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

                                  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 September 30, 1998

                                       OR

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

  For the transition period from                  to

Commission      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 October 31, 1998: 228,227,508

As  of October 31, 1998  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 and Nine
       Months Ended September 30, 1998 and 1997...........................   1

       Consolidated Balance Sheets as of September 30, 1998
       and December 31, 1997..............................................   2

       Consolidated Statements of Cash Flows for the Nine
       Months Ended September 30, 1998 and 1997...........................   4

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

       Consolidated Statements of Income for the Three and Nine
       Months Ended September 30, 1998 and 1997...........................   5

       Consolidated Balance Sheets as of September 30, 1998
       and December 31, 1997..............................................   6

       Consolidated Statements of Cash Flows for the Nine
       Months Ended September 30, 1998 and 1997...........................   8

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

     Notes to Consolidated Financial Statements-- PSE&G...................  22

   Item 2. Management's Discussion and Analysis of Financial
           Condition and Results of Operations
       PSEG ..............................................................  23
       PSE&G..............................................................  34

   Item 3. Qualitative and Quantitative Disclosures About Market Risk.....  35

PART II.  OTHER INFORMATION

   Item 1. Legal Proceedings..............................................  36

   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 per share data)         
                                                            (Unaudited)
<CAPTION>


                                                                     Three Months Ended          Nine Months Ended
                                                                        September 30,              September 30,      
                                                                     1998         1997          1998        1997
                                                                   ---------    ---------    ---------    ---------   
<S>                                                                <C>          <C>          <C>          <C>      
OPERATING REVENUES
  Electric .....................................................   $   1,219    $   1,107    $   3,112    $   2,966
  Gas ..........................................................         197          270        1,081        1,328
  Nonutility Activities ........................................           9           71          212          162
                                                                   ---------    ---------    ---------    ---------
       Total Operating Revenues ................................       1,425        1,448        4,405        4,456
                                                                   ---------    ---------    ---------    ---------

OPERATING EXPENSES
Operation
  Interchanged Power and Fuel for Electric Generation ..........         275          252          730          696
  Gas Purchased ................................................         128          144          687          745
  Other ........................................................         297          281          918          798
Maintenance ....................................................          52           69          153          197
Depreciation and Amortization ..................................         165          156          493          462
Taxes (Note 6)
  Income Taxes .................................................         134           93          356          245
  Transitional Energy Facility Assessment/New Jersey
    Gross Receipts Taxes .......................................          41          132          128          421
  Other ........................................................          21           20           60           63
                                                                   ---------    ---------    ---------    ---------
       Total Operating Expenses ................................       1,113        1,147        3,525        3,627
                                                                   ---------    ---------    ---------    ---------

OPERATING INCOME ...............................................         312          301          880          829
                                                                   ---------    ---------    ---------    ---------

OTHER INCOME AND DEDUCTIONS
  Settlement of Salem Litigation - Net of Applicable
     Taxes of $29 ..............................................         --           --           --           (53)
  Other - net ..................................................           3            2           12            6
                                                                   ---------    ---------    ---------    ---------

       Total Other Income and Deductions .......................           3            2           12          (47)
                                                                   ---------    ---------    ---------    ---------

INCOME BEFORE INTEREST CHARGES AND
DIVIDENDS ON PREFERRED SECURITIES ..............................         315          303          892          782
                                                                   ---------    ---------    ---------    ---------

INTEREST CHARGES AND PREFERRED SECURITIES
  DIVIDENDS
  Interest Expense .............................................         115          119          352          345
  Allowance for Funds Used During Construction - Debt and
    Capitalized Interest .......................................          (3)          (6)         (10)         (15)
  Preferred Securities Dividend Requirements of Subsidiaries ...          23           14           57           42
  Net Loss on Preferred Stock Redemptions ......................        --           --           --              3
                                                                   ---------    ---------    ---------    ---------

       Total Interest Charges and Preferred Securities Dividends         135          127          399          375
                                                                   ---------    ---------    ---------    ---------

       NET INCOME ..............................................   $     180    $     176    $     493    $     407
                                                                   =========    =========    =========    =========


WEIGHTED AVERAGE COMMON SHARES AND
   POTENTIAL DILUTIVE EFFECT OF  STOCK OPTIONS
     OUTSTANDING (000's) .......................................     231,727      231,958      231,901      231,995

EARNINGS PER SHARE (Basic and Diluted) .........................   $    0.78    $    0.76    $    2.13    $    1.75
                                                                   =========    =========    =========    =========

DIVIDENDS PAID PER SHARE OF COMMON STOCK .......................   $    0.54    $    0.54    $    1.62    $    1.62
                                                                   =========    =========    =========    =========

See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>            
                 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                           CONSOLIDATED BALANCE SHEETS
                                     ASSETS
                              (Millions of Dollars)

<CAPTION>

                                                                         (Unaudited)
                                                                        September 30,   December 31,
                                                                            1998           1997
                                                                        -------------  -----------
<S>                                                                      <C>           <C>    
UTILITY PLANT - Original cost
  Electric ...........................................................   $   13,908    $   13,692
  Gas ................................................................        2,782         2,697
  Common .............................................................          586           558
                                                                         ----------    ----------
       Total .........................................................       17,276        16,947
  Less: Accumulated depreciation and amortization ....................        6,921         6,463
                                                                         ----------    ----------
       Net ...........................................................       10,355        10,484
  Nuclear Fuel in Service, net of accumulated amortization -
     1998, $321; 1997, $302 ..........................................          181           216
                                                                         ----------    ----------
       Net Utility Plant in Service ..................................       10,536        10,700
  Construction Work in Progress, including Nuclear Fuel in
    Process - 1998, $74; 1997, $60 ...................................          313           326
  Plant Held for Future Use ..........................................           24            24
                                                                         ----------    ----------
       Net Utility Plant .............................................       10,873        11,050
                                                                         ----------    ----------
INVESTMENTS AND OTHER NONCURRENT ASSETS
 Long-Term Investments, net of amortization - 1998, $27; 1997,
    $21, and net of valuation allowances - 1998, $24; 1997, $10 ......        2,886         2,873
 Nuclear Decommissioning and Other Special Funds .....................          570           492
 Other Noncurrent Assets,  net of amortization - 1998, $18; 1997, $16,
    and net of valuation allowances - 1998, $5; 1997, $0 .............          193           167
                                                                         ----------    ----------
       Total Investments and Other Noncurrent Assets .................        3,649         3,532
                                                                         ----------    ----------
CURRENT ASSETS
  Cash and Cash Equivalents ..........................................           78            83
  Accounts Receivable:
    Customer Accounts Receivable .....................................          539           520
    Other Accounts Receivable ........................................          361           293
    Less: Allowance for Doubtful Accounts ............................           39            41
  Unbilled Revenues ..................................................          186           270
  Fuel, at average cost ..............................................          326           310
  Materials and Supplies, at average cost, net of inventory valuation
    reserves - 1998, $12; 1997, $12 ..................................          144           142
  Prepayments ........................................................          234            48
  Miscellaneous Current Assets .......................................           32            38
                                                                         ----------    ----------
       Total Current Assets ..........................................        1,861         1,663
                                                                         ----------    ----------
DEFERRED DEBITS (Note 3)
  Unamortized Loss on Reacquired Debt and Debt Expense ...............          140           136
  OPEB Costs .........................................................          275           289
  Environmental Costs ................................................          121           122
  Electric Energy and Gas Costs ......................................           69           167
  SFAS 109 Income Taxes ..............................................          698           725
  Demand Side Management Costs .......................................          141           116
  Other ..............................................................          130           143
                                                                         ----------    ----------
       Total Deferred Debits .........................................        1,574         1,698
                                                                         ----------    ----------
TOTAL ................................................................   $   17,957    $   17,943
                                                                         ==========    ==========

See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>              
                   PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                           CONSOLIDATED BALANCE SHEETS
                         CAPITALIZATION AND LIABILITIES
                    (Millions of Dollars, except share data)

<CAPTION>

                                                                          (Unaudited)
                                                                         September 30,   December 31,
                                                                              1998           1997
                                                                         ------------   -------------
<S>                                                                      <C>          <C>
CAPITALIZATION
  Common Stockholders' Equity:
    Common Stock, issued; 231,957,608 shares ..........................  $    3,603     $   3,603
    Treasury Stock, at cost; 2,351,100 shares .........................         (91)         --
    Retained Earnings .................................................       1,720         1,623
    Foreign Currency Translation Adjustment ...........................         (37)          (15)
                                                                         ----------     ---------
       Total Common Stockholders' Equity ..............................       5,195         5,211
  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 8) ............................................       1,038           513
  Long-Term Debt ......................................................       4,517         4,873
                                                                         ----------     ---------
       Total Capitalization ...........................................      10,920        10,767
                                                                         ----------     ---------
OTHER LONG-TERM LIABILITIES
  Accrued OPEB ........................................................         332           289
  Decontamination and Decommissioning Costs ...........................          39            43
  Environmental Costs  (Note 4) .......................................          69            73
  Capital Lease Obligations ...........................................          50            52
                                                                         ----------     ---------
       Total Other Long-Term Liabilities ..............................         490           457
                                                                         ----------     ---------
CURRENT LIABILITIES
  Long-Term Debt due within one year ..................................         419           340
  Commercial Paper and Loans ..........................................       1,206         1,448
  Accounts Payable ....................................................         725           686
  Other ...............................................................         345           353
                                                                         ----------     ---------
       Total Current Liabilities ......................................       2,695         2,827
                                                                         ----------     ---------
DEFERRED CREDITS
  Income Taxes ........................................................       3,380         3,394
  Investment Tax Credits ..............................................         328           343
  Other ...............................................................         144           155
                                                                         ----------     ---------
       Total Deferred Credits .........................................       3,852         3,892
                                                                         ----------     ---------
COMMITMENTS AND CONTINGENT LIABILITIES  (Note 4) ......................        --            --
                                                                         ----------     ---------
TOTAL .................................................................  $   17,957     $  17,943
                                                                         ==========     =========

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

              
                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (Millions of Dollars)
                                   (Unaudited)
<CAPTION>

                                                              Nine Months Ended September 30,
                                                              -------------------------------
                                                                    1998      1997
                                                                  ---------  ---------
<S>
  CASH FLOWS FROM OPERATING ACTIVITIES                              <C>      <C>
  Net income .....................................................   $ 493    $ 407
  Adjustments to reconcile net income to net cash flows from
   operating activities:
    Depreciation and Amortization ................................     493      462
    Amortization of Nuclear Fuel .................................      70       47
    Recovery of Electric Energy and Gas Costs - net ..............      98       23
    Unrealized (Gains)/Losses on Investments - net ...............     (29)     (37)
    Proceeds from Leasing Activities .............................     (39)      76
    Changes in certain current assets and liabilities:
     Net change in Accounts Receivable and Unbilled Revenues .....      (5)     167
     Net increase in Inventory - Fuel and Materials and Supplies .     (18)     (11)
     Net change in Accounts Payable ..............................      39      (32)
     Net increase in Prepayments .................................    (186)    (175)
     Net decrease in Other Current Assets and Liabilities ........      (2)    (102)
    Other ........................................................      27      (47)
                                                                     -----    -----
       Net Cash Provided By Operating Activities .................     941      778
                                                                     -----    -----
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Utility Plant, excluding AFDC .....................    (359)    (383)
  Net decrease (increase) in Long-Term Investments and Real Estate      46     (438)
  Contribution to Decommissioning Funds and Other Special Funds ..     (91)     (43)
  Other ..........................................................     (39)     (65)
                                                                     -----    -----
       Net Cash Used In Investing Activities .....................    (443)    (929)
                                                                     -----    -----
CASH FLOWS FROM FINANCING ACTIVITIES
  Net (decrease) increase in Short-Term Debt .....................    (242)     422
  Issuance of Long-Term Debt .....................................     250      454
  Redemption of Long-Term Debt ...................................    (527)    (488)
  Redemption of Preferred Stock ..................................    --        (94)
  Issuance of Preferred Securities ...............................     525       95
  Purchase of Treasury Stock .....................................     (91)    --
  Retirement of Common Stock .....................................    --        (43)
  Cash Dividends Paid on Common Stock ............................    (376)    (376)
  Other ..........................................................     (42)     (10)
                                                                     -----    -----
       Net Cash Used In Financing Activities .....................    (503)     (40)
                                                                     -----    -----
Net Decrease In Cash And Cash Equivalents ........................      (5)    (191)
Cash And Cash Equivalents At Beginning Of Period .................      83      279
                                                                     -----    -----
Cash And Cash Equivalents At End Of Period .......................   $  78    $  88
                                                                     =====    =====

Income Taxes Paid ................................................   $ 347    $ 118
Interest Paid ....................................................   $ 339    $ 302

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

<CAPTION>

                                                                   Three Months Ended    Nine Months Ended
                                                                     September 30,         September 30,
                                                                  ------------------    -------------------
                                                                    1998       1997       1998       1997
                                                                  -------    -------    -------    --------
<S>                                                               <C>        <C>        <C>        <C>    
OPERATING REVENUES
  Electric .....................................................   $ 1,219    $ 1,107    $ 3,112    $ 2,966
  Gas ..........................................................       197        270      1,081      1,328
                                                                   -------    -------    -------    -------
       Total Operating Revenues ................................     1,416      1,377      4,193      4,294
                                                                   -------    -------    -------    -------

OPERATING EXPENSES
Operation
  Interchanged Power and Fuel for Electric Generation ..........       275        252        730        696
  Gas Purchased ................................................       128        144        687        745
  Other ........................................................       265        259        814        736
Maintenance ....................................................        51         69        153        197
Depreciation and Amortization ..................................       162        155        484        459
Taxes (Note 6)
  Income Taxes .................................................       155         84        351        231
  Transitional Energy Facility Assessment/New Jersey
     Gross Receipts Taxes ......................................        41        132        128        421
  Other ........................................................        18         18         56         58
                                                                   -------    -------    -------    -------
       Total Operating Expenses ................................     1,095      1,113      3,403      3,543
                                                                   -------    -------    -------    -------

OPERATING INCOME ...............................................       321        264        790        751
                                                                   -------    -------    -------    -------

OTHER INCOME AND DEDUCTIONS
   Settlement of Salem Litigation - Net of Applicable 
      Taxes of $29 .............................................      --         --         --          (53)
  Other - net ..................................................         1          2          6          6
                                                                   -------    -------    -------    -------
       Total Other Income and Deductions .......................         1          2          6        (47)
                                                                   -------    -------    -------    -------

INCOME BEFORE INTEREST CHARGES AND
DIVIDENDS ON PREFERRED SECURITIES ..............................       322        266        796        704
                                                                   -------    -------    -------    -------

INTEREST CHARGES AND PREFERRED SECURITIES
   DIVIDENDS
  Interest Expense .............................................        97        100        285        296
  Allowance for Funds Used During Construction - Debt ..........        (3)        (4)        (9)       (12)
  Preferred Securities Dividend Requirements
      of  Subsidiaries .........................................        11         11         33         33
                                                                   -------    -------    -------    -------

       Total Interest Charges and Preferred Securities Dividends       105        107        309        317
                                                                   -------    -------    -------    -------

       NET INCOME ..............................................       217        159        487        387
                                                                   -------    -------    -------    -------

  Preferred Stock Dividend Requirements ........................         2          2          7         10

  Net Loss on Preferred Stock Redemptions ......................      --         --         --            3
                                                                   -------    -------    -------    -------

EARNINGS AVAILABLE TO PUBLIC SERVICE
ENTERPRISE GROUP INCORPORATED ..................................   $   215    $   157    $   480    $   374
                                                                   =======    =======    =======    =======


