UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-Q
             (Mark One)

                [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
                  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
                  For the quarterly period ended June 30, 2001

                                       OR

                 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
                  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
                        For the transition period from to


 Commission           Registrant, State of Incorporation,      I.R.S. Employer
 File Number              Address, and Telephone Number       Identification No.
------------        ---------------------------------------   ------------------
 001-00973          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
                               http:\\www.pseg.com

Indicate  by  check  mark  whether the  registrant  (1) has  filed  all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                          Yes   X       No

As  of July 31, 2001, Public  Service Electric and  Gas  Company  and 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>

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                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
================================================================================

                                TABLE OF CONTENTS
                                                                           PAGE
PART I. FINANCIAL INFORMATION

Item 1.   Financial Statements                                               1

Item 2.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations                                         13

Item 3.   Qualitative and Quantitative Disclosures About Market Risk        17


PART II. OTHER INFORMATION

Item 1.   Legal Proceedings                                                 18

Item 5.   Other Information                                                 18

Item 6.   Exhibits and Reports on Form 8-K                                  19

Signature                                                                   20

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                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
================================================================================

                          PART I. FINANCIAL INFORMATION

                          ITEM 1. FINANCIAL STATEMENTS

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


                                                      For the Quarter Ended     For the Six Months Ended
                                                             June 30,                  June 30,
                                                     -----------------------    ------------------------
                                                        2001          2000         2001         2000
                                                     ---------    ----------    ---------   ------------
<S>                                                  <C>          <C>           <C>         <C>
OPERATING REVENUES
  Electric Transmission and Distribution             $     401    $      404    $     718   $        735
  Commodity                                                558            70        1,111            153
  Gas Distribution                                         352           319        1,434          1,066
  Generation                                                --           510           --          1,000
  Trading                                                   --           689           --          1,303
                                                     ---------    ----------    ---------    -----------
      Total Operating Revenues                           1,311         1,992        3,263          4,257
                                                     ---------    ----------    ---------    -----------
OPERATING EXPENSES
  Commodity Costs                                          558            70        1,111            153
  Gas Costs                                                243           222        1,030            679
  Generation Costs                                          --           170           --            271
  Trading Costs                                             --           674           --          1,261
  Operation and Maintenance                                242           374          492            752
  Depreciation and Amortization                             87            82          159            170
  Taxes Other than Income Taxes                             31            39           74             88
                                                     ---------    ----------    ---------    -----------
      Total Operating Expenses                           1,161         1,631        2,866          3,374
                                                     ---------    ----------    ---------    -----------
OPERATING INCOME                                           150           361          397            883
Other Income and Deductions                                  2             2           13             12
Interest Expense - Net                                     (95)          (97)        (153)          (194)
Preferred Securities Dividend Requirements of
   Subsidiaries                                             (7)          (12)         (18)           (23)
                                                     ---------    ----------    ---------    -----------
INCOME BEFORE INCOME TAXES                                  50           254          239            678
Income Taxes                                               (18)         (102)         (95)          (276)
                                                     ---------    ----------    ---------    -----------
NET INCOME                                                  32           152          144            402
Preferred Securities Dividend Requirements and
Premium on Redemption                                       (1)           (2)          (4)            (5)
                                                     ---------    ----------    ---------    -----------
EARNINGS AVAILABLE TO PUBLIC SERVICE
  ENTERPRISE GROUP INCORPORATED                      $      31    $      150    $     140     $      397
                                                     =========    ==========    =========    ===========

See Notes to Consolidated Financial Statements.
</TABLE>

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<TABLE>


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

                                                             (Unaudited)
                                                               June 30,        December 31,
                                                                 2001              2000
                                                             ------------     --------------
<S>                                                          <C>              <C>
  Cash and Cash Equivalents                                  $        370     $           39
  Restricted Cash                                                      62                 --
  Accounts Receivable:
    Customer Accounts Receivable                                      584                614
    Other Accounts Receivable                                          63                 71
    Allowance for Doubtful Accounts                                  (50)                (39)
  Unbilled Revenues                                                   200                357
  Fuel                                                                354                372
  Materials and Supplies                                               60                 48
  Prepayments                                                         233                  5
  Energy Contracts                                                     13                 --
  Other                                                                21                 24
                                                             ------------     --------------
    Total Current Assets                                            1,910              1,491
                                                             ------------     --------------

PROPERTY, PLANT, AND EQUIPMENT
  Transmission and Distribution                                     8,594              8,479
  Other                                                               423                420
                                                             ------------     --------------
    Total                                                           9,017              8,899
  Accumulated Depreciation and Amortization                        (3,237)            (3,139)
                                                             ------------     --------------
    Net Property, Plant and Equipment                               5,780              5,760
                                                             ------------     --------------

NONCURRENT ASSETS
  Regulatory Assets                                                 5,349              4,995
  Note Receivable - Affiliated Company                                 --              2,786
  Long-Term Investments                                               115                109
  Other Special Funds                                                  86                 70
  Other                                                                30                 56
                                                             ------------     --------------
    Total Noncurrent Assets                                         5,580              8,016
                                                             ------------     --------------
TOTAL ASSETS                                                 $     13,270     $       15,267
                                                             ============     ==============

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


                           PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                                 CONSOLIDATED BALANCE SHEETS
                                LIABILITIES AND CAPITALIZATION
                                    (Millions of Dollars)


                                                             (Unaudited)
                                                               June 30,       December 31,
                                                                 2001             2000
                                                             ------------   --------------
<S>                                                          <C>            <C>
CURRENT LIABILITIES
  Long-Term Debt Due Within One Year                         $        205   $          100
  Commercial Paper and Loans                                           56            1,543
  Accounts Payable                                                    323              440
  Accounts Payable-Affiliated Companies                               219              308
  Energy Contracts                                                    157               --
  Other                                                               315              253
                                                             ------------   --------------
    Total Current Liabilities                                       1,275            2,644
                                                             ------------   --------------

NONCURRENT LIABILITIES
  Deferred Income Taxes and ITC                                     2,731            2,701
  Regulatory Liabilities                                              386              470
  OPEB Costs                                                          454              441
  Other                                                               198              223
                                                             ------------   --------------
    Total Noncurrent Liabilities                                    3,769            3,835
                                                             ------------   --------------

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

CAPITALIZATION
  LONG-TERM DEBT                                                    5,711            3,590
                                                             ------------   --------------

  PREFERRED SECURITIES
    Preferred Stock Without Mandatory Redemption                       80               95
    Preferred Stock With Mandatory Redemption                          --               75
    Subsidiaries' Preferred Securities:
    Guaranteed Preferred Beneficial Interest in
        Subordinated Debentures                                       155              513

                                                             ------------   --------------
      Total Preferred Securities                                      235              683
                                                             ------------   --------------

