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

                                  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, 2000

                                       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


333-95697           PSEG ENERGY HOLDINGS, INC.            22-2983750
                    (A New Jersey Corporation)
                        80 Park Plaza-T22
                  Newark, New Jersey 07101-4194
                          973 456-3581


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.

     Public Service Enterprise Group Incorporated       Yes X    No ___

     Public Service Electric and Gas Company            Yes X    No ___

     PSEG Energy Holdings Inc.                          Yes X    No ___


As of October  31,  2000,  Public  Service  Enterprise  Group  Incorporated  had
outstanding  214,406,518  shares of its sole class of Common Stock,  without par
value and Public Service  Electric and Gas Company and PSEG Energy Holdings Inc.
had issued and outstanding  132,450,344 and 100 shares of common stock,  without
nominal  or  par  value,  respectively,   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

                                                                            Page
                                                                            ----
PART I.  FINANCIAL INFORMATION

   Item 1. Financial Statements

     Public Service Enterprise Group Incorporated (PSEG)..................     1

     Public Service Electric and Gas Company (PSE&G)......................     5

     PSEG Energy Holdings Inc. (Energy Holdings)..........................     9

     Notes to Consolidated Financial Statements -- PSEG...................    13

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

     Notes to Consolidated Financial Statements -- Energy Holdings.........   24

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

       PSEG ..............................................................    25

       PSE&G..............................................................    38

       Energy Holdings....................................................    38

   Item 3. Qualitative and Quantitative Disclosures About Market Risk.....    39

PART II.  OTHER INFORMATION

   Item 1. Legal Proceedings..............................................    40

   Item 5. Other Information..............................................    40

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

   Signatures -- PSEG.....................................................    42

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

   Signatures -- Energy Holdings..........................................    43

<PAGE>


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

                          PART I. FINANCIAL INFORMATION

                          ITEM 1. FINANCIAL STATEMENTS


<PAGE>
<TABLE>
<CAPTION>


                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                        CONSOLIDATED STATEMENTS OF INCOME
                (Millions of Dollars, except for Per Share Data)
                                   (Unaudited)


                                                               Three Months Ended                      Nine Months Ended
                                                                  September 30,                          September 30,
                                                       ------------------------------------    -----------------------------------
                                                            2000                 1999                2000                1999
                                                       ---------------     ----------------    ----------------     --------------
<S>                                                    <C>                 <C>                 <C>                  <C>
OPERATING REVENUES
   Electric Revenues *
     Bundled                                           $          --       $          494      $           --       $      2,480
     Generation                                                  564                  430               1,677                430
     Transmission and Distribution                               498                  320               1,385                320
                                                       ---------------     ----------------    ----------------     --------------
       Total Electric Revenues                                 1,062                1,244               3,062              3,230
   Gas Distribution                                              280                  214               1,346              1,191
   Other                                                         183                  148                 562                416
                                                       ---------------     ----------------    ----------------     --------------
       Total Operating Revenues                                1,525                1,606               4,970              4,837
                                                       ---------------     ----------------    ----------------     --------------
OPERATING EXPENSES
   Electric Energy Costs                                         302                  312                 798                775
   Gas Costs                                                     205                  154                 922                780
   Operation and Maintenance                                     490                  471               1,462              1,328
   Depreciation and Amortization                                  90                  122                 266                410
   Taxes Other Than Income Taxes                                  46                   44                 134                143
                                                       ---------------     ----------------    ----------------     --------------
       Total Operating Expenses                                1,133                1,103               3,582              3,436
                                                       ---------------     ----------------    ----------------     --------------
OPERATING INCOME                                                 392                  503               1,388              1,401
Other Income and Deductions                                        6                   26                  23                 39
Interest Expense                                                (148)                (126)               (422)              (355)
Preferred Securities Dividend Requirements                       (24)                 (23)                (71)               (70)
                                                       ---------------     ----------------    ----------------     --------------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM                                               226                  380                 918              1,015
Income Taxes                                                     (84)                (159)               (364)              (425)
                                                       ---------------     ----------------    ----------------     --------------
INCOME BEFORE EXTRAORDINARY ITEM                                 142                  221                 554                590
Extraordinary Item (net of tax of $345)                           --                  (14)                 --               (804)
                                                       ---------------     ----------------    ----------------     --------------

NET INCOME (LOSS)                                      $         142       $          207      $          554       $       (214)
                                                       ===============     ================    ================     ==============

WEIGHTED AVERAGE COMMON
   SHARES OUTSTANDING (000's)                                214,623              219,225             215,465            220,413
                                                       ===============     ================    ================     ==============

EARNINGS (LOSS) PER SHARE (BASIC
   AND DILUTED):

INCOME BEFORE EXTRAORDINARY ITEM                       $        0.66       $         1.01      $         2.57       $       2.68
Extraordinary Item (net of tax)                                   --                (0.06)                 --              (3.65)
                                                       ---------------     ----------------    ----------------     --------------
NET INCOME (LOSS)                                      $        0.66       $         0.95      $         2.57       $      (0.97)
                                                       ===============     ================    ================     ==============

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

*Note: Bundled  revenues were recorded based on the bundled rates in effect
       through  7/31/99.  Commencing with the unbundling  of  rates  on  8/1/99,
       revenues are disaggregated between Generation Revenue and Transmission
       and Distribution Revenue.

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


                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                           CONSOLIDATED BALANCE SHEETS
                                     ASSETS
                              (Millions of Dollars)


                                                                                (Unaudited)
                                                                               September 30,             December 31,
                                                                                    2000                     1999
                                                                             -------------------      -------------------
<S>                                                                          <C>                      <C>
CURRENT ASSETS
   Cash and Cash Equivalents                                                 $             115        $             259
   Accounts Receivable:
     Customer Accounts Receivable                                                          589                      646
     Other Accounts Receivable                                                             298                      371
     Allowance for Doubtful Accounts                                                       (43)                     (40)
   Unbilled Revenues                                                                       181                      241
   Fuel                                                                                    279                      311
   Materials and Supplies, net of valuation reserves-- 2000 and 1999, $11                  153                      130
   Prepayments                                                                             111                       39
   Other                                                                                   142                       86
                                                                             -------------------      -------------------
       Total Current Assets                                                              1,825                    2,043
                                                                             -------------------      -------------------

PROPERTY, PLANT AND EQUIPMENT
   Electric - Generation                                                                 2,430                    2,355
   Electric - Transmission and Distribution                                              5,264                    5,113
   Gas - Distribution                                                                    3,136                    3,019
   Other                                                                                   580                      534
                                                                             -------------------      -------------------
       Total                                                                            11,410                   11,021

   Accumulated Depreciation and Amortization                                            (4,094)                  (3,943)
                                                                             -------------------      -------------------
        Net Property, Plant and Equipment                                                7,316                    7,078
                                                                             -------------------      -------------------
 NONCURRENT ASSETS
   Regulatory Assets                                                                     4,958                    5,041
   Long-Term Investments, net of accumulated amortization and
     valuation allowances-- 2000, $72; 1999, $65                                         4,489                    3,848
   Nuclear Decommissioning Fund                                                            682                      631
   Other Special Funds                                                                     124                      148
   Other, net of accumulated amortization-- 2000, $19;
     1999, $12                                                                             314                      226
                                                                             -------------------      -------------------
       Total Noncurrent Assets                                                          10,567                    9,894
                                                                             -------------------      -------------------
TOTAL ASSETS                                                                 $          19,708        $          19,015
                                                                             ==================       ===================


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


                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                           CONSOLIDATED BALANCE SHEETS
                         LIABILITIES AND CAPITALIZATION
                              (Millions of Dollars)


                                                                                (Unaudited)
                                                                               September 30,              December 31,
                                                                                    2000                      1999
                                                                             -------------------       -------------------
<S>                                                                          <C>                       <C>
CURRENT LIABILITIES
   Long-Term Debt Due Within One Year                                        $             779         $           1,073
   Commercial Paper and Loans                                                            2,664                     1,972
   Accounts Payable                                                                        613                       738
   Other                                                                                   419                       394
                                                                             -------------------       -------------------
       Total Current Liabilities                                                         4,475                     4,177
                                                                             -------------------       -------------------

NONCURRENT LIABILITIES
   Deferred Income Taxes and ITC                                                         3,045                     2,928
   Regulatory Liabilities                                                                  522                       604
   Nuclear Decommissioning                                                                 682                       631
   OPEB Costs                                                                              433                       390
   Other                                                                                   495                       506
                                                                             -------------------       -------------------
       Total Noncurrent Liabilities                                                      5,177                     5,059
                                                                             -------------------       -------------------

COMMITMENTS AND CONTINGENT LIABILITIES                                                      --                        --
                                                                             -------------------       -------------------
CAPITALIZATION
   LONG-TERM DEBT                                                                        4,706                     4,575
                                                                             -------------------       -------------------
   SUBSIDIARIES' PREFERRED SECURITIES
     Preferred Stock Without Mandatory Redemption                                           95                        95
     Preferred Stock With Mandatory Redemption                                              75                        75
     Guaranteed Preferred Beneficial Interest in Subordinated Debentures                 1,038                     1,038
                                                                             -------------------       -------------------
       Total Subsidiaries' Preferred Securities                                          1,208                     1,208
                                                                             -------------------       -------------------

   COMMON STOCKHOLDERS' EQUITY
     Common Stock, issued:  231,957,608 shares                                           3,604                     3,604
     Treasury Stock, at cost: 2000--17,551,090 shares;
       1999--15,540,390 shares                                                            (669)                     (597)
     Retained Earnings                                                                   1,398                     1,193
     Accumulated Other Comprehensive Loss                                                 (191)                     (204)
                                                                             -------------------       -------------------
       Total Common Stockholders' Equity                                                 4,142                     3,996
                                                                             -------------------       -------------------
         Total Capitalization                                                           10,056                     9,779
                                                                             -------------------       -------------------
TOTAL LIABILITIES AND CAPITALIZATION                                         $          19,708         $          19,015
                                                                             ===================       ===================

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

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


                                                                                            Nine Months Ended
                                                                                              September 30,
                                                                                 ----------------------------------------
                                                                                       2000                   1999
                                                                                 -----------------      -----------------
<S>                                                                              <C>                    <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income (loss)                                                             $           554        $          (214)
   Adjustments to reconcile net income (loss) to net cash flows from
     operating activities:
   Extraordinary Loss - net of tax                                                            --                    804
   Depreciation and Amortization                                                             266                    410
   Amortization of Nuclear Fuel                                                               47                     68
   Recovery of Electric Energy and Gas Costs-- net                                            24                     68
   Provision for Deferred Income Taxes and ITC-- net                                           3                   (227)
   Investment Distributions                                                                   40                    124
   Equity Income from Partnerships                                                           (30)                   (50)
   Unrealized Gains on Investments                                                            (9)                   (53)
 Net Changes in Certain Current Assets and Liabilities:
   Accounts Receivable and Unbilled Revenues                                                 193                   (127)
   Prepayments                                                                               (72)                  (102)
   Accounts Payable                                                                         (125)                   174
   Other Current Assets and Liabilities                                                      (22)                     1
   Other                                                                                      60                     79
                                                                                 -----------------      -----------------
     Net Cash Provided By Operating Activities                                               929                    955
                                                                                 -----------------      -----------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Additions to Property, Plant and Equipment, excluding
     Capitalized Interest and AFDC                                                          (574)                  (280)
   Net Change in Long-Term Investments                                                      (536)                  (846)
   Other                                                                                     (47)                   (51)
                                                                                 -----------------      -----------------
     Net Cash Used in Investing Activities                                                (1,157)                (1,177)
                                                                                 -----------------      -----------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Net Change in Short-Term Debt                                                             692                    546
   Issuance of Long-Term Debt                                                                590                    713
   Redemption/Purchase of Long-Term Debt                                                    (777)                  (428)
   Purchase of Treasury Stock                                                                (72)                  (309)
   Cash Dividends Paid on Common Stock                                                      (348)                  (357)
   Other                                                                                      (1)                     1
                                                                                 -----------------      -----------------
     Net Cash (Used In) Provided By Financing Activities                                      84                    166
                                                                                 -----------------      -----------------
Net Change in Cash and Cash Equivalents                                                     (144)                   (56)
Cash and Cash Equivalents at Beginning of Period                                             259                    140
                                                                                 -----------------      -----------------
Cash and Cash Equivalents at End of Period                                       $           115        $            84
                                                                                 =================      =================
Income Taxes Paid                                                                $           380        $           426
Interest Paid                                                                    $           354        $           345

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

<TABLE>
<CAPTION>

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


                                                                Three Months Ended                      Nine Months Ended
                                                                   September 30,                          September 30,
                                                         ----------------------------------    ------------------------------------
                                                             2000                1999               2000                1999
                                                         --------------     ---------------    ---------------     ----------------
<S>                                                      <C>                <C>                <C>                 <C>
OPERATING REVENUES
   Electric Revenues *
     Bundled                                             $         --       $         494      $          --       $        2,480
     Generation                                                   135                 430              1,248                  430
     Transmission and Distribution                                884                 320              1,771                  320
                                                         --------------     ---------------    ---------------     ----------------
       Total Electric Revenues                                  1,019               1,244              3,019                3,230
   Gas Distribution                                               280                 214              1,346                1,191
                                                         --------------     ---------------    ---------------     ----------------
       Total Operating Revenues                                 1,299               1,458              4,365                4,421
                                                         --------------     ---------------    ---------------     ----------------
OPERATING EXPENSES
   Electric Energy Costs                                          603                 309              1,076                  765
   Gas Costs                                                      202                 141                881                  730
   Operation and Maintenance                                      185                 382                958                1,141
   Depreciation and Amortization                                   60                 120                230                  405
   Taxes Other than Income Taxes                                   35                  43                123                  142
                                                         --------------     ---------------    ---------------     ----------------
       Total Operating Expenses                                 1,085                 995              3,268                3,183
                                                         --------------     ---------------    ---------------     ----------------
OPERATING INCOME                                                  214                 463              1,097                1,238
Other Income and Deductions                                         5                   5                 17                    8
Interest Expense                                                  (52)                (98)              (246)                (284)
Preferred Securities Dividend Requirements                        (11)                (12)               (34)                 (35)
                                                         --------------     ---------------    ---------------     ----------------
INCOME BEFORE INCOME TAXES AND
   EXTRAORDINARY ITEM                                             156                 358                834                  927
Income Taxes                                                      (57)               (153)              (333)                (393)
                                                         --------------     ---------------    ---------------     ----------------
INCOME BEFORE EXTRAORDINARY ITEM                                   99                 205                501                  534
Extraordinary Item (net of tax of $345)                            --                 (14)                --                 (804)
                                                         --------------     ---------------    ---------------     ----------------
NET INCOME (LOSS)                                                  99                 191                501                 (270)
Preferred Stock Dividend Requirements                              (2)                 (2)                (7)                  (7)
                                                         --------------     ---------------    ---------------     ----------------
EARNINGS (LOSS) AVAILABLE TO PUBLIC SERVICE
ENTERPRISE GROUP INCORPORATED                            $         97       $         189      $         494       $         (277)
                                                         ==============     ===============    ===============     ================

*        Note:  Bundled  revenues  were  recorded  based on the bundled rates in
         effect  through  7/31/99.  Commencing  with the  unbundling of rates on
         8/1/99,  revenues  are  disaggregated  between  Generation  Revenue and
         Transmission and Distribution Revenue.