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

                    
                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                           CONSOLIDATED BALANCE SHEETS
                                     ASSETS
                              (Millions of Dollars)
<CAPTION>


                                                                       (Unaudited)
                                                                      September 30,     December 31,
                                                                          1998             1997
                                                                      -------------    -------------
<S>                                                                   <C>             <C>       
UTILITY PLANT - Original cost
  Electric .........................................................   $   13,908      $   13,692
  Gas ..............................................................        2,782           2,697
  Common ...........................................................          586             558
                                                                       ----------      ----------
       Total .......................................................       17,276          16,947
  Less: Accumulated depreciation and amortization ..................        6,921           6,463
                                                                       ----------      ----------
       Net .........................................................       10,355          10,484
  Nuclear Fuel in Service, net of accumulated amortization -
     1998, $321; 1997, $302 ........................................          181             216
                                                                       ----------      ----------
       Net Utility Plant in Service ................................       10,536          10,700
  Construction Work in Progress, including Nuclear Fuel in
    Process - 1998, $74; 1997, $60 .................................          313             326
  Plant Held for Future Use ........................................           24              24
                                                                       ----------      ----------
       Net Utility Plant ...........................................       10,873          11,050
                                                                       ----------      ----------
INVESTMENTS AND OTHER NONCURRENT ASSETS
  Long-Term Investments, net of amortization - 1998, $27; 1997, $21,
    and net of valuation allowances - 1998, $14; 1997, $10 .........          136             137
  Nuclear Decommissioning and Other Special Funds ..................          570             492
 Other Noncurrent Assets ...........................................           43              45
                                                                       ----------      ----------
       Total Investments and Other Noncurrent Assets ...............          749             674
                                                                       ----------      ----------
CURRENT ASSETS
  Cash and Cash Equivalents ........................................           17              17
  Accounts Receivable:
    Customer Accounts Receivable ...................................          498             488
    Other Accounts Receivable ......................................          336             232
    Less: Allowance for Doubtful Accounts ..........................           37              41
  Unbilled Revenues ................................................          186             270
  Fuel, at average cost ............................................          326             310
  Materials and Supplies, at average cost, net of inventory
    valuation reserves - 1998, $12; 1997, $12 ......................          144             142
  Prepayments ......................................................          229              44
  Miscellaneous Current Assets .....................................           28              37
                                                                       ----------      ----------
       Total Current Assets ........................................        1,727           1,499
                                                                       ----------      ----------
DEFERRED DEBITS (Note 3)
  Unamortized Loss on Reacquired Debt and Debt Expense .............          140             135
  OPEB Costs .......................................................          275             289
  Environmental Costs ..............................................          121             122
  Electric Energy and Gas Costs ....................................           69             167
  SFAS 109 Income Taxes ............................................          698             725
  Demand Side Management Costs .....................................          141             116
  Other ............................................................          130             143
                                                                       ----------      ----------
       Total Deferred Debits .......................................        1,574           1,697
                                                                       ----------      ----------
TOTAL ..............................................................   $   14,923      $   14,920
                                                                       ==========      ==========

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>


                                                             (Unaudited)
                                                             September 30,    December 31,
                                                                1998              1997
                                                            --------------   --------------

<S>                                                           <C>             <C>    
 CAPITALIZATION
  Common Stockholder's Equity:
    Common Stock ...........................................   $ 2,563         $ 2,563
    Contributed Capital ....................................       594             594
    Retained Earnings ......................................     1,455           1,352
                                                               -------         -------
       Total Common Stockholder's Equity ...................     4,612           4,509
  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 8) ..................................       513             513
  Long-Term Debt ...........................................     4,044           4,126
                                                               -------         -------
       Total Capitalization ................................     9,339           9,318
                                                               -------         -------
OTHER LONG-TERM LIABILITIES
  Accrued OPEB .............................................       332             289
  Decontamination and Decommissioning Costs ................        39              43
  Environmental Costs  (Note 4) ............................        69              73
  Capital Lease Obligations ................................        50              52
                                                               -------         -------
       Total Other Long-Term Liabilities ...................       490             457
                                                               -------         -------
CURRENT LIABILITIES
  Long-Term Debt due within one year .......................       100             118
  Commercial Paper and Loans ...............................     1,082           1,106
  Accounts Payable .........................................       637             608
  Other ....................................................       257             268
                                                               -------         -------
       Total Current Liabilities ...........................     2,076           2,100
                                                               -------         -------
DEFERRED CREDITS
  Income Taxes .............................................     2,567           2,569
  Investment Tax Credits ...................................       319             333
  Other ....................................................       132             143
                                                               -------         -------
       Total Deferred Credits ..............................     3,018           3,045
                                                               -------         -------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 4) ............      --              --
                                                               -------         -------
TOTAL ......................................................   $14,923         $14,920
                                                               =======         =======

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

<TABLE>
                                    
                                   PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                             (Millions of Dollars)
                                                  (Unaudited)
<CAPTION>

                                                              Nine Months Ended September 30,
                                                              -------------------------------
                                                                  1998           1997
                                                                ----------    -----------
<S>                                                               <C>         <C>  
 CASH FLOWS FROM OPERATING ACTIVITIES 
  Net income ...................................................   $ 487       $ 387
  Adjustments to reconcile net income to net cash flows from
   operating activities:
    Depreciation and Amortization ..............................     484         459
    Amortization of Nuclear Fuel ...............................      70          47
    Recovery of Electric Energy and Gas Costs - net ............      98          23
    Changes in certain current assets and liabilities:
     Net change in Accounts Receivable and Unbilled Revenues ...     (34)        160
     Net increase in Inventory - Fuel and Materials and Supplies     (18)        (11)
     Net change in Accounts Payable ............................      29         (12)
     Net increase in Prepayments ...............................    (185)       (169)
     Net decrease in Other Current Assets and Liabilities ......      (2)       (107)
    Other ......................................................      39         (81)
                                                                   -----       -----
       Net Cash Provided By Operating Activities ...............     968         696
                                                                   -----       -----
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Utility Plant, excluding AFDC ...................    (359)       (383)
  Contribution to Decommissioning Funds and Other Special Funds      (91)        (43)
  Other ........................................................     (10)        (33)
                                                                   -----       -----
       Net Cash Used In Investing Activities ...................    (460)       (459)
                                                                   -----       -----
CASH FLOWS FROM FINANCING ACTIVITIES
  Net (decrease) increase in Short-Term Debt ...................     (24)        290
  Issuance of Long-Term Debt ...................................     250         279
  Redemption of Long-Term Debt .................................    (350)       (416)
  Redemption of Preferred Stock ................................    --           (94)
  Issuance of Preferred Securities .............................    --            95
  Cash Dividends Paid ..........................................    (383)       (401)
  Other ........................................................      (1)        (13)
                                                                   -----       -----
       Net Cash Used In Financing Activities ...................    (508)       (260)
                                                                   -----       -----
Net Change In Cash And Cash Equivalents ........................    --           (23)
Cash And Cash Equivalents At Beginning Of Period ...............      17          48
                                                                   -----       -----
Cash And Cash Equivalents At End Of Period .....................   $  17       $  25
                                                                   =====       =====

Income Taxes Paid ..............................................   $ 333       $ 205
Interest Paid ..................................................   $ 295       $ 271

See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
--------------------------------------------------------------------------------
                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
--------------------------------------------------------------------------------
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Basis of Presentation/Organization

     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 1997  Annual  Report on Form 10-K and the
Quarterly  Reports on Form 10-Q for the  quarters  ended March 31, 1998 and June
30, 1998. These Notes update and supplement matters discussed in the 1997 Annual
Report  on Form 10-K and the  Quarterly  Reports  on Form 10-Q for the  quarters
ended March 31, 1998 and June 30, 1998.

     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 1997
Annual Report on Form 10-K. Certain  reclassifications of prior period data have
been made to conform with the current presentation.

     These reclassifications  include netting the cost of interchanged power for
energy trading against energy trading revenue in Operating  Revenues - Electric.
Public Service Enterprise Group Incorporated  (PSEG) and Public Service Electric
& Gas Company  (PSE&G) enter into  contracts for the purchase and sale of energy
commodities  (primarily  electricity) to manage exposure to price volatility and
to generate  market gains.  The gross  amounts of revenue and expense  generated
from these  contracts  have  previously  been  reported in Electric  Revenue and
Interchanged Power and Fuel for Electric  Generation,  respectively,  within the
statements of income.  Effective in the third quarter of 1998,  these  contracts
are reported on a net basis.  Reclassifications of prior period information have
been made to conform with the current presentation.

     Organization

     As  previously  reported,  on June 12, 1998,  PSEG  renamed  certain of its
principal non-utility subsidiaries. Enterprise Diversified Holdings Incorporated
was renamed  PSEG Energy  Holdings  Inc.  (Energy  Holdings);  Community  Energy
Alternatives  Incorporated  was  renamed  PSEG  Global  Inc.  (Global);  Energis
Resources  Incorporated  was  renamed  PSEG  Energy  Technologies  Inc.  (Energy
Technologies)  and  Public  Service  Resources   Corporation  was  renamed  PSEG
Resources Inc. (Resources).

Note 2.  Rate Matters

     New Jersey Energy Master Plan Proceedings and Related Legislation

     As previously  reported,  the New Jersey Board of Public Utilities (BPU) is
engaged in  proceedings  to implement  the New Jersey Energy Master Plan (Energy
Master Plan) which,  when completed,  are expected to  fundamentally  change the
electric  industry  in the State by,  among  other  things,  introducing  retail
competition  to replace the  monopoly  position of regulated  public  utilities,
potentially  requiring  or  resulting in the  separation  or sale of  utilities'
generation  assets  and  establishing  generic  rules  governing  the  regulated
utilities'  relationships with their affiliates.  If the generation  business is
deregulated  as  proposed,   generation  will  be  in  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,  marketing ability and quality of service,  among others.  The
outcome of these  proceedings and the proposed  legislation to authorize the BPU
to permit  competition in the electric and gas marketplace  will have a profound
effect on PSEG and PSEG's principal subsidiary, PSE&G.

     In connection  with its Energy Master Plan  proceedings,  the BPU requested
the Office of Administrative  Law (OAL) to hold evidentiary  hearings  regarding
stranded  costs and  unbundling  issues.  On August 17, 1998,  the OAL filed its
decision providing its  recommendations to the BPU. The BPU can adopt, reject or
modify the Administrative  Law Judge's (ALJ)  recommendations in its decision on
PSE&G's  proposal  which was filed as part of these  proceedings.  PSE&G  cannot
predict  the  extent  to  which  the BPU  will  rely on the  ALJ's  decision  in
evaluating PSE&G's proposal.  The ALJ's decision on PSE&G's competition and rate
proposal:

          Recommended  the adoption of PSE&G's  request to securitize up to $2.5
          billion of its  after-tax  stranded  costs  through  the  issuance  of
          revenue bonds, which would mature over a 15 year period.

          Recommended the recovery of $1.6 billion of PSE&G's above-market price
          contracts to purchase power from non-utility generators (NUGs).

          Recommended a rate cut of between 10% and 12%, exclusive of the impact
          of energy tax reform.

          Supported  PSE&G's request for a seven year transition  period.  PSE&G
          had  proposed a  transition  period of seven  years,  starting  on the
          effective date of the BPU's final decision in these proceedings,  with
          basic tariff rates  capped  during that seven year period.  During the
          transition  period,  PSE&G would  maintain  responsibility  for system
          reliability of energy and capacity supply.

          Accepted PSE&G's  approach/methodology  of quantifying  stranded costs
          without quantifying the amount of such costs.

          Recommended  a review of PSE&G's  actual  electric  fuel costs,  which
          would apply any potential savings from the elimination of the Electric
          Levelized Energy  Adjustment  Clause (LEAC) to mitigate stranded costs
          (see Note 3. Regulatory Assets and Liabilities).

          Supported PSE&G's Societal  Benefits Clause proposal,  but proposed to
          exclude non-utility  generators (NUG) costs from the Societal Benefits
          Clause. A separate NUG charge would be created.

          Recommended  adding  an  amount,  known as a  "retail  adder,"  to the
          proposed  market-based  energy  credit  on  customers'  bills  to give
          customers who choose another energy supplier credits for more than the
          market price for power.

     On October 2, 1998,  PSE&G filed  exceptions to the ALJ's  decision.  These
exceptions  addressed  issues  identified  in the ALJ's  decision  including the
validity of capital  additions  made by PSE&G after the  conclusion  of its 1992
base rate case, the relevance of PSE&G's  methodology  regarding stranded costs,
mitigation  strategies,  the adoption of  securitization  and the  unbundling of
costs and rates.  Other parties to the proceeding have also filed  exceptions to
the ALJ's  decision.  PSE&G  filed its reply  exceptions  to the other  parties'
exceptions to the ALJ's decision on October 30, 1998.

     Hearings at the BPU addressing  other  restructuring  issues such as market
power,  functional separation and consumer protection concluded on May 28, 1998.
Briefs  have been filed by the  parties  in these  hearings  and a  decision  is
pending.

     As discussed above, proposed legislation,  the Electric Discount and Energy
Competition Act (Energy Competition Act), concerning competition in the electric
and gas  industries,  was  introduced,  into the New Jersey  State  Assembly  on
September  14,  1998 as  House  Bill  A-10 and into  the New  Jersey  Senate  on
September  28,  1998 as Senate  Bill S-5.  These  bills  will be debated in both
houses of the New Jersey  legislature  prior to any final approval.  Legislative
hearings  commenced on October 19, 1998. This legislation  would provide the BPU
requisite  authority  to  implement  certain  aspects  of  wholesale  and retail
electric  competition  in  New  Jersey.  Key  features  of the  proposed  Energy
Competition Act, as introduced, but subject to revision, include:

          Competitive  choice for electric  service  would begin on June 1, 1999
          with an optional  phase-in period of four months.  Competitive  choice
          for gas service must be fully  implemented  by December 31, 1999.  For
          further  discussion  of gas  competition,  see  Gas  Unbundling  Pilot
          Program.

          Initial electric rate reductions of between 5% and 10%, phased in over
          a period of up to twenty-four months,  would be provided to consumers.
          When  coupled  with  reductions  expected  from recent  changes in New
          Jersey energy taxes (see Note 6. Taxes), the total rate reductions for
          consumers could total between 11% and 16%.

          Utilities  would  have  an  opportunity  to  recover   stranded  costs
          associated with generation  assets through a market  transition charge
          (MTC)  that  could  last up to  eight  years.  Costs  associated  with
          above-market  power purchase  contracts with other  utilities and with
          non-utility  generators  (NUGs) would be recovered  over the remaining
          life of those  contracts.  Mitigation  by the utility of its  stranded
          costs, to the extent possible, would be required.

          Securitization is limited to 75% of generation-related stranded costs.
          Generation-related  transition  bonds  with a maximum  maturity  of 15
          years  could be issued  if the  proceeds  are used to reduce  stranded
          costs  associated  with  generation-related   assets.  Power  purchase
          contracts  could  also be  securitized  in an effort to buy out or buy
          down contracts. Overall rate reductions and stranded cost levels would
          determine the amount of debt a company would be allowed to securitize.

          On or after the starting date of implementation of retail choice,  the
          BPU may require functional  separation of a utility's  non-competitive
          business  functions from its competitive  electric  generation service
          and require that those functions be provided by a related  competitive
          business  segment or a public  utility  holding  company.  The related
          competitive  business segment would not be subject to regulation under
          New Jersey utility law.

          While the proposed Energy Competition Act does not mandate divestiture
          of  generation  assets,  it would  give the BPU the  right to  examine
          market  conditions  and require  divestiture  if it finds market power
          would impede development of competition.