  COMMON STOCKHOLDER'S EQUITY
    Common Stock, issued:  132,450,344 shares                         892            2,563
    Contributed Capital                                                --              594
    Basis Adjustment                                                  986              986
    Retained Earnings                                                 403              375
    Accumulated Other Comprehensive Loss                              (1)               (3)
                                                             ------------    -------------
      Total Common Stockholder's Equity                             2,280            4,515
                                                             ------------    -------------
        Total Capitalization                                        8,226            8,788
                                                             ------------    -------------
TOTAL LIABILITIES AND CAPITALIZATION                         $     13,270    $      15,267
                                                             ============    =============

See Notes to Consolidated Financial Statements.
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


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

                                                              For the Six Months Ended
                                                                      June 30,
                                                           -----------------------------
                                                               2001              2000
                                                           -----------      ------------
<S>                                                        <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                               $       144      $        402
  Adjustments to reconcile net income to net cash
   flows from operating activities:
  Depreciation and Amortization                                    159               170
  Amortization of Nuclear Fuel                                      --                45
  (Deferral)Recovery of Gas Costs-- net                           (111)               25
  Provision for Deferred Income Taxes and ITC-- net                 30                61
  Net Changes in Certain Current Assets and Liabilities:
    Restricted Cash                                                (62)               --
    Accounts Receivable and Unbilled Revenues                      206               (16)
    Prepayments                                                   (228)             (239)
    Accounts Payable                                              (206)              379
    Other Current Assets and Liabilities                            71               (94)
  Other                                                             11                23
                                                           -----------      ------------
    Net Cash Provided By Operating Activities                       14               756
                                                           -----------      ------------

CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Property, Plant and Equipment,
   excluding Capitalized Interest and AFDC                        (172)             (230)
  Other                                                             (6)              (17)
                                                           -----------      ------------
    Net Cash Used in Investing Activities                         (178)             (247)
                                                           -----------      ------------

CASH FLOWS FROM FINANCING ACTIVITIES
  Net Change in Short-Term Debt                                 (1,487)              307
  Issuance of Long-Term Debt                                     2,525                --
  Deferred Issuance Costs                                         (201)               --
  Redemption/Purchase of Long-Term Debt                           (299)             (621)
  Collection of Note Receivable - Affiliated Company             2,786                --
  Redemption of Preferred Securities                              (448)               --
  Return of Capital                                             (2,265)               --
  Cash Dividends Paid on Common Stock                             (112)             (334)
  Other                                                             (4)               (5)
                                                           -----------      ------------
    Net Cash Provided By (Used In) Financing Activities            495              (653)
                                                           -----------      ------------
Net Change in Cash and Cash Equivalents                            331              (144)
Cash and Cash Equivalents at Beginning of Period                    39               173
                                                           -----------      ------------
Cash and Cash Equivalents at End of Period                 $       370      $         29
                                                           ===========      ============

Income Taxes Paid                                          $       192      $        387
Interest Paid                                              $       152      $        190

See Notes to Consolidated Financial Statements.
</TABLE>

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                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
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                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Organization and Basis of Presentation

Organization

     Public Service Electric and Gas Company, (PSE&G), a wholly-owned subsidiary
of Public Service Enterprise Group  Incorporated  (PSEG), is an operating public
utility providing  electric and gas service in certain areas within the State of
New Jersey.  Following  the  transfer of its  generation-related  assets to PSEG
Power LLC (Power) in August 2000,  PSE&G  continues to maintain its electric and
gas transmission and distribution businesses.

Basis of Presentation

     The financial statements included herein have been prepared pursuant to the
rules  and  regulations  of the  Securities  and  Exchange  Commission.  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  (Statements)
and Notes to  Consolidated  Financial  Statements  (Notes) update and supplement
matters  discussed  in PSE&G's  2000  Annual  Report on Form 10-K and  Quarterly
Report on Form 10-Q for the  quarter  ended March 31, 2001 and should be read in
conjunction with those Notes.

     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 PSE&G's
2000 Annual Report on Form 10-K. Certain  reclassifications of prior period data
have been made to conform with the current presentation.

Restricted Cash

     PSE&G Transition Funding LLC (Transition Funding), a PSE&G subsidiary,  has
deposited  funds with a Trustee  which are  required  to be used for  payment of
principal, interest and other expenses related to its transition bonds (see Note
3. Regulatory  Issues).  Accordingly,  these funds are classified as "Restricted
Cash" on PSE&G's Consolidated Balance Sheets.

Commodity Revenues and Costs

     Commodity revenues in 2001 represent the basic generation service (BGS) and
Market  Transition  Charge (MTC) tariff rates  charged by PSE&G to its customers
who do not choose another supplier and Non-Utility  Generation Transition Charge
(NTC) rates  charged by PSE&G to its customers to recover the above market costs
related to energy purchased by PSE&G under various Non-Utility  Generation (NUG)
Contracts.  Commodity  revenues  in 2001 also  include  sales to Power of energy
purchased  under  the NUG  Contracts.  These  sales  are  made to  Power  at the
Locational  Marginal  Price  (LMP) in the PJM Market.  For periods  prior to the
transfer of the generation business to Power in August 2000,  Commodity revenues
include  the  sales of energy  purchased  under the NUG  Contracts  at LMP.  Any
difference between the amounts PSE&G pays under the NUG Contracts and the amount
it recovers  through the NTC and sales at LMP are deferred as a regulatory asset
or liability.  The BGS and MTC revenues are offset by a corresponding expense in
Commodity  Costs for the amount paid to Power under PSE&G's  contract with Power
pursuant to which  Power  delivers  energy and  capacity to PSE&G under its full
requirements  contract (BGS Contract).  The costs for energy purchased under the
NUG contracts is also included in Commodity Costs.

Note 2.  Accounting Matters

     In July 2000,  the  Emerging  Issues Task Force  (EITF)  99-19,  "Reporting
Revenue  Gross as a Principal  versus Net as an Agent"  (EITF  99-19),  provided
guidance on the issue of whether a company  should  report  revenue based on the
gross  amount  billed to the customer or the net amount  retained.  The guidance
states that this determination  requires significant judgment,  which depends on
the relevant facts and circumstances. For the first six months of 2001, based on
PSEG's  analysis  and  interpretation  of EITF 99-19,  Power,  the  successor to
PSE&G's  generation  business,  reported  all the revenues and Energy Costs on a
gross basis for the physical  bilateral  energy sales and purchases and capacity
sales and purchases.  PSEG continues to report swaps, futures,  option premiums,
firm transmission  rights,  transmission  congestion credits,  and purchases and
sales of emission  credits on a net basis.  The prior year financial  statements
for PSE&G, which include results of the generation and trading operations,  have
been reclassified accordingly.

     Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative  Instruments and Hedging  Activities" (SFAS 133) is effective for all
fiscal years beginning  after June 15, 2000.  SFAS 133, as amended,  establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts,  and for hedging activities.
Under SFAS 133, certain contracts that were not formerly considered  derivatives
may now meet the definition of a derivative.  PSE&G and its subsidiaries adopted
SFAS 133 effective January 1, 2001. There was no transition  adjustment relating
to the  adoption  of SFAS  133  (see  Note 6.  Financial  Instruments  and  Risk
Management).

     The Financial Accounting Standards Board's (FASB) Derivative Implementation
Group (DIG),  has issued  guidance  effective  July 1, 2001,  regarding  certain
derivative  contracts  and the  eligibility  of those  contracts  for the normal
purchases and sales exceptions.  PSE&G is currently evaluating this guidance and
cannot  predict the impact on its financial  position or results of  operations,
however such impact could be material.

     In July 2001, the FASB issued SFAS No. 141, "Business  Combinations"  (SFAS
141).  SFAS 141,  was  effective  July 1, 2001 and  requires  that all  business
combinations subsequent to that date be accounted for under the purchase method.
PSE&G is currently  evaluating this guidance and does not believe it will have a
substantial effect on its growth strategy.  PSE&G does not anticipate that there
will be a material impact on its financial position or results of operations.

     Also in July  2001,  the FASB  issued  SFAS No.  142,  "Goodwill  and Other
Intangible  Assets"  (SFAS  142).  Under  SFAS 142,  goodwill  is  considered  a
nonamortizable  asset and will be subject to an annual review for impairment and
an interim review when events or circumstances occur. SFAS 142 also defines what
is considered  an intangible  asset,  other than  goodwill,  that may arise in a
purchase combination. SFAS 142 is effective for all fiscal years beginning after
December  15,  2001.  There will be no effect on PSE&G's  financial  position or
results  of  operations.

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

<PAGE>
Note 3.  Regulatory Issues

New Jersey Energy Master Plan Proceedings and Related Orders

     In August 1999, following the enactment of the New Jersey Electric Discount
and Energy  Competition  Act,  the New Jersey  Board of Public  Utilities  (BPU)
rendered a Final Order relating to PSE&G's rate  unbundling,  stranded costs and
restructuring  proceedings (Final Order) providing,  among other things, for the
transfer to Power of all of PSE&G's electric  generation  facilities,  plant and
equipment  for  $2.443  billion  and  all  other  related  property,   including
materials,  supplies  and  fuel at the net book  value  thereof,  together  with
associated rights and liabilities.

     Also in the Final Order,  the BPU concluded that PSE&G should recover up to
$2.94  billion (net of tax) of its  generation-related  stranded  costs  through
securitization  of $2.4 billion and an opportunity to recover up to $540 million
(net of tax) of its  unsecuritized  generation-related  stranded  costs on a net
present  value basis.  The $540 million is subject to recovery  through a market
transition  charge (MTC).  PSE&G remits the MTC revenues to Power as part of the
BGS Contract as provided for by the Final Order.

     In September  1999,  the BPU issued its order  approving  PSE&G's  petition
relating  to the  proposed  securitization  transaction  (Finance  Order)  which
authorized,  among other things,  the imposition of a non-bypassable  transition
bond charge (TBC) on PSE&G's  customers;  the sale of PSE&G's  property right in
such charge to a  bankruptcy-remote  financing entity;  the issuance and sale of
$2.525  billion of  transition  bonds by such entity as  consideration  for such
property right,  including an estimated $125 million of transaction  costs;  and
the application by PSE&G of the transition  bond proceeds to retire  outstanding
debt and/or equity.  Transition  Funding issued the transition  bonds on January
31, 2001 and the TBC and an additional  2% rate  reduction  became  effective on
February 7, 2001 in accordance  with the Final Order.  The rate decrease and the
TBC were funded through the MTC rate.

     In October and November  1999,  appeals  were filed by New Jersey  Business
User's Coalition,  the New Jersey Ratepayer  Advocate (RPA) and Co-Steel Raritan
(Co-Steel),  an individual  PSE&G  customer,  the  "appellants"  challenging the
validity of the Finance  Order as well as the Final  Order.  In April 2000,  the
Appellate  Division of the New Jersey  Superior Court  unanimously  rejected the
arguments made by the appellants and affirmed the Final Order and Finance Order.
In May 2000,  the  appellants  requested the New Jersey  Supreme Court to review
certain aspects of the Appellate Division decision. In July 2000, the New Jersey
Supreme Court granted the requests.  In December  2000, by a vote of 4 to 1, the
New  Jersey  Supreme  Court  issued  its order  affirming  the  judgment  of the
Appellate Division. The New Jersey Supreme Court's written opinion was issued on
May 18, 2001.

     On  March  6,  2001,  Co-Steel  filed a  Petition  of  Writ  of  Certiorari
(Petition)  with the United States  Supreme Court seeking  limited review of the
New  Jersey  Supreme  Court   decision,   the  granting  of  which  is  entirely
discretionary  with the Court.  Briefs in  opposition  to the Petition have been
filed. The outcome of this action cannot be predicted.

     On January 31, 2001, $2.525 billion of transition bonds (non-recourse asset
based  securities)  were issued by  Transition  Funding,  in eight  classes with
maturities  ranging  from 1 year to 15 years.  Also on January 31,  2001,  PSE&G
received  payment  from  Power on its  $2.786  billion  promissory  note used to
finance the transfer of PSE&G's  generation  business.  The proceeds  from these
transactions  were used to pay for certain debt  issuance and related  costs for
securitization,  retire a portion of PSE&G's outstanding short-term debt, reduce
PSE&G common equity, loan funds to PSEG and make various short-term investments.

<PAGE>
Note 4. Regulatory Assets and Liabilities

     At June 30, 2001 and December 31,  2000,  respectively,  PSE&G had deferred
the following  regulatory  assets and  liabilities on the  Consolidated  Balance
Sheets:

<TABLE>
<CAPTION>

                                                                        June 30,           December 31,
                                                                          2001                 2000
                                                                     ----------------    --------------
                                                                            (Millions of Dollars)
<S>                                                                         <C>                  <C>
Regulatory Assets:
   Stranded Costs to be Recovered...............................            $4,225               $4,093
   SFAS 109 Income Taxes........................................               329                  285
   OPEB Costs...................................................               222                  232
   Societal Benefits Charges (SBC)..............................                42                   74
   Underrecovered Gas Costs.....................................                94                   --
   Environmental Costs..........................................                74                   74
   Unamortized Loss on Reacquired Debt and Debt Expense.........                98                  104
   Non-Utility Generation Transition Charge (NTC)...............                26                    7
   Other........................................................               239                  126
                                                                     -------------       --------------
       Total Regulatory Assets..................................            $5,349               $4,995
                                                                     =============       ==============