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


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


                                                                                     (Unaudited)
                                                                                    September 30,           December 31,
                                                                                        2000                    1999
                                                                                   ----------------       ------------------
<S>                                                                                <C>                    <C>
CURRENT ASSETS
   Cash and Cash Equivalents                                                       $           26         $            173
   Accounts Receivable:
     Customer Accounts Receivable                                                             443                      529
     Other Accounts Receivable                                                                 62                      313
     Allowance for Doubtful Accounts                                                          (36)                     (35)
   Unbilled Revenues                                                                          180                      241
   Fuel                                                                                       229                      308
   Materials and Supplies, net of valuation reserves-- 2000 $0 and 1999, $11                   55                      130
   Prepayments                                                                                 94                       34
   Other                                                                                       17                       50
                                                                                   ----------------       ------------------
     Total Current Assets                                                                   1,070                    1,743
                                                                                   ----------------       ------------------

PROPERTY, PLANT AND EQUIPMENT
   Electric - Generation                                                                       --                    2,284
   Electric - Transmission and Distribution                                                 5,264                    5,113
   Gas - Distribution                                                                       3,136                    3,019
   Other                                                                                      420                      457
                                                                                   ----------------       ------------------
     Total                                                                                  8,820                   10,873
   Accumulated Depreciation and Amortization                                               (3,082)                  (3,911)
                                                                                   ----------------       ------------------
     Net Property, Plant and Equipment                                                      5,738                    6,962
                                                                                   ----------------       ------------------

NONCURRENT ASSETS
   Regulatory Assets                                                                        4,958                    5,041
   Notes Receivable - Affiliated Companies                                                  2,786                       --
   Long-Term Investments                                                                      105                       99
   Nuclear Decommissioning Fund                                                                --                      631
   Other Special Funds                                                                         84                      148
   Other                                                                                       73                      100
                                                                                   ----------------       ------------------
     Total Noncurrent Assets                                                                8,006                    6,019
                                                                                   ----------------       ------------------
TOTAL ASSETS                                                                       $       14,814         $         14,724
                                                                                   ================       ==================

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


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


                                                                                      (Unaudited)
                                                                                     September 30,            December 31,
                                                                                         2000                     1999
                                                                                   ------------------       ------------------
<S>                                                                                <C>                      <C>
CURRENT LIABILITIES
   Long-Term Debt Due Within One Year                                              $             --         $            623
   Commercial Paper and Loans                                                                 1,595                    1,475
   Accounts Payable                                                                             278                      676
   Other                                                                                        223                      281
                                                                                   ------------------       ------------------
     Total Current Liabilities                                                                2,096                    3,055
                                                                                   ------------------       ------------------

NONCURRENT LIABILITIES
   Deferred Income Taxes and ITC                                                              2,704                    2,032
   Regulatory Liabilities                                                                       522                      604
   Nuclear Decommissioning                                                                       --                      631
   OPEB Costs                                                                                   425                      390
   Other                                                                                        212                      479
                                                                                   ------------------       ------------------
     Total Noncurrent Liabilities                                                             3,863                    4,136
                                                                                   ------------------       ------------------

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

CAPITALIZATION
   LONG-TERM DEBT                                                                             3,391                    3,099
                                                                                   ------------------       ------------------

   PREFERRED SECURITIES
     Preferred Stock Without Mandatory Redemption                                                95                       95
     Preferred Stock With Mandatory Redemption                                                   75                       75
     Subsidiaries' Preferred Securities:
     Guaranteed Preferred Beneficial Interest in Subordinated Debentures                        513                      513
                                                                                   ------------------       ------------------
       Total Preferred Securities                                                               683                      683
                                                                                   ------------------       ------------------

   COMMON STOCKHOLDER'S EQUITY
     Common Stock, issued:  132,450,344 shares                                                2,563                    2,563
     Contributed Capital                                                                        594                      594
     Basis Adjustment                                                                           986                       --
     Retained Earnings                                                                          641                      597
     Accumulated Other Comprehensive Loss                                                        (3)                      (3)
                                                                                   ------------------       ------------------
       Total Common Stockholder's Equity                                                      4,781                    3,751
                                                                                   ------------------       ------------------
         Total Capitalization                                                                 8,855                    7,533
                                                                                   ------------------       ------------------

TOTAL LIABILITIES AND CAPITALIZATION                                               $         14,814         $         14,724
                                                                                   ==================       ==================
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)


                                                                                                Nine Months Ended
                                                                                                  September 30,
                                                                                    ------------------------------------------
                                                                                         2000                     1999
                                                                                    ----------------       -------------------
<S>                                                                                 <C>                    <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income (loss)                                                                $          501         $            (270)
   Adjustments to reconcile net income (loss) to net cash flows from
     operating activities:
   Extraordinary Loss - net of tax                                                              --                       804
   Depreciation and Amortization                                                               230                       405
   Amortization of Nuclear Fuel                                                                 36                        68
   Recovery of Electric Energy and Gas Costs-- net                                              24                        68
   Provision for Deferred Income Taxes and ITC-- net                                            (9)                     (203)
   Net Changes in Certain Current Assets and Liabilities:
     Accounts Receivable and Unbilled Revenues                                                  56                      (126)
     Prepayments                                                                               (62)                     (107)
     Accounts Payable                                                                          (14)                      138
     Other Current Assets and Liabilities                                                      (20)                      (9)
   Other                                                                                        61                        85
                                                                                    ----------------       -------------------
     Net Cash Provided By Operating Activities                                                 803                       853
                                                                                    ----------------       -------------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Additions to Property, Plant and Equipment, excluding
     Capitalized Interest and AFDC                                                            (280)                     (280)
   Other                                                                                        (2)                      (59)
                                                                                    ----------------       -------------------
     Net Cash Used in Investing Activities                                                    (282)                     (339)
                                                                                    ----------------       -------------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Net Change in Short-Term Debt                                                               120                       230
   Issuance of Long-Term Debt                                                                  290                        --
   Redemption/Purchase of Long-Term Debt                                                      (621)                     (246)
   Cash Dividends Paid on common stock                                                        (450)                     (510)
   Other                                                                                        (7)                       (6)
                                                                                    ----------------       -------------------
     Net Cash Used in Financing Activities                                                    (668)                     (532)
                                                                                    ----------------       -------------------
Net Change in Cash and Cash Equivalents                                                       (147)                      (18)
Cash and Cash Equivalents at Beginning of Period                                               173                        42
                                                                                    ----------------       -------------------
Cash and Cash Equivalents at End of Period                                          $           26         $              24
                                                                                    ================       ===================
Income Taxes Paid                                                                   $          509         $             443
Interest Paid                                                                       $          303         $             297

See Notes to Consolidated Financial Statements.
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


                            PSEG ENERGY HOLDINGS INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                              (Millions of Dollars)
                                   (Unaudited)


                                                              Three Months Ended                      Nine Months Ended
                                                                 September 30,                          September 30,
                                                       ----------------------------------     ----------------------------------
                                                           2000               1999                2000                1999
                                                       -------------     ----------------     --------------     ---------------
<S>                                                    <C>               <C>                  <C>                <C>
OPERATING REVENUES
   Income from Joint Ventures
     and Partnerships                                  $        47       $           39       $        108       $          96
   Energy Service Revenues                                      79                   67                232                 124
   Energy Supply Revenues                                        9                   15                 66                  61
   Income from Capital and Operating Leases                     47                   29                122                  82
   Net Investment Gains (Losses)                                (9)                 (11)                 9                  31
   Other                                                        10                    9                 25                  22
                                                       -------------     ----------------     --------------     ---------------
       Total Operating Revenues                                183                  148                562                 416
                                                       -------------     ----------------     --------------     ---------------
OPERATING EXPENSES
   Cost of Energy Sales                                          9                   14                 67                  59
   Restructure Costs                                            --                   --                  7                  --
   Operation and Maintenance                                   103                   90                297                 190
   Depreciation and Amortization                                 3                    2                 10                   5
   Write-down of Investments                                    --                   44                 --                  44
                                                       -------------     ----------------     --------------     ---------------
       Total Operating Expenses                                115                  150                381                 298
                                                       -------------     ----------------     --------------     ---------------
OPERATING INCOME (LOSS)                                         68                  (2)                181                 118
Other Income                                                     1                   65                  3                  72
Interest Expense-Net                                           (31)                 (25)              (102)                (65)
                                                       -------------     ----------------     --------------     ---------------
INCOME BEFORE INCOME TAXES                                      38                   38                 82                 125
Income Taxes                                                   (11)                 (14)               (23)                (44)
Minority Interests                                              --                   --                  1                   1
                                                       -------------     ----------------     --------------     ---------------
NET INCOME                                                      27                   24                 60                  82
   Preferred Stock Dividend Requirements                        (6)                  (6)               (19)                (19)
                                                       -------------     ----------------     --------------     ---------------
EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE
   GROUP INCORPORATED                                  $        21       $           18        $        41       $          63
                                                       =============     ================      =============     ===============


See Notes to Consolidated Financial Statements.

</TABLE>

<PAGE>
<TABLE>
<CAPTION>


                            PSEG ENERGY HOLDINGS INC.
                           CONSOLIDATED BALANCE SHEETS
                                     ASSETS
                              (Millions of Dollars)


                                                                                       (Unaudited)
                                                                                      September 30,            December 31,
                                                                                           2000                    1999
                                                                                    -------------------     --------------------
<S>
CURRENT ASSETS                                                                                 <C>                     <C>
   Cash and Cash Equivalents                                                        $              56       $               43
   Accounts Receivable:
     Trade                                                                                        121                      111
     Other                                                                                         33                       31
     Allowance for Doubtful Accounts                                                               (7)                      (5)
   Assets Held for Sale                                                                            36                       36
   Notes Receivable                                                                                19                       12
   Other Current Assets                                                                             6                       12
                                                                                    -------------------     --------------------
       Total Current Assets                                                                       264                      240
                                                                                    -------------------     --------------------

PROPERTY AND EQUIPMENT
   Real Estate, net of valuation allowances 2000 and 1999, $22                                     89                       34
   Property and Equipment                                                                          58                       45
                                                                                    -------------------     --------------------
     Total                                                                                        147                       79
   Accumulated Depreciation and Amortization                                                      (48)                     (33)
                                                                                    -------------------     --------------------
       Net Property and Equipment                                                                  99                       46
                                                                                   -------------------     --------------------
INVESTMENTS
   Capital Leases - Net                                                                         2,274                    1,759
   Corporate Joint Ventures                                                                     1,477                    1,428
   Partnerships Interests                                                                         532                      493
   Other Investments                                                                               75                       73
                                                                                    -------------------     --------------------
       Total Investments                                                                        4,358                    3,753
                                                                                    -------------------     --------------------
OTHER ASSETS                                                                                      106                       75
                                                                                    -------------------     --------------------
   TOTAL ASSETS                                                                     $           4,827       $            4,114
                                                                                    ===================     ====================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                            PSEG ENERGY HOLDINGS INC.
                           CONSOLIDATED BALANCE SHEETS
                         LIABILITIES AND CAPITALIZATION
                              (Millions of Dollars)


                                                                                       (Unaudited)
                                                                                      September 30,              December 31,
                                                                                           2000                      1999
                                                                                    -------------------      ----------------------
<S>                                                                                 <C>                      <C>
CURRENT LIABILITIES
   Long-Term Debt Due Within One Year                                               $             204        $                175
   Notes Payable                                                                                  370                         351
   Accounts Payable:
     Trade                                                                                         47                          41
     Interest                                                                                      43                          20
     Other                                                                                         59                          43
   Other Current Liabilities                                                                       15                          11
                                                                                    -------------------      ----------------------
       Total Current Liabilities                                                                  738                         641
                                                                                    -------------------      ----------------------

NONCURRENT LIABILITIES
   Deferred Income Taxes and ITC                                                                1,015                         896
   Other Noncurrent Liabilities                                                                    31                          25
                                                                                    -------------------      ----------------------
       Total Noncurrent Liabilities                                                             1,046                         921
                                                                                    -------------------      ----------------------

COMMITMENTS AND CONTINGENT LIABILITIES                                                             --                          --
                                                                                    -------------------      ----------------------
MINORITY INTERESTS                                                                                  7                           2
                                                                                    -------------------      ----------------------
CAPITALIZATION
   LONG-TERM DEBT                                                                               1,316                       1,175
                                                                                    -------------------      ----------------------

   STOCKHOLDER'S EQUITY
     Common Stock, issued: 100 shares                                                              --                          --
     Preferred Stock                                                                              509                         509
     Additional Paid-in Capital                                                                 1,090                         790
     Retained Earnings                                                                            309                         276
     Accumulated Other Comprehensive Loss                                                        (188)                       (200)
                                                                                    -------------------      ----------------------
       Total Stockholder's Equity                                                               1,720                       1,375
                                                                                    -------------------      ----------------------
         Total Capitalization                                                                   3,036                       2,550
                                                                                    -------------------      ----------------------

TOTAL LIABILITIES AND CAPITALIZATION                                                $           4,827        $              4,114
                                                                                    ===================      ======================
See Notes to Consolidated Financial Statements.
</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                            PSEG ENERGY HOLDINGS INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (Millions of Dollars)
                                   (Unaudited)
                                                                                                  Nine Months Ended
                                                                                                    September 30,
                                                                                    ----------------------------------------------
                                                                                           2000                      1999
                                                                                    -------------------      ---------------------
<S>                                                                                 <C>                      <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                                       $              60        $                82
   Adjustments to reconcile net income to net cash flows from operating
activities:
   Depreciation and Amortization                                                                   18                         13
   Deferred Income Taxes (Other than Leases)                                                        3                        (17)
   Income from Leasing Activities                                                                  24                         (2)
   Investment Distributions                                                                        40                        124
   Equity Income from Partnerships                                                                (30)                       (50)
   Net Gains on Investments                                                                        (9)                       (53)
   Restructure Costs                                                                                7                         --
   Net Changes in Certain Current Assets and Liabilities:
     Accounts Receivable                                                                          (72)                       (75)
     Taxes Payable                                                                                 --                          6
     Accounts Payable                                                                             113                         67
     Interest Payable                                                                              12                          9
     Other Current Assets and Liabilities                                                         (28)                         2
   Other                                                                                            5                         (2)
                                                                                    -------------------      ---------------------
     Net Cash Provided By Operating Activities                                                    143                        104
                                                                                    -------------------      ---------------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Increase in Partnerships and Joint Ventures                                                   (146)                      (709)
   Investments in Capital Leases                                                                 (459)                      (236)
   Acquisitions, net of Cash Provided                                                             (16)                       (31)
   Proceeds from Sales of Capital Leases                                                            9                         77
   Additions to Property and Equipment                                                             (6)                        (5)
   Proceeds from Sale of Real Estate and Equity Investments                                        --                         71
   (Addition to)/Reduction of Deferred Project Costs                                               (2)                        15
   Return of Capital from Partnerships                                                             72                         27
   Other                                                                                          (16)                         8
                                                                                    -------------------      ---------------------
     Net Cash Used in Investing Activities                                                       (564)                      (783)
                                                                                    -------------------      ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from Additional Paid-in Capital                                                       300                        200
   Cash Dividends Paid                                                                            (27)                       (21)
   Repayment of Borrowings                                                                       (156)                      (180)
   Proceeds from Borrowings                                                                       311                        688
   Other                                                                                            6                         (4)
                                                                                    -------------------      ---------------------
     Net Cash Provided By Financing Activities                                                    434                        683
                                                                                    -------------------      ---------------------
Net Change in Cash and Cash Equivalents                                                            13                          4
Cash and Cash Equivalents at Beginning of Period                                                   43                          9
                                                                                    -------------------      ---------------------
Cash and Cash Equivalents at End of Period                                          $              56        $                13
                                                                                    ===================      =====================
Income Tax Benefits                                                                 $            (119)       $               (12)
Interest Paid                                                                       $              31        $                34

See Notes to Consolidated Financial Statements.
</TABLE>

<PAGE>


================================================================================
                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
================================================================================
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1. Basis of Presentation

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.  Public Service Enterprise Group Incorporated's (PSEG)
and Public Service  Electric and Gas Company's  (PSE&G)  consolidated  financial
statements and Notes to Consolidated Financial Statements (Notes) should be read
in conjunction with their 1999 Annual Report on Form 10-K, the Quarterly Reports
on Form 10-Q for the  quarters  ended  March  31,  2000 and June 30,  2000,  the
Current  Reports on Form 8-K filed August 21, 2000,  September 5, 2000,  October
18, 2000 and October 27, 2000 and the Amended Current Report on Form 8-K/A filed
November 1, 2000.  PSEG Energy Holdings  Inc.'s (Energy  Holdings)  consolidated
financial   statements  and  Notes  should  be  read  in  conjunction  with  its
Registration Statement on Form S-4 filed June 29, 2000, Quarterly Report on Form
10-Q for the quarter  ended June 30, 2000 and Current  Reports on Form 8-K filed
October 18, 2000 and October 27, 2000. These Notes update and supplement matters
discussed  in PSEG's  and  PSE&G's  1999  Annual  Report on Form 10-K and Energy
Holdings' Registration Statement on Form S-4 filed June 29, 2000.