          Competitive services may be offered by an electric public utility only
          with the written approval of the BPU. Tariffs for competitive services
          would be required  and subject to review and  approval by the BPU. The
          competitive  business segment must not adversely impact the ability of
          the utility to offer non-competitive  services to customers in a safe,
          adequate and proper  manner.  The price for services  must not be less
          than  the  fully   allocated   cost  of   providing   such   services.
          Cross-subsidization  would be  prohibited  and standards for affiliate
          relationships would be established. The BPU would be required to apply
          50% of the net revenues earned from competitive services offered by an
          electric  public utility as an offset to stranded costs or a reduction
          of rates.

          Utility  holding  companies  would be permitted  to offer  competitive
          electric  generation  service to  existing  utility  retail  customers
          subject to affiliate relations standards to be established by the BPU.
          A utility holding  company's  competitive  business  entity  utilizing
          utility  assets,  including  personnel  and  equipment  other than the
          delivery network, to provide competitive  services may be subject to a
          50% sharing of net  revenues  from such  services.  Unless the utility
          ratepayers  receive  full  market  value  for the use of such  utility
          assets pursuant to a contract  between the parties filed with the BPU,
          those  revenues  would be used to  offset  transition  charges  and/or
          distribution rates for a period of time.

          The BPU would be required to initiate a proceeding  and adopt  interim
          technical standards to ensure the safety,  reliability and accuracy of
          metering  equipment  provided to electric and gas  customers.  The BPU
          would  be  required  to  issue  an  order   providing   customers  the
          opportunity  to choose a supplier  for some or all  customer  services
          (such as metering  and billing) not later than one year from the start
          of retail competition.

          The BPU  would  be  required  to  adopt  interim  consumer  protection
          standards for electric and gas suppliers to prevent slamming,  protect
          customer privacy and provide customers  necessary  information to make
          informed decisions.

          Simultaneously  with the  implementation of retail choice, the BPU may
          permit  recovery of certain costs through a Societal  Benefits  Clause
          which would be a  component  of rates for all  customers.  These costs
          would include  societal  programs for which rate recovery was approved
          prior to April 30, 1997; nuclear  decommissioning  costs;  demand side
          management  program costs and  manufactured  gas plant clean up costs.
          The BPU  should  commence  a  proceeding  within  nine  months  of the
          implementation  of retail  choice  to  determine  whether a  universal
          service fund should be created.

          Utilities would serve customers for at least three years as the energy
          provider of last resort,  providing basic generation and gas services.
          The BPU would be required  to decide,  no later than three years after
          the start of  retail  choice,  whether  to allow  other,  non-utility,
          suppliers to offer basic generation service on a competitive basis.

          Businesses,  cities,  towns and  counties  would be able to  aggregate
          their own power demands and other energy needs for which marketers may
          bid to serve.  Aggregation by  municipalities  to serve  residents and
          businesses within those  municipalities  could commence in three years
          from the effective date of the legislation.

          Electric  suppliers  must  disclose  information  about  fuels used to
          generate  the  electricity  that they sell and  emissions  from  their
          portfolio  of  electricity   suppliers  on  customers'  bills  and  in
          marketing   materials.   The  BPU  and  New   Jersey   Department   of
          Environmental   Protection  (NJDEP)  may  adopt  an  emission  control
          portfolio  standard  for all retail  suppliers if the BPU finds that a
          standard is  necessary  to meet Clean Air Act rules and that  regional
          and Federal actions would not achieve compliance with those rules.

     Final  legislative  and  executive  action on the proposed  legislation  is
currently expected during the fourth quarter of 1998. If this legislation is not
enacted  this  year,  it is  possible  that  any  legislation  and  any  related
regulatory  action  required for industry  restructuring  could be delayed until
2000.

     To the extent that any portion of its  stranded  costs are not  probable of
recovery  upon the  conclusion  of the Energy  Master Plan  proceedings  and the
related  legislative  process,  and thus ineligible for deferral as a regulatory
asset under Statement of Financial  Accounting  Standards (SFAS) 71, "Accounting
for the Effects of Certain Types of Regulation"  (SFAS 71), PSE&G would incur an
extraordinary,  non-cash  charge to  operations  that could be  material  to the
financial  position and results of operations of PSEG and PSE&G.  For additional
discussion  related to the Energy Master Plan and the related  legislation,  see
Note 3.  Regulatory  Assets and  Liabilities.  PSEG and PSE&G cannot predict the
outcome of these  administrative  and  legislative  proceedings.  However,  such
proceedings could have a material adverse effect on PSEG's and PSE&G's financial
condition,  results of operations and net cash flows and could adversely  affect
the  carrying  values of PSEG's and  PSE&G's  assets and the  ability to declare
dividends on PSEG's common stock.

     On  September  15,  1998,  in  anticipation  of  securitization  of PSE&G's
stranded costs  afforded by the proposed  Energy  Competition  Act and the ALJ's
decision,  the Board of Directors of PSEG  authorized the repurchase of up to 10
million  shares of its common stock  (Common  Stock).  Under the  authorization,
repurchases will be made in the open market at the discretion of PSEG. Until the
expected  securitization  process  in  connection  with the Energy  Master  Plan
occurs,  the  Common  Stock  repurchase  will be  funded  by PSEG  debt with the
repurchased  shares held as treasury  stock.  At September  30,  1998,  PSEG had
repurchased  approximately  2.4 million  shares of Common Stock at a cost of $91
million, under this authorization.

     Non-utility Generation Buydown

     As previously reported,  PSE&G is seeking to restructure certain of its BPU
approved  contracts  with NUGs,  which are  estimated to be $1.6  billion  above
assumed future market  prices.  Under Federal and State  regulations,  utilities
have been required to enter into long-term  power purchase  agreements with NUGs
at prices which have subsequently proven to be above market. In June 1998, PSE&G
and the Union County Utilities  Authority (UCUA) announced an agreement to amend
their Power  Purchase and  Interconnection  Agreement and in July 1998,  the BPU
approved this amendment.  Under this  amendment,  PSE&G has paid UCUA a lump sum
amount of $7.75 million in exchange for a $15.6 million savings to ratepayers on
a net  present  value  basis.  The  payment  of $7.75  million  by PSE&G will be
recovered through the LEAC or successor mechanisms for recovery of NUG costs, to
be determined by the outcome of the Energy Master Plan proceedings.

     Levelized Gas Adjustment Clause (LGAC)

     On July 10,  1998,  PSE&G  filed a motion  with  the BPU  requesting  a $27
million annual  increase in its LGAC for the period October 1, 1998 to September
30,  1999,   representing  an  increase  on  a  typical   residential   bill  of
approximately 2.8%. Also included in the revised LGAC rate is an increase in the
Remediation  Adjustment  Clause (RAC)  component,  a decrease in the Demand Side
Adjustment  Factor  (DSAF)  and a request  to change,  on a monthly  basis,  the
over/under collection component of the LGAC rate for residential  customers.  On
October  15,  1998,  PSE&G,  BPU Staff and the  Ratepayer  Advocate  executed an
Interim  Stipulation.  The  Stipulation  allows  the filed  LGAC rates to become
effective,  subject to refund.  On November 4, 1998,  the BPU  approved an Order
adopting the Interim Stipulation. The remaining issues will be either settled or
litigated and incorporated in the BPU's Final Order in this matter. PSE&G cannot
predict the outcome of this proceeding.

     Gas Unbundling Pilot Program

     In April 1997,  the BPU approved  PSE&G's  proposal for a  residential  gas
unbundling  pilot  program  (SelectGas),   which  allowed  approximately  65,000
residential natural gas customers, out of a total of 1.4 million residential gas
customers,  to participate in the competitive marketplace effective May 1, 1997.
To date,  none of these eligible  customers have  subscribed to the program.  On
April 30,  1998,  PSE&G filed a report with the BPU on  SelectGas  and  proposed
refinements for a permanent residential gas unbundling program (SelectGas Plus).
Under  SelectGas  Plus, as proposed,  a total of 300,000  residential  customers
would be permitted to choose  their gas supplier on a  first-come,  first-served
basis.  This  expanded  program  would  commence  sixty  days  after a BPU order
authorizing   this  program.   PSE&G's   proposal  would  permit  its  remaining
residential  customers  to  choose  their gas  supplier  by July 1, 1999 or such
alternate  date as may be  established  by the BPU.  For further  discussion  of
residential gas  competition,  see New Jersey Energy Master Plan Proceedings and
Related Legislation.

     Electric  Levelized Energy Adjustment Clause  (LEAC)/Demand Side Adjustment
     Factor (DSAF)

     As previously  reported,  on April 1, 1998,  the BPU approved an annualized
increase of $150.8 million in the DSAF component of the LEAC.  This increase was
effective  for service  rendered on or after April 3, 1998.  The Division of the
Ratepayer  Advocate has appealed the BPU's order,  seeking to overturn the BPU's
decision.  Initial Briefs on Appeal were filed on October 14, 1998. PSE&G cannot
predict the outcome of that appeal. If such an appeal is successful, there could
be a material adverse impact on PSEG's and PSE&G's financial condition,  results
of operations and net cash flows.

     As previously reported,  PSE&G's competition and rate proposal in the BPU's
restructuring  proceedings provides for a transition period of seven years, with
basic tariff rates being capped and the  discontinuation  of the LEAC  effective
December 31, 1998. That proposal also provides for recovery of mandated societal
costs,  including Demand Side Management  (DSM), to be adjusted based on changes
in such costs.  At September  30,  1998,  PSE&G had an  underrecovered  balance,
including  interest,  of  approximately  $146  million  related to electric  DSM
programs.  Such  amount is  included  in  Deferred  Debits on PSEG's and PSE&G's
Consolidated  Balance Sheets.  PSE&G estimates that the underrecovered  electric
DSM balance at December 31, 1998 will be  approximately  $130 million.  PSEG and
PSE&G cannot predict the final outcome of DSM and other mandated  societal costs
recovery under the BPU's proceedings and the related  legislation.  Inability to
recover such amounts could have a material  adverse impact on PSEG's and PSE&G's
financial  condition,  results of  operations  and net cash  flows.  For further
discussion of the  potential  impact on PSEG and PSE&G of the Energy Master Plan
proceedings,   see  New  Jersey  Energy  Master  Plan  Proceedings  and  Related
Legislation.

     Remediation Adjustment Charge (RAC)

     On July 10,  1998,  PSE&G filed a motion  before the BPU  requesting a $1.5
million  annual  increase  in its RAC for the period  August 1, 1997 to July 31,
1998,  representing an increase on a typical  residential  bill of approximately
0.03%.  On November 4, 1998,  the BPU  approved  an Order  adopting  the Interim
Stipulation. The BPU's Order approves the rates requested on July 10, 1998 on an
interim basis, subject to refund. Any remaining issues will be either settled or
litigated and incorporated in the BPU's Final Order in this matter. PSE&G cannot
predict the outcome of this proceeding.

     Other Post-Retirement Benefits (OPEB)

     On October 21, 1998, the BPU ordered PSE&G to fund in an external trust its
annual OPEB  obligation to the maximum extent  allowable under Section 401(h) of
the Internal Revenue Code. For 1998, this amount is expected to be approximately
$12 million.  Remaining OPEB costs will not be funded in an external  trust,  as
mandated by the BPU.

     Competitive Services Audit

     On August  31,  1998,  the BPU  mandated  the  commencement  of an audit of
PSE&G's competitive  services,  including PSE&G's Appliance Service Business, to
determine  whether  PSE&G's  competitive  services have impaired or could impair
PSE&G's   ability  to  provide   safe,   adequate   and   proper   service;   if
cross-subsidization   exists  between  the  regulated  utility  and  the  entity
providing  competitive  services;  if rates for competitive services are unjust,
unreasonable,  discriminatory  or unduly  preferential  and if the utility is in
compliance with the BPU's compliance monitoring and reporting requirements.  The
BPU's  intention is to complete this audit by December 31, 1998, in concert with
the Energy Master Plan.

     Storm Damage Investigation

     On September  14, 1998,  the BPU announced an  investigation  of the damage
caused by the September 7, 1998 storm that passed through PSE&G's territory.  No
docketed  proceeding  has yet been  initiated.  The BPU has issued two series of
questions  focusing on 1)  reductions in workforce  over the past few years,  2)
cutbacks in tree trimming over the past few years and 3) communications  efforts
to affected  municipalities  and  customers.  PSE&G has  responded to all of the
BPU's questions to date. PSE&G cannot predict the outcome of this investigation.

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 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 rate-making  process,  there will be a corresponding
increase or decrease in revenues. Accordingly, PSE&G has deferred certain costs,
which will be 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.  PSE&G
continues to meet the requirements for application of SFAS 71.

     As discussed in Note 2. Rate Matters,  the regulatory  changes  proposed in
the Energy Master Plan will create a shift from regulated pricing to competitive
market  pricing for  electric  generation.  Assuming  enactment  of the required
enabling  legislation  (see Note 2. Rate Matters),  these proposed  changes will
limit PSEG's and PSE&G's ability to continue to meet the applicable  criteria of
SFAS 71 for the  generation  portion  of  PSE&G's  business.  If  PSE&G  were to
discontinue the application of SFAS 71 and full recovery was not probable, there
would be an extraordinary,  non-cash charge to operations that could be material
to the financial position and results of operations of PSEG and PSE&G.

     The impact to PSEG and PSE&G will be determined based on the outcome of the
Energy Master Plan  proceedings and the related  legislation.  While  management
cannot predict the outcome of the Energy Master Plan proceedings and the related
legislative process on PSEG's and PSE&G's future financial condition, results of
operations  and net cash flows,  the effect could be material  (see Note 2. Rate
Matters).

     At September 30, 1998 and December 31, 1997,  respectively,  PSEG and PSE&G
had deferred the following regulatory assets on the Consolidated Balance Sheets:
<TABLE>
<CAPTION>
                                                                            September 30,           December 31,
                                                                                1998                    1997
                                                                          -------------------     ------------------
                                                                                   (Millions of Dollars)
<S>                                                                              <C>                      <C> 
       Unamortized Loss on Reacquired Debt and Debt Expense..............        $140                     $135
       OPEB Costs........................................................         275                      289
       Environmental Costs...............................................         121                      122
       Electric Energy and Gas Costs.....................................          69                      167
       SFAS 109 Income Taxes.............................................         698                      725
       Demand Side Management Costs......................................         141                      116
       Decontamination and Decommissioning Costs.........................          39                       43
       Property Abandonments.............................................          25                       37
       Plant and Regulatory Study Costs..................................          33                       34
       Oil and Gas Property Write-Down...................................          22                       26
                                                                               ------                   ------
            Total Regulatory Assets......................................      $1,563                   $1,694
                                                                               ======                   ======
</TABLE>

     Electric Energy and Gas Costs

     Recoveries of electric energy and gas costs are determined by the BPU under
the LEAC and LGAC.  PSE&G's  deferred fuel balances as of September 30, 1998 and
December 31, 1997, respectively, reflect underrecovered costs as follows:
<TABLE>
<CAPTION>

                                                                                  September 30,          December 31,
                                                                                      1998                   1997
                                                                                -------------------    ------------------
                                                                                         (Millions of Dollars)
<S>                                                                                      <C>                    <C>
       Underrecovered Electric Energy Costs......................................        $8                     $91
       Underrecovered Gas Fuel Costs.............................................        61                      76
                                                                                        ---                   -----
            Total...............................................................        $69                    $167
                                                                                        ===                    ====
</TABLE>

     The BPU Order dated December 31, 1996 provides PSE&G the  opportunity,  but
not a guarantee, during the period January 1, 1997 through December 31, 1998, to
fully recover its December 31, 1996  underrecovered LEAC balance of $151 million
without  any  change  in  the  current  energy  component  of the  LEAC  charge.
Management  believes  that it will  recover this amount by December 31, 1998 and
continues to follow deferred accounting treatment for the LEAC.

