,  Inc.  (SAP),  the  possibility of
significant  interruptions of normal operations should be reduced.  However,  if
PSEG, PSE&G, their domestic and international subsidiaries, the other members of
PJM,  PJM  trading  partners  supplying  power  through  PJM,  PSEG's or PSE&G's
critical  vendors and/or customers or the capital markets are unable to meet the
Year 2000  deadline,  such  inability  could have a material  adverse  impact on
PSEG's and PSE&G's operations,  financial  condition,  results of operations and
net cash flows.

Accounting Issues

     For a discussion  of  significant  accounting  matters  including  Emerging
Issues Task Force (EITF) Issues 98-10,  "Accounting  for Energy Trading and Risk
Management   Activities"  (EITF  98-10),   Statement  of  Position  (SOP)  98-1,
"Accounting  for the  Costs of  Computer  Software  Developed  or  Obtained  for
Internal  Use," and SOP 98-5,  "Reporting on the Costs of Start-Up  Activities,"
see Note 1. Basis of  Presentation/Summary of Significant Accounting Policies of
Notes.

Impact of New Accounting Pronouncements

     For a discussion of the impact of new accounting  pronouncements  including
SFAS 133,  "Accounting for Derivative  Instruments and Hedging Activities" (SFAS
133), see Note 8. Accounting Matters of Notes.

PSE&G

     The information  required by this item is incorporated  herein by reference
to the  following  portions of PSEG's  Management's  Discussion  and Analysis of
Financial  Condition and Results of Operations,  insofar as they relate to PSE&G
and its  subsidiaries:  Overview  and Future  Outlook;  Results  of  Operations;
Liquidity  and  Capital  Resources;  External  Financings;  Foreign  Operations;
Competitive Environment;  Year 2000 Readiness Disclosure;  Accounting Issues and
Impact of New Accounting Pronouncements.

Forward Looking Statements

     The Private  Securities  Litigation Reform Act of 1995 (the Act) provides a
"safe  harbor" for  forward-looking  statements  to encourage  such  disclosures
without the threat of litigation  providing  those  statements are identified as
forward-looking  and  are  accompanied  by  meaningful,   cautionary  statements
identifying  important  factors  that could  cause the actual  results to differ
materially  from those  projected in the statement.  Forward-looking  statements
have been made in this report. Such statements are based on management's beliefs
as  well  as  assumptions  made  by  and  information   currently  available  to
management.  When used  herein,  the  words  "will",  "anticipate",  "estimate",
"expect", "objective",  "hypothetical",  "potential" and similar expressions are
intended to identify forward-looking  statements. 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:  deregulation and the unbundling of energy supplies
and services; managing rapidly changing energy trading operations in conjunction
with  electricity and gas production,  transmission  and  distribution  systems;
managing foreign investments and electric generation and distribution  operation
in locations outside of the traditional utility service territory; political and
foreign currency risks; an increasingly  competitive energy  marketplace;  sales
retention  and growth  potential  in a mature  service  territory  and a need to
reduce  operating and capital costs;  ability to obtain adequate and timely rate
relief, cost recovery,  including stranded costs, and other necessary regulatory
approvals;  Federal and state regulatory  actions;  costs of construction;  Year
2000 issues;  operating  restrictions,  increased cost and  construction  delays
attributable  to  environmental  regulations;  nuclear  decommissioning  and the
availability  of  reprocessing  and storage  facilities  for spent nuclear fuel;
licensing and  regulatory  approval  necessary  for nuclear and other  operating
stations;  the ability to economically and safely operate nuclear  facilities in
accordance with regulatory requirements; environmental concerns; and market risk
and credit market  concerns.  PSEG and PSE&G undertake no obligation to publicly
update or revise  any  forward-looking  statements,  whether  as a result of new
information,  future  events or  otherwise.  The  foregoing  review  of  factors
pursuant to the Act should not be construed as  exhaustive  or as any  admission
regarding  the  adequacy  of  disclosures  made by PSEG and  PSE&G  prior to the
effective date of the Act.