     Effective  August 1,  2000,  the  presentation  of  Electric  Revenues  and
Electric Energy Costs in the  Consolidated  Statements of Income has changed due
to PSE&G's  transfer of its  electric  generating  facilities  to PSEG Power LLC
(Power) and wholesale power contracts to PSEG Energy  Resources and Trade (ER&T)
(see Note 2.  Regulatory  Issues  and  Accounting  Impacts of  Deregulation),  a
wholly-owned  subsidiary of Power.  Effective  with the transfer,  PSE&G entered
into a contract  with Power to obtain the energy and capacity  necessary to meet
PSE&G's basic generation service (BGS) obligation. As a result, PSE&G's Electric
Energy Costs will now reflect PSE&G's cost under the contracted price with Power
and Power's  Electric  Energy Costs will reflect the actual cost of  generation.
PSEG eliminates  these  intercompany  revenues and expenses in its  consolidated
financial statements.

     Under the BGS  contract,  PSE&G pays a fixed price for energy and  capacity
provided  by Power and  charges  such costs to its BGS  customers.  As a result,
PSE&G is no longer  subject to price risk  related to market  exposures  for its
estimated electric commitments.  Following the generation asset transfer,  Power
has entered  into  forwards,  futures,  swaps and  options to manage  price risk
exposure  for its  commitments  to meet  PSE&G's BGS  obligation  in addition to
Power's other supply contracts.

     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 PSEG's
and PSE&G's 1999 Annual  Report on Form 10-K and Energy  Holdings'  Registration
Statement on Form S-4 filed June 29, 2000.  Certain  reclassifications  of prior
period data have been made to conform with the current presentation.

Note 2.  Regulatory Issues and Accounting Impacts of Deregulation

New Jersey Energy Master Plan Proceedings and Related Orders

     Following  the  enactment  of the New Jersey  Electric  Discount and Energy
Competition  Act  (Energy  Competition  Act),  the New  Jersey  Board of  Public
Utilities  (BPU)  rendered  its  summary  decision   relating  to  PSE&G's  rate
unbundling,  stranded costs and  restructuring  proceedings  (Summary Order) and
subsequently  issued its Final Order in these  matters,  providing,  among other
things,  for the transfer to an affiliate 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 by various  means,
including an explicit market transition charge (MTC).  Following the issuance of
the Final Order, the BPU issued its order approving PSE&G's petition relating to
the proposed securitization transaction (Finance Order) which authorized,  among
other  things,  the issuance  and sale of $2.525  billion of  transition  bonds,
including an estimated $125 million of transaction costs.

     The Energy Competition Act, the BPU's Summary Order and Final Order and the
related  BPU  proceedings,  referred to as the Energy  Master Plan  Proceedings,
opened the New Jersey energy  markets to  competition by allowing all New Jersey
retail electric customers to, among other things, select their electric supplier
commencing  August 1, 1999 and all New  Jersey  retail gas  customers  to select
their gas supplier commencing January 1, 2000.

     In October and  November  1999,  two appeals of certain  provisions  of the
Final Order and two appeals of certain  provisions of the related  Finance Order
were filed in the Appellate Division of the New Jersey Superior Court (Appellate
Division)  on behalf  of  several  customers  and the New  Jersey  Office of the
Ratepayer Advocate (Ratepayer Advocate). In a decision issued on April 13, 2000,
a three-judge  Appellate Division panel unanimously affirmed the Final Order and
Finance  Order.   Thereafter,   the  appellants  filed  a  Petition   requesting
Certification  and a Notice of Appeal with the New Jersey  Supreme Court seeking
review of the  Appellate  Division  decision.  On July 14, 2000,  the New Jersey
Supreme Court granted Certification with respect to both matters. Oral arguments
for all parties were held on November 8, 2000.

     While PSE&G  continues to believe that the Appellate  Division's  unanimous
decision was  correct,  it can give no  assurances  with respect to the ultimate
timing or  disposition  of these  matters by the New Jersey  Supreme  Court.  An
adverse outcome to this review or substantial additional delays beyond the first
quarter of 2001,  could have a material  adverse  impact on PSEG's,  PSE&G's and
Energy Holdings' financial  condition,  results of operations and net cash flows
and could  require  revisions to financing  plans,  revisions to business  plans
delaying or restricting  current  growth  strategies and the imposition of other
operational and/or financial measures.

     As  a  result  of  the  Supreme  Court's  review,   PSE&G's  securitization
transaction has been delayed at least until the first quarter of 2001, causing a
delay in the implementation of the Securitization  Transition Charge (STC) which
would have  reduced the MTC. In order to  recognize  the recovery of the allowed
unsecuritized  stranded  costs over the transition  period,  PSEG has recorded a
charge to net income of $52 million, after tax, in the third quarter of 2000 for
the  cumulative  amount  of  estimated  collections  in  excess  of the  allowed
unsecuritized stranded costs from August 1, 1999 through September 30, 2000. Any
such  collections in excess of the allowed  unsecuritized  stranded costs at the
end of the transition  period will be credited to the Societal  Benefits  Clause
(SBC) as required by the Final Order.

Asset Transfer to Power

     PSE&G,  pursuant to the Final Order,  transferred  its electric  generating
facilities  and  wholesale  power  contracts  to  Power,  an  unregulated  power
producing  affiliate,  on August 21, 2000 in exchange for a Promissory Note from
Power in an amount equal to the  purchase  price.  Until such note is paid,  the
assets  transferred  remain  subject to the lien of PSE&G's  First and Refunding
Mortgage.

     The generating  assets were  transferred at the price  specified in the BPU
order - $2.443 billion plus $343 million for other generating related assets and
liabilities.  Because  the  transfer  was  between  affiliates,  PSE&G and Power
recorded  the sale at the net book value of the assets  and  liabilities  rather
than the transfer price. The difference between the total transfer price and the
net book value of the generation-related  assets and liabilities was recorded as
a Basis  Adjustment on PSE&G's and Power's  Consolidated  Balance Sheets.  These
amounts are eliminated on PSEG's consolidated financial statements.

     The parties have agreed to execute a supplemental  agreement reflecting any
change in the value of the  assets,  if  required  as a result of the New Jersey
Supreme Court review discussed above.

Extraordinary Charge and Other Accounting Impacts of Deregulation

     In April 1999,  PSE&G  determined  that  Statement of Financial  Accounting
Standards (SFAS) 71 "Accounting for the Effects of Regulation"  (SFAS 71) was no
longer  applicable  to  the  electric  generation  portion  of its  business  in
accordance  with the  requirements  of  Emerging  Issues  Task Force Issue 97-4,
"Deregulation  of the Pricing of Electricity - Issues Related to the Application
of FASB Statements No. 71 and No. 101" (EITF 97-4). Accordingly,  PSE&G recorded
an extraordinary charge to earnings of $804 million (after tax). PSE&G accounted
for  this  charge  consistent  with the  requirements  of SFAS  101,  "Regulated
Enterprises  -  Accounting  for  the  Discontinuation  of  Application  of  FASB
Statement  No.  71".  This  extraordinary  charge  consisted  primarily  of  the
write-down of PSE&G's nuclear and fossil generating  stations in accordance with
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" (SFAS 121).  PSE&G  performed a  discounted  cash flow
analysis on a unit-by-unit basis to determine the amount of the impairment. As a
result  of this  impairment  analysis,  the net  book  value  of the  generating
stations was reduced by  approximately  $5.0 billion  (pre-tax) or approximately
$3.1  billion  (net of tax).  This amount was offset by the creation of a $4.057
billion (pre-tax),  or $2.4 billion (net of tax) regulatory asset related to the
future receipt of securitization  proceeds, as provided for in the Summary Order
and affirmed in the Final Order and Finance Order.

     In addition to the impairment of PSE&G's electric generating stations,  the
extraordinary charge consisted of various accounting  adjustments to reflect the
absence of cost of service regulation in the electric  generation portion of its
business.  The adjustments primarily related to materials and supplies,  general
plant  items  and   liabilities  for  certain   contractual  and   environmental
obligations.

     Other  accounting  impacts  of the  discontinuation  of  SFAS  71  included
reclassifying the Accrued Nuclear  Decommissioning  Reserve and the Accrued Cost
of Removal  for  generation-related  assets  from  Accumulated  Depreciation  to
Long-Term   Liabilities.   In  accordance  with  the  Final  Order,  PSE&G  also
reclassified  a $569  million  excess  depreciation  reserve  related to PSE&G's
electric  distribution  assets from  Accumulated  Depreciation  to a  Regulatory
Liability.  Such amount will be  amortized in  accordance  with the terms of the
Final Order over the period from January 1, 2000 to July 31, 2003.

Note 3. Regulatory Assets and Liabilities

     At September 30, 2000 and December 31, 1999,  respectively,  PSEG and PSE&G
had deferred the following regulatory assets and liabilities on the Consolidated
Balance Sheets:

<TABLE>
<CAPTION>

                                                                            (Unaudited)
                                                                           September 30,         December 31,
                                                                               2000                  1999
                                                                         ------------------    -----------------
                                                                                 (Millions of Dollars)
<S>                                                                                 <C>                  <C>
Regulatory Assets:
Stranded Costs to be Securitized                                                    $4,057               $4,057
SFAS 109 Income Taxes                                                                  280                  286
OPEB Costs                                                                             237                  237
SBC and Related Items                                                                   27                  130
Demand Side Management Costs                                                            14                    7
Environmental Costs                                                                     90                   94
Unamortized Loss on Reacquired Debt and Debt Expense                                   107                  117
Other                                                                                  146                  113
                                                                         ------------------    -----------------
Total Regulatory Assets                                                             $4,958               $5,041
                                                                         ==================    =================

Regulatory Liabilities:
Excess Depreciation Reserve                                                           $475                 $569
Non-utility Generation Market Transition Charge (NTC)                                    6                   20
Overrecovered Gas Costs                                                                 41                   15
                                                                         ------------------    -----------------
Total Regulatory Liabilities                                                          $522                 $604
                                                                         ==================    =================

</TABLE>
Note 4.  Commitments and Contingent Liabilities

Generation Asset Purchase

     In  September  1999,  Power  announced  an  agreement  to  acquire  all  of
Conectiv's  interests in Salem Nuclear Generating Station (Salem) and Hope Creek
Nuclear Generating Station (Hope Creek) and half of Conectiv's interest in Peach
Bottom Atomic Power Station  (Peach  Bottom) for an aggregate  purchase price of
$15.4  million  plus the net book value of  Conectiv's  nuclear fuel at closing.
Payment of Power's  obligation under such agreement has been guaranteed by PSEG.
The majority of regulatory  approvals  necessary for this  acquisition have been
obtained,  including  the approval by the BPU. In order for Conectiv to complete
the sale, the BPU must issue a second order to address Conectiv's  stranded cost
recovery.  Conectiv has advised Power that it will not complete the  transaction
during the time that the appeal on PSE&G's Final Order remains pending. However,
on October 6, 2000, Power entered into Wholesale Transaction Confirmation letter
agreements  with  Conectiv  under which Power will  obtain  544MW of  generation
capacity and output  representing  the portion of Conectiv's  interest in Salem,
Hope Creek and Peach Bottom to be  acquired.  Under this  agreement,  Power will
receive  all  revenue  and  pay all  expenses  associated  with  this  544MW  of
generating  capacity and output  through the date that the purchase  transaction
closes.  Power has been  advised by Conectiv  that the  Ratepayer  Advocate,  by
letter to the BPU dated October 26, 2000,  has objected to and  challenged  this
financial transaction.

PSE&G Manufactured Gas Plant Remediation Program

     PSE&G is currently  working  with New Jersey  Department  of  Environmental
Protection (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  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.  The  costs  for this
remediation effort are recovered through the SBC.

Passaic River Site

     The U.S.  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",  including the
former Harrison Gas Plant and the Essex Generating Station. PSE&G cannot predict
what action, if any, the EPA or any third party may take against PSE&G or Power,
as the transferee of PSE&G's generation assets and liabilities,  with respect to
these  matters,  or in such event,  what costs PSE&G  and/or  Power may incur to
address any such claims. However, such costs may be material.

PSEG Guarantees for ER&T

     As of November 1, 2000,  approximately $224 million in guarantees have been
either  provided  to  or  committed  for  trading   counter-parties  of  Power's
subsidiary,  ER&T,  following assignment of PSE&G's wholesale power contracts to
ER&T to assure ER&T's creditworthiness in the marketplace.

Energy Holdings

     Energy  Holdings  and/or its subsidiary,  PSEG Global Inc.  (Global),  have
guaranteed certain obligations of Global's affiliates,  including equity funding
for  projects,  performance  or other  obligations  related  to certain of their
projects in an aggregate  amount of  approximately  $368 million as of September
30, 2000. A  substantial  portion of such  guarantees  will be  eliminated  upon
funding of project equity commitments. In addition, a subscription agreement for
PSEG to purchase Global's capital stock secures approximately $3 million of such
guarantees.

Note 5.  Financial Instruments and Risk Management

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

Forward Purchase Agreement-PSEG

     In December 1999, as part of PSEG's share repurchase program,  PSEG entered
into a  Forward  Purchase  Agreement  with a third  party  which  has  purchased
approximately  6.4 million shares at a cost of approximately  $225 million.  The
transaction  may be  settled  in  cash or  with  shares  of  Common  Stock.  Any
repurchase  of these shares will not be reflected on PSEG's  balance sheet until
settlement of the  transaction.  PSEG does not expect to settle this transaction
prior to the  securitization  financing  which has been  delayed to at least the
first quarter of 2001 (See Note 2. Regulatory  Issues and Accounting  Impacts of
Deregulation).