     As previously  reported,  under the BPU Order dated  December 31, 1996, any
underrecovered or overrecovered  LEAC balance existing on December 31, 1998 will
not be considered in any LEAC review  subsequent to that date. Any  overrecovery
at that date is expected to be applied to reduce any  potential  stranded  costs
and  any  underrecovered  balance  will  be  charged  to  income  in the  period
identified.  Additionally,  if PSE&G's  Energy Master Plan proposal is approved,
the LEAC would be discontinued. Certain components of the LEAC would become part
of the Societal  Benefits Clause under PSE&G's  proposal and the proposed Energy
Competition  Act.  Further,  discontinuance  of the  LEAC  may  cause  increased
earnings  volatility since PSE&G will bear the full risks and rewards of changes
in nuclear and fossil  generating  fuel costs and  replacement  power costs.  No
assurances  can be given as to the outcome of the New Jersey  Energy Master Plan
proceedings and the related legislation.

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.  PSE&G is the  operator of Salem and PECO
Energy is the operator of 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 (MDC) (defined below) 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.  MDC is the gross  electrical  output  for a station  measured  at the
output terminals of its turbine generators during the most restrictive  seasonal
conditions,  less the station's service load. 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  $92 million,  to be incurred  from 1997 through  2001,  of which $8
million  was  incurred in 1997 and  approximately  $25 million is expected to be
incurred in 1998.  During the nine months ended  September 30, 1998, $16 million
of costs related to Year 2000 readiness were incurred.  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 is continuing and costs identified to date are approximately
$5 million, which are not included in the estimate above. Additionally, PSE&G is
installing  programs from SAP America,  Inc. to replace  certain major  business
systems  (SAP).  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 by 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  Pennsylvania--New  Jersey--Maryland  Interconnection  (PJM), PJM
trading  partners  supplying  power  through  PJM or PSEG's or PSE&G's  critical
vendors  and/or  customers  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.

     Hazardous Waste

    Certain Federal and state laws authorize the U.S.  Environmental  Protection
Agency  (EPA) and the 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.  Except as discussed below
with  respect  to its  Remediation  Program,  PSEG and PSE&G do not  expect  its
expenditures  for any such site to have a  material  effect  on their  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,  among others, to develop  procedures for implementing  these
regulations.  These regulations may substantially increase the costs of remedial
investigations and remediations, where necessary,  particularly at sites located
on surface water bodies.  PSE&G and predecessor  companies owned and/or operated
facilities  located 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 and net cash flows.

    PSE&G Manufactured Gas Plant Remediation Program (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.

    Air Pollution Control

    As  previously  reported,  in September  1997,  NJDEP  proposed  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.  In June 1998, NJDEP
adopted final regulations implementing a NOx budget program and establishing the
formulas for NOx allocations.  The extent of investment in control  technologies
or  operational  changes  required  to comply  with  these  regulations  will be
directly related to the number of allowances PSE&G receives or is otherwise able
to  acquire.  PSE&G does not expect to receive  its final NOx budget  allocation
under the rule until the fall of 1999 and thus cannot fully assess the potential
costs at this time.  One  component  of the  potential  costs is the cost of new
projects  required to comply with the new regulations.  The current estimate for
those new projects is $67 million,  to be incurred  between 2000 and 2003, which
is incremental to the Construction and Capital  Requirements  Forecast disclosed
in the 1997 Annual Report on Form 10-K.

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 security
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.

     PSEG

     Interest Rate Swap

     PSEG  entered  into  an  interest  rate  swap  on June  26,  1998 to  hedge
Enterprise Capital Trust II's $150 million of Floating Rate Capital  Securities,
Series B, due 2028,  which were sold to a group of  institutional  investors  in
June 1998.  Enterprise  Capital Trust II is a special purpose statutory business
trust  controlled  by PSEG.  The basis for both the  interest  rate swap and the
Floating Rate Capital  Securities is the quarterly London Interbank Offered Rate
(LIBOR).  This interest rate swap effectively  hedges the underlying debt for 10
years at an effective rate of 7.2%.

     Energy Holdings

     Equity Securities

     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 fair  value 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  carrying  value  of  Resources'
portfolio  as of  September  30, 1998 and December 31, 1997 was $173 million and
$185 million, respectively.

     PSE&G

     Nuclear Decommissioning Trust Funds

     Contributions  made  into  the  Nuclear  Decommissioning  Trust  Funds  are
invested in debt and equity  securities.  The carrying value of $469 million and
$459 million of these funds approximates their fair market value as of September
30, 1998 and December 31, 1997, respectively.

Note 6.  Taxes

     As  previously  reported,  the New Jersey Gross  Receipts and Franchise Tax
(NJGRT) was eliminated effective January 1, 1998 and replaced with a combination
of the New Jersey Corporate  Business Tax which is a State income tax, the State
sales and use tax and a Transitional  Energy Facility Assessment (TEFA), with no
material impact on the financial  condition,  results of operations and net cash
flows of PSEG and  PSE&G.  The TEFA will be phased  out over five  years.  While
under NJGRT,  PSE&G was subject to an effective state tax on unit sales equal to
approximately 13% of receipts.  As a result of such tax reform,  after the phase
out of the TEFA,  the  effective  state  tax rate  applicable  to PSE&G  will be
substantially reduced. Interim rates were implemented with regard to the new tax
structure  effective with service rendered on and after January 1, 1998. The BPU
completed its  administrative  review of the filings of all New Jersey utilities
and approved permanent rates for 1998 on July 13, 1998 in a final Order.

     On  September  18,  1998 and  October  15,  1998,  PSE&G filed with the BPU
additional  information  necessary to 1) reconcile its NJGRT  collections to its
liability  through April 1998, 2) reflect the impact of cash working capital and
net negative  deferred  State income taxes on a separate  electric and gas basis
and 3) provide  actual and estimated  tax  collected  and tax liability  through
December 31, 1998. The BPU has the ability to mandate  adjustments  beyond those
set forth in its July 13, 1998 Order.  PSE&G does not expect these  adjustments,
if any,  to have a  material  impact  on its  financial  condition,  results  of
operations and net cash flows.

     Effective January 1, 1998, PSE&G became subject to the New Jersey Corporate
Business Tax, resulting in an effective income tax rate as follows:
<TABLE>
<CAPTION>

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

<S>                                                               <C>          <C>            <C>              <C>   
Federal tax provision at statutory rate                           35.0 %       35.0 %         35.0 %           35.0 %
New Jersey Corporate Business Tax, net of Federal benefit          5.9 %         --            5.9 %             --
Other-- net                                                        2.6 %       (0.6)%          1.4 %           (0.6)%
                                                               ---------     -------       --------       ----------
       Effective Income Tax Rate                                  43.5 %       34.4 %         42.3 %           34.4 %
                                                               ==========    =======       ========       ==========
</TABLE>

Note 7.  Accounting Matters

     In June 1997, the Financial  Accounting  Standards Board (FASB) issued SFAS
131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS
131),  which is effective for financial  statements for periods  beginning after
December  15,  1997.  This  Statement  need not be applied to interim  financial
statements in the initial year of its application.  SFAS 131 supersedes SFAS 14,
"Financial  Reporting for Segments of a Business  Enterprise"  and requires that
companies  disclose  segment data based on how management  makes decisions about
allocating resources to segments and measuring their performance. Since SFAS 131
solely revises disclosure requirements, the adoption of SFAS 131 will not have a
material impact on the financial  condition,  results of operations and net cash
flows of PSEG or PSE&G.

     In February 1998, the FASB issued SFAS 132,  "Employers'  Disclosures about
Pensions and Other  Postretirement  Benefits" (SFAS 132), which is effective for
financial  statements  for periods  beginning  after  December  15,  1997.  This
statement revises and standardizes disclosure requirements for pension and other
postretirement  benefit plans but does not change the measurement or recognition
of those  plans.  Since SFAS 132 solely  revises  disclosure  requirements,  the
adoption of SFAS 132 will not have a material impact on the financial condition,
results of operations and net cash flows of PSEG and PSE&G.

     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
derivative's  change in fair value will be  immediately  recognized in earnings.
PSEG and PSE&G are currently  evaluating  the impact of SFAS 133 in light of the
planned  issuance  by the  Emerging  Issues  Task  Force  (EITF) of EITF  98-10,
"Accounting  for Energy Trading and Risk Management  Activities".  EITF 98-10 is
expected to be effective  for  financial  statements  issued after  December 31,
1998. EITF 98-10 will provide guidance on accounting for energy contracts.  PSEG
and PSE&G  will  evaluate  the  impact of EITF  98-10 once it is issued in final
form.

     In April 1998,  the  American  Institute of  Certified  Public  Accountants
(AICPA) issued  Statement of Position 98-5,  "Reporting on the Costs of Start-Up
Activities" (SOP 98-5),  which is effective for financial  statements for fiscal
years  beginning after December 15, 1998. 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  is not  expected  to have a
material impact on the financial  condition,  results of operations and net cash
flows of PSEG and PSE&G.

Note 8.  Guaranteed Preferred Beneficial Interest in Subordinated Debentures

     The Guaranteed  Preferred  Beneficial  Interest in Subordinated  Debentures
includes  the  monthly  guaranteed  preferred  beneficial  interest  in  PSE&G's
subordinated  debentures  and  the  quarterly  guaranteed  preferred  beneficial
interest  in PSEG's and  PSE&G's  subordinated  debentures.  The  balances as of
September 30, 1998 and December 31, 1997 of these  preferred  securities  are as
follows:
<TABLE>
<CAPTION>

                                                                                     September 30,       December 31,
                                                                                        1998                 1997
                                                                                   -----------------    -----------------
                                                                                          (Millions of Dollars)
       <S>        
                                                                                        <C>                    <C> 
       Monthly Guaranteed Preferred Beneficial Interest in PSE&G's     
            Subordinated Debentures.............................................         $210                   $210
       Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's
            Subordinated Debentures.............................................          303                    303
       Quarterly Guaranteed Preferred Beneficial Interest in PSEG's
            Subordinated Debentures.............................................          525                     --
                                                                                       ------                   ----
            Total..............................................................        $1,038                   $513
                                                                                       ======                   ====
</TABLE>

     The increase in the Quarterly  Guaranteed  Preferred Beneficial Interest in
PSEG's Subordinated Debentures since December 31, 1997 is due to the issuance of
$225  million  of  7.44%  Trust  Originated  Preferred  Securities,  Series A by
Enterprise  Capital  Trust I in January  1998,  of $150 million of Floating Rate
Capital Securities,  Series B by Enterprise Capital Trust II in June 1998 and of
$150  million  of  7.25%  Trust  Originated  Preferred  Securities,  Series C by
Enterprise Capital Trust III in July 1998.


<PAGE>





--------------------------------------------------------------------------------
                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
--------------------------------------------------------------------------------

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)

Note 9.  Comprehensive Income

     Effective January 1, 1998, PSEG 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.  As
allowed for interim periods, PSEG has elected to disclose  Comprehensive Income,
which includes net income and the effects of foreign  currency  translation,  in
the Notes as follows:
<TABLE>
<CAPTION>

     Comprehensive Income, Net of Tax:

                                                                  Three Months Ended                Nine Months Ended
                                                                    September 30,                     September 30,
                                                             -----------------------------        -----------------------
                                                                1998             1997               1998         1997
                                                             -----------      ------------        ---------    ----------
                                                                (Millions of Dollars)             (Millions of Dollars)
<S>                                                                <C>               <C>              <C>           <C> 
       Net income..........................................        $180              $176             $493          $407
       Foreign currency translation........................        (10)                --             (22)            --
                                                                   ----              ----             ----          ----
       Comprehensive income................................        $170              $176             $471          $407
                                                                   ====              ====             ====          ====


</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/Organization
         Note 2.    Rate Matters
         Note 3.    Regulatory Assets and Liabilities
         Note 4.    Commitments and Contingent Liabilities
         Note 5.    Financial Instruments and Risk Management
         Note 6.    Taxes
         Note 7.    Accounting Matters
         Note 8.    Guaranteed Preferred Beneficial Interest in Subordinated
                    Debentures

Note 6.  Taxes

     Since PSE&G is now subject to the New Jersey  Corporate  Business  Tax, its
effective income tax rate is as follows:
<TABLE>
<CAPTION>

                                                                        Quarter Ended             Nine Months Ended
                                                                        September 30,               September 30,
                                                                    -----------------------     -----------------------
                                                                     1998          1997          1998          1997
                                                                    ---------     ---------     ---------    ----------
<S>                                                                   <C>           <C>           <C>           <C>  
Federal tax provision at statutory rate.........................      35.0 %        35.0 %         35.0 %       35.0 %
New Jersey Corporate Business Tax, net of Federal benefit.......       5.9 %         --             5.9 %        --
Other-- net.....................................................       0.9 %        (0.3)%          1.4 %       (0.2)%
                                                                    -------       -------        -------      -------
       Effective Income Tax Rate...................................   41.8 %        34.7 %         42.3 %       34.8 %
                                                                    =======       =======        =======      =======

</TABLE>
<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) 1997 Annual
Report  on Form 10-K and the  Quarterly  Reports  on Form 10-Q for the  quarters
ended March 31,  1998 and June 30, 1998  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.

Results of Operations

     Basic and diluted  earnings per share of PSEG common stock  (Common  Stock)
were $0.78 for the quarter ended September 30, 1998, representing an increase of
$0.02 or 3% per  share  from the  comparable  1997  period.  Basic  and  diluted
earnings  per share were $2.13 for the nine months  ended  September  30,  1998,
representing  an  increase  of $0.38 or 22% per share from the  comparable  1997
period.

     Public Service Electric and Gas Company's (PSE&G)  contribution to earnings
per share of Common  Stock for the quarter and nine months ended  September  30,
1998 increased $0.25 and $0.46 from the comparable  1997 periods,  respectively.
The  increases  for the quarter and nine months  ended  September  30, 1998 were
primarily due to increased  sales of  electricity  resulting  from  considerably
warmer  weather in the third  quarter of 1998  augmented  by  positive  economic
factors in New Jersey,  profits  realized from other wholesale power  activities
and  decreased  operating  and  maintenance  expenses  related  to the return to
service of PSE&G's Salem Nuclear  Generating  Station (Salem).  The increase for
the nine  months  ended  September  30,  1998 was  partially  offset  by  higher
operation  expenses,  including Year 2000 readiness (see Note 4. Commitments and
Contingent  Liabilities of Notes and Year 2000 Issues below),  and  depreciation
expenses.  The  increases  for the nine  months  ended  September  30, 1998 were
further  impacted by the one-time charge to earnings of $64 million or $0.28 per
share  recorded in 1997  resulting  from the settlement of lawsuits filed by the
co-owners  of Salem and from  profits  realized  from  energy  trading and other
wholesale power activities in 1998. For a discussion of commodity  trading,  see
Item 3. Qualitative and Quantitative Disclosures about Market Risk.