                      ITEM 3. QUALITATIVE AND QUANTITATIVE
                          DISCLOSURES ABOUT MARKET RISK

     The market risk inherent in PSEG's market risk  sensitive  instruments  and
positions  is the  potential  loss  arising  from  adverse  changes in commodity
prices,  equity security prices,  interest rates and foreign  currency  exchange
rates as discussed  below.  PSEG's policy is to use  derivatives  to manage risk
consistent  with its  business  plans  and  prudent  practices.  PSEG has a Risk
Management  Committee  made up of  executive  officers and an  independent  risk
oversight function to ensure compliance with corporate policies and prudent risk
management practices.

     PSEG is  exposed  to  credit  losses  in the  event of  non-performance  or
non-payment by  counterparties.  PSEG also has a credit management process which
is used to assess,  monitor and  mitigate  counterparty  exposure  for PSE&G and
Energy  Holdings.  In the  event  of  nonperformance  or  nonpayment  by a major
counterparty,  there may be a  material  adverse  impact on PSEG's  and  PSE&G's
financial condition, results of operations and net cash flows.

     Commodities--PSE&G

     The   availability   and  price  of  energy   commodities  are  subject  to
fluctuations from factors such as weather,  environmental  policies,  changes in
supply and demand,  state and Federal  regulatory  policies and other events. To
reduce price risk caused by market  fluctuations,  PSE&G enters into  derivative
contracts,   including  forwards,  futures,  swaps  and  options  with  approved
counterparties, to hedge its anticipated demand. These contracts, in conjunction
with owned electric generating  capacity and physical gas supply contracts,  are
designed to cover estimated electric and gas customer commitments.

     PSE&G  currently  has  levelized  energy  adjustment  clauses  in its  rate
structure  in place for both  electricity  (LEAC) and natural gas (LGAC).  These
clauses were  established to minimize the impact of major commodity price swings
on customer  prices.  They also reduce the risk to PSE&G by permitting  PSE&G to
defer  price  increases  and  decreases  until   regulatory   treatment  can  be
determined.  In accordance  with the BPU's April 21, 1999 Summary Order,  PSE&G,
effective August 1, 1999, will no longer account for the cost of electric energy
through a levelized  adjustment  clause.  For discussion of the levelized energy
adjustment  clauses  and the  potential  impacts  from the  Energy  Master  Plan
Proceedings,  see Note 2. Regulatory  Issues and Note 3.  Regulatory  Assets and
Liabilities of Notes and Net Interchanged Power and Fuel for Electric Generation
of Item 2.  Management's  Discussion  and  Analysis of Financial  Condition  and
Results of  Operations  (MD&A).  For  discussion  of  changes in the  pricing of
electric energy offered for sale in the PJM interchange  energy market,  see PJM
Interconnection, L.L.C. (PJM) of MD&A.

     PSE&G uses a value-at-risk model to assess the market risk of its commodity
business.  This model includes fixed price sales commitments,  owned generation,
native  load   requirements,   physical   contracts  and  financial   derivative
instruments.   Value-at-risk  represents  the  potential  gains  or  losses  for
instruments or portfolios due to changes in market factors, for a specified time
period and confidence level. PSE&G estimates  value-at-risk across its commodity
business  using a model  with  historical  volatilities  and  correlations.  The
measured  value-at-risk  using  a   variance/co-variance   model  with  a  97.5%
confidence  level  and  assuming  a one  week  horizon  at  March  31,  1999 was
approximately $5 million, compared to the December 31, 1998 level of $4 million.
PSE&G's calculated  value-at-risk  exposure  represents an estimate of potential
net losses that could be  recognized  on its portfolio of physical and financial
derivative  instruments  assuming  historical  movements in future market rates.
These estimates, however, are not necessarily indicative of actual results which
may  occur,  since  actual  future  gains and  losses  will  differ  from  those
historical  estimates based upon actual fluctuations in market rates,  operating
exposures,  and the timing thereof,  and changes in PSE&G's portfolio of hedging
instruments during the year.

     Foreign Currencies--Energy Holdings

     For discussion of foreign currency risks, see Note 5. Financial Instruments
and Risk Management of Notes.