Commodity-Related Instruments -- PSE&G and Power

     At September 30, 2000 and December 31, 1999, PSE&G and Power held or issued
commodity and financial  instruments that reduce exposure to price  fluctuations
from factors such as weather, environmental policies, changes in demand, changes
in  supply,  state and  Federal  regulatory  policies  and other  events.  These
instruments, in conjunction with owned electric generating capacity and physical
gas supply contracts,  are designed to cover estimated electric and gas customer
commitments.  PSE&G and Power use futures, forwards, swaps and options to manage
and hedge price risk related to these market exposures.

     At  September  30,  2000,   Power  had  outstanding   commodity   financial
instruments with a notional contract quantity of 55.6 million mWh of electricity
and  PSE&G had  outstanding  commodity  financial  instruments  with a  notional
contract  quantity of 58.2  million  MMBTU of natural gas. At December 31, 1999,
PSE&G had outstanding  commodity financial  instruments with a notional contract
quantity of 36.1 million mWh of  electricity  and 25.5 million  MMBTU of natural
gas.  Notional amounts are indicative only of the volume of activity and are not
a measure of market risk.

     PSE&G's and Power's energy  trading and related  contracts have been marked
to market and gains and losses from such  contracts  were  included in earnings.
PSE&G recorded $42 million and $3 million of unrealized gains in the nine months
ended September 30, 2000 and 1999,  respectively,  and Power recorded $6 million
of unrealized gains through September 30, 2000 related to these contracts.

Commodity-Related Instruments -- Energy Holdings

     In June 2000, Energy Holdings'  subsidiary,  PSEG Energy  Technologies Inc.
(Energy  Technologies)  outsourced  certain supply services under its retail gas
service agreements.  With this transaction,  Energy Technologies has changed the
manner  in which it  operates  its  energy  and gas  commodity  business  and at
September 30, 2000 there were no electric or gas commodity financial instruments
outstanding.  Energy  Holdings  had  recorded  $1.7 million of gains in the nine
months ended September 30, 2000 related to these instruments.

Equity Securities -- Energy Holdings

     Energy   Holdings'   subsidiary,   PSEG  Resources  Inc.   (Resources)  has
investments in equity securities and limited partnerships. 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 liquidity and
market volatility factors, where appropriate.  The aggregate fair values of such
investments which had available market prices at September 30, 2000 and December
31, 1999 were $132 million and $131 million,  respectively. The potential change
in fair value  resulting from a hypothetical  10% change in quoted market prices
of these  investments  amounted  to $10  million at  September  30, 2000 and $11
million at December 31, 1999.

Foreign Currencies -- Energy Holdings

     In accordance with their growth strategies,  Global and Resources have made
international  investments  of  approximately  $1.5  billion  and $1.2  billion,
respectively, as of September 30, 2000.

     Resources'  international  investments  are primarily  leveraged  leases of
assets located in the Netherlands, Australia, the United Kingdom, Germany, China
and New Zealand  with  associated  revenues  denominated  in U.S.  dollars,  and
therefore, not subject to foreign currency risk.

     Global's international  investments are primarily in projects that generate
or distribute  electricity in Argentina,  Brazil,  Chile,  China,  India, Italy,
Peru,  Poland and Venezuela.  Investing in foreign  countries  involves  certain
additional risks. Economic conditions that result in higher comparative rates of
inflation in foreign  countries are likely to result in declining values in such
countries' currencies. As currencies fluctuate against the U.S. dollar, there is
a corresponding change in Global's investment value in terms of the U.S. dollar.
Such change is reflected as an increase or decrease in the investment  value and
other  comprehensive  income,  a separate  component  of  stockholders'  equity.
Cumulatively through September 30, 2000, net foreign currency  devaluations have
reduced the  reported  amount of PSEG's  total  stockholders'  equity and Energy
Holdings' total stockholder's equity by approximately $188 million.

     Previously,  Global had  consolidated  project debt totaling  approximately
$94.5  million   associated   with  Global's  33%   investment  in  a  Brazilian
distribution company that was non-recourse to Global,  Energy Holdings and PSEG.
The debt was  denominated  in the Brazilian  Real and was indexed to a basket of
currencies,  including the U.S. dollar. The debt was refinanced in May 2000 with
funds from Energy  Holdings and a $190 million United States dollar  denominated
loan at the  Brazilian  distribution  company,  of which  Global's  share is $62
million.  The functional  currency of the distribution  company is the Brazilian
Real.  Therefore its debt is subject to exchange rate risk as the Brazilian Real
fluctuates with the United States dollar. Changes in the exchange rate cause the
loan amount,  as reported in the  functional  currency,  to be marked  upward or
downward, with an offset to the income statement.  Global has entered into a $60
million  currency collar expiring on December 29, 2000 to mitigate the potential
loss caused by a significant  devaluation of the functional currency against the
U.S. dollar.  By entering into the collar,  Global's maximum exposure related to
the loan is limited to approximately $10 million in 2000.

Interest Rates

     PSEG,  PSE&G and Energy  Holdings  are  subject to the risk of  fluctuating
interest  rates in the normal course of business.  Their  policies are to manage
interest  rate risk through the use of fixed rate debt,  floating  rate debt and
interest  rate swaps.  As of September  30, 2000, a  hypothetical  10% change in
market  interest rates would result in a $9 million,  $12 million and $2 million
change in annual  interest costs related to short-term and floating rate debt at
PSEG, PSE&G and Energy Holdings, respectively.

Note 6.  Income Taxes

PSEG's effective income tax rate is as follows:
<TABLE>
<CAPTION>



                                                                    Quarter Ended               Nine Months Ended
                                                                    September 30,                 September 30,
                                                               -------------------------    ---------------------------
                                                                 2000        1999 (A)          2000         1999 (A)
                                                               ----------    -----------    ------------    -----------

<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...............................................       (3.7)%           0.6%          (1.2)%           0.7%
                                                               ----------    -----------    ------------    -----------
     Effective Income Tax Rate.............................      37.2%           41.5%           39.7%          41.6%
                                                               ==========    ===========    ============    ===========
<FN>
(A) Excludes the impact of the extraordinary charge recorded in 1999.
</FN>

</TABLE>

Note 7.  Financial Information by Business Segments

Basis of Organization

     The reportable segments disclosed herein were determined based on a variety
of factors  including  the  regulatory  environment  of each of PSEG's  lines of
business  and the types of products  and services  offered.  Effective  with the
unbundling  of  PSE&G's  rates on  August 1,  1999 and the  deregulation  of the
electric generation portion of PSE&G's business,  the basis of segment reporting
changed.  Estimates have been used to separate  historical,  pre-August 1, 1999,
electric   segment  data  into  the  Generation,   ER&T  and   Transmission  and
Distribution segments of PSE&G's business.

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

<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------------------------
                                                                                       Energy                  Consolidated
                               Generation      ER&T     T & D    Resources   Global   Technologies  Other (A)      Total
                               ----------      ----     -----    ---------   ------   ------------- --------- --------------
                                                                  (Millions of Dollars)

<S>                                  <C>        <C>    <C>           <C>       <C>          <C>      <C>           <C>
For the Quarter Ended
September 30, 2000:
Total Operating Revenues...          $529       $35    $1,164        $41       $48          $94      $(386)        $1,525
Segment Net Income (Loss)..            33        18        69          9        21           --         (8)           142
                               ==========      ====    ======    =========   ======    ============ ========= ==============

----------------------------------------------------------------------------------------------------------------------------

For the Quarter Ended
September 30, 1999:
Total Operating Revenues...          $729       $17      $712        $21       $40          $87        $--         $1,606
Segment Income Before
   Extraordinary Item......           169         7        29          6        20           (1)        (9)           221
Extraordinary Item                    (14)       --        --         --        --           --         --            (14)
Segment Net Income (Loss)..           155         7        29          6        20           (1)        (9)           207
                               ==========      ====    ======    =========   ======    ============ ========= ==============

----------------------------------------------------------------------------------------------------------------------------

For the Nine Months Ended
September 30, 2000:
Total Operating Revenues...        $1,576      $101    $3,117       $132      $119         $310       $(385)       $4,970
Segment Net Income (Loss)..           198        51       273         41        34          (12)        (31)          554
                               ==========      ====    ======    =========   ======    ============ ========= ==============

----------------------------------------------------------------------------------------------------------------------------

For the Nine Months Ended
September 30, 1999:
Total Operating Revenues...        $2,067       $52    $2,302       $118      $102         $195         $ 1        $4,837
Segment Income Before
   Extraordinary Item......           393        24       117         51        35           (5)        (25)          590
Extraordinary Item                 (3,204)       --     2,400         --        --           --          --          (804)
Segment Net Income (Loss)..        (2,811)       24     2,517         51        35           (5)        (25)         (214)
                               ==========      ====    ======    =========   ======    ============ ========= ==============

----------------------------------------------------------------------------------------------------------------------------

As of September 30, 2000:
Total Assets...............        $3,055      $304   $14,814     $2,611    $1,859         $290    $(3,225)       $19,708
                               ==========      ====    ======    =========   ======    ============ ========= ==============

----------------------------------------------------------------------------------------------------------------------------

As of December 31, 1999:
Total Assets...............        $3,055      $246   $11,423     $2,096    $1,715         $252        $228       $19,015
                               ==========      ====    ======    =========   ======    ============ ========= ==============

----------------------------------------------------------------------------------------------------------------------------

<FN>
(A)    PSEG's  other  activities  include  amounts  applicable  to PSEG  (parent
       corporation),  Energy Holdings  (parent  corporation),  Enterprise  Group
       Development Corporation and intercompany eliminations, primarily relating
       to intercompany  transactions  between Power and PSE&G (see Note 1. Basis
       of Presentation and Note 10. Related Party Transactions).  The net losses
       primarily  relate to  financing  and certain  administrative  and general
       costs at the parent corporations.
</FN>
</TABLE>

Geographic  information for PSEG is disclosed below. The foreign investments and
operations  noted below were made through Energy  Holdings.  PSE&G does not have
foreign investments or operations.

<TABLE>
<CAPTION>



                                                     Revenues (1)                               Identifiable Assets
                                   --------------------------------------------------    -----------------------------------
                                      Quarter Ended             Nine Months Ended
                                      September 30,               September 30,          September 30,         December 31,
                                   ----------------------     -----------------------    -----------------    --------------
                                    2000          1999          2000         1999             2000                1999
                                   ---------     --------     ----------    ---------    -----------------    --------------
<S>                                 <C>          <C>            <C>          <C>                 <C>               <C>
United States.................      $1,478       $1,569         $4,830       $4,734              $17,065           $16,595
Foreign Countries (2).........          47           37            140          103                2,643             2,420
                                   ---------     --------     ----------    ---------    -----------------    --------------
     Total....................      $1,525       $1,606         $4,970       $4,837              $19,708           $19,015
                                   ---------     --------     ----------    ---------    -----------------    --------------


Identifiable investments in foreign countries include amounts from:
     Netherlands                                                                                    $793              $623
     Chile and Peru                                                                                  522               520
     Argentina                                                                                       358               356
     Brazil (3)                                                                                      317               330
     Other                                                                                           653               591
                                                                                         -----------------    --------------
         Total                                                                                    $2,643            $2,420
                                                                                         =================    ==============
<FN>
     (1)  Revenues are  attributed  to countries  based on the  locations of the
          investments.  Global's  revenue  includes  its share of the net income
          from joint ventures recorded under the equity method of accounting.

     (2)  Total assets are net of foreign  currency  translation  adjustment  of
          $209  million  (pretax) as of  September  30, 2000 and $(222)  million
          (pretax) as of December 31, 1999.

     (3)  Amount  is net of  foreign  currency  translation  adjustment  of $152
          million  (pretax) as of September 30, 2000 and $(189) million (pretax)
          as of December 31, 1999.
</FN>

</TABLE>

Note 8.  Accounting Matters

     In December 1999, the SEC released Staff  Accounting  Bulletin No. 101 (SAB
101) which provides  guidance on the timing of revenue  recognition in financial
statements.  The basic  guidelines  on revenue  recognition  state that  revenue
should not be recognized until it is realized or realizable and earned.  SAB 101
provides  specific  criteria to assist in this  determination.  PSEG,  PSE&G and
Energy  Holdings are in the process of determining  the possible  effects of the
adoption of SAB 101 on existing revenue recognition  practices.  The adoption of
SAB 101 is not  expected  to have a  material  adverse  effect on the  financial
statements of PSEG, PSE&G or Energy Holdings.

     In June 1998,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Statement of Financial  Accounting  Standards  (SFAS) No. 133,  "Accounting  for
Derivative  Instruments and Hedging  Activities".  In June 1999, the FASB issued
SFAS No. 137,  "Accounting for Derivative  Instruments and Hedging Activities --
Deferral of the  Effective  Date of FASB  Statement No. 133" (SFAS 137) to defer
the  effective  date of SFAS 133, for one year.  Consequently,  SFAS 133 will be
effective for all fiscal quarters beginning after January 1, 2001. The FASB also
decided to defer by one year the transition date regarding embedded  derivatives
in SFAS 133. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative  Instruments and Certain Hedging  Activities" (SFAS 138) which amends
certain  provisions  of SFAS 133 to clarify four areas causing  difficulties  in
implementation.  The amendment  included  expanding the normal purchase and sale
exemption  for  supply   contracts,   permitting   the   offsetting  of  certain
intercompany  foreign currency derivatives and thus reducing the number of third
party derivatives,  permitting hedge accounting for foreign-currency denominated
assets and liabilities,  and redefining  interest rate risk to reduce sources of
ineffectiveness. A team has been appointed to implement SFAS 133 for PSEG, PSE&G
and  Energy   Holdings.   This  team  has  been  educating  both  financial  and
non-financial  personnel,   inventorying  embedded  derivatives  and  addressing
various  other SFAS 133 related  issues.  PSEG,  PSE&G and Energy  Holdings will
adopt  SFAS 133 and the  corresponding  amendments  under SFAS 138 on January 1,
2001.  Management  is  currently  determining  the impact of SFAS 133 on PSEG's,
PSE&G's and Energy  Holdings'  consolidated  results of operations and financial
position.  This statement  should have no impact on consolidated  cash flows. At
this  time,  the  impacts  of SFAS 133 and  SFAS  138 have not been  quantified;
however,  all derivatives will be recognized at fair value and the impact on the
financial statements could be material.  For derivatives that do not qualify for
hedge  accounting  treatment and for any  ineffectiveness  that will result from
hedging  transactions,  a  cumulative  amount  will be  recorded  in the  Income
Statement.  For cash flow hedges that qualify for hedge accounting,  PSEG, PSE&G
and Energy Holdings will recognize the appropriate  amount in the equity section
of the balance sheet in Other  Comprehensive  Income.  Finally,  for derivatives
where gains or losses will be payable or recoverable  through regulated rates, a
regulatory liability or asset will be established.