     PSEG Energy Holdings Inc.'s (Energy Holdings)  contribution to earnings per
share of Common Stock for the quarter and nine months ended  September  30, 1998
decreased  $0.23 and  $0.08  from the  comparable  1997  periods,  respectively,
primarily due to lower earnings of PSEG Resources Inc.  (Resources).  Resources'
earnings  decreased  for the quarter and nine months  ended  September  30, 1998
primarily due to lower income from its  investment  portfolio as a result of the
recent  downturn in the equities  market (see Note 5. Financial  Instruments and
Risk  Management of Notes).  For the nine months ended  September 30, 1998,  the
decrease was partially  offset by a gain resulting from the exercise of an early
buyout  option in the first  quarter of 1998 by the lessee in one of  Resources'
leveraged  lease  investments  and increased  income from new  investments  (see
Energy Holdings -- Earnings/(Losses)).

PSE&G -- Revenues

     Electric

     Revenues  increased  $112  million  or 10% and $146  million  or 5% for the
quarter and nine months ended September 30, 1998 from the comparable  periods in
1997,  respectively,  primarily due to higher sales resulting from  considerably
warmer  weather in the third  quarter of 1998  augmented  by  positive  economic
factors in New Jersey (see PSE&G -- Expenses -- Interchanged  Power and Fuel for
Electric  Generation).  These  increases were partially  offset by a decrease to
revenue  caused by New  Jersey  energy  tax reform in 1998 (see Note 6. Taxes of
Notes and PSE&G -- Expenses -- Income  Taxes).  Collection  of New Jersey  Gross
Receipts and Franchise Tax (NJGRT) was reflected in revenue and expense in prior
years.  As a result of energy tax reform,  the portion of NJGRT  replaced by the
New Jersey sales and use tax is no longer reflected in revenue or expense on the
income  statement.  State  sales  and use tax is a  liability  of the  customer,
collected by PSE&G and remitted to the State and is recorded in Tax  Collections
Payable,  which is included in Other  Current  Liabilities  on the  Consolidated
Balance Sheets.

     Gas

     Revenues  decreased  $73  million  or 27% and $247  million  or 19% for the
quarter and nine months ended September 30, 1998 from the comparable  periods in
1997,  respectively.  The decreases were primarily due to energy tax reform (see
PSE&G -- Revenues -- Electric above) and higher therm revenues  recorded in 1997
resulting  from a change in estimates of unbilled gas revenue due to refinements
of PSE&G's methodology. The decrease in the nine months ended September 30, 1998
was further  impacted by lower recovery of fuel costs and decreased  therm sales
resulting from milder winter weather in 1998.

PSE&G -- Expenses

     Interchanged Power and Fuel for Electric Generation

     Interchanged Power and Fuel for Electric  Generation  increased $23 million
or 9% and $34 million or 5% for the quarter and nine months ended  September 30,
1998 from the comparable 1997 periods, respectively,  primarily due to increased
sales of  electricity  resulting  in  increased  purchases  of fuel for electric
generation  and  purchases  of power from the  Pennsylvania-New  Jersey-Maryland
Interconnection  (PJM) pool.  Effective January 1, 1998, the amount included for
Electric Levelized Energy Adjustment Clause (LEAC) under/overrecovery represents
the difference between fuel-related revenues and fuel-related expenses which are
comprised of the cost of  generation  and  interchanged  power at the PJM market
clearing price.  Effective  April 1, 1998,  PJM, as independent  system operator
(ISO),  replaced the PJM uniform market clearing price with locational  marginal
pricing (LMP) for determining the market  clearing  pricing to energy  providers
(see  Competitive  Environment  - PJM).  Experience  to date  shows no  material
adverse impact of this change to LMP on PSE&G's cost of  Interchanged  Power and
Fuel for  Electric  Generation.  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.

     Effective July 1, 1998,  energy trading purchases are netted against energy
trading  revenue and  gains/(losses)  on such trading  activity are presented in
Operating Revenues -- Electric on the Consolidated  Statements of Income.  There
was no impact on net income  resulting from this  reclassification  (see Note 1.
Basis of Presentation/Organization of Notes).

     Income Taxes

     PSE&G became subject to New Jersey State income tax,  effective  January 1,
1998,  due to energy tax reform in the State of New Jersey (see Note 6. Taxes of
Notes).  Income Taxes  increased  $71 million or 85% and $120 million or 52% for
the quarter and nine months ended  September 30, 1998 from the  comparable  1997
periods,  respectively.  These  increases  are primarily due to the inclusion of
State  income tax of $34 million and $90 million for the quarter and nine months
ended  September  30, 1998,  respectively.  In the quarter and nine months ended
September 30, 1998, there were increases of $37 million and $30 million from the
comparable  1997 periods in Federal  income taxes,  respectively,  due to higher
pre-tax operating income.

     Transitional  Energy Facility Assessment (TEFA) / New Jersey Gross Receipts
     and Franchise Tax (NJGRT)

     TEFA/NJGRT  decreased  $91  million or 69% and $293  million or 70% for the
quarter and nine  months  ended  September  30,  1998 from the  comparable  1997
periods, respectively, due to New Jersey energy tax reform. For 1998, the amount
represents  TEFA  unit-based  taxes  while  the  1997  amount  represents  NJGRT
unit-based  taxes.  The TEFA unit tax rates are  approximately  30% of the NJGRT
unit tax rates. See PSE&G -- Revenues and Income Taxes, above, and Note 6. Taxes
of Notes for other impacts of New Jersey energy tax reform.

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 Issues, below.


<PAGE>



Energy Holdings -- Earnings/(Losses)
<TABLE>
<CAPTION>

                                                                   Increase (Decrease)              Increase (Decrease)
                                                                 --------------------------       -------------------------
                                                                      Quarter Ended                  Nine Months Ended
                                                                      September 30,                    September 30,
                                                                      1998 vs. 1997                    1998 vs. 1997
                                                                 --------------------------       -------------------------
                                                                                  (Millions of Dollars)
<S>                                                                        <C>                               <C>  
       Resources                                                           $(48)                             $(12)
       PSEG Global Inc. (Global)                                             (6)                               (7)
       PSEG Energy Technologies Inc. (Energy Technologies)                    -                                (1)
                                                                           ------                            -----
                                Total                                      $(54)                             $(20)
                                                                           ======                            =====
</TABLE>

     Energy  Holdings  had net  losses  of $35  million  for the  quarter  ended
September  30, 1998  compared to net earnings of $19 million for the same period
in 1997,  representing  a  decrease  of $54  million.  Energy  Holdings  had net
earnings of $13 million for the nine months ended September 30, 1998 compared to
$33 million for the same period in 1997, representing a decrease of $20 million.
These  decreases  were  primarily  due  to  Resources'  lower  income  from  its
investments.  The effects on PSEG's and Energy Holdings' earnings resulting from
fluctuations  in the fair value of these  investments  for the  quarter and nine
months ended  September 30, 1998 were  unrealized  losses of $67 million and $22
million,  respectively,  compared  to  unrealized  gains of $7  million  and $15
million  for the same  periods  of 1997,  respectively  (see  Note 5.  Financial
Instruments and Risk Management).  Continuing volatility in the equities markets
may also impact  PSEG's and Energy  Holdings'  financial  condition,  results of
operations and net cash flows.  The results for the nine months ended  September
30, 1998 were partially offset by a gain resulting from the exercise of an early
buyout  option in the first  quarter of 1998 by the lessee in a leveraged  lease
and increased income from new investments.

Liquidity and Capital Resources

     PSEG

     PSEG is a 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
subsidiaries, PSE&G and Energy Holdings.

     Cash  generated  from PSE&G's  operations  is expected to provide the major
source of funds for PSE&G's  business.  Energy  Holdings'  growth will be funded
through external financings, cash generated from operations and equity capital.

     Dividend  payments  on Common  Stock  were  $1.62  per  share  and  totaled
approximately  $376  million for the nine months  ended  September  30, 1998 and
1997,  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 and related legislation and PSEG's and PSE&G's response thereto
(see Note 2. Rate  Matters  and Note 3.  Regulatory  Assets and  Liabilities  of
Notes),  the  receipt  of  dividend  payments  from its  subsidiaries  and other
factors.   PSE&G  paid  common  dividends  of  approximately  $376  million  and
approximately  $391 million to PSEG during the nine months ended  September  30,
1998 and 1997,  respectively.  Changes in PSE&G's financial condition that could
result from the Energy Master Plan  proceedings  and related  legislation  could
have a material  adverse  effect on the ability to maintain the dividend at such
level  (see  PSE&G  below).  Due to the  growth in Energy  Holdings'  investment
activities,  no dividends on Energy Holdings' common stock were paid in the nine
months ended September 30, 1998 and 1997 or are anticipated for the remainder of
1998.  Energy  Holdings  paid $12 million of dividends  related to its preferred
stock  issued to PSEG for the nine  months  ended  September  30,  1998.  Energy
Holdings had no preferred  stock  outstanding in the period ended  September 30,
1997.

     On  September  15,  1998,  in  anticipation  of  securitization  of PSE&G's
stranded costs  afforded by the proposed  Energy  Competition  Act and the ALJ's
decision,  the Board of Directors of PSEG  authorized the repurchase of up to 10
million shares of Common Stock.  Under the  authorization,  repurchases  will be
made  in  the  open  market  at the  discretion  of  PSEG.  Until  the  expected
securitization  process in connection  with the Energy  Master Plan occurs,  the
Common Stock repurchase will be funded by PSEG debt with the repurchased  shares
held  as  treasury   stock.   At  September  30,  1998,   PSEG  had  repurchased
approximately 2.4 million shares of Common Stock at a cost of $91 million, under
this authorization.

     PSEG issued a total of $300 million of tax deductible  preferred securities
in June and July  1998.  The  proceeds  of the  sales  were  used to  invest  an
additional  $292  million  in Energy  Holdings,  which  made  additional  equity
investments in Global and Resources.

     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,
respectively,  has  defaulted on an indenture  related  thereto or its guarantee
thereof,  neither  PSEG nor PSE&G,  respectively,  may pay any  dividends on its
common or preferred stock.

     As of September 30, 1998, PSEG's capital structure  consisted of 48% common
equity,  41%  long-term  debt  and  11%  preferred  stock  and  other  preferred
securities.

     As a result  of the 1992  focused  audit of PSEG's  non-utility  businesses
(Focused Audit),  the New Jersey Board of Public Utilities (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 September  30, 1998 were
approximately  16% of 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
Corporation  (PSEG Capital),  a wholly-owned  subsidiary of Energy Holdings,  to
$750 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. Beginning in 1995, the debt supported
by such minimum net worth maintenance  agreement was limited to $650 million and
the affiliation fee has been  proportionately  reduced as such supported debt is
reduced.  PSEG and Energy  Holdings and its  subsidiaries  continue to reimburse
PSE&G for the cost of all services provided to them by employees of PSE&G.

     As a result of PSEG's  intent that  Energy  Holdings  and its  subsidiaries
provide  growth  vehicles for PSEG,  financing  requirements  connected with the
continued  growth of Energy Holdings,  changes to the utility industry  expected
from the final  outcome of the Energy  Master Plan  proceedings  and the related
legislation and potential  accounting impacts resulting from the deregulation of
the generation of electricity,  modifications will be required to certain of the
restrictions  agreed to by PSEG with the BPU in response  to the Focused  Audit.
Inability to achieve  satisfactory  resolution of these matters could impact the
future  relative size and financing of Energy Holdings and  accordingly,  PSEG's
future prospects,  including financial condition,  results of operations and net
cash  flows  (see  Note 2.  Rate  Matters  and  Note 3.  Regulatory  Assets  and
Liabilities of Notes).

     PSE&G

     Capital  resources and capital  requirements may be affected by the outcome
of the Energy Master Plan proceedings and related legislation.  For a discussion
of the  potential  impact of the Energy  Master  Plan  proceedings  and  related
legislation on PSE&G's future prospects,  including financial condition, results
of  operations  and net  cash  flows,  see  Note 2.  Rate  Matters  and  Note 3.
Regulatory Assets and Liabilities of Notes.

     For the nine months  ended  September  30,  1998,  PSE&G had utility  plant
additions,  including  Allowance  for Funds Used  During  Construction,  of $368
million, a $27 million decrease from the corresponding 1997 period. The decrease
was primarily due to the replacement of Salem 1 steam  generators in 1997. PSE&G
expects  that it will be able to generate  all of its  construction  and capital
requirements over the next five years  internally,  assuming adequate and timely
recovery of costs, as to which no assurances can be given.

     Energy Holdings

     In June and  July  1998,  PSEG  invested  $147  million  and $145  million,
respectively,  in Energy Holdings which issued to PSEG like amounts of its 4.80%
and 4.875% Cumulative  Preferred Stock and made additional equity investments in
Global and Resources.  PSEG funded its additional  investment in Energy Holdings
through  the  sale  of  tax  deductible   preferred   securities  (see  External
Financings).

     In July 1998, Global sold its 5% interest in a domestic  cogeneration plant
and in August  1998,  sold its 50%  interest in a natural  gas-fired  generating
station in  Colombia.  The  aggregate  proceeds  from these sales of $68 million
approximated Global's book value.

     In July 1998,  Resources purchased a 33.3% interest in a leveraged lease of
a natural gas-fired  generating  station in the United Kingdom for approximately
$40  million and in  September  1998,  purchased a 100%  interest in a leveraged
lease of several gas distribution  networks in the Netherlands for approximately
$45 million.

     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 interest  rates may affect  PSEG's and Energy
Holdings' financial condition, results of operations and net cash flows.

External Financings

     PSEG

     On September  30,  1998,  PSEG had a $25 million line of credit with a bank
with no debt outstanding under this line of credit. Also, at that date, PSEG had
a committed  $150 million  revolving  credit  facility which expires in December
2002 with $100 million  outstanding under this facility.  In addition,  PSEG has
$200 million of debt  registered on a registration  statement which is effective
and has filed a  registration  statement for an additional  $150 million of debt
which registration statement has not yet become effective.

     In June 1998,  Enterprise  Capital  Trust II, a special  purpose  statutory
business  trust  controlled  by PSEG,  issued $150 million of its Floating  Rate
Capital  Securities,  Series B. At the time of issuance,  PSEG's  floating  rate
obligation  under its debentures was swapped for a fixed rate payment  resulting
in an  effective  rate of 7.2%  (see  Note 5.  Financial  Instruments  and  Risk
Management  of Notes).  In July 1998,  Enterprise  Capital  Trust III, a special
purpose statutory  business trust controlled by PSEG, issued $150 million of its
7.25% Trust Originated Preferred  Securities,  Series C. Proceeds of both issues
were lent to PSEG and are  evidenced  by its  deferrable  interest  subordinated
debentures.  PSEG  used  the  proceeds  of these  issues  to make  $292  million
preferred  equity  investments  in Energy  Holdings.  The  debentures  and their
related indentures constitute a full and unconditional  guarantee by PSEG of the
preferred  securities issued by the trusts.  If, and for as long as, payments on
PSEG's  debentures  have been deferred,  or PSEG has defaulted on the indentures
related thereto or its guarantee thereof,  PSEG may not pay any dividends on its
Common Stock (see Liquidity and Capital Resources -- PSEG).