                           PART II. OTHER INFORMATION
                            ITEM 1. LEGAL PROCEEDINGS

     Certain  information  reported  under  Item 3 of Part I of  Public  Service
Enterprise  Group  Incorporated's  (PSEG) and Public  Service  Electric  and Gas
Company's (PSE&G) 1998 Annual Report on Form 10-K is updated below.

(1)  New Matter.  On April 19, 1999, a complaint  was received by PSEG naming as
     defendants  the  current  directors  of PSEG,  and naming PSEG as a nominal
     defendant,  from the same purported  shareholder of PSEG who instituted the
     December 1995 shareholder  derivative suit and who instituted the June 1998
     proxy  litigation,  alleging  that the 1999  proxy  statement  provided  to
     shareholders  of PSEG was false  and  misleading  by  reason,  among  other
     things,  of failure to disclose  certain material facts relating to (i) the
     controls  over  and  oversight  of  PSEG's  nuclear  operations,  (ii)  the
     condition  of problems at PSEG's  nuclear  operations  and (iii) the demand
     letter and derivative  litigation  described  above. The complaint seeks to
     have the 1999 proxy  statement  declared to be in  violation of law, to set
     aside  the  election  of  directors  of PSEG  and the  ratification  of the
     selection  of  Deloitte & Touche LLP as PSEG's  auditors at the 1999 annual
     shareholder  meeting,  and to require PSEG to conduct a special  meeting of
     shareholders   providing  for  election  of  directors   following   timely
     dissemination  of a proxy  statement  approved  by the  Court  hearing  the
     matter,  which should include as nominees for election as directors persons
     having no previous  relationship  with PSEG or the current  directors,  and
     other  relief.  PSEG cannot  predict the  outcome of this  matter.  Similar
     allegations  by the  plaintiff  regarding  the  1996,  1997 and 1998  proxy
     statements were dismissed by the Court in the applicable proceedings. G. E.
     Stricklin v. E. James Ferland,  et. al.,  United States  District Court for
     the Eastern District of Pennsylvania.

     In addition, see the following at the pages hereof indicated:

     (1)  Pages 9 through 14 and 24 through  25.  Proceedings  before the BPU in
          the  matter  of  the  Energy   Master  Plan  Phase  II  Proceeding  to
          investigate  the future  structure  of the  Electric  Power  Industry,
          Docket Nos. EX94120585Y, EO97070461, EO97070462 and EO97070463.

     (2)  Page 14.  Proceeding  before the BPU  Establishing  Procedures for gas
          unbundling, Docket No. GX99030121.

     (3)  Page 15.  Proceedings  before the BPU relating to PSE&G's proposed CTC
          filed September 19, 1996, Docket Nos. ET96090669 and 97040274.

     (4)  Page 18.  Investigation by the U.S.  Environmental  Protection  Agency
          (EPA) regarding the Passaic River site.

     (5)  Page 18. Additional investigation by the U.S. Environmental Protection
          Agency (EPA) regarding the Passaic River site.

     (6)  Page 41. Administrative proceedings before the NJDEP under Section 316
          of the FWPCA for certain electric generating stations.

           ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     PSEG's Annual Meeting of Stockholders  was held on April 20, 1999.  Proxies
for the meeting were  solicited  pursuant to Regulation 14A under the Securities
Act of 1934.  There was no solicitation of proxies in opposition to management's
nominees as listed in the proxy statement and all of management's  nominees were
elected to the Board of Directors. Details of the voting are provided below:

<TABLE>
<CAPTION>

                                                           Votes                 Votes
                                                            For                Withheld
                                                      ------------------    ------------------
<S>                                                       <C>                     <C>      
Proposal 1 - Election of Directors

     Class III - Term expiring 2002
          T. J. Dermot Dunphy                             181,790,995             2,462,843
          Raymond V. Gilmartin                            181,934,810             2,319,028
          Conrad K. Harper                                181,749,133             2,500,205

                                                           Votes                 Votes
                                                            For                 Against            Abstentions
                                                      ------------------    ------------------    -----------------
Proposal 2 - Ratification of the Appointment of
       Deloitte & Touche LLP as Independent
       Auditors for 1999                                  181,946,886               777,509            1,400,350


</TABLE>

With respect to Proposal 2,  abstentions are not counted in the vote totals and,
therefore, have no effect on the vote.