Note 9.  Comprehensive Income

Comprehensive Income (Loss), Net of Tax:
<TABLE>
<CAPTION>

                                                                Quarter Ended                 Nine Months Ended
                                                                September 30,                   September 30,
                                                         ----------------------------      ------------------------
                                                            2000            1999             2000          1999
                                                         -----------     ------------      ---------     ----------
                                                                           (Millions of Dollars)

<S>                                                           <C>              <C>            <C>           <C>
Net income (loss)...................................          $142             $207           $554          $(214)
Foreign currency translation, net of tax (A)........            (8)             (32)            12           (159)
                                                         -----------     ------------      ---------     ----------
     Comprehensive income/(loss)....................          $134             $175           $566          $(373)
                                                         ===========     ============      =========     ==========

<FN>
(A)    Net of tax of $0.9  million  and  $3.6  million  for the  quarters  ended
       September 30, 2000 and 1999,  respectively,  and $(1.3) million and $17.7
       million  for  the  nine  months  ended   September  30,  2000  and  1999,
       respectively.
</FN>

</TABLE>

Note 10.  Related Party Transactions

PSE&G and Power

     PSE&G's  transfer of its electric  generating  assets was in exchange for a
Promissory  Note from Power in an amount  equal to the total  purchase  price of
$2.786  billion.  Interest  on the note is payable at an annual  rate of 14.23%,
which represents PSE&G's weighted average cost of capital.  From August 21, 2000
to September 30, 2000, Power has paid interest of  approximately  $44 million to
PSE&G.

     Effective  with the  transfer,  Power  charges  PSE&G  for the  energy  and
capacity provided to meet PSE&G's BGS requirements.  Through September 30, 2000,
Power has charged PSE&G approximately $386 million for PSE&G's BGS requirements.
As of September 30, 2000,  PSE&G's  payable to Power relating to these costs was
approximately  $161 million.  Also through September 30, 2000, PSE&G sold energy
and capacity to Power at the market price of  approximately  $29 million,  which
PSE&G purchased under various  non-utility  generation (NUG) contracts at a cost
of  approximately  $66  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) for energy and at wholesale  market prices for capacity,  is deferred as a
regulatory asset (see Note 3. Regulatory Assets and Liabilities).


Energy Holdings

     Approximately  90% of the  electricity  generated  by the Eagle Point Power
Plant, a 50% owned equity investment of Global, is sold to PSE&G under a 25-year
power purchase contract  terminating in May 2016.  Global's share of partnership
revenues  received  from PSE&G  represented  approximately  $17  million and $48
million  for  the  quarter  and  nine  months  ended   September  30,  2000  and
approximately  $14 million and $40 million for the quarter and nine months ended
September 30, 1999.


<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
         Note 2.    Regulatory Issues
         Note 3.    Regulatory Assets and Liabilities
         Note 4.    Commitments and Contingent Liabilities
         Note 5.    Financial Instruments and Risk Management
         Note 7.    Financial Information by Business Segments
         Note 8.    Accounting Matters
         Note 10.   Related Party Transactions

Note 6.  Income Taxes

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

                                                                    Quarter Ended              Nine Months Ended
                                                                    September 30,                September 30,
                                                               -------------------------    -------------------------
                                                                 2000        1999 (A)        2000         1999 (A)
                                                               ----------    -----------    ---------     -----------
<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..............................................        (4.4)%           1.3%       (1.0)%            1.4%
                                                               ----------    -----------   -----------    -----------
     Effective Income Tax Rate............................        36.5%          42.2%        39.9%           42.3%
                                                               ==========    ===========    =========     ===========

<FN>
(A) Excludes the impact of the extraordinary charge recorded in 1999.

</FN>
</TABLE>


Note 9.  Comprehensive Income

     For the quarters ended September 30, 2000 and 1999,  PSE&G's  comprehensive
income equaled the consolidated net income of PSE&G.


<PAGE>

================================================================================
                            PSEG ENERGY HOLDINGS INC.
================================================================================

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

         Note 1.    Basis of Presentation
         Note 2.    Regulatory Issues
         Note 3.    Regulatory Assets and Liabilities
         Note 4.    Commitments and Contingent Liabilities
         Note 5.    Financial Instruments and Risk Management
         Note 7.    Financial Information by Business Segments
         Note 8.    Accounting Matters
         Note 10.   Related Party Transactions

Note 6.  Income Taxes

     Energy Holdings' effective tax rate was 28.5% and 35.4% for the nine months
ended September 30, 2000 and September 30, 1999, respectively.  Energy Holdings'
effective tax rate differs from the statutory  federal  income tax rate of 35.0%
primarily  due to the  imposition of state taxes and the accruals at the rate of
10% of Global's  foreign income due to the incremental  cost associated with the
repatriation of foreign earnings.  Energy Holdings does not consolidate  foreign
projects and there is no foreign  income tax  reflected in income tax expense in
Energy Holdings' consolidated financial statements at September 30, 2000.

Note 9.  Comprehensive Income

     Comprehensive Income (Loss), Net of Tax:
<TABLE>
<CAPTION>

                                                                  Quarter Ended              Nine Months Ended
                                                                  September 30,                September 30,
                                                             -------------------------    ------------------------
                                                                2000          1999          2000           1999
                                                             -----------    ----------    ----------      --------
                                                                            (Millions of Dollars)

<S>                                                                <C>           <C>            <C>          <C>
Earnings/(loss)......................................              $21           $18            $41          $63
Foreign currency translation, net of tax (A).........               (8)          (32)            12         (159)
                                                             -----------    ----------    ----------      --------
     Comprehensive income/(loss).....................              $13          $(14)           $53         $(96)
                                                             ===========    ==========    ==========      ========

<FN>
(A)  Net of tax of  $0.9  million  and  $3.6  million  for  the  quarters  ended
     September  30, 2000 and 1999,  respectively,  and $(1.3)  million and $17.7
     million  for  the  nine  months   ended   September   30,  2000  and  1999,
     respectively.
</FN>

</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) and Public
Service  Electric  and Gas  Company  (PSE&G)  1999  Annual  Report on Form 10-K,
Quarterly  Reports on Form 10-Q for the  quarters  ended March 31, 2000 and June
30, 2000, Current Reports on Form 8-K filed August 21, 2000,  September 5, 2000,
October 18, 2000 and October 27, 2000 and Amended  Current  Report on Form 8-K/A
filed November 1, 2000 and the PSEG Energy  Holdings  Inc.'s  (Energy  Holdings)
Registration  Statement filed on Form S-4 on June 29, 2000,  Quarterly Report on
Form 10-Q for the quarter  ended June 30,  2000 and Current  Reports on Form 8-K
filed  October  18,  2000 and  October  27,  2000,  affecting  the  consolidated
financial  condition and the results of operations  of PSEG,  PSE&G,  and Energy
Holdings and their  subsidiaries.  This  discussion  refers to the  Consolidated
Financial  Statements  (Statements) and related Notes to Consolidated  Financial
Statements  (Notes)  of PSEG,  PSE&G and Energy  Holdings  and should be read in
conjunction with such Statements and Notes.

Overview and Future Outlook

     Following  the  enactment  of the New Jersey  Electric  Discount and Energy
Competition  Act  (Energy  Competition  Act),  the New  Jersey  Board of  Public
Utilities  (BPU)  rendered  its  summary  decision   relating  to  PSE&G's  rate
unbundling,  stranded costs and  restructuring  proceedings  (Summary Order) and
subsequently issued PSEG's Final Order in these matters,  providing, among other
things,  for the  transfer to an  affiliate  of all of its  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 present
value basis. The $540 million is subject to recovery by various means, including
an explicit market transition charge (MTC).  Following the issuance of the Final
Order,  the BPU issued its order  approving  PSE&G's  petition  relating  to the
proposed  securitization  transaction  (Finance Order) which  authorized,  among
other  things,  the issuance  and sale of $2.525  billion of  transition  bonds,
including an estimated $125 million of transaction costs.

     The Energy Competition Act, the BPU's Summary Order and Final Order and the
related  BPU  proceedings,  referred to as the Energy  Master Plan  Proceedings,
opened the New Jersey energy  markets to  competition by allowing all New Jersey
retail electric customers to, among other things, select their electric supplier
commencing  August 1, 1999 and all New  Jersey  retail gas  customers  to select
their gas supplier commencing January 1, 2000.

     In October and  November  1999,  two appeals of certain  provisions  of the
Final Order and two appeals of certain  provisions of the related  Finance Order
were filed in the Appellate Division of the New Jersey Superior Court (Appellate
Division)  on behalf  of  several  customers  and the New  Jersey  Office of the
Ratepayer Advocate.  In an order issued April 13, 2000, a three-judge  Appellate
Division  panel  unanimously   affirmed  the  Final  Order  and  Finance  Order.
Thereafter,  the  appellants  filed a Petition  requesting  Certification  and a
Notice  of  Appeal  with the New  Jersey  Supreme  Court  seeking  review of the
Appellate  Division  decision.  On July 14, 2000,  the New Jersey  Supreme Court
granted  Certification  with respect to both  matters.  Oral  arguments  for all
parties were held on November 8, 2000.

     As  a  result  of  the  Supreme  Court's  review,   PSE&G's  securitization
transaction has been delayed at least until the first quarter of 2001, causing a
delay in the implementation of the Securitization  Transition Charge (STC) which
would have  reduced  MTC.  In order to  recognize  the  recovery  of the allowed
unsecuritized  stranded  costs over the transition  period,  PSEG has recorded a
charge to net income of $52 million, after tax, in the third quarter of 2000 for
the  cumulative  amount  of  estimated  collections  in  excess  of the  allowed
unsecuritized stranded costs from August 1, 1999 through September 30, 2000. Any
such  collections in excess of the allowed  unsecuritized  stranded costs at the
end of the transition  period will be credited to the Societal  Benefits  Clause
(SBC) as required by the Final Order.

     While PSE&G  continues to believe that the Appellate  Division's  unanimous
decision was  correct,  it can give no  assurances  with respect to the ultimate
timing or  disposition  of these  matters by the New Jersey  Supreme  Court.  An
adverse outcome to this review or substantial additional delays beyond the first
quarter of 2001,  could have a material  adverse  impact on PSEG's,  PSE&G's and
Energy Holdings' financial  condition,  results of operations and net cash flows
and could  require  revisions to financing  plans,  revisions to business  plans
delaying or restricting  current  growth  strategies and the imposition of other
operational and/or financial measures.

     As a result of the Final Order,  PSEG  organized PSEG Power LLC (Power) and
its  subsidiaries  to,  among other  things,  acquire,  own and operate  PSE&G's
electric generation assets.  PSE&G,  pursuant to the Final Order has transferred
its electric generating facilities to Power and its wholesale power contracts to
PSEG Energy Resources and Trade LLC (ER&T), a wholly-owned  subsidiary of Power.
The generating assets were transferred at the price specified in the BPU order -
$2.443  billion  plus $343  million  for other  generating  related  assets  and
liabilities.  The  parties  have  agreed  to  execute a  supplemental  agreement
reflecting  any change in the value of the assets if required as a result of the
New Jersey  Supreme  Court review,  discussed  above.  The  transfer,  which was
effective August 1, 2000, was in exchange for a Promissory Note from Power in an
amount  equal  to the  purchase  price.  Until  such  note is paid,  the  assets
transferred remain subject to the lien of PSE&G's First and Refunding Mortgage.

     PSEG has positioned  Energy  Holdings as a major part of its planned growth
strategy.  In order to achieve this  strategy,  PSEG Global Inc.  (Global)  will
focus on generation and  distribution  investments  within targeted  high-growth
regions.  A  significant  portion  of  Global's  growth  is  expected  to  occur
internationally  due to the current and anticipated  growth in electric capacity
required in certain regions of the world.  PSEG Resources Inc.  (Resources) will
utilize  its market  access,  industry  knowledge  and  transaction  structuring
capabilities to expand its energy-related  financial investment portfolio.  PSEG
Energy  Technologies,  Inc.  (Energy  Technologies)  will  continue  to  provide
heating,   ventilating  and  air  conditioning   (HVAC)  contracting  and  other
energy-related   services  to  industrial  and   commercial   customers  in  the
Northeastern and Middle Atlantic United States.

     Effective  August 1,  2000,  the  presentation  of  Electric  Revenues  and
Electric Energy Costs in the Consolidated  Statements of Income has changed, due
to PSE&G's transfer of its electric generating facilities to Power and wholesale
power  contracts to ER&T.  Effective  with the  transfer,  PSE&G  entered into a
contract with Power to obtain the energy and capacity  necessary to meet PSE&G's
basic generation service (BGS) obligation.  As a result, PSE&G's Electric Energy
Costs will now reflect  PSE&G's cost under the  contracted  price with Power and
Power's  Electric Energy Costs will reflect the actual cost of generation.  PSEG
eliminates  these  intercompany  revenues  and  expenses  in their  consolidated
financial statements.

     Under the BGS  contract  PSE&G pays a fixed  price for energy and  capacity
provided  by Power and  charges  such costs to its BGS  customers.  As a result,
PSE&G is no longer  subject to price risk  related to market  exposures  for its
estimated  electric  commitments.  Following the transfer of generation  assets,
Power has entered into forwards, futures, swaps and options to manage price risk
exposure  for its  commitments  to meet  PSE&G's BGS  obligation  in addition to
Power's other supply contracts.

Results of Operations

     In the following discussion for the quarter and nine months ended September
30,  2000,  as compared to the same  periods in the prior year,  Management  has
combined   certain   current  year  results  for  PSE&G  and  Power,   including
intercompany  eliminations,  to  provide a better  comparison  to the prior year
results,  prior to the generation asset transfer to Power,  when operations were
centralized under PSE&G.

<TABLE>
<CAPTION>

                                                                            Earnings (Losses)
                                                       --------------------------------------------------------------
                                                             Quarter Ended                    Nine Months Ended
                                                             September 30,                      September 30,
                                                       ---------------------------        ---------------------------
                                                         2000            1999               2000            1999
                                                       -----------    ------------        -----------    ------------
                                                                          (Millions of Dollars)

<S>                                                         <C>            <C>                <C>             <C>
PSE&G, Before Extraordinary Item.............               $97            $203               $494            $527
PSE&G Extraordinary Item.....................                --             (14)                --            (804)
                                                       -----------    ------------        -----------    ------------
     Total PSE&G.............................                97             189                494            (277)
Energy Holdings..............................                21              18                 41              63
Power........................................                21              --                 21              --
PSEG*........................................                 3              --                 (2)             --
                                                       -----------
                                                                      ------------        -----------    ------------
     Total PSEG..............................              $142            $207               $554           $(214)
                                                       ===========    ============        ===========    ============

*Includes after tax effect of interest on certain financing transactions.
</TABLE>

<TABLE>
<CAPTION>


                                                           Contribution to Earnings Per Share (Basic and Diluted)
                                                        --------------------------------------------------------------
                                                              Quarter Ended                    Nine Months Ended
                                                              September 30,                      September 30,
                                                        ---------------------------        ---------------------------
                                                          2000            1999               2000            1999
                                                        -----------     -----------        -----------    ------------

<S>                                                        <C>            <C>                <C>             <C>
PSE&G, Before Extraordinary Item.............              $0.45          $0.93              $2.29           $2.40
PSE&G Extraordinary Item.....................                 --          (0.06)                --           (3.65)
                                                       ------------    -----------        -----------     -----------
     Total PSE&G.............................               0.45           0.87               2.29           (1.25)
Energy Holdings..............................               0.10           0.08               0.19            0.28
Power........................................               0.10             --               0.10              --
PSEG*........................................               0.01             --              (0.01)             --
                                                       ------------    -----------        -----------     -----------
     Total PSEG..............................              $0.66          $0.95              $2.57          $(0.97)
                                                       ============    ===========        ===========     ===========

*Includes after tax effect of interest on certain financing transactions.