Regulatory Liabilities:
   Excess Depreciation Reserve..................................              $381                 $444
   Overrecovered Gas Costs......................................                --                   26
   Other........................................................                 5                   --
                                                                     -------------       --------------
       Total Regulatory Liabilities.............................              $386                 $470
                                                                     =============       ==============
</TABLE>

Note 5.  Commitments and Contingent Liabilities

Hazardous Waste

     The New Jersey Department of Environmental  Protection (NJDEP)  regulations
concerning site investigation and remediation  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
industry  to  develop  procedures  for  implementing  these  regulations.  These
regulations may substantially increase the costs of environmental investigations
and  remediations,  where  necessary,  particularly at sites situated on surface
water bodies.  PSE&G and predecessor  companies  owned and/or  operated  certain
facilities situated 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
compliance  with these  regulations  will have a material  adverse effect on its
financial position, results of operations or net cash flows.
<PAGE>

Manufactured Gas Plant Remediation Program

     PSE&G is  currently  working  with the NJDEP  under a program  (Remediation
Program) to assess,  investigate  and,  if  necessary,  remediate  environmental
conditions at PSE&G's  former  manufactured  gas plant sites.  To date, 38 sites
have been  identified.  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 long-term costs
of the  Remediation  Program cannot be reasonably  estimated,  but experience to
date indicates that  approximately $20 million per year could be incurred over a
period of about 30 years and that the overall cost could be material.  The costs
for this remediation effort are recovered through the SBC.

     Net of recoveries, costs incurred through June 30, 2001 for the Remediation
Program  amounted to $151.6  million.  In addition,  at June 30,  2001,  PSE&G's
estimated  liability for remediation  costs through 2003 aggregated $74 million.
Expenditures beyond 2003 cannot reasonably be estimated.

Passaic River Site

     The United States Environmental Protection Agency (EPA) has determined that
a six mile  stretch of the Passaic  River in Newark,  New Jersey is a "facility"
within the  meaning of that term under the Federal  Comprehensive  Environmental
Response,  Compensation  and  Liability  Act of 1980 and that, to date, at least
thirteen corporations, including PSE&G, may be potentially liable for performing
required  remedial actions to address potential  environmental  pollution at the
Passaic  River  "facility."  PSE&G  and  certain  of its  predecessors  operated
industrial  facilities  at  properties  within  the  Passaic  River  "facility,"
comprised of four former  manufactured gas plants (MGP), one operating  electric
generating station and one former generating  station.  Costs to clean up former
MGPs are  recoverable  from  utility  customers  under  the SBC.  The  operating
electric  generating station has been transferred to Power, which is responsible
for remediation of the station,  if required.  PSE&G cannot predict what action,
if any, the EPA or any third party may take against  PSE&G with respect to these
matters,  or in such  event,  what  costs  PSE&G may incur to  address  any such
claims. However, such costs may be material.

Note 6.  Financial Instruments and Risk Management

Commodity-Related Instruments

     PSE&G  enters  into swaps,  options  and  futures for its gas  distribution
business to reduce exposure to price  fluctuations from factors such as weather,
changes in demand and changes in supply. These instruments,  in conjunction with
physical  gas supply  contracts,  are designed to cover  estimated  gas customer
commitments.  PSE&G has entered into 294 MMBTU of gas futures, swaps and options
to hedge forecasted  requirements.  As of June 30, 2001, the fair value of those
instruments  was $(144) million with a maximum term of  approximately  one year.
PSE&G utilizes  derivatives to hedge its gas purchasing  activities  which, when
realized,  are recoverable  through its Levelized Gas Adjustment  Clause (LGAC).
Accordingly,  the  offset to the change in fair  value of these  derivatives  is
specified as a regulatory asset or liability.

Interest Rates

     PSE&G is subject to the risk of  fluctuating  interest  rates in the normal
course of business.  PSE&G's policy is to manage  interest rate risk through the
use of fixed rate debt,  floating rate debt and interest rate swaps.  As of June
30, 2001, a hypothetical  10% change in market  interest rates would result in a
$3 million  change in annual  interest  costs related to short-term and floating
rate debt at PSE&G.

     Transition Funding has entered into an interest rate swap on its sole class
of floating rate transition bonds. The notional amount of the interest rate swap
is $496.6 million.  The interest rate swap is indexed to the  three-month  LIBOR
rate. The fair value of the interest rate swap was approximately $0.7 million as
of June 30, 2001 and was recorded as a derivative liability,  with an offsetting
amount recorded as a regulatory asset on the Consolidated  Balance Sheets.  This
amount will vary over time as a result of changes in market conditions.

Note 7.  Income Taxes

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

                                                                    Quarter Ended              Six Months Ended
                                                                      June 30,                     June 30,
                                                               -------------------------    -------------------------
                                                                 2001           2000           2001           2000
                                                               ----------    -----------    ---------     -----------
<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%           5.9%          5.9%
Other-- net..............................................         (4.9)%        (0.7)%         (1.1)%        (0.2)%
                                                               ----------    -----------    ---------     -----------
     Effective Income Tax Rate............................        36.0%         40.2%          39.8%         40.7%
                                                               ==========    ===========    =========     ===========
</TABLE>

     The primary  reason for the  decrease in the  effective  tax rate,  for the
quarter and six months ended June 30,  2001,  as compared to the same period for
2000,  is the  effect of the  amortization  of  regulatory  tax  adjustments  in
relationship to a lower pre-tax income.

     The Internal  Revenue Service has concluded the audit of PSE&G's  1994-1996
Federal  Income Tax Returns.  PSE&G does not  anticipate  that the result of the
Revenue Agents' Report will have a material adverse impact on PSE&G's  financial
position, results of operations or net cash flows.
<PAGE>
Note 8.  Financial Information by Business Segments

     Information  related to the segments of PSE&G's business is detailed below.
Following the transfer of its generation-related assets to Power in August 2000,
PSE&G continues to maintain its electric and gas  transmission  and distribution
(T&D) business as its only remaining reportable segment.