                            ITEM 5. OTHER INFORMATION

     Certain information reported under PSEG's and PSE&G's 1998 Annual Report to
the SEC is updated  below.  References are to the related pages of the Form 10-K
as printed and distributed.

PJM Interconnection, L.L.C.

     Form 10-K,  page 10. On March 19, 1999,  the New York  Mercantile  Exchange
(NYMEX) began offering an electric  energy futures  trading  contract based upon
the  previously  established  PJM Western  trading hub. The PJM Western hub is a
financial  location  specifically  designed for facilitating  such trading.  The
Western hub is a composite of 111  locations for which PJM publishes a composite
price. The composite price is made up of the fixed load-weighted  average of the
locational  prices at each of the nodes that  comprise the hub. PJM studies have
determined  that a composite of many nodes provides a more stable hub price than
selecting a single node for the hub. The stability of the hub prices contributes
to the liquidity of the markets trading to and from the hub.


<PAGE>


Nuclear Operations

     Form 10-K, page 11. As previously reported,  on September 16, 1998, the NRC
indefinitely  suspended its Systematic Assessment of Licensee Performance (SALP)
program  until  the NRC staff  completed  a review of its  nuclear  power  plant
performance  assessment  process.  The NRC has now developed a new program which
takes into account  improvements in the performance of the nuclear industry over
the past twenty years and the desire of the NRC to apply more objective, timely,
safety-significant  criteria  in  assessing  performance.  The NRC will  monitor
performance in three broad areas - reactor  safety,  radiation  safety and plant
security.  Nuclear  plant  performance  will be  measured  by a  combination  of
objective performance  indicators and by the NRC inspection program,  which will
be refocused on those plant  activities which have the greatest impact on safety
and overall risk. Each performance  indicator and inspection  assessment will be
categorized to determine the appropriate  regulatory  response.  For performance
indicators and inspection area results which do not meet the NRC's highest level
of acceptable  performance,  the NRC will increase its  inspection and oversight
activities.  Each  year,  a  performance  report  will be  issued as well as the
inspection plan for the following  six-month period.  Additionally,  plants with
declining performance will be identified which may require further NRC action.

     The new program  will begin in June 1999 on a pilot basis at eight  nuclear
power  plants,  including  Salem and Hope Creek.  It is  expected  that this new
process will be used at all domestic  nuclear plants  beginning in January 2000.
On April 16, 1999,  as part of the  transition to a new  performance  assessment
program,  the NRC announced  formal  elimination of the "watch list" of troubled
plants and that recognition will no longer be given to "superior" performers.

     On April 12, 1999, the NRC issued its six-month Plant Performance Review of
Salem  and Hope  Creek,  which is being  used as an  interim  process  since the
suspension  of the SALP program  until the new  assessment  program is in place.
Salem and Hope Creek's overall performance was rated "acceptable" for the period
April  1998  through  January  1999.   Areas  for  improvement   included  human
performance,    corrective    maintenance   backlog,   work   control   process,
communications and procedural deficiencies.

     PECO  Energy has  advised  PSE&G that the NRC  issued its  six-month  Plant
Performance  Review of Peach Bottom on April 9, 1999.  Overall  performance  was
rated "acceptable" for the period April 1998 through January 15, 1999. Areas for
improvement  included engineering analysis of degraded conditions and some human
performance  issues  concerning  maintenance  activities  and  equipment  status
control.