</TABLE>


     Basic and diluted  earnings per share of PSEG common stock  (Common  Stock)
were $0.66 for the quarter  ended  September  30,  2000, a decrease of $0.35 per
share from the comparable 1999 period, excluding the extraordinary charge. Basic
and diluted  earnings  per share of Common  Stock were $2.57 for the nine months
ended September 30, 2000, a decrease of $0.11 per share from the comparable 1999
period, excluding the extraordinary charge.

     Excluding the  extraordinary  charge from 1999 relating to deregulation and
the  discontinuation of Statement of Financial  Accounting  Standards (SFAS) No.
71,  "Accounting  for the  Effects of Certain  Types of  Regulation"  (SFAS 71),
PSE&G's and Power's combined contributions to earnings per share of Common Stock
for the quarter and nine months ended  September  30, 2000  decreased  $0.38 and
$0.01 from the comparable 1999 periods, respectively. The decrease was primarily
due to the $52 million  charge to income  related to MTC recovery  (See Overview
and Future Outlook).  Lower  depreciation  and  amortization  resulting from the
amortization of the Excess Depreciation Reserve beginning in January 2000 helped
to offset some of the decrease.

     Energy  Holdings'  contribution  to  earnings  per  share of  Common  Stock
increased  $0.02 and  decreased  $0.09 for the  quarter  and nine  months  ended
September 30, 2000, respectively, from the comparable 1999 periods. The increase
for the quarter was primarily due to Resources'  higher  leveraged  lease income
and a prior year  write-down of other  investments  in Global's  portfolio.  The
decrease for the nine months ended  September  30, 2000, as compared to the same
period in 1999,  is  primarily  due to lower  unrealized  gains from  Resources'
investment portfolio.

     As a result of PSEG's  stock  repurchase  program  which began in September
1998,  earnings  per share of Common Stock for the quarter and nine months ended
September 30, 2000 increased $0.01 and $0.06, respectively,  from the comparable
1999 periods.  A total of approximately 17.8 million shares had been repurchased
at a cost of  approximately  $679 million under this program as of September 30,
2000.

PSE&G and Power--Revenues

     Electric

<TABLE>
<CAPTION>


                                                                            Electric Revenues
                                                       --------------------------------------------------------------
                                                             Quarter Ended                    Nine Months Ended
                                                             September 30,                      September 30,
                                                       ---------------------------        ---------------------------
                                                         2000            1999               2000            1999
                                                       -----------    ------------        -----------    ------------
                                                                          (Millions of Dollars)

<S>                                                      <C>             <C>                <C>             <C>
PSE&G........................................            $1,019          $1,244             $3,019          $3,230
Power........................................               429              --                429              --
Intercompany Eliminations*...................              (386)             --               (386)             --
                                                       -----------    ------------        -----------    ------------

     Total Electric Revenues.................            $1,062          $1,244             $3,062          $3,230
                                                       ===========    ============        ===========    ============

* Represents the revenue Power receives from PSE&G for BGS and MTC.
</TABLE>


     Revenues  decreased  $182  million  or 15% and $168  million  or 5% for the
quarter and nine months ended September 30, 2000 from the comparable  periods in
1999  primarily due to an $88 million  pre-tax  charge to income  related to MTC
recovery  combined  with the  effects of the 5% rate  reduction  required by the
Final Order which decreased  generation revenues for the quarter and nine months
ended  September  30,  2000 by  approximately  $27  million  and  $123  million,
respectively.

     In addition,  customer  migration  from PSE&G could further  reduce PSE&G's
future basic generation service (BGS) obligation which would result in decreased
BGS  revenues  for Power.  However,  such  customer  migration  also creates the
opportunity  for Power to sell available  energy and capacity into the wholesale
market.  As of  September  30,  2000,  approximately  8% of  the  customer  load
traditionally served by PSE&G was being served by third party suppliers.

     Gas

     Revenues  increased  $66  million  or 23% and $155  million  or 12% for the
quarter and nine months ended September 30, 2000 from the comparable  periods in
1999, respectively, primarily due to the increasing prices for natural gas. This
is due to the fact that under certain  transportation  only contracts,  PSE&G is
responsible  only for  delivery  of gas to its  customers.  Such  customers  are
responsible  for payment to PSE&G for the cost of the  commodity  and as PSE&G's
costs for these customers increase, the customer's rates will increase.

PSE&G and Power--Expenses

     Electric Energy Costs
<TABLE>
<CAPTION>

                                                                          Electric Energy Costs
                                                       --------------------------------------------------------------
                                                             Quarter Ended                    Nine Months Ended
                                                             September 30,                      September 30,
                                                       ---------------------------        ---------------------------
                                                         2000            1999               2000            1999
                                                       -----------    ------------        -----------    ------------
                                                                          (Millions of Dollars)

<S>                                                        <C>             <C>              <C>               <C>
PSE&G........................................              $603            $309             $1,076            $765
Power........................................                82              --                 82              --
Intercompany Eliminations*...................              (386)             --               (386)             --
                                                       -----------    ------------        -----------    ------------

     Total Electric Energy Costs.............              $299            $309               $772            $765
                                                       ===========    ============        ===========    ============

* Represents the amount PSE&G pays to Power for BGS and MTC.
</TABLE>


     Electric  Energy Costs decreased $10 million or 3% and increased $7 million
or 1% for the  quarter  and  nine  months  ended  September  30,  2000  from the
comparable 1999 periods, respectively.

     Gas Costs

     Gas Costs  increased  $61  million  or 30% and $151  million or 17% for the
quarter and nine  months  ended  September  30,  2000 from the  comparable  1999
periods, respectively, primarily due to the increasing prices for natural gas.

     Operation and Maintenance

<TABLE>
<CAPTION>

                                                                        Operation and Maintenance
                                                       --------------------------------------------------------------
                                                             Quarter Ended                    Nine Months Ended
                                                             September 30,                      September 30,
                                                       ---------------------------        ---------------------------
                                                         2000            1999               2000            1999
                                                       -----------    ------------        -----------    ------------
                                                                          (Millions of Dollars)

<S>                                                        <C>             <C>                <C>           <C>
PSE&G........................................              $185            $382               $958          $1,141
Power........................................               212              --                212              --
                                                       -----------    ------------        -----------    ------------
     Total Operation and Maintenance.........              $397            $382             $1,170          $1,141
                                                       ===========    ============        ===========    ============
</TABLE>

     Operation  and  Maintenance  expense  increased  $15  million or 4% and $29
million or 3% for the quarter and nine months ended  September 30, 2000 from the
comparable  1999  periods,  respectively.  The increases  were  primarily due to
increased costs related to Power's  acquisitions in 2000 and higher transmission
and distribution costs including higher materials and support services.

     Depreciation and Amortization

<TABLE>
<CAPTION>
                                                                      Depreciation and Amortization
                                                       --------------------------------------------------------------
                                                             Quarter Ended                    Nine Months Ended
                                                             September 30,                      September 30,
                                                       ---------------------------        ---------------------------
                                                         2000            1999               2000            1999
                                                       -----------    ------------        -----------    ------------
                                                                          (Millions of Dollars)

<S>                                                         <C>            <C>                <C>             <C>
PSE&G........................................               $60            $120               $230            $405
Power........................................                26              --                 26              --
                                                       -----------    ------------        -----------    ------------
     Total Depreciation and Amortization.....               $86            $120               $256            $405
                                                       ===========    ============        ===========    ============

</TABLE>

     Depreciation and Amortization expense decreased $34 million or 28% and $149
million or 37% for the quarter and nine months ended September 30, 2000 from the
comparable  1999  periods,  respectively.  The decrease was primarily due to the
amortization of the regulatory  liability for the excess  electric  distribution
depreciation  reserve at PSE&G,  which commenced on January 1, 2000 and amounted
to  approximately  $31  million  and $94 million for the quarter and nine months
ended September 30, 2000. Also  contributing to the decrease for the nine months
ended  September  30,  2000,  as  compared  to the  same  period  in  1999,  was
approximately  $60 million of lower  depreciation  resulting  from the lower net
book value balances of the generation-related  assets, which were transferred to
Power,  which  were  reduced  as of April 1, 1999 as a result of the  impairment
recorded  pursuant to SFAS 121,  "Accounting  for the  Impairment  of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121).

     Once the  securitization  transaction  is  complete,  PSE&G  will  begin to
amortize the regulatory asset recorded for stranded costs with such amortization
expense offsetting these decreases.

     Interest Expense

     PSE&G's  interest  expense  decreased $46 million or 47% and $38 million or
13% for the quarter and nine months ended September 30, 2000 from the comparable
1999 periods,  respectively.  The decrease is primarily  due to interest  income
received  from  Power  for the  Promissory  Note  (See  Note 10.  Related  Party
Transactions).

     Income Taxes

     Income  Taxes  decreased  $96 million or 63% and $60 million or 15% for the
quarter and nine  months  ended  September  30,  2000 from the  comparable  1999
periods,  primarily due to lower pre-tax  operating  income  resulting  from the
transfer of the generation portion of the business to Power.

Energy Holdings

Energy Holdings--Revenues

     Revenues  increased  $35 million and $146  million for the quarter and nine
months ended September 30, 2000,  respectively,  as compared to the same periods
in 1999. The increases primarily resulted from Resources' higher leveraged lease
income from new leveraged lease  investments,  Energy  Technologies'  additional
revenues from acquisitions of HVAC and mechanical service contracting  companies
in 2000 and 1999 and Global's higher income from partnerships.

Energy Holdings--Operating Expenses

     Operating  expenses  decreased $35 million for the quarter ended  September
30, 2000 from the comparable period in 1999 primarily due to Global's prior year
write-down  of  investments  of $44 million.  Operating  expenses  increased $83
million for the nine months ended September 30, 2000 from the comparable  period
in 1999,  primarily due to the addition of operating  expenses from the HVAC and
mechanical service contracting companies acquired by Energy Technologies in 2000
and 1999.  This  increase in  operating  expenses  was  partially  offset by the
write-down of Global's investments in 1999.

Energy Holdings--Interest Expense and Preferred Dividends

     Net financing expenses increased $6 million and $37 million for the quarter
and nine months ended  September 30, 2000,  respectively.  Both  increases  were
primarily  due to higher  levels of debt  required  to  finance  investment  and
acquisition activities at Global and Resources and higher interest rates.

Energy Holdings - Earnings Before Interest and Taxes (EBIT) Contribution

     The results of operations for each of Energy  Holdings'  business  segments
are explained  below with reference to the EBIT  contribution.  Energy  Holdings
borrows on the basis of a combined  credit  profile to finance the activities of
its  subsidiaries.  As such, the capital  structure of each of the businesses is
managed by Energy Holdings. Debt at each subsidiary is evidenced by demand notes
with Energy Holdings and PSEG Capital Corporation (PSEG Capital).

<TABLE>
<CAPTION>


                                                      Quarter Ended                    Nine Months Ended
                                                      September 30,                      September 30,
                                                ---------------------------        ---------------------------
                                                   2000            1999               2000            1999
                                                -----------     -----------        -----------     -----------
                                                                    (Millions of Dollars)
<S>                                                   <C>             <C>                <C>             <C>
EBIT:
     Global.............................              $36             $44                $85             $85
     Resources..........................               35              19                120             111
     Energy Technologies................                1              (1)               (15)             (6)
     Other..............................               (3)              1                 (5)              1
                                                -----------     -----------        -----------     -----------
Total EBIT..............................              $69             $63               $185            $191
                                                ===========     ===========        ===========     ===========
</TABLE>

         Global

     Global's  investments  consist primarily of minority ownership positions in
projects  and joint  ventures,  none of which it  consolidates.  Other than fees
collected for providing operations and maintenance  services,  Global's revenues
primarily  represent  its pro-rata  ownership  share of net income  generated by
project  affiliates  which is accounted for by the equity method of  accounting.
The  expenses in the table  below are those  required  to develop  projects  and
administrative and general expenses required to operate the business as a whole.
Project operating expenses are not reported as direct expenses of Global but are
deducted  to arrive at net income of  project  affiliates,  a pro-rata  share of
which is reported as revenues by Global.

<TABLE>
<CAPTION>


                                                      Quarter Ended                    Nine Months Ended
                                                      September 30,                      September 30,
                                                ---------------------------        ---------------------------
                                                   2000            1999               2000            1999
                                                -----------     -----------        -----------     -----------
                                                                    (Millions of Dollars)
<S>                                                   <C>             <C>               <C>             <C>
     Revenues...........................              $48             $40               $119            $102
     Expenses...........................               13              61                 37              88
                                                 -----------     -----------        -----------     -----------
     Operating Income...................               35             (21)                82              14
     Other Income.......................                1              65                  3              71
                                                -----------     -----------        -----------     -----------
Total EBIT..............................              $36             $44                $85             $85
                                                ===========     ===========        ===========     ===========

</TABLE>


     Global's  EBIT  contribution  decreased  $8 million for the  quarter  ended
September  30,  2000  from the  comparable  period  in 1999.  The  decrease  was
primarily  due to the  gain on sale of its  interest  in a  Newark,  New  Jersey
co-generation  facility in 1999,  partially  offset by the  write-down  of other
investments in Global's portfolio.

     Global's  EBIT  contribution  was $85  million  for the nine  months  ended
September  30, 2000 and 1999.  For the nine months  ended  September  30,  2000,
Global's  EBIT  contribution  was primarily the result of higher income from its
new  investments  in domestic  generation  and foreign  distribution  companies.
Global's EBIT  contribution  for 1999 was primarily  impacted by the gain on the
sale of its interest in a Newark, New Jersey co-generation  facility,  partially
offset by the write-down of other investments in Global's portfolio.

         Resources

     Resources earns its leveraged lease revenues primarily from rental payments
and tax benefits  associated with such  transactions.  As a passive  investor in
limited partnership project financing transactions, Resources recognizes revenue
from its  pro-rata  share of the income  generated by these  investments.  As an
owner  of  beneficial  interests  in  two  leveraged  buyout  funds,   Resources
recognizes  revenue as the share  prices of public  companies  in the  leveraged
buyout funds fluctuate.  In addition,  revenue is recognized as companies in the
fund  distribute  dividend  income  through the fund to the investors and as the
fund liquidates its holdings.

<TABLE>
<CAPTION>

                                                              Quarter Ended                  Nine Months Ended
                                                              September 30,                    September 30,
                                                         -------------------------       ---------------------------
                                                           2000           1999             2000            1999
                                                         -----------    ----------       -----------     -----------
                                                                           (Millions of Dollars)

<S>                                                          <C>           <C>              <C>             <C>
     Revenues..................................              $41           $21              $132            $118
     Expenses..................................                6             2                12               7
                                                        ----------     ----------       -----------     -----------
Total EBIT.....................................              $35           $19              $120            $111
                                                        ==========     ==========       ===========     ===========
</TABLE>


     Resources'  EBIT  contribution  increased $16 million for the quarter ended
September  30,  2000  from the  comparable  period  in 1999.  The  increase  was
primarily due to higher income from new leveraged lease investments.