<TABLE>
<CAPTION>

     --------------------------------------------------------------------------------------------------------
                                                                                                Consolidated
                                                       Generation     Trading       T & D          Total
                                                      ------------  -----------  -----------  ---------------
                                                                         (Millions of Dollars)
       <S>                                                        <C>         <C>         <C>              <C>
       For the Quarter Ended June 30, 2001:
       Total Operating Revenues....................        $   --      $  --       $ 1,311          $ 1,311
       Segment Earnings Available to PSEG..........        $   --      $  --       $    31          $    31
                                                      ============  ===========  ===========  ===============
     --------------------------------------------------------------------------------------------------------
       For the Quarter Ended June 30, 2000:
       Total Operating Revenues....................        $  540      $ 689       $   763          $ 1,992
       Segment Earnings Available to PSEG..........        $   63      $   9       $    78          $   150
                                                      ============  ===========  ===========  ===============
     --------------------------------------------------------------------------------------------------------
       For the Six Months Ended June 30, 2001:
       Total Operating Revenues....................        $   --      $  --       $ 3,263          $ 3,263
       Segment Earnings Available to PSEG..........        $   --      $  --       $   140          $   140
                                                      ============  ===========  ===========  ===============
     --------------------------------------------------------------------------------------------------------
       For the Six Months Ended June 30, 2000:
       Total Operating Revenues....................        $1,070      $1,303      $ 1,884          $ 4,257
       Segment Earnings Available to PSEG..........        $  173      $   25      $   199          $   397
                                                      ============  ===========  ===========  ===============
     --------------------------------------------------------------------------------------------------------
       As of June 30, 2001:
       Total Assets................................        $   --      $   --      $13,270          $13,270
                                                      ============  ===========  ===========  ===============
     --------------------------------------------------------------------------------------------------------
       As of December 31, 2000:
       Total Assets................................        $   --      $   --      $15,267          $15,267
                                                      ============   ==========  ===========  ===============
     --------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>
Note 9.  Comprehensive Income

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


                                                        Comprehensive Income
                                          ---------------------------------------------------
                                                Quarter Ended            Six Months Ended
                                                  June 30,                   June 30,
                                          -----------------------  --------------------------
                                              2001         2000        2001           2000
                                          ----------   ----------  -----------   ------------
<S>                                              <C>         <C>          <C>            <C>
Net Income....................                   $32         $152         $144           $402
Other Comprehensive Income....                     2           --            2             --
                                          ----------   ----------  -----------   ------------
Comprehensive Income..........                   $34         $152         $146           $402
                                          ==========   ==========  ===========   ============
</TABLE>

Note 10.  Related Party Transactions

     PSE&G's  transfer of its electric  generating  assets was in exchange for a
$2.786 billion  Promissory Note from Power.  Interest on the Promissory Note was
payable at an annual rate of 14.23%,  which represented PSE&G's weighted average
cost of capital.  For the period from January 1, 2001 to January 31, 2001, PSE&G
recorded interest income of approximately $34 million relating to the Promissory
Note. Power repaid the Promissory Note on January 31, 2001.

     In addition,  on January 31, 2001,  PSE&G loaned $1.084  billion to PSEG at
14.23% per annum and recorded  interest income of  approximately  $6 million and
$33 million  relating to the loan for the quarter and six months  ended June 30,
2001, respectively.  PSEG repaid the loan to PSE&G on April 16, 2001. PSE&G also
returned  $2.265  billion  of  capital to PSEG on  January  31,  2001  utilizing
proceeds from  securitization  and the generation asset sale, as required by the
Final Order, as part of its recapitalization.

     Effective  with the transfer of the  electric  generation  business,  Power
charges  PSE&G for MTC and the energy and capacity  provided to meet PSE&G's BGS
requirements.  For the quarter  and six months  ended June 30,  2001,  Power has
charged PSE&G approximately $474 million and $937 million for MTC and BGS. As of
June  30,  2001,   PSE&G's   payable  to  Power  relating  to  these  costs  was
approximately  $186  million.  For the quarter and six months ended through June
30,  2001,  PSE&G sold  energy  and  capacity  to Power at the  market  price of
approximately $36 million and $80 million,  respectively,  which PSE&G purchased
under  various  Non-Utility  Generation  (NUG)  contracts  at costs above market
prices. As of June 30, 2001,  PSE&G's  receivable related to these purchases was
approximately  $14  million.  PSE&G,  as  a  result  of  the  Final  Order,  has
established  an NTC to  recover  the above  market  costs  related  to these NUG
contracts.  The  difference  between  PSE&G's  cost and their  recovery of costs
through the NTC and sales to Power,  which are at the locational  marginal price
(LMP) set by the PJM  Interconnection LLC Independent System Operator for energy
and at wholesale market prices for capacity, is deferred as a regulatory asset.

     PSEG  Services  Corporation  (Services)  provides and bills  administrative
services to PSE&G on a monthly  basis.  PSE&G's  costs  related to such  service
amounted to  approximately  $91 million and $200 million for the quarter and six
months  ended  June  30,  2001,  respectively.  As of  June  30,  2001,  PSE&G's
intercompany payable related to these costs was approximately $35 million.
<PAGE>
================================================================================
                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
================================================================================

                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 PSE&G's 2000 Annual Report on Form 10-K and Quarterly  Report on
Form 10-Q for the  quarter  ended  March 31,  2001  affecting  the  consolidated
financial  condition  and the results of operations  of PSE&G.  This  discussion
refers  to the  Statements  and  related  Notes of PSE&G  and  should be read in
conjunction with such Statements and Notes.

Results of Operations

Revenues

     Electric Transmission and Distribution

     Transmission and Distribution  revenues  decreased $3 million or 1% and $17
million or 2% for the  quarter  and the six months  ended June 30, 2001 from the
comparable periods in 2000, respectively.

     Commodity

     Commodity  revenues  were $558 million and $1.1 billion for the quarter and
six months  ended June 30, 2001 as compared to $70 million and $153  million for
the comparable periods in 2000,  respectively.  These revenues represent the BGS
and MTC tariff rates charged by PSE&G to its customers who do not choose another
supplier  and NTC rates  charged by PSE&G to its  customers to recover the above
market costs related to energy  purchased by PSE&G under various NUG  Contracts.
Commodity revenues in 2001 also include sales to Power of energy purchased under
the NUG  contracts.  These sales are made to Power at the LMP in the PJM Market.
For periods prior to the transfer of the generation  business to Power in August
2000,  Commodity  revenues  include the sales of energy  purchased under the NUG
Contracts at LMP. Any  difference  between the amounts  PSE&G pays under the NUG
Contracts  and the  amount  it  recovers  through  the NTC and  sales at LMP are
deferred as a regulatory asset or liability. The BGS and MTC revenues are offset
by a corresponding expense in Commodity Costs for the amount paid to Power under
the BGS Contract.

     The MTC tariff  rate  decreased  2% in  February  2001  effective  with the
implementation  of securitization in accordance with the BPU's Final Order. This
rate  reduction  was  approximately  $28 million and was funded  through the MTC
component of rates,  which,  along with BGS  revenues,  is passed along to Power
through  Commodity  Costs.  Effective  August  1,  2001,  PSE&G  implemented  an
additional 2% rate reduction as required by the Final Order,  bringing the total
rate decrease to 9% since August 1, 1999.