     As  previously  disclosed,  both  PSEG  and  PSE&G  have  issued a total of
approximately  $525  million  and  $513  million,  respectively,  of  deferrable
interest  subordinated  debentures  which are  treated as debt to the issuer for
Federal income tax purposes and as preferred equity for financial accounting and
rating  agency  purposes.  In a case not involving  PSEG or PSE&G,  the Internal
Revenue Service (IRS) has proposed to disallow  interest  deductions  claimed by
Enron Corp. (Enron) on two issues of similar long-term subordinated  debentures.
That issue is now in litigation (Enron Corp. v.  Commissioner,  Tax Court Docket
No.  6149-98).  There  can be no  assurance  that  Enron  will  prevail  in this
litigation  if it is not  settled  or,  if  Enron  does  prevail,  that  the IRS
nevertheless  may seek to disallow the deductions that PSEG and PSE&G have taken
and will claim for interest paid on such  debentures.  The  annualized  interest
expense for these  debentures for PSEG and PSE&G together is  approximately  $83
million.  In total for 1994 through 1997,  PSEG and PSE&G claimed  approximately
$89  million in  interest  deductions  for these  debentures,  which  equates to
approximately  $31 million in tax  benefits.  If challenged by the IRS, PSEG and
PSE&G  would  expect to  vigorously  defend the  deductibility  of the  interest
payments  taken as deductions on  previously  filed Federal tax returns.  In the
event of the  occurrence of a Tax Event as defined in the  respective  debenture
indentures,  such as the  receipt of an opinion of counsel  that there is a more
than  insubstantial risk that interest payable on the debentures will not be tax
deductible, PSEG and PSE&G have the right to redeem the preferred securities and
issue the  debentures to the preferred  securities  holders or to refinance such
obligations as allowed in the respective debenture indentures.


<PAGE>

     PSE&G

     PSE&G  has  authority  from  the  BPU,   through   December  31,  1998,  to
opportunistically  refinance essentially all of its long-term debt and to refund
up to $250  million  of  matured  debt.  PSE&G  expects to be able to obtain BPU
approval to extend the authorization to opportunistically  refinance essentially
all of its long-term debt through January 4, 2000.

     Under its  First and  Refunding  Mortgage  (Mortgage),  PSE&G may issue new
First and  Refunding  Mortgage  Bonds  (Bonds)  against  previous  additions and
improvements  and/or  retired Bonds provided that its ratio of earnings to fixed
charges is at least 2:1. At September 30, 1998, the coverage ratio under PSE&G's
Mortgage was 4.19:1.  As of September 30, 1998,  the Mortgage would permit up to
approximately $3.5 billion aggregate  principal amount of new Bonds to be issued
against previous additions and improvements.

     In April 1998, $8 million of PSE&G's 7.50% Bonds, Series OO, were purchased
in the open market. On August 3, 1998, the remaining outstanding $234 million of
the Series OO Bonds were redeemed.

     In May 1998, PSE&G sold $250 million of its Bonds,  Remarketable Series YY,
due 2023,  Mandatorily  Tendered 2008. The Series YY Bonds will bear interest at
the rate of 6.375%  per annum  until May 1,  2008.  PSE&G  also  entered  into a
Remarketing Agreement with a third party that granted the third party the option
to call and remarket the Series YY Bonds on May 1, 2008 for the  remaining  term
of the Series YY Bonds. If not called by the third party,  the Bonds must be put
by the holders to PSE&G.  The proceeds of the sale were used primarily to redeem
PSE&G's Series OO Bonds.

     On July 1, 1998, $18 million of PSE&G's 6% Debenture Bonds matured.

     To provide  liquidity for its commercial  paper  program,  PSE&G has a $650
million  revolving  credit  agreement  expiring in June 1999 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 September 30, 1998,
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 2, 1999, not more than $1.3 billion of short-term  obligations,
consisting of commercial  paper and other  unsecured  borrowings  from banks and
other  lenders.  On  October  5, 1998,  PSE&G  filed a petition  with the BPU to
increase  this  authorization  to $1.5 billion and extend it through  January 4,
2000.  PSE&G  expects a BPU decision  before  December 31, 1998. An inability to
issue short-term  obligations would have a material adverse impact on PSEG's and
PSE&G's  financial  condition,  results of  operations  and net cash  flows.  On
September  30, 1998,  PSE&G had $996  million of  short-term  debt  outstanding,
including $124 million  borrowed  against its  uncommitted  bank lines of credit
which lines of credit totaled $124 million at that date.

     PSE&G Fuel Corporation (Fuelco), a wholly-owned  subsidiary of PSE&G, has a
$125  million  commercial  paper  program to finance  its 42.49%  share of Peach
Bottom  nuclear  fuel,  which  program is supported by a $125 million  revolving
credit  facility  expiring on June 28, 2001.  PSE&G has guaranteed  repayment of
Fuelco's  obligations under this program.  At September 30, 1998, Fuelco had $86
million of commercial paper outstanding under this program.

     Energy Holdings

     At September  30, 1998,  PSEG  Capital had total debt  outstanding  of $521
million,  including  $498 million of Medium Term Notes (MTNs) and $23 million of
Senior Notes. In July 1998, $75 million of PSEG Capital's 9.00% MTNs matured. As
a result of the Focused Audit,  PSEG Capital debt is to be phased out over a six
to ten year period from April 1993 (see Liquidity and Capital Resources).

     As of September 30, 1998, Enterprise Capital Funding Corporation (Funding),
a wholly-owned  subsidiary of Energy Holdings, had $150 million and $300 million
revolving   credit   facilities   expiring  in  November  1998  and  July  1999,
respectively,  with two groups of banks, under which $24 million was outstanding
as of  September  30,  1998.  Funding  expects to be able to renew  both  credit
agreements and has reached preliminary  agreement with a group of banks to renew
for one year the facility  expiring in November  1998. As of September 30, 1998,
Funding  had $69  million of total debt  outstanding,  including  $45 million of
privately placed Senior Notes.

     Energy Holdings,  Resources and Global are subject to restrictive  business
and financial covenants  contained in existing debt agreements.  Energy Holdings
is  required  to  maintain a debt to equity  ratio of no more than  2.00:1 and a
twelve-months  earnings  before  interest and taxes to interest  (EBIT) coverage
ratio of at least  1.50:1.  As of  September  30,  1998,  Energy  Holdings had a
consolidated  debt to  equity  ratio of  0.78:1.  For the  twelve  months  ended
September 30, 1998, the EBIT coverage  ratio,  as defined to exclude the effects
of EGDC, was 1.79:1.  Compliance with applicable financial covenants will depend
upon future financial position and levels of earnings,  as to which no assurance
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 (see Liquidity and
Capital Resources).

Nuclear Operations

     As  previously  reported,  PSE&G's  Salem  Units  1 and 2  (Salem  1 and 2)
returned to service on April 17, 1998 and August 30, 1997, respectively. On June
30, 1998, the Nuclear Regulatory Commission (NRC) closed its Confirmatory Action
Letter (CAL)  concerning  Salem noting that all  commitments of the CAL had been
satisfactorily addressed. For a discussion of the operating performance standard
applicable to Salem,  see Note 4.  Commitments  and  Contingent  Liabilities  of
Notes.

     At the July 1998 semi-annual NRC Senior Management Meeting, the NRC removed
Salem 1 and 2 from  the NRC  Watch  List.  The NRC  noted  that  plant  material
condition,  safety  culture  and  management  oversight  and  effectiveness  had
substantially  improved.  The NRC also  observed  that,  while  the  maintenance
backlog  resulting from discovery  efforts during the outage remains high, PSE&G
is  effectively  managing  the  prioritization  and  resolution  of those items.
Additionally,  the NRC noted that PSE&G's  management team has instituted robust
safety oversight and self-assessment at the site and that Salem has demonstrated
sustained successful plant performance.

Foreign Operations

     In accordance with its growth strategy,  Global has made approximately $860
million of international investments,  primarily in Brazil, Argentina and China,
in  projects  that  generate  and  distribute  electricity.   These  investments
represent  approximately  5% of PSEG's assets.  As a primary vehicle for growth,
Global is expected to continue to  emphasize  international  investments.  Where
possible,  Global  structures its investments to manage the risk associated with
project  development,  including foreign currency  devaluation and fluctuations.
PSEG has  evaluated the current  economic  turmoil in these  regions,  including
potential  devaluations  of currencies  affecting the emerging  markets in which
Global invests, and has determined that although short-term growth in demand may
be negatively  impacted,  the long-term outlook for investments made to date has
not been impaired. However, PSEG cannot predict what impact further developments
in emerging  market  financial  conditions may have on its financial  condition,
results of operations and net cash flows.

Competitive Environment

     State Regulatory Matters

     For  discussions  of the New Jersey  Energy  Master  Plan  proceedings  and
related  legislation,   non-utility   generation  buydown,  the  LGAC,  the  Gas
Unbundling Pilot Program,  the LEAC/Demand Side Adjustment  Factor,  the RAC and
other rate  matters,  see Note 2. Rate  Matters of Notes.  The  outcome of these
proceedings could have a material adverse impact on PSEG's and PSE&G's financial
condition, results of operations and net cash flows.

     Federal Energy Regulatory Commission (FERC)

     As previously  reported,  numerous  parties,  including  PSE&G,  have filed
petitions for judicial review of Orders No. 888, 888A and 888B before the Courts
of Appeals for the District of Columbia and the Second Circuits.  In March 1998,
all of these appeals were  consolidated in the Court of Appeals for the District
of Columbia Circuit (D.C. Circuit).  On April 30, 1998, the D.C. Circuit entered
an order  permitting  certain  additional  parties to intervene and establishing
certain  procedural  guidelines  for the hearing of these  appeals.  Briefs were
filed on October 1, 1998. Oral argument has not yet been scheduled.

     Pennsylvania--New Jersey--Maryland Interconnection

     On October 15, 1998,  PJM began  operating a  centralized  capacity  credit
market,  providing a new option to participants  for procuring  capacity to meet
capacity  obligations within the PJM Control Area. Capacity is the capability to
produce electric power,  typically from owned generation or third party purchase
contracts and differs from the electric energy markets,  described below,  which
trade the actual power being  generated.  A centralized  capacity  credit market
enables a  participant  to trade its  capacity not required to meet its capacity
obligations for  reliability  purposes.  The market  facilitates the selling and
buying of capacity for  participants  by providing a single point of contact for
market  participants and a published  capacity market clearing price. The design
of the PJM capacity  market is compatible  with the already  existing  bilateral
capacity  market and does not  preclude  any market  participant  from using the
generation it owns to satisfy its capacity  obligations.  PJM will accept offers
to buy and sell capacity credits, centrally clear the market and post the market
clearing  prices for these credits.  PSE&G will continue  offering  capacity for
sale through bilateral transactions and will also participate in the centralized
PJM capacity market.

     Effective  April 1,  1998,  PJM  implemented  LMP to  establish  the market
clearing  prices  for  energy and to price  energy  transactions  when there are
congested areas within the PJM control area pursuant to FERC  requirements.  LMP
provides for an efficient  allocation of congestion costs to transmission  users
within the PJM  control  area based on system use.  Experience  to date shows no
material  adverse  impact as a result of the  change to LMP on  PSE&G's  cost of
Interchanged Power and Fuel for Electric  Generation.  PSE&G does not anticipate
any material impact due to the implementation of LMP in the future.

     On  December  31,  1997,   the  PJM  Supporting   Companies   filed  market
enhancements with the FERC. PSE&G, one of the Supporting Companies, supports the
filing  which  includes  the  ability to auction  residual  and  released  Fixed
Transmission  Rights,  which are a financial hedge against  congestion costs. It
also includes a multi-settlement  system and provides a day-ahead settlement for
energy,  which allows market participants to "lock-in" energy prices a day ahead
and only pay for the  deviations  from the amounts  settled one day ahead at the
real-time energy price. As proposed,  these systems would all be administered by
the PJM ISO.

     Currently,  the PJM Operating  Agreement  dictates that 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.
Transactions that are bid into the PJM pool from generation  located outside the
PJM control area are capped at $1,000 per megawatt hour. All power providers are
paid at the PJM LMP  under  normal  market  operations.  In the  event  that all
available  generation  within  the PJM  control  area is  insufficient  to cover
demand, PJM could institute emergency purchases from adjoining regions. The cost
of such emergency  purchases is dependent upon market conditions and not subject
to any PJM price cap.  Certain of the PJM member  companies  have  requested the
FERC to revise the PJM Operating  Agreement to allow  submission of market based
bids to the PJM  interchange  energy  market.  PSEG and PSE&G cannot predict the
outcome of this  request or the impact on PSEG's and  PSE&G's  future  financial
condition,  results  of  operations  and  net  cash  flows  if such  request  is
successful. For further discussion of price volatility of electricity,  see Item
3.Qualitative and Quantitative Disclosures About Market Risk.

Year 2000 Issues

     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's and PSE&G's Year 2000 readiness program addresses issues relating to
three principal types of systems:

          Information   technology   systems,   which   include  such   business
          applications  as the customer  information,  administrative  and "back
          office" systems.

          Process control  systems,  which include  embedded  devices as well as
          real time  systems  such as energy  management  systems  (EMS) and the
          supervisory control systems for gas and electric (SCADA).

          Infrastructure   systems,  which  include  such  devices  as  servers,
          routers, etc.

Inventory  is more than 70%  complete for all  information  technology,  process
control  and  infrastructure  systems.  Substantial  Assessment  work  has  been
completed  on the  information  technology,  infrastructure  systems and process
control systems.  Remediation/Testing is in progress on information  technology,
process control and infrastructure systems.

     PSEG and PSE&G expect to complete  required  Year 2000  readiness  work for
more than 50% of their critical systems by the end of 1998. The work required by
the remaining  critical systems is expected to be completed by July 1999, except
for  certain  systems  operated  by PSE&G's  Nuclear  Business  Unit  (NBU),  as
discussed  below.  By the  end  of  1999,  a  majority  of  PSEG's  and  PSE&G's
non-critical  systems are  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
requiring  submission  of a  written  response  within  90  days  of  that  date
indicating  whether or not nuclear plant  operators have pursued and continue to
pursue  Year 2000  programs  and  addressing  the  programs'  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  operators'  Year 2000
program or no later than July 1, 1999 confirming that their  facilities are Year
2000 ready,  or will be Year 2000 ready,  by 2000 with regard to compliance with
the terms and  conditions  of their  licenses and NRC  regulations.  On July 23,
1998, PSE&G provided its written response to the first  requirement noted above,
outlining  for the NRC its NBU Year 2000  program and  indicating  that  planned
implementation  will allow the NBU to be Year 2000 ready and in compliance  with
the terms and  conditions of its licenses and NRC regulation by January 1, 2000.
As of  September  30,  1998,  PSE&G's  NBU  Year  2000  effort  is on  schedule.
Additionally,  at a meeting held on September 29, 1998, PECO informed PSE&G that
Peach  Bottom's  Year  2000  effort  is on  schedule  to meet the July  1999 NRC
response schedule.  The NRC has recently begun audits of a representative sample
of operating nuclear power plants,  including Hope Creek, to spot check measures
that  licensees  are taking to assure that key computer  systems will be able to
function in 2000.

     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).  Sufficient  information  has not yet been received from
all key vendors to confirm their  preparedness for Year 2000. PSEG and PSE&G are
aggressively pursuing the key vendors who have been unresponsive.  However, PSEG
and PSE&G are not yet able to determine whether all of their key vendors will be
able to meet  Year 2000  requirements.  Failure  of key  vendors  to meet  these
requirements  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

     The North American  Electric  Reliability  Council (NERC) has been asked by
the  Department  of Energy (DOE) to lead national  efforts for electric  utility
industry  Year 2000  readiness.  In its report  issued in September  1998,  NERC
evaluated  potential  risks for the industry from both an impact and probability
basis.  PSEG's and PSE&G's internal analyses of the risks posed by the Year 2000
are consistent with the risk assessment  prepared by NERC. PSEG and PSE&G expect
that the Year 2000 project  (specifically  remediation and contingency  planning
efforts)  will  mitigate  these  risks  and allow  PSEG and PSE&G to meet  their
fiduciary, regulatory and safety commitments.