     Resources' EBIT contribution increased $9 million for the nine months ended
September  30,  2000  from the  comparable  period  in 1999.  The  increase  was
primarily due to higher income from new leveraged lease  investments,  partially
offset by lower investment gains due to sales in 1999 of securities in leveraged
buyout funds.

         Energy Technologies

     Energy  Technologies  earns its revenues  from energy sales and the sale of
energy-related equipment and services.
<TABLE>
<CAPTION>

                                                               Quarter Ended                 Nine Months Ended
                                                               September 30,                   September 30,
                                                         ---------------------------     ----------------------------
                                                           2000            1999             2000            1999
                                                         -----------     -----------     ------------    ------------
                                                                           (Millions of Dollars)

<S>                                                            <C>            <C>             <C>             <C>
     Revenues...................................               $94            $87             $310            $195
     Expenses...................................                93             88              325             201
                                                         -----------     -----------     ------------    ------------
Total EBIT......................................                $1            $(1)            $(15)            $(6)
                                                         ===========     ===========     ============    ============

</TABLE>

     Energy Technologies' EBIT contribution increased $2 million for the quarter
ended September 30, 2000 from the comparable period in 1999.  Revenues increased
$7  million  and  operating  expenses  increased  $5  million  primarily  due to
acquisitions of HVAC and mechanical  service  contracting  companies in 2000 and
1999.

     Energy  Technologies'  EBIT contribution  decreased $9 million for the nine
months ended  September 30, 2000 from the  comparable  period in 1999.  Revenues
increased $115 million and operating  expenses  increased $124 million primarily
due to acquisitions of HVAC and mechanical service contracting companies in 2000
and 1999. Also included in the increased  operating expenses was a restructuring
charge to income  for  approximately  $6.6  million  for the nine  months  ended
September 30, 2000. Of this amount  approximately $2 million related to employee
severance  costs  applicable to the termination of  approximately  60 employees,
$1.6 million related to deferred commodity transportation costs and $3.0 million
related to the write-off of computer hardware and software.

Liquidity and Capital Resources

     PSEG is a 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 three direct
operating subsidiaries in 2000, PSE&G, Power and Energy Holdings.

PSE&G and Power

     As noted previously, on July 14, 2000, the New Jersey Supreme Court decided
to hear appeals of the BPU Energy Master Plan decision.  As a result,  a planned
$2.525 billion securitization financing by PSE&G has been delayed at least until
the first quarter of 2001,  and a planned  financing by Power has been similarly
delayed.

     Going forward,  cash generated from PSE&G's  transmission  and distribution
business is expected to provide the  majority of the funds for PSE&G's  business
needs.  Power's  initial  external  financing  will be delayed  until  after the
securitization  financing.  Following this initial  financing,  Power's  capital
needs will be funded with cash generated from operations and may be supplemented
with external  financings and equity  infusions from PSEG as dictated by Power's
growth strategy. Also as a result of the delay in securitization, PSEG and PSE&G
will utilize  various  medium-term  financings  to refinance  existing  debt and
maturities. The BPU has authorized PSE&G to issue through December 2001 up to $1
billion in  long-term  debt with  maturities  not to exceed  three years for the
purposes of redeeming or refunding prior debt.

     On September 17, 1999,  the BPU issued its Finance Order which  authorized,
among other things, the imposition of a non-bypassable transition bond charge on
PSE&G's customers;  the sale of PSE&G's property right in such charge created by
the Energy Competition Act 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.  Pending a favorable  resolution of matters now
before the New Jersey Supreme  Court,  PSEG and PSE&G do not expect such sale of
transition bonds and the receipt of proceeds prior to the first quarter of 2001.

     Both the right of PSE&G to receive the bondable  transition charge pursuant
to the  securitization  transaction  and the proceeds from the  Promissory  Note
related to the transfer of its  generation-related  assets to Power are property
subject to the lien of PSE&G's First and Refunding Mortgage (Mortgage). All such
property  will be released  from the lien of the Mortgage at the time of receipt
of the cash proceeds from each such sale. In accordance  with the  provisions of
the Mortgage,  the net proceeds from each sale of such released property will be
deposited with the Trustee.

     The  Mortgage  authorizes  PSE&G to exercise  one or more of the  following
options as to the application of proceeds of such released property, at its sole
discretion:

          1.   Withdraw  funds for  corporate  use by  utilizing  additions  and
               improvements and/or retired bonds. (Option 1)

          2.   Direct  the  Trustee to invest the  proceeds  in U.S.  Government
               Securities. (Option 2)

          3.   Direct the Trustee to purchase its  Mortgage  Bonds at the lowest
               prices  obtainable,  at or below par  value.  If the  Trustee  is
               unable to  purchase  sufficient  Mortgage  Bonds to exhaust  such
               proceeds  deposited  with it, the balance may be applied on a pro
               rata basis towards the redemption of eligible  series of Mortgage
               Bonds outstanding at par. (Option 3)

     At September 30, 2000,  PSE&G had a total of $3.4 billion of Mortgage Bonds
outstanding, of which $2.6 billion are taxable registered Mortgage Bonds subject
to the special redemption  provisions  outlined in Option 3 (Redeemable  Bonds).
Further, $777 million of the Mortgage Bonds outstanding are tax-exempt Pollution
Control Bonds and $15 million are two series of taxable  coupon  Mortgage  Bonds
due 2037 (Coupon  Bonds).  Neither the  Pollution  Control  Bonds nor the Coupon
Bonds are subject to the special redemption provisions outlined in Option 3.

     PSE&G has not yet made a final  decision as to the amount and the manner in
which it will retire or redeem its Mortgage Bonds.  Such a decision will be made
on or about the time the  proceeds  from  securitization  and the payment of the
Promissory  Note related to the sale of the  generation-related  assets to Power
are  deposited  with the Trustee,  on the basis of market  conditions  and other
factors  existing  at that time (see  Overview  and  Future  Outlook).  Based on
current information,  a likely utilization of the options available to PSE&G, as
noted above, could be as follows:

          A.   Withdraw $2.4 billion of net proceeds from  securitization  under
               Option 1, above. These proceeds would be used to:

               i.   Redeem  $123.5  million  of  Pollution   Control  Bonds  now
                    redeemable;

               ii.  Retire PSE&G's outstanding short-term debt; and

               iii. Reduce PSE&G common  and/or  preferred  securities  with the
                    balance of proceeds.

          B.   Withdraw the  proceeds  from the payment of the  Promissory  Note
               related  to the  generation-related  asset  sale to  Power  under
               Option 1.  These  proceeds  will be used to reduce  PSE&G  common
               and/or preferred securities.

     As previously reported, in anticipation of securitization,  PSEG's Board of
Directors  has  authorized  the  repurchase  of up to an aggregate of 30 million
shares of Common Stock in the open  market.  At  September  30,  2000,  PSEG had
repurchased  approximately  17.8 million  shares of Common  Stock,  at a cost of
approximately  $679 million.  The repurchased  shares have been held as treasury
stock or used for other corporate purposes.  In December 1999, PSEG entered into
a  Forward   Purchase   Agreement   with  a  third  party  which  has  purchased
approximately  6.4 million shares at a cost of approximately  $225 million.  The
transaction  may be  settled  in  cash or  with  shares  of  Common  Stock.  Any
repurchase  of these shares will not be reflected on PSEG's  balance sheet until
settlement  of the  transaction.  Market  conditions  and  the  availability  of
alternative  investments  will  dictate if and when more shares of Common  Stock
will be repurchased under this authorization.

     Dividend  payments  on  Common  Stock  for the  nine  month  periods  ended
September 30, 2000 and 1999 were $1.62 per share and totaled  approximately $348
million and $357 million for the nine months ended  September 30, 2000 and 1999,
respectively.  PSEG has not  increased its dividend rate in eight years in order
to retain additional  capital for reinvestment and to reduce its payout ratio as
earnings grow.  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 $450  million and $510 million to PSEG for the nine
months ended September 30, 2000 and 1999, respectively.  These amounts were used
to fund PSEG's  Common Stock  dividends and to support a portion of PSEG's stock
repurchase program.

     PSEG  believes  that it will have  adequate  earnings  and cash flow in the
future from PSE&G and Power to maintain  Common  Stock  dividends at the current
level.  However,  the amounts and dates of such dividends declared in the future
will necessarily be dependent upon PSEG's future earnings, cash flows, financial
requirements and other factors.  Earnings and cash flows required to support the
dividend will become more volatile as PSEG's  business  changes from one that is
principally regulated to one that is principally competitive.

     Energy Holdings

     It is intended that Global and Resources will provide the earnings and cash
flow for Energy Holdings' long-term growth.  Resources' investments are designed
to  produce  immediate  cash flow and  earnings  that  enable  Global and Energy
Technologies to focus on longer investment horizons. During the next five years,
Energy Holdings will need  significant  capital to fund its planned  growth.  In
addition to cash  generated from  operations,  Energy  Holdings'  growth will be
funded through external  financings and equity infusions from PSEG. The delay of
the  securitization  financing  could  impact the ability of PSEG to continue to
make equity  infusions into Energy Holdings which could affect Energy  Holdings'
growth strategy.

     Cash flow from operating activities increased $39 million from $104 million
to $143  million for the nine  months  ended  September  30, 2000 as compared to
1999,  primarily due to a decrease in accounts  receivable in Global as a result
of a partner's reimbursement for their share of project costs.

     Regulatory Restrictions

     As a result of a 1992 BPU proceeding  concerning the  relationship of PSE&G
to PSEG's non-utility businesses (Focused Audit), the BPU approved a plan which,
among other things,  provided that: (1) PSEG would not permit PSEG's non-utility
assets to exceed 20% of PSEG's  consolidated  assets without prior notice to the
BPU (as of September 30, 2000,  these assets were in excess of the 20% limit and
such notice had been given);  (2) the PSE&G Board of Directors  would provide an
annual  certification  that the business and financing  plans of Energy Holdings
will not adversely  affect PSE&G; (3) PSEG would (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 by May 2003;
and (4) Energy Holdings would pay PSE&G an affiliation fee of up to $2 million a
year to be applied by PSE&G to reduce utility rates.

     As a result of the  accounting  impacts  resulting from the Final Order and
the  deregulation of the electric  generation  business in New Jersey,  PSEG and
PSE&G no  longer  believe  that the 20%  non-utility  asset  limitation  remains
appropriate  and  believe  further  that  modifications  to  the  Focused  Audit
limitations  will be  required.  The Final Order  addressed  the Focused  Audit,
noting that PSEG's non-regulated assets would likely exceed 20% and 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.  The BPU  directed  PSE&G to file a petition
addressing  the Focused  Audit prior to the end of the first quarter of 2000. In
March 2000,  PSE&G submitted a letter to the BPU as its initial  compliance with
this filing  requirement in which it notified the BPU of its intention to make a
filing to modify the terms of the Focused  Audit within 120 days after the Final
Order becomes final and non-appealable.  Energy Holdings believes that, if still
required,  it is capable of eliminating PSEG support of PSEG Capital debt within
the time period set forth in the Focused Audit.

     Regulatory  oversight by the BPU to ensure that there is no harm to utility
customers from PSEG's non-utility  investments is expected to continue. PSEG and
PSE&G  believe that these issues will be  satisfactorily  resolved,  although no
assurances  can be given.  In addition,  if PSEG were no longer exempt under the
Public Utility Holding Company Act (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.
PSEG believes, however, that this would not have a material adverse impact on it
and its subsidiaries.

Capital Requirements

     PSE&G and Power

     On October 31, 2000 Power  announced  that it had entered into an agreement
with a third party to purchase 30 gas and steam  turbines with a total  combined
generating capacity of 4,390 MW for $862.8 million. The turbines will be used at
projects in the Northeast and Midwest.

     In September 2000,  Power announced that it will assume  responsibility  of
four  Midwest  generation  projects  being  developed  by  Global  and  will  be
responsible  for all future  generation  projects and  development in the United
States. The four projects will have a combined  generating capacity of 2,830 MW.
Power will reimburse Global for their project costs through 2000.

     On July 19, 2000, Power announced that it will construct a two-unit,  1,186
MW natural-gas fired combined-cycle generating facility at its Linden Generating
Station at a cost of approximately $590 million with completion  expected in May
2003.  Three existing  oil-fired  steam units at Linden with a total capacity of
436 MW will be retired upon completion of the new facility.

     Also in 2000,  Power  announced  that it will  construct  a 500 MW  natural
gas-fired,  combined-cycle  electric  generating plant at its Bergen  Generating
Station at a cost of approximately $290 million with completion expected in June
2002.  Power has also  installed  four new  combustion  turbines  at  Burlington
Generating Station and two new combustion turbines at Linden Generating Station,
adding 168 MW and 164 MW, respectively,  of electric generating  capacity,  at a
cost of  approximately  $151  million.  The new  combustion  turbines  were  all
operational as of July 2000.

     In May 2000,  Power acquired  Niagara Mohawk Power  Corporation's  (Niagara
Mohawk) 400 MW oil and gas-fired electric generating station in Albany, New York
(Albany Steam  Station) for $49.9  million.  Under the terms of the  acquisition
agreement,  Niagara  Mohawk could also receive up to an additional $9 million if
Power chooses to pursue redevelopment of the Albany Steam Station.

     In  September  1999,  Power  announced  that it had signed an  agreement to
acquire all of  Conectiv's  interests in the Salem  Nuclear  Generating  Station
(Salem) and the Hope Creek Nuclear  Generating  Station (Hope Creek) and half of
Conectiv's  interest in the Peach Bottom  Atomic Power Station  (Peach  Bottom),
totaling 544 MW for an aggregate  purchase  price of $15.4  million plus the net
book value of nuclear fuel at closing. For further information and discussion of
the  Wholesale  Transaction  Confirmation  letter  agreements  between Power and
Conectiv, see Note 4. Commitments and Contingent Liabilities.

     PSE&G and  Power  have  substantial  commitments  as part of their  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.

     For the nine month periods ended  September 30, 2000 and 1999 PSE&G had net
plant  additions  of $280  million,  excluding  Allowance  for Funds Used During
Construction (AFDC) and capitalized interest.  Power had net plant additions for
the  nine  months  ended  September  2000 of $288  million,  excluding  AFDC and
capitalized interest.

     Energy Holdings

     Future investment  activity will be subject to periodic review and revision
and may vary significantly depending upon the opportunities  presented.  Factors
affecting actual  expenditures and investments  include  availability of capital
and suitable  investment  opportunities,  market  volatility  and local economic
trends.

     Over the next  several  years,  Energy  Holdings,  certain  of its  project
affiliates and PSEG Capital will be required to refinance  maturing debt,  incur
additional debt and provide equity to fund investment activity. 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 Energy Holdings' financial  condition,  results of operations and net
cash flows (see Liquidity and Capital Resources-Regulatory Restrictions above).

External Financings

     PSEG

     At September 30, 2000, PSEG had a committed $150 million  revolving  credit
facility which will expire in December  2002. At September 30, 2000,  there were
no borrowings under this revolving  credit facility.  On September 8, 1999, PSEG
entered into an uncommitted  line of credit with a bank with no stated limit. At
September 30, 2000, PSEG had $145 million outstanding under this line of credit.