     Gas Distribution

     Gas Distribution  revenues increased $33 million or 10% and $368 million or
35% for the quarter and the six months  ended June 30, 2001 from the  comparable
periods in 2000,  respectively,  primarily due to higher natural gas costs which
were passed along to customers.  Customer  rates in all classes of business have
increased  in 2001 to  recover a portion of the higher  natural  gas costs.  The
commercial and industrial  classes fuel recovery rates vary monthly according to
the market price of gas. The BPU also approved  increases in the fuel  component
of the  residential  class rates of 16% in  November  2000 and 2% for each month
from December 2000 through July 2001.  These  increased  revenues were offset by
higher gas distribution costs discussed below.
<PAGE>
     Generation

     Following  the transfer of PSE&G's  generation  business to Power in August
2000, PSE&G no longer records Generation revenues.

     Trading

     Together with the transfer of PSE&G's  generation  business to Power, PSE&G
transferred  its trading  operations  to Power in August 2000 and  therefore  no
longer has Trading revenues.

Operating Expenses

     Commodity Costs

     Commodity  Costs were $558 million and $1.1 billion for the quarter and the
six months  ended June 30, 2001 as compared to $70 million and $153  million for
the comparable  periods in 2000,  respectively.  For 2001, these costs represent
the amount paid to Power under  PSE&G's  contract  with Power  pursuant to which
Power delivers energy and capacity to PSE&G under its BGS Contract and purchases
of energy under various NUG contracts.  For 2000,  these costs  represented only
purchases  of energy  under  various NUG  contracts  as PSE&G  operated  its own
generation  business.  The BGS and MTC  costs  paid to Power  were  reduced  $28
million as a result of the rate reduction discussed above.

     Gas Costs

     Gas Costs  increased  $21  million  or 9% and $351  million  or 52% for the
quarter and the six months  ended June 30, 2001 from the  comparable  periods in
2000,  respectively,  primarily  due to higher  natural gas costs,  as discussed
above.  Due to the Levelized Gas Adjustment  Clause,  gas costs are increased or
decreased to offset a  corresponding  increase or decrease in fuel revenues with
no impact on income.

     Generation Costs

     Following  the transfer of PSE&G's  generation  business to Power in August
2000, PSE&G no longer records Generation Costs.

     Trading Costs

     Together with the transfer of PSE&G's  generation  business to Power, PSE&G
transferred  its trading  operations  to Power in August 2000 and  therefore  no
longer has Trading Costs.

     Operations and Maintenance

     Operations and Maintenance  expense  decreased $132 million or 35% and $260
million or 35% for the quarter and six months ended June 30, 2001, respectively,
primarily due to the  elimination of $185 million and $325 million in Operations
and Maintenance  expenses resulting from the transfer of the generation business
to Power in August  2000.  The decrease  was  partially  offset as a result of a
greater  proportion of expenditures  used for operations and maintenance  rather
than capital  project work in the second  quarter of 2001 than in the comparable
2000 period.
<PAGE>
     Depreciation and Amortization

     Depreciation  and  Amortization  expense  increased  $5  million  or 6% and
decreased  $11 million or 6% for the  quarter and the six months  ended June 30,
2001 from the  comparable  periods in 2000,  respectively.  The increase for the
quarter was primarily due to $43 million of amortization of the regulatory asset
recorded for PSE&G's  stranded  costs,  which commenced with the issuance of the
transition  bonds.  This increase was partially offset by the elimination of $32
million  Depreciation and Amortization  expenses  resulting from the transfer of
the generation business to Power in August 2000 and lower depreciation resulting
from various  asset  retirements.  For the six months  ended June 30, 2001,  the
decrease was primarily due to the  elimination of $68 million  Depreciation  and
Amortization  expenses resulting from the transfer of the generation business to
Power in  August  2000 and  lower  depreciation  resulting  from  various  asset
retirements.  The decrease was partially offset by approximately  $65 million of
amortization of the regulatory asset discussed above.

Interest Expense

     Net Interest Expense  decreased $2 million or 2% and $41 million or 21% for
the quarter and the six months ended June 30, 2001 from the  comparable  periods
in 2000,  respectively,  primarily due to approximately  $66 million of interest
earned from Power and PSEG for the intercompany loans relating to the generation
business  transfer and lower interest  resulting from reduced  short-term  debt.
These decreases were partially offset by accrued  interest of approximately  $67
million on the bonds issued by Transition Funding on January 31, 2001, discussed
below.

Preferred Securities Dividends

     Preferred  Securities  Dividends decreased $6 million or 43% and $6 million
or 21% for the  quarter  and six months  ended June 30,  2001 as compared to the
same period in 2000,  primarily due to the redemption of preferred securities in
March 2001 and June 2001 (see External Financings).

Liquidity and Capital Resources

     On January 31,  2001,  $2.525  billion of  transition  bonds were issued by
Transition Funding, a  bankruptcy-remote,  wholly-owned  subsidiary.  PSE&G also
received  payment  from  Power on its  $2.786  billion  Promissory  Note used to
finance the transfer of PSE&G's generation  business to Power. The proceeds from
these  transactions were used to pay for certain debt issuance and related costs
for  securitization,  redeem a portion of PSE&G's  outstanding  short-term debt,
reduce  PSE&G  common  equity by $2.265  billion,  loan  funds to PSEG of $1.084
billion and make various short-term  investments.  PSEG repaid the loan to PSE&G
on April 16,  2001.  These funds are expected to be used for further debt and/or
equity reductions in 2001 including  payment of maturing and certain  redeemable
securities.  Any inability to obtain required  additional external capital or to
extend or replace maturing debt and/or existing agreements at current levels and
reasonable  interest rates may affect PSE&G's  financial  condition,  results of
operations and net cash flows.

     Cash  generated  from PSE&G's  transmission  and  distribution  business is
expected to provide  the  majority of the funds for its  business  needs.  Since
1986,  PSE&G has made regular cash  payments to PSEG in the form of dividends on
outstanding shares of PSE&G's common stock. PSE&G paid common stock dividends of
$112 million and $334 million to PSEG for the  six-month  periods ended June 30,
2001 and 2000, respectively.

Capital Requirements

     PSE&G  has  substantial  commitments  as part of its  ongoing  construction
programs. These programs are continuously reviewed and periodically revised as a
result of changes in  economic  conditions,  revised  load  forecasts,  business
strategies,   site  changes,  cost  escalations  under  construction  contracts,
requirements  of regulatory  authorities  and laws,  the timing of and amount of
electric and gas transmission  and/or  distribution rate changes and the ability
of PSE&G to raise necessary capital.

     Construction   expenditures   are  related  to   improvements   in  PSE&G's
transmission and distribution system, gas system and common facilities.  For the
six month  periods  ended June 30,  2001 and 2000,  respectively,  PSE&G had net
plant additions of $172 million and $230 million,  excluding Allowance for Funds
Used  During  Construction  (AFDC).  This  decrease  is a  result  of a  greater
proportion of expenditures  being applied to operations and maintenance  expense
projects as discussed above.