     The  following  risks  defined by NERC were assumed only for the purpose of
planning and preparing for operations. None of the risks identified in this plan
are predictions of Year 2000 events:

                                                  NERC              NERC
                                               Probability         Impact
        NERC Defined Scenario                  for Industry      for Industry
------------------------------------------------------------- -----------------
Loss of generation                                High              High
------------------------------------------------------------- -----------------
Loss of EMS, SCADA Systems                        High              High
------------------------------------------------------------- -----------------
Loss of leased communications lines               High              High
------------------------------------------------------------- -----------------
Generation Restart/Loss of Load/Unusual load      High              Low
------------------------------------------------------------- -----------------
Environmental control or monitoring              Medium            Medium
------------------------------------------------------------- -----------------
Loss of internal communications                  Medium            Medium
------------------------------------------------------------- -----------------
Loss of gas or oil supply                        Medium             High
------------------------------------------------------------- -----------------
Sabotage                                         Medium             High
------------------------------------------------------------- -----------------
Distribution system failure/DC Tie                Low              High
Failure/Under-frequency or under-frequency
voltage load shed failure/Loss of system 
protection/Loss of transmission/Loss of
security coordinator functions
------------------------------------------------------------- -----------------
Voltage control device failure                     Low              High
------------------------------------------------------------- -----------------
Loss of control center access                      Low             Medium
------------------------------------------------------------- -----------------
Loss of coal                                       Low             Medium
------------------------------------------------------------- -----------------
Operating Personnel/Generation and                 Low              Low
Transmission Information Sharing
System (OASIS) Failure/Loss of
non-critical operating data/DSM 
failure/Supplies
------------------------------------------------------------- -----------------

     PSEG's and PSE&G's efforts have focused on reducing the "High" and "Medium"
probability scenarios and mitigating the effects of "High" and "Medium" impacts.

     PSEG and PSE&G 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.
Future Year 2000 related  liabilities will be determined  through the courts and
the overall risk cannot be determined at this time. PSEG and PSE&G have not been
subject  to  specific  or  general  Year  2000  regulatory  action,  other  than
responding to inquiries from regulatory bodies such as the BPU and the NRC.

     Contingency Plans

     PSEG and  PSE&G  are in the  process  of  developing  contingency  plans in
accordance with NERC guidelines.  The cornerstone of NERC's guidance is to use a
"defense in depth" strategy by creating  multiple defense barriers to reduce the
risk of catastrophic  results to extremely small probability levels. Other areas
covered by NERC and PSEG's and PSE&G's responses include:

        NERC Guidance                      PSEG's and PSE&G's Contingency Plan
-----------------------------------     ----------------------------------------
Identify and fix known Year 2000        PSEG and PSE&G have focused their
problems.                               resources on the remediation of
                                        non-compliant systems.
-----------------------------------     ----------------------------------------
Identify most  probable and             PSEG and PSE&G are currently evaluating.
credible worst case  scenarios.
-----------------------------------     ----------------------------------------
Plan for the probable, prepare          PSEG and PSE&G will develop special
for the worst. Develop special          procedures and will conduct both
operating procedures, conduct           internal drills and participate in
training and system wide drills.        industry efforts.
-----------------------------------     ----------------------------------------
Operate systems in a precautionary      PSEG & PSE&G are working with the
posture during critical Year 2000       Mid-Atlantic Area Council (MAAC) and
periods. This may include reducing      with PJM for detailed planning.
voluntary bulk transfers, ensuring
that adequate generation facilities
are in service and increasing
staffing.
-----------------------------------     ----------------------------------------

     The nature of contingency  plans will include 1) using  existing  redundant
assets,  such as  PSE&G's  mix of  generating  assets;  2)  leveraging  existing
business   continuity  plans,  such  as  storm  preparedness  plans;  3)  manual
work-arounds;  and 4) using  rapid-reaction  teams.  PSEG and  PSE&G's  emerging
strategy calls for the deployment of these plans in the following  manner (using
risk scenarios shown above that NERC evaluated to have a high  probability and a
high impact):

        Scenario                                    Initial Plan
--------------------------         ---------------------------------------------
Loss of generation.                Use existing redundant assets. Have available
                                   a varied mix of generating assets, with 
                                   sufficient reserve capacity, to ensure that 
                                   if certain stations are unable to function,
                                   the reserve can meet generating needs.
--------------------------         ---------------------------------------------
Loss of EMS, SCADA Systems         Use manual work-arounds and rapid reaction
                                   teams.                        
--------------------------         ---------------------------------------------
Loss of leased communications      Use existing redundant assets such as
lines.                             existing radio and back-up communications
                                   systems.
--------------------------         ---------------------------------------------

     PSEG and PSE&G have  adopted  NERC's  timetable,  guidelines  and  detailed
requirements for developing these  contingency  plans.  PSEG and PSE&G expect to
have their preliminary contingency plans completed by December 31, 1998 with the
second version of their contingency plans completed by June 30, 1999, consistent
with NERC's timetable. PSEG and PSE&G will participate,  with internal drills to
be completed  beforehand,  in NERC's  industry-coordinated  Year 2000  readiness
drills on April 8-9, 1999 and September 8-9, 1999.  PSEG and PSE&G will evaluate
plan updates, as needed, from September 1999 through January 2000.

     PSEG and PSE&G  expect that with  completion  of the Year 2000  project and
implementation  of SAP (see Note 4,  Commitments  and Contingent  Liabilities of
Notes), 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 or PSEG's or PSE&G's critical vendors and/or customers 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.
    
Future Outlook

     PSEG continues to pursue its strategies to grow its business. As previously
reported,  more emphasis will be placed on finding  opportunities  for expansion
outside of traditional utility services and markets. PSE&G's strategy is to size
its electric generation fleet in New Jersey to meet its anticipated needs, while
seeking to increase its value through wholesale trading. PSE&G will also seek to
capitalize  on  synergies  which may exist with its natural gas  purchasing  and
trading activities. PSE&G's transmission and distribution strategy, both gas and
electric,  is to provide  cost-effective,  high quality service.  PSEG will also
consider  opportunities  for expansion through business  combinations.  Global's
strategy  is to invest in both  generation  and  transmission  and  distribution
facilities  worldwide  with the goal of  creating  long-term  value.  Resources'
strategy is to continue  focusing on passive  investments  in the energy  sector
worldwide seeking to provide earnings and economic value.  Energy  Technologies'
strategy is to expand upon the current  energy  related  services it provides to
industrial and commercial customers to create long-term value.

     Successful   implementation   of  these   strategies,   coupled   with  the
restructuring  of the  electric  industry  (see Note 2. Rate Matters and Note 3.
Regulatory  Assets and  Liabilities of Notes),  could  significantly  change the
organizational  structure  of the PSEG  family of  businesses  as well as PSEG's
earnings mix. Also significant  among the changes in the earnings mix would be a
reduction in the  percentage of earnings from the domestic  generation  business
and an increase from the international generation, transmission and distribution
businesses,  and to a lesser extent,  from the energy  services  business.  As a
result of the  deregulation of the electric  industry,  PSE&G may be required to
separate its electric  generation  services,  and potentially  other competitive
services, from its regulated utility operations and transfer those operations to
an entity  functionally  independent  from PSE&G. To the extent that recovery of
stranded costs  occasioned by deregulation  are not probable of recovery and not
eligible for deferred  accounting  treatment under SFAS 71, PSE&G would incur an
extraordinary,  non-cash charge to operations, which charge could be material to
the financial  position and results of operations of PSEG and PSE&G (see Note 3.
Regulatory Assets and Liabilities).

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:  Results of Operations;  Liquidity and Capital  Resources;
External  Financings;  Nuclear  Operations;   Foreign  Operations;   Competitive
Environment; Year 2000 Issues and Future Outlook.

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                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
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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;  an increasingly  competitive energy marketplace;  sales retention
and growth potential in a mature service  territory and a need to contain costs;
ability to obtain adequate and timely rate relief, cost recovery,  including the
potential  impact of 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;  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.


<PAGE>




                      ITEM 3. QUALITATIVE AND QUANTITATIVE
                          DISCLOSURES ABOUT MARKET RISK

Commodities

     The   availability   and  price  of  energy   commodities  are  subject  to
fluctuations from factors such as weather,  environmental  policies,  changes in
demand,  changes in supply and state and Federal regulatory policies.  To reduce
price risk caused by market fluctuations, PSE&G enters into physical forward and
options contracts and financial derivatives including forwards,  futures,  swaps
and options with approved counterparties, to hedge its anticipated demand. These
contracts,  in conjunction with owned electric generating capacity, are designed
to cover  estimated  electric  and gas  customer  commitments.  Gains and losses
resulting from physical forward and options contracts and financial  derivatives
are  recognized  as a component of net electric  revenue upon  maturity of these
contracts.   Additionally,  PSE&G  enters  into  physical  forward  and  options
contracts that are  speculative in nature which are immaterial to PSE&G's market
portfolio  and do not have a  material  impact on PSE&G's  financial  condition,
results of operations and net cash flows.

     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 percent
confidence  level and  assuming a one week  horizon at  September  30,  1998 was
approximately  $8 million,  which is  significantly  less than the June 30, 1998
level of $18 million due to the  expiration  of summer 1998  positions and their
associated volatilities. 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.

     As discussed in Results of  Operations of Item 2.  Management's  Discussion
and Analysis, energy trading operations at PSE&G positively impacted the results
of  operations  for the nine months  ended  September  30, 1998.  Certain  other
utilities  and power  marketers  have  experienced  significant  losses in their
energy  trading  operations  during that  period.  These  losses were  primarily
attributable  to  extreme  market  volatility  and  counterparty  defaults  that
resulted.

     PSEG is  exposed  to  credit  losses  in the  event of  non-performance  or
non-payment by counterparties.  PSEG has a Risk Management  Committee made up of
executive  officers and an independent  risk  oversight  function to enhance its
risk management  practices.  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.


<PAGE>


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                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
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                           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) 1997 Annual Report on Form 10-K and the Quarterly  Reports on
Form 10-Q for the  quarters  ended  March 31,  1998 and June 30, 1998 is updated
below.

     (1) Form  10-K,  Pages  19-20  and June 30,  1998  Form  10-Q,  Page 27. As
         previously reported,  PSE&G has been named as a potentially responsible
         party and  alleged  to be liable  for  contamination  at the Metal Bank
         Cottman Avenue Superfund Site, a former  non-ferrous  scrap reclamation
         facility  located in Philadelphia,  Pennsylvania.  PSE&G estimates that
         its share of the cost of  performing  the remedy  selected  by the U.S.
         Environmental  Protection  Agency  (EPA) could be $4 to $8 million.  On
         June 26,  1998,  EPA  Region  III  issued an  Administrative  Order For
         Remedial  Design And  Remedial  Action,  Docket No.  III-98-082-DC,  to
         thirteen  Respondents  including  PSE&G,  other  utilities,  and  other
         persons and entities,  ordering the Respondents to implement the remedy
         selected  in the Record of Decision  (ROD)  issued by EPA Region III in
         December,  1997.  Additionally,  with respect to this site,  on July 1,
         1998, the United States of America moved in the matter  entitled United
         States of America, et al, v. Union Corporation, et al, Civil Action
         No. 80-1589,  United States District Court for the Eastern  District of
         Pennsylvania,  seeking  leave  of court  to file an  amended  complaint
         adding claims under the Federal Comprehensive  Environmental  Response,
         Compensation  and Liability Act of 1980  (CERCLA).  PSE&G and one other
         utility are third party defendants in the foregoing  captioned  matter.
         On July 28, 1998,  PSE&G and seven other utilities named as Respondents
         in the above-referenced  Administrative Order filed with EPA Region III
         a Notice of Intent to Comply  With  Administrative  Order for  Remedial
         Design and Remedial Action,  Metal Bank Cottman Avenue Site, Docket No.
         III-98-082-DC.

     (2) Form 10-K, Page 27, March 31, 1998 Form 10-Q, Page 24 and June 30, 1998
         Form 10-Q,  Page 27. As  previously  reported,  in October  1995,  PSEG
         received a letter  from a  representative  of a  purported  shareholder
         demanding that it commence legal action against certain of its officers
         and directors with regard to nuclear operations of Salem and Hope Creek
         Nuclear  Generating  Stations  (Salem  and Hope  Creek).  The  Board of
         Directors promptly commenced an investigation and advised the purported
         shareholder thereof. While the investigation was pending, the purported
         shareholder  nevertheless  commenced,  by  complaint  filed in December
         1995,  a  shareholder  derivative  action  against  the then  incumbent
         directors,  except Dr. Remick. Similar derivative complaints were filed
         by two profit  sharing  plans and one  individual in February and March
         1996 against Messrs.  Ferland,  Codey, Eliason and others. On March 19,
         1996, the Board's investigation was concluded, and the Board determined
         that this  litigation  should  not have been  instituted  and should be
         terminated.  On July 3, 1996, another individual purported  shareholder
         filed a  similar  complaint  naming  the same  defendants  as the first
         derivative  lawsuit.  The four  complaints  generally  seek recovery of
         damages for alleged losses purportedly arising out of PSE&G's operation
         of Salem and Hope Creek, together with certain other relief,  including
         removal of certain  executive  officers  of PSE&G and PSEG and  certain
         changes in the composition of PSEG's Board of Directors.  On August 21,
         1996,  all  defendants  filed  motions to dismiss  all four  derivative
         actions,  which  motions  were  denied  and  attempts  to  appeal  were
         unsuccessful.  Pursuant to a Court Order,  on December  31,  1997,  the
         defendants  filed  motions for  summary  judgment to dismiss two of the
         cases. In one of the other two cases,  separate motions for partial and
         complete  summary  judgment  were filed by the  defendants  on April 1,
         1998.  In the  fourth  case,  on April 1, 1998 the  defendants  filed a
         motion for partial  summary  judgment.  On May 21, 1998, the defendants
         filed additional motions for complete summary judgment in the third and
         fourth cases. All of these motions are pending. By stipulation filed on
         June 15, 1998,  the  individual  plaintiff in the action filed in March
         1996 was  voluntarily  dismissed  as a  plaintiff  in the  action.  The
         outcome of these matters cannot be predicted.

     (3) Form 10-K, Page 27. As previously  reported,  PSE&G and the three other
         co-owners  of Salem  filed suit in February  1996 in the U.S.  District
         Court for the  District  of New Jersey  against  Westinghouse  Electric
         Corporation  (Westinghouse)  seeking  damages  to  recover  the cost of
         replacing the steam generators at Salem 1 and 2. The suit alleges fraud
         and breach of contract by  Westinghouse in the sale,  installation  and
         maintenance  of the  generators,  including  a claim  under the Federal
         Racketeering  Influenced and Corrupt Organizations Act (RICO). In April
         1996,  Westinghouse  filed an answer and $2.5 million  counterclaim for
         unpaid  work  related to services  at Salem.  Westinghouse  has filed a
         motion  for  summary  judgment  on the  grounds  that the  claim of the
         plaintiffs is barred by the statute of  limitations  and oral arguments
         on this  motion were held in February  1998.  On November 6, 1998,  the
         Court granted  Westinghouse  summary judgment on the RICO claim but did
         not address the plaintiffs'  remaining claims,  dismissing them without
         prejudice since the Court only had original  jurisdiction over the RICO
         claim.  The plaintiffs are considering  whether to appeal this decision
         and/or to re-file their  remaining  claims in the Superior Court of New
         Jersey.