Other Nuclear Matters

     Form 10-K,  page 13. As  previously  reported,  as a result of several BWRs
experiencing  clogging of some emergency  core cooling system suction  strainers
which supply water from the suppression  pool for emergency  cooling of the core
and related  structures,  the NRC issued a Bulletin in 1996 to operators of BWRs
requesting  that measures be taken to minimize the  potential for clogging.  The
NRC has proposed three resolution options and required that actions be completed
by the  end of  the  unit's  first  refueling  outage  after  January  1,  1997.
Alternative resolution options will be subject to NRC approval.  PSE&G installed
a portion of the required large capacity passive  strainers at Hope Creek during
Hope Creek's  refueling  outage in December 1997.  The remaining  strainers were
installed  in March  1999.  PECO Energy has  advised  PSE&G that large  capacity
passive  strainers were installed at Peach Bottom 3 during its refueling  outage
in October  1997 and at Peach  Bottom 2 during its  refueling  outage in October
1998. PSE&G cannot predict what other actions,  if any, the NRC may take in this
matter.

Air Pollution Control

     Form  10-K,  page  20.  For  discussion  of NOx  allowances,  see  Note  4.
Commitments and Contingent Liabilities of Notes.


<PAGE>


Water Pollution Control

     Form 10-K, page 22. As previously reported,  PSE&G is implementing the 1994
NJPDES permit issued for Salem which requires,  among other things, water intake
screen  modifications  and wetlands  restoration.  Under the 1994 permit,  which
remains  in  effect  until  such time as a renewal  permit is  issued,  PSE&G is
continuing  to restore  wetlands  and to conduct the  requisite  management  and
monitoring  associated with the implementation of the special conditions of that
permit. The existing permit remains in full force and effect  indefinitely given
the submission of a timely renewal filing.  On March 4, 1999, PSE&G timely filed
a  comprehensive  application  for the  renewal of Salem's  NJDEP  permit  which
included  updated  Section  316(a)  and  316(b)  demonstrations  as  well  as  a
demonstration of the implementation of the Special Conditions of the 1994 NJPDES
permit  and  their  biological  efficacy.  PSE&G  has  also  made a  preliminary
submission  to the  Delaware  River  Basin  Commission  (DRBC) to  initiate  the
regulatory review necessary to renew the Docket for Salem,  which Docket expires
in September 2000 unless renewed by the DRBC.  While it is impossible to predict
the timing  and/or  outcome of the review of these  applications  presently,  an
unfavorable  determination  could have a material  adverse  effect on PSEG's and
PSE&G's financial position, results of operations and net cash flows.

Certain Beneficial Owners

     New Matter. As previously reported,  according to the Schedule 13G filed by
Barclays Bank, PLC dated February 12, 1999,  Barclays Bank, PLC was a beneficial
owner of 7.2% of Common Stock. According to the revised Schedule 13G of Barclays
Bank,  PLC dated March 10,  1999,  Barclays  Bank,  PLC was the owner of 3.5% of
Common Stock.

                    ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>

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

                         PSEG                                                        PSE&G
  ----------------------------------------------------      ----------------------------------------------------------
    Exhibit                   Document                      Exhibit                       Document
    Number                                                    Number
  ------------- --------------------------------------      ------------ ---------------------------------------------
<S>   <C>                                                     <C>                                                  
      12        Computation of Ratios of Earnings             12(A)      Computation of Ratios of Earnings to Fixed
                to Fixed Charges (PSEG)                                  Charges (PSE&G)

     27(A)      Financial Data Schedule (PSEG)                12(B)      Computation of Ratios of Earnings to Fixed
                                                                         Charges plus Preferred Stock Dividend
                                                                         Requirements (PSE&G)

                                                              27(B)      Financial Data Schedule (PSE&G)

</TABLE>

(B) Reports on Form 8-K:

Registrant                   Date of Report              Items Reported
--------------               --------------              --------------
PSEG and PSE&G               March 18, 1999              Items 5 and 7

PSEG and PSE&G               April 26, 1999              Item 5

<PAGE>


                                   SIGNATURES
                                   ----------

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrants  have duly  caused  these  reports to be signed on their  respective
behalf by the undersigned thereunto duly authorized.


                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                                  (Registrants)


                       By:      PATRICIA A. RADO
                    -------------------------------------------
                                Patricia A. Rado
                          Vice President and Controller
                         (Principal Accounting Officer)





Date: May 6, 1999