External Financings

     Under its Mortgage,  PSE&G may issue new First and Refunding Mortgage Bonds
against  previous  additions and  improvements  and/or  retired  Mortgage  Bonds
provided  that its ratio of earnings to fixed  charges  calculated in accordance
with its Mortgage is at least 2:1. At June 30, 2001,  PSE&G's Mortgage  coverage
ratio was 3:1. As of June 30, 2001,  the Mortgage  would permit up to $1 billion
aggregate  principal  amount of new Mortgage Bonds to be issued against previous
additions and improvements. In addition to the refinancing of existing long-term
debt  authorized  by the BPU in the Final  Order,  PSE&G will need to obtain BPU
authorization to issue any incremental debt financing  necessary for its capital
program.  The BPU has  authorized  PSE&G to issue up to $1 billion of  long-term
debt on the basis of  previously  matured,  redeemed or  purchased  debt through
December 31, 2001, of which $590 million has been issued.

     As  discussed  previously,  on January 31,  2001,  transition  bonds in the
amount of $2.525 billion were issued by Transition Funding in eight classes with
maturities ranging from 1 year to 15 years.

     In March  2001,  PSE&G  reduced the maximum  size of its  commercial  paper
program  from $1.5  billion  to $900  million.  To  provide  liquidity  for this
program,  PSE&G maintains $900 million in revolving credit  facilities,  each of
which  expire  in June  2002.  As of June 30,  2001,  there  were no  borrowings
outstanding under these facilities.

     Also in March 2001, PSE&G redeemed all of its $150 million of 9.375% Series
A cumulative  monthly  income  preferred  securities,  all of its $75 million of
5.97% preferred  stock, $15 million of its 6.75% preferred stock and $52 million
of its floating  rate notes due December 7, 2002. In June 2001,  PSE&G  redeemed
the remaining  $248 million  outstanding  of floating rate notes due December 7,
2002.

     In June 2001,  PSE&G  redeemed all of its $208  million of 8.625%  Series A
cumulative quarterly income preferred securities.

     PSE&G has several uncommitted lines of credit with banks. On June 30, 2001,
PSE&G had $55 million of short-term  debt  outstanding  under these  uncommitted
bank lines of credit.

Regulatory Restrictions

     Capital  resources  and  investment  requirements  may be  affected  by the
outcome of the  proceedings  being  conducted  by the BPU pursuant to its Energy
Master Plan and the New Jersey  Electric  Discount  and Energy  Competition  Act
(Energy  Competition  Act)  and  the  requirements  of the  1992  Focused  Audit
conducted by the BPU, of the impact of PSEG's non-utility businesses,  including
Energy Holdings,  on PSE&G. As a result of the Focused Audit, the BPU approved a
plan which, among other things, provides that:

(1)  PSEG will not permit Energy  Holdings'  investments to exceed 20% of PSEG's
     consolidated assets without prior notice to the BPU;

(2)  The PSE&G Board of Directors will provide an annual  certification that the
     business and financing plans of Energy  Holdings will not adversely  affect
     PSE&G;

(3)  PSEG will (a) limit debt  supported  by the minimum  net worth  maintenance
     agreement  between  PSEG and PSEG  Capital to $650  million  and (b) make a
     good-faith  effort to eliminate  such support over a six to ten year period
     from May 1993; and

(4)  Energy  Holdings  will pay PSE&G an  affiliation  fee of up to $2 million a
     year.

     In its Final Order  requiring  PSE&G to transfer its  generation  assets to
Power,  the BPU noted that, due to  significant  changes in the industry and, in
particular,  PSEG's  corporate  structure  as  a  result  of  the  Final  Order,
modifications to or relief from the Focused Audit might be warranted.  PSE&G has
notified  the BPU of its  intention  to make a filing to modify the terms of the
Focused  Audit.   PSE&G  believes  that  the  Focused  Audit  restrictions  have
effectively  been  superceded  by  the  Final  Order.  PSE&G  therefore  expects
modifications to be made,  although no assurances can be given, and that the 20%
notification  requirement  and the  present  requirement  for PSEG to  eliminate
credit  supported  debt to PSEG Capital will not adversely  affect its financial
condition, results of operations and net cash flows. Regulatory oversight by the
BPU to assure that there is no harm to utility  ratepayers from Energy Holdings'
share  of  PSEG's  non-utility  investments  is  expected  to  continue.  Energy
Holdings' assets were  approximately 26% of PSEG's  consolidated  assets at June
30, 2001.

     In addition,  if PSEG were no longer to be exempt under the Public  Utility
Holding Company Act of 1935 (PUHCA),  PSEG and its subsidiaries would be subject
to  additional  regulation  by the SEC with respect to financing  and  investing
activities,  including  the amount and type of  non-utility  investments.  PSE&G
believes  that this would not have a material  adverse  effect on its  financial
condition, results of operations and net cash flows.

Accounting Matters

     For a discussion of ETIF 99-19, SFAS 133 and related DIG issues,  SFAS 141,
SFAS 142 and SFAS 143, see Note 2.  Accounting  Matters,  and Note 6.  Financial
Instruments and Risk Management of Notes.

Forward Looking Statements

     Except for the  historical  information  contained  herein,  certain of the
matters discussed in this report constitute "forward-looking  statements" within
the  meaning of the  Private  Securities  Litigation  Reform  Act of 1995.  Such
forward-looking  statements are subject to risks and  uncertainties  which could
cause  actual  results  to  differ  materially  from  those  anticipated.   Such
statements are based on management's  beliefs as well as assumptions made by and
information  currently  available to  management.  When used  herein,  the words
"will",  "anticipate",   "intend",  "estimate",   "believe",  "expect",  "plan",
"hypothetical",  "potential",  variations of such words and similar  expressions
are  intended  to  identify  forward-looking  statements.  PSE&G  undertakes  no
obligation to publicly update or revise any forward-looking statements,  whether
as a result of new information, future events or otherwise. The following review
of factors  should not be construed as exhaustive or as any admission  regarding
the adequacy of  disclosures  made by PSE&G prior to the  effective  date of the
Private Securities Litigation Reform Act of 1995.

     In addition to any assumptions  and other factors  referred to specifically
in connection  with such  forward-looking  statements,  factors that could cause
actual   results  to  differ   materially   from  those   contemplated   in  any
forward-looking  statements include,  among others, the following:  deregulation
and the unbundling of energy  supplies and services and the  establishment  of a
competitive  energy  marketplace for products and services;  sales retention and
growth  potential  in a mature  PSE&G  service  territory;  ability to  complete
development or acquisition of current and future investments;  ability to obtain
adequate and timely rate relief, cost recovery,  and other necessary  regulatory
approvals;  Federal and state  regulatory  actions;  regulatory  oversight  with
respect to utility and non-utility affiliate relations and activities; operating
restrictions,   increased  cost  and   construction   delays   attributable   to
environmental regulations;  environmental concerns; and market risk and debt and
equity market concerns associated with these issues.