     (4) Form 10-K,  Page 45 and June 30, 1998 Form 10-Q, Page 27. As previously
         reported,  in October 1997, Old Dominion  Electric  Cooperative  (ODEC)
         filed a complaint at the Federal Energy  Regulatory  Commission  (FERC)
         seeking to modify its 1992  agreement with PSE&G for a ten year sale of
         150  megawatts  of  capacity  and energy.  In May 1998,  while the ODEC
         complaint  was  pending,  in a  separate  proceeding  relating  to  the
         restructuring  of PJM, FERC ordered PSE&G to reduce its charges to ODEC
         by $5.5  million  annually for each of the  remaining  six years of the
         agreement. FERC determined that a transmission charge, which it imputed
         to the agreement, violated FERC policy, specifically, that users of the
         PJM transmission system must pay one rate for transmission based on the
         transmission  zone in  which  they are  delivering  power  rather  than
         multiple  rates based on the  transmission  areas  through  which their
         power  transactions  are  moving.  PSE&G has  applied to the FERC for a
         rehearing  of its order  which is pending  at this  time.  On August 4,
         1998, FERC dismissed ODEC's complaint,  determining that certain issues
         relating to rate "pancaking" for  transmission  had been  appropriately
         addressed in the separate FERC proceeding on PJM restructuring and that
         ODEC had failed to show that it was entitled to relief on the remaining
         issues. ODEC did not seek further review of this order.

     (5) June 30, 1998 Form 10-Q,  Page 28. On June 25,  1998,  a complaint  was
         filed against the directors of PSEG,  and PSEG as a nominal  defendant,
         by the same  purported  shareholder of PSEG who instituted the December
         1995 shareholder derivative suit, alleging that the 1996, 1997 and 1998
         proxy  statements  provided  to  shareholders  of PSEG  were  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 and
         reserves  with  respect to PSEG's  nuclear  operations,  (iii) a demand
         letter relating to the earlier shareholder derivative suit, (iv) PSEG's
         liabilities  to the Salem  co-owners as a result of the shutdown of the
         Salem plants and (v) a shareholder  proposal  relating to operations of
         Salem 1 and 2 which  was  voted  upon at the  1998  annual  meeting  of
         shareholders.  The complaint  seeks to have declared  illegal the 1996,
         1997  and 1998  elections  of  directors  of  PSEG,  the vote  upon the
         stockholder  proposal at the 1998 annual  meeting,  ratification of the
         selection  of Deloitte & Touche LLP as PSEG's  auditors at those annual
         meetings,  requiring 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 this matter,  which will
         include  as  nominees  for  election  as  directors  persons  having no
         previous  relationship  with PSEG or the  current  directors  and other
         relief.  A motion to dismiss the complaint has been filed.  PSEG cannot
         predict the outcome of this matter. G.E. Stricklin v. E. James Ferland,
         et al, United  States  District Court  for the  Eastern  District  of
         Pennsylvania, Civil Action No. 98-3279.

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

     (1)   Pages 9 through 13. Proceedings before the New Jersey Board of Public
           Utilities  (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, EO97070462 and EO97070463.

     (2)   Page 13.  Proceeding before the BPU relating to PSE&G's Levelized Gas
           Adjustment  Clause  (LGAC)  filed on November  14,  1997,  Docket No.
           GR97110839.

     (3)   Pages 13 and 14. Proceeding  before the Superior Court of New Jersey,
           Appellate  Division  in the matter of the motion of PSE&G to increase
           the level of the Electric  Demand Side Adjustment  Factor,  Appellate
           Docket No. A-005257-97T2.

     (4)   Page  13.  Proceedings  before  the  BPU  relating  to  the  Electric
           Levelized  Energy  Adjustment  Clause (LEAC) rate increase to recover
           Demand Side Management (DSM) costs, Docket No. ER97020101.

     (5)   Page 14.  Proceedings  before the BPU relating to an audit of PSE&G's
           competitive services, Docket No. EC98080627.

     (6)   Page 30. Proceedings before the Federal Energy Regulatory  Commission
           (FERC) relating to competition and electric  wholesale power markets.
           (Inquiry  Concerning  the Pricing  Policy for  Transmission  Services
           Provided  by  Utilities  Under the  Federal  Power  Act,  Docket  No.
           RM93-19.)

     (7)   Page 30.  Proceedings  before the  United  States  Court of  Appeals,
           District of Columbia Circuit,  in the matter of appeal of FERC Orders
           No. 888,  888A and 888B.  (Transmission  Access Policy Study Group v.
           Federal Energy Regulatory Commission,  United States Court of Appeals
           in the District of Columbia Circuit, Docket No. 97-1715.)

     (8)   Page 30.  Proceeding before FERC relating to the development by PSE&G
           and other regional  transmission  owners in PJM of a new transmission
           service tariff and an Independent System Operator, FERC Docket Nos.
           OA97-261-000, et al.

     (9)   Page 37.  Suit  filed  by  co-owners  of  Salem against Westinghouse.
           Public  Service  Electric  and  Gas Company,  et.al., v. Westinghouse
           Electric Corporation, United States District Court  for  the District
           of New Jersey, Civil Action No. CB-96-925.

    (10)   Page 39.  Proceedings  before the  United  States  Court of  Appeals,
           District   of   Columbia   Circuit,   in  the  matter  of  the  DOE's
           unconditional  obligation  to begin spent fuel  acceptance by January
           31, 1998,  Northern States Power v. Department of Energy,  Docket No.
           97-1064.

     (11)  Page 40. Proceedings  before FERC relating to a declaratory  judgment
           action  challenging  PSE&G's  interpretation  of the capacity release
           rules, Texas Eastern Transmission Corporation, FERC Docket No.
           RP98-83-000.

                            ITEM 5. OTHER INFORMATION

     Certain  information  reported  under PSEG's and PSE&G's 1997 Annual Report
and March 31,  1998 and June 30,  1998  Quarterly  Reports to the SEC is updated
below.  References  are to the related  pages of the Form 10-K and the Quarterly
Reports on Form 10-Q for the quarters  ended March 31, 1998 and June 30, 1998 as
printed and distributed.

Credit Ratings

     Form 10-K, Page 5 and June 30, 1998 Form 10-Q, Page 29

     During the second  quarter of 1998,  Standard and Poor's,  Moody's and Duff
and Phelps reconfirmed the credit ratings for PSEG and PSE&G as disclosed in the
1997 Form 10-K.  Additionally,  Moody's  changed  its outlook  from  negative to
stable. In August 1998, Standard and Poor's changed its outlook from negative to
stable.

Nuclear Fuel Disposal

     Form 10-K, Page 12 and June 30, 1998 Form 10-Q, Page 29

     As  a  result  of  reracking  the  two  spent  fuel  pools  at  Salem,  the
availability of adequate spent fuel storage  capacity is estimated  through 2012
for Salem 1 and 2016 for  Salem 2,  prior to  losing  an  operational  full core
discharge  reserve.  The Hope Creek pool is also fully racked and it is expected
to provide  storage  capacity  until 2006,  again prior to losing an operational
full core discharge  reserve.  PSE&G is currently  assessing  available  options
which could satisfy the potential need for  additional  storage  capacity.  PECO
Energy has  advised  PSE&G that spent fuel racks at Peach  Bottom  have  storage
capacity  until  2000 for Peach  Bottom 2 and 2001 for Peach  Bottom 3, prior to
losing full core  discharge  reserve  capability.  PECO Energy has also  advised
PSE&G that it is constructing an on-site dry storage  facility which is expected
to be operational in 2000 to provide additional storage capacity.

     As previously  reported,  in  accordance  with the Nuclear Waste Policy Act
(NWPA), PSE&G has entered into contracts with the Department of Energy (DOE) for
the disposal of spent nuclear fuel.  Payments made to the DOE for disposal costs
are based on nuclear generation and are included in Fuel for Electric Generation
and Net  Interchanged  Power in the Statements of Income.  These costs are being
recovered  until the start of retail  competition  through the LEAC (see Note 2.
Rate Matters and Note 3. Regulatory Assets and Liabilities of Notes).

     DOE construction of a permanent disposal facility has not begun and DOE has
announced  that it does not expect a facility to be available  until 2010 at the
earliest.  Accordingly,  legislation  which  would  have  the  DOE  establish  a
centralized interim spent fuel storage facility has been introduced in Congress.
In  litigation  brought by PSE&G,  40 other  utilities  and many state and local
governments,  the United  States  Court of Appeals for the  District of Columbia
Circuit reaffirmed DOE's unconditional obligation to begin spent fuel acceptance
by January 31, 1998.  In November  1997,  the court ruled that the utilities had
fulfilled  their  obligations  under  their  respective  contracts  with  DOE by
contributing  to the Nuclear  Waste  Fund.  The court  further  ruled that DOE's
argument of unavoidable delay to meet its obligation was without merit. However,
the court did not order DOE to  commence  spent fuel  acceptance  by January 31,
1998;  instead,  it decided that the standard  contract  provided a  potentially
adequate remedy in the form of payment of damages if DOE failed its obligations.
In May 1998 the  court  denied a  petition  to  order  DOE to begin  spent  fuel
acceptance  immediately  and declare  that the  utilities  are allowed to escrow
their Nuclear Waste Fund fees until DOE begins spent fuel acceptance.  Following
this decision, DOE offered a proposal to settle issues related to its failure to
meet  its  obligation,  which  the  utilities  unanimously  rejected.  PSE&G  is
continuing  to work with the  utility  industry  to  develop a  methodology  for
determining damages incurred as a result of DOE's failure to meet its obligation
and a strategy for its  implementation.  PSE&G is presently  studying options to
recover  damages  from  DOE.  No  assurances  can be  given  as to the  ultimate
availability of a facility.

Nuclear Operations

     Form 10-K, Page 8 and June 30, 1998 Form 10-Q, Page 30

     On September 15, 1998, the NRC issued its latest  Systematic  Assessment of
Licensee  Performance  (SALP)  Report for Salem for the period  March 1, 1997 to
August 1, 1998. In the areas of  Maintenance  and  Engineering,  Salem was rated
Category 2 or "good" performance.  In the areas of Operations and Plant Support,
Salem  received  "superior",  or Category  1,  ratings.  The NRC noted  improved
performance  overall during the period, as demonstrated by the nearly event free
return  of both  units to  operation  following  the  extended  outage.  The NRC
identified strong management oversight,  safe and conservative operations,  good
engineering  support  and  effective  programs  for  independent  oversight  and
self-assessment. The NRC also noted that although human performance has improved
significantly  due  to  extensive   training   interventions,   continued  close
management attention is warranted in the operations and maintenance areas.

     On September  16, 1998,  the NRC  suspended its SALP program for an interim
period  until  the NRC  staff  completes  a review of its  nuclear  power  plant
performance assessment process. During the interim period while the SALP program
is suspended,  the NRC will utilize the results of its plant performance reviews
to provide nuclear power plant performance  information to licensees,  state and
local  officials  and  the  public.  These  reviews  are  intended  to  identify
performance  trends  since  the  previous  assessment  and make any  appropriate
changes to the NRC's inspection  plans. At the end of the process,  the NRC will
decide whether to resume the SALP program or substitute an alternative  program.
PSE&G  cannot  predict  the final  outcome  of this NRC review nor its impact on
PSE&G's nuclear operations.

     In accordance  with NRC Appendix R  requirements,  nuclear  plants  utilize
various  fire  barrier  systems  to  protect  equipment  necessary  for the safe
shutdown of the plant in the event of a fire.  As part of an  inspection  by the
NRC in April 1997,  the NRC noted  certain  weaknesses  in PSE&G's  fire barrier
systems.  PSE&G sent a letter to the NRC in June 1997  addressing  these  issues
concerning the  qualification  of fire wrap barriers used to protect  electrical
cabling at Salem.  The letter outlined a resolution plan and schedule to address
the fire wrap issues. PSE&G has committed to alternative measures in the form of
fire watches  until this plan is  implemented.  A review of the  installed  fire
barrier  materials  and safe  shutdown  analysis is currently  in  progress.  If
certain  modifications  are mandated by the NRC, this could result in a material
adverse  impact to PSE&G's  financial  condition,  results of operations and net
cash flows.  Additionally,  failure to resolve  these fire barrier  issues could
result in potential NRC violations, fines and/or plant shutdown.

Other State Regulatory Matters

     Form 10-K, Page 4, March 31, 1998 Form 10-Q, Page 27 and June 30, 1998 Form
10-Q, Page 30

     As previously reported,  on December 3, 1997 one of the interstate pipeline
companies from which PSE&G obtains  service filed a declaratory  judgment action
with FERC  challenging  PSE&G's  interpretation  of the capacity  release rules.
Under the  interpretation  proposed by the interstate  pipeline  company,  PSE&G
would be required to guarantee the performance of its subsidiary  Public Service
Energy Trading Company (PSETC) under the transferred agreements. PSE&G disagreed
with these claims and filed a protest  challenging  the filing.  On February 11,
1998, FERC ruled in favor of the interstate pipeline company finding that it was
not unreasonable for the pipeline company to refuse to discharge PSE&G under the
circumstances addressed in the order. On April 29, 1998, FERC issued an order on
rehearing in which it denied PSE&G's request for a rehearing.  On June 26, 1998,
PSE&G  filed a  petition  for  review of  FERC's  order  with the U.S.  Court of
Appeals, District of Columbia Circuit. This matter is currently pending.


<PAGE>



Air Pollution Control

     Form 10-K, Page 15 and 40 and June 30, 1998 Form 10-Q, Page 31

     On  September  24,  1998,  EPA issued  regulations  (referred to as a State
Implementation  Plan (SIP) Call)  requiring the 22 states in the eastern half of
the United  States to make  significant  NOx emission  reductions by 2003 and to
subsequently cap these emissions.  The NOx reduction requirements are consistent
with requirements already in place in New Jersey and thus are not likely to have
an  additional   impact  on  New  Jersey  facilities  nor  change  the  capacity
availability  from PSE&G's New Jersey  facilities.  The impact on  facilities in
Pennsylvania  cannot be assessed at this time as such impacts are dependent upon
Pennsylvania's  implementation  of the SIP Call through state  regulations which
have not been proposed.  If implemented as adopted,  these  recommendations will
require  power plants in the South and Midwest to meet NOx control  requirements
that are similar to the  requirements  faced by PSE&G  facilities in New Jersey.
PSE&G  supports  adoption  and  implementation  of the EPA SIP Call  because  it
addresses the ozone  transport  problem  which burdens much of the  northeastern
United States.  Also, see Note 4.  Commitments  and Contingent  Liabilities  for
information  on  the  New  Jersey   Department  of  Environmental   Protection's
regulations.

Hazardous Substances

     Form 10-K, Page 20

     As  previously  reported,  PSE&G and over 60 other  entities were joined in
1995 as  additional  third-party  defendants in U.S. v.  CDMG Realty Co., et al,
Civil  Action  No.  89-4246  (NHP),  venued in the U.S.  District  Court for the
District  of New  Jersey.  On July 31,  1998,  PSE&G  and 23  other  third-party
defendants entered into a Settlement Agreement with third-party plaintiffs.  The
Settlement  Agreement  provides  the settling  defendants,  including  PSE&G,  a
release from all claims for  contribution,  diminution  of property  value,  and
certain defined response costs. PSE&G's financial contribution to the settlement
was not  material.  By Order dated  September 2, 1998,  the matter was dismissed
with prejudice.

                    ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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

             PSEG
---------------------------------
Exhibit Number        Document

        12            Computation of Ratios of Earnings to Fixed Charges (PSEG)

        27(A)         Financial Data Schedule (PSEG)

            PSE&G
---------------------------------
Exhibit Number        Document

        12(A)         Computation of Ratios of Earnings to Fixed Charges (PSE&G)

        12(B)         Computation of Ratios of Earnings to Fixed Charges plus
                      Preferred Stock Dividend  Requirements (PSE&G)

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

(B)      Reports on Form 8-K: None.

<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: November 10, 1998