     PSEG has an $850  million  commercial  paper  program to provide  funds for
general  corporate  purposes and,  until  securitization  proceeds are received,
provide funds for Power.  On September 30, 2000,  PSEG had  commercial  paper of
$557 million outstanding.

     To provide  liquidity for its  commercial  paper  program,  PSEG has a $570
million  revolving  credit  facility  expiring in March 2001 and a $280  million
revolving  credit facility  expiring in March 2005.  These agreements are with a
group of banks and provide for borrowings  with maturities of up to one year. As
of  September  30,  2000  there  were  no  borrowings  outstanding  under  these
facilities.

     On October 10,  2000 PSEG filed a  registration  statement  with the SEC to
register $500 million of additional debt.

     In 1998,  PSEG  issued  $100  million of  Extendible  Notes,  Series A, due
November 22, 2000.  These Notes were  automatically  tendered and  remarketed in
February 2000. The interest rate through  maturity is at the three-month  London
Interbank Offered Rate (LIBOR) plus 0.22%, reset quarterly.

     Also in 1998, PSEG issued $175 million of Extendible  Notes,  Series B, due
November 22, 2000. These Notes were automatically tendered and remarketed in May
2000. The interest rate through maturity is at the three-month LIBOR plus 0.32%,
reset quarterly.

     In 1999, PSEG issued $300 million of Extendible  Notes,  Series C, due June
15, 2001.  These Notes were  automatically  tendered and remarketed in September
2000.  The  interest  rate  through  maturity is at the  three-month  LIBOR plus
0.375%, reset quarterly.

     PSE&G

     As of  September  30, 2000,  the  Mortgage  would permit up to $2.9 billion
aggregate  principal  amount of new Mortgage Bonds to be issued against previous
additions and  improvements,  the level of which will be impacted by the actions
ultimately   taken  in   connection   with   securitization   and  the  sale  of
generation-related  assets to Power (see Liquidity and Capital  Resources - PSEG
and PSE&G). 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.  PSE&G
expects  to apply for and  receive  necessary  BPU  authorization  for  external
financings to meet its requirements  over the next five years, as needed.  While
PSE&G expects such authority to be granted, no assurances can be given.  Failure
to receive such authority on a timely basis could have a material adverse effect
on the financial  condition,  results of operations  and net cash flows of PSE&G
and PSEG.

     The BPU has  authorized  PSE&G to issue up to $1 billion  of new  long-term
debt on the basis of  previously  matured,  redeemed or  purchased  debt through
December 31, 2001

     On  September 6, 2000,  PSE&G  issued $290  million of secured  Medium Term
Notes, Series A at 7.19%, due September 6, 2002.

     PSE&G  maintains  a $1.5  billion  commercial  paper  program.  To  provide
liquidity for this program,  PSE&G has a $450 million revolving credit agreement
expiring in June 2001, a $650 million credit facility  expiring in June 2002 and
a $400 million credit facility  expiring in June 2001. These agreements  provide
for  borrowings  with  maturities  of up to one year.  As of September 30, 2000,
there were no borrowings outstanding under these facilities.

     The BPU has authorized  PSE&G to issue and have outstanding at any one time
through  January 2, 2001, not more than $2.0 billion of short-term  obligations,
consisting of commercial  paper and other  unsecured  borrowings  from banks and
other  lenders.  PSE&G has several  uncommitted  lines of credit with banks.  On
September  30, 2000,  PSE&G had $1.6  billion of  short-term  debt  outstanding,
including $423 million  borrowed  against its uncommitted  bank lines of credit.
PSE&G  has  filed a  petition  with the BPU to  extend  its  authority  to issue
short-term debt through January 2, 2003.

     PSE&G Fuel  Corporation  had a $125  million  commercial  paper  program to
finance a 42.49% share of Peach  Bottom  nuclear  fuel.  This  commercial  paper
program was supported by a $125 million  revolving  credit facility with a group
of banks. As a result of the transfer of generation  assets from PSE&G to Power,
the PSE&G Fuel Corporation  commercial paper program has been discontinued.  All
commercial  paper  outstanding  under this  program  was paid down on August 17,
2000. The credit  facility  supporting  this program was terminated on September
11, 2000.

     Energy Holdings

     A registration statement was declared effective September 5, 2000 regarding
an exchange offer for the $300 million of 9.125% Senior Notes due February 2004.
The  exchange  offer was  completed on October 18, 2000 with  substantially  all
notes being exchanged.

     Energy Holdings  completed an exchange offer in August 2000 exchanging $400
million of publicly  traded  10.0% Senior Notes due October 2009 for notes which
were issued in October 1999 in a private placement.

     Foreign Operations

     In accordance with their growth strategies,  Global and Resources have made
approximately  $1.5 billion and $1.2  billion,  respectively,  of  international
investments.  As of September 30, 2000, foreign  investments  represented 13% of
PSEG's  consolidated  assets and the  revenues  from those  foreign  investments
contributed 3% to consolidated  revenues for the nine months ended September 30,
2000. For discussion of foreign currency risk, see Note 5. Financial Instruments
and Risk Management.

PSE&G and Energy Holdings

     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 Energy Holdings and their subsidiaries: Overview and Future Outlook; Results
of Operations;  Liquidity and Capital Resources; External Financings and Foreign
Operations.

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.  PSEG,  PSE&G and Energy
Holdings   undertake   no   obligation   to   publicly   update  or  revise  any
forward-looking  statements,  whether  as a result  of new  information,  future
events or otherwise.  The following review of factors should not be construed as
exhaustive or as any admission  regarding  the adequacy of  disclosures  made by
PSEG,  PSE&G and Energy  Holdings  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;  managing  rapidly
changing wholesale energy trading operations in conjunction with electricity and
gas  production,   transmission  and  distribution  systems;   managing  foreign
investments  and electric  generation and  distribution  operations in locations
outside of the  traditional  utility  service  territory;  political and foreign
currency risks; an increasingly competitive energy marketplace;  sales retention
and growth  potential in a mature PSE&G service  territory;  ability to complete
development  or  acquisition  of current  and future  investments;  partner  and
counterparty risk;  exposure to market price fluctuations and volatility of fuel
and power supply, power output, marketable securities,  among others; ability to
obtain  adequate  and timely rate relief,  cost  recovery,  and other  necessary
regulatory approvals;  ability to obtain securitization proceeds; Federal, state
and foreign 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;  nuclear decommissioning and the availability of storage facilities
for spent nuclear fuel;  licensing and regulatory approval necessary for nuclear
and other operating  stations;  the ability to  economically  and safely operate
nuclear  facilities in accordance  with regulatory  requirements;  environmental
concerns;  and market risk and debt and equity market  concerns  associated with
these issues.

                      ITEM 3. QUALITATIVE AND QUANTITATIVE
                          DISCLOSURES ABOUT MARKET RISK

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

     PSEG is  exposed  to  credit  losses  in the  event of  non-performance  or
non-payment by  counterparties.  PSEG also has a credit management process which
is used to assess,  monitor and mitigate  counterparty exposure for PSEG and its
subsidiaries.  In  the  event  of  non-performance  or  non-payment  by a  major
counterparty,  there  may  be a  material  adverse  impact  on  PSEG's  and  its
subsidiaries' financial condition,  results of operations or net cash flows. For
discussion of interest rates, commodity-related  instruments,  equity securities
and  foreign  currency  risks,  see  Note  5.  Financial  Instruments  and  Risk
Management.

     Commodity-Related Instruments

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

     PSEG 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  and  financial  contracts.  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.
PSEG 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 95%
confidence  level  over a  one-week  time  horizon  at  September  30,  2000 was
approximately  $12  million,  compared  to the  December  31,  1999  level of $3
million. PSEG's calculated value-at-risk represents an estimate of the potential
change  in the value of its  portfolio  of  physical  and  financial  derivative
instruments.  These estimates, however, are not necessarily indicative of actual
results,  which may differ due to the fact that actual market rate  fluctuations
may differ from forecasted  fluctuations  and due to the fact that the portfolio
of hedging instruments may change over the holding period.


                           PART II. OTHER INFORMATION

                            ITEM 1. LEGAL PROCEEDINGS

     Certain  information  reported under Item 3 of Part I of PSEG's and PSE&G's
1999  Annual  Report on Form  10-K and  Quarterly  Reports  on Form 10-Q for the
quarters  ended  March  31,  2000  and  June  30,  2000  and  Energy   Holdings'
Registration  Statement on Form S-4, filed June 29, 2000 and Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000, is updated below.

          (1)  Form 10-K,  pages 5, 27, 33, 64 and 69, March 31, 2000 Form 10-Q,
               pages 9 and 17 and June 30, 2000 Form 10-Q,  pages 13 and 25. See
               Pages 14 and 25.  Proceedings before the BPU in the matter of the
               Energy Master Plan Phase II Proceeding to investigate  the future
               structure   of  the   Electric   Power   Industry,   Docket  Nos.
               EX94120585Y, EO97070461, EO97070462 and EO97070463.

          (2)  Form  10-K,  pages 8, 27, 34 and 69,  March 31,  2000 Form  10-Q,
               pages 9 and 17 and June 30, 2000 Form 10-Q,  pages 13 and 25. See
               Pages 14 and 25.  Appeals  of the BPUs  Final  Order and  Finance
               Order  in  the  Energy  Master  Plan  Proceedings,   Docket  Nos.
               C1263-99, C-1265-99 and C-1413-99.

                            ITEM 5. OTHER INFORMATION

     Certain information reported under PSEG's and PSE&G's 1999 Annual Report on
Form 10-K and  Quarterly  Reports on Form 10-Q for the quarters  ended March 31,
2000 and June 30, 2000 and Energy Holdings'  Registration Statement on Form S-4,
filed June 29, 2000 and Quarterly Report on Form 10-Q for the quarter ended June
30, 2000,  is updated  below.  References  are to the related  pages on the Form
10-K, Form 10-Q or Form S-4, as appropriate, as printed and distributed.

PSE&G agreement with El Paso Merchant Energy

     New Matter.  PSE&G and El Paso Merchant  Energy, a business unit of El Paso
Energy Corporation,  have announced the restructuring of a long-term power sales
agreement,  a  non-utility  generation  (NUG)  contract  between  its Newark Bay
generating  project and PSE&G.  The BPU approved the  agreement.  As required by
state and  federal  regulation,  PSE&G  entered  into a long-term  agreement  to
purchase the output of the plant at prices that are now above market.  Under the
new agreement, El Paso Merchant Energy will supply a fixed amount of electricity
to PSE&G at reduced  rates.  PSE&G expects that the new agreement  will save its
customers $75 million over the remaining 13-year term of the agreement,  with no
impact on earnings.

Levelized Gas Adjustment Clause (LGAC)

     Form 10-K,  page 9 and June 30, 2000 Form 10-Q page 41 . On July 31,  2000,
PSE&G filed an amended motion with the BPU requesting  interim  authorization by
September  1, 2000 to change the monthly  pricing  mechanism  in PSE&G's LGAC to
cover currently  estimated price increases on a per month basis,  exercisable in
any month with no annual  limit.  The change  will also allow  PSE&G to decrease
prices if the expected increases in gas costs do not occur. Currently, PSE&G has
been given limited  authority to change the monthly pricing mechanism during the
months of November 2000 through  April 2001. On October 3, 2000,  PSE&G filed an
emergent motion for provisional relief with the BPU.

     On  November  1, 2000,  the BPU  issued a written  order  granting  PSE&G a
provisional rate increase of 16% with a 2% monthly  potential  flexing mechanism
during the  upcoming  winter for the amounts  that PSE&G is  permitted to charge
customers.

Energy Efficiency and Renewable Energy (Formerly DSM)

     Form 10-K,  page 9. On October 10, 2000,  the BPU  approved,  on an interim
basis, $7.5 million of statewide funding for new energy efficiency  programs and
$2.5  million  of  statewide   funding  for  renewable  energy  programs  to  be
administered  by the BPU  pending  the BPU's  final  order in the  Comprehensive
Resource  Analysis  (CRA)  proceeding.  PSE&G is waiting  for the BPU to issue a
written order with details on how the interim CRA program is to be  administered
and how much of the cost of this funding will be collected  from each of the New
Jersey's seven utilities.

PJM Interconnection LLC (PJM)

     Form 10-K, page 12. In October 2000, PJM and nine PJM transmission  owners,
including  PSE&G,  made a filing with the Federal Energy  Regulatory  Commission
(FERC) stating that PJM is a Regional Transmission Organization (RTO) that meets
or exceeds the  requirements  of the Final Rule  promulgated  by FERC in the RTO
rulemaking  proceeding  (Order  2000).  Included  in this  filing was a PJM rate
proposal  designed  to  provide   reasonable,   risk-adjusted   returns  on  new
transmission investments in the PJM region.

Gas Operations and Supply

     Form  10-K,  page 16.  On  August  11,  2000,  PSE&G  filed a gas  merchant
restructuring  plan with the BPU which  provides for,  among other  things,  the
transfer of PSE&G's gas supply, transportation, storage and peaking contracts to
a subsidiary  of Power and a  requirements  contract  between  PSE&G and Power's
subsidiary enabling PSE&G to fulfill its basic gas supply service.  PSE&G cannot
predict the outcome of this matter.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

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

<TABLE>
<CAPTION>


-------------------------------------------------------------------------------------------------------------
                        Exhibit       Document
                        Number
-----------------    -----------      -----------------------------------------------------------------------
<S>                     <C>           <C>
PSEG                    10A(19)       Employment Agreement with Frank Cassidy dated October 17, 2000
                        10A(20)       Employment Agreement with Robert J. Dougherty dated October 17, 2000
                        10A(21)       Employment Agreement with Alfred C. Koeppe dated October 17, 2000
                        10A(22)       Employment Agreement with Robert C. Murray dated October 17, 2000
                        12            Computation of Ratios of Earnings to Fixed Charges (PSEG)
                        27(A)         Financial Data Schedule (PSEG)
-----------------    -----------      -------------------------------------------------------------------------
PSE&G                   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)
-----------------    -----------      -------------------------------------------------------------------------
ENERGY HOLDINGS         12(C)         Computation of Ratios of Earnings to Fixed Charges (Energy Holdings)
                        27(C)         Financial Data Schedule (Energy Holdings)

-------------------------------------------------------------------------------------------------------------

</TABLE>


(A) Reports on Form 8-K and Form 8-K/A

   Registrant                          Date of Report             Items Reported
   ----------                          --------------             --------------

   PSEG and PSE&G                      August 21, 2000            Items 2 and 7
   PSEG and PSE&G                      September 5, 2000          Items 2 and 7
   PSEG, PSE&G and Energy Holdings     October 18, 2000           Items 5 and 7
   PSEG, PSE&G and Energy Holdings     October 27, 2000           Item 9
   PSEG and PSE&G                      November 1, 2000           Item 7

<PAGE>

================================================================================
                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
================================================================================
                                   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 13, 2000


<PAGE>


================================================================================
                            PSEG ENERGY HOLDINGS INC.
================================================================================

                                   SIGNATURES

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


                            PSEG ENERGY HOLDINGS INC.
                                  (Registrant)


                   By:            DEREK DIRISIO
                       _________________________________
                                  Derek DiRisio
                          Vice President and Controller
                         (Principal Accounting Officer)




Date: November 13, 2000