                      ITEM 3. QUALITATIVE AND QUANTITATIVE
                          DISCLOSURES ABOUT MARKET RISK

     The market risk inherent in PSE&G's market risk sensitive  instruments  and
positions is the potential loss arising from adverse changes in commodity prices
and interest rates as discussed  below.  PSE&G's policy is to use derivatives to
manage risk consistent with its business plans and prudent practices. PSEG has a
Risk Management  Committee  comprised of executive officers which PSE&G utilizes
for an independent risk oversight  function to ensure  compliance with corporate
policies and prudent risk management practices.

     PSE&G is  exposed  to  credit  losses in the  event of  non-performance  or
non-payment by counterparties.  PSE&G also has a credit management process which
is used to assess, monitor and mitigate counterparty exposure for PSE&G . In the
event of non-performance or non-payment by a major counterparty,  there may be a
material adverse impact on PSE&G's financial condition, results of operations or
net  cash  flows.  For  discussion  of  interest  rates  and   commodity-related
instruments see Note 6. Financial Instruments and Risk Management of Notes.

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

                           PART II. OTHER INFORMATION

                            ITEM 1. LEGAL PROCEEDINGS

     Certain information  reported under Item 3 of Part I of PSE&G's 2000 Annual
Report on Form 10-K or Quarterly Report on Form 10-Q for the quarter ended March
31, 2001 is updated below:

     Form 10-K,  page 3. See Page 18 for  information on proceedings  before the
BPU in the matter of the  PSE&G's  filings  with the BPU  regarding  its auction
proposal for BGS supply, Docket Nos. EX01050303.

     Form 10-K, page 12. See Page 18 for  information on proceedings  before the
BPU in the  matter  of the  PSE&G's  filings  with the BPU to  transfer  its gas
contracts, Docket No. GR00080564.

     New Matter.  See Page 19 for  information on proceedings  before the BPU in
the matter of the PSE&G's  filings with the BPU for increased gas base rates and
revised gas property depreciation rates, Docket Nos. GR01050328 and GR01050297.

                            ITEM 5. OTHER INFORMATION

     Certain information  reported under PSE&G's 2000 Annual Report on Form 10-K
and  Quarterly  Report  on Form 10-Q for the  quarter  ended  March 31,  2001 is
updated  below.  References are to the related pages on the Form 10-K as printed
and distributed.

     Electric Operation and Supply

     Form 10-K,  page 3. PSE&G has contracted with Power to provide the capacity
and electricity  necessary for the BGS obligation through July 31, 2002. On June
29, 2001 PSE&G and the other three BPU  regulated  New Jersey  electric  utility
companies  submitted a joint filing to the BPU setting forth an auction proposal
for the  provision of BGS supply  beginning  August 1, 2002.  In addition,  each
company also filed specific contingency plans and accounting information.

     Gas Contract Transfer

     Form 10-K,  page 12. On March 16, 2001, the New Jersey  Ratepayer  Advocate
(RPA)  filed a motion to  dismiss  this case.  The motion is pending  before the
Administrative Law Judge. At a hearing held on April 16, 2001, PSE&G presented a
Stipulation of  Settlement.  PSE&G is  negotiating  to have  additional  parties
execute the  Stipulation.  The final  hearing was  conducted on June 22, 2001. A
settlement  meeting  was  conducted  with  the BPU on July  24,  2001.  PSE&G is
drafting a proposed settlement agreement. The initial brief and reply briefs are
scheduled to be filed on August 15, 2001 and September 4, 2001, respectively.

     FERC RTO Orders

     Form 10-K, page 14. The Federal Energy Regulatory  Commission  (FERC), in a
series of orders  issued on July 11 and 12 called for the creation of four large
regional  transmission  organizations (RTOs) to facilitate  competitive regional
markets in the U.S.  FERC  rejected  several  smaller RTO proposals and directed
transmission owners and independent system operators (ISOs) to combine into much
larger  RTOs,   dramatically   altering  their  proposed   geographic  size  and
configuration.

     In the Northeast region, FERC conditionally  approved the  Pennsylvania-New
Jersey  Maryland  (PJM) RTO  proposal  (subject  to  several  modifications  and
compliance  filings)  and  rejected  the New York ISO and  ISO-New  England  RTO
proposals.  FERC directed that the three existing ISOs for PJM, New York and New
England,  as well as the systems  involved in PJM West, form a single  Northeast
RTO, based on the "PJM  platform".  FERC directed that the parties in the region
engage in mediation  (with FERC  oversight)  to prepare a proposal and timetable
for the merger of the ISOs into a single RTO. At the end of the 45-day mediation
period, the Administrative Law Judge assigned to the matter will submit a report
to the Commission.

     Wholesale and retail  customers,  as well as lower-cost  generation  should
benefit from having better access to a larger regional market.  While impacts on
all PSEG affiliates are uncertain  because  specific rules will not be known for
some  time,  the  elimination  of  seams  issues  and the  creation  of a single
wholesale  market in the  Northeast  is  generally  expected  to have a positive
impact on the PSEG companies.  The goal of the mediation process is to develop a
business plan and milestones for the creation and  implementation  of the single
northeast RTO.

     Gas Base Rate Filings

     New  Matter.  On May 4,  2001,  PSE&G  filed a  petition  with  the BPU for
authority to revise its gas property  depreciation rates (Depreciation Case). In
this filing,  PSE&G requested  authority to implement its proposed  depreciation
rates  simultaneously  for book  purposes and  ratemaking  purposes when the BPU
implements  new  tariffs  designed  to recover the  additional  annual  revenues
resulting from the gas base rate case discussed  below.  On May 25, 2001,  PSE&G
filed a petition  with the BPU  requesting an increase in gas base rates of $171
million for gas delivery  service (Gas Base Rate Case).  The requested  increase
would  result in an overall  gas revenue  increase  of 7.06% to reflect  current
costs.  Present  gas rates will  remain in effect  pending  approval by the BPU.
PSE&G  believes that the current gas base rates,  in effect since November 1991,
do not  reasonably  reflect  capital  investments  and other  costs  required to
maintain  the  gas  utility   infrastructure.   The  BPU  has  consolidated  the
Depreciation Case and the Gas Base Rate Case.

                    ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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

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

    10.1                Wholesale Power Contract between PSE&G and Energy
                        Resources and Trade LLC (ER&T)

    12                  Computation of Ratios of Earnings to Fixed Charges

    12(A)               Computation of Ratios of Earnings to Fixed Charges Plus
                        Preferred Securities


<PAGE>

                                   SIGNATURE

Pursuant  to  the  requirements  of the  Securities  Exchange Act  of 1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                     ---------------------------------------
                                  (Registrant)


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

Date: August 8, 2001