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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-Q
             (Mark One)
             [ X ]       QUARTERLY REPORT PURSUANT TO SECTION 13 OR
                         15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                 For the quarterly period ended March 31, 2002

                                       OR

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


 Commission           Registrant, State of Incorporation,      I.R.S. Employer
 File Number             Address, and Telephone Number        Identification No.
--------------- -------------------------------------------  -------------------
  001-00973        PUBLIC SERVICE ELECTRIC AND GAS COMPANY        22-1212800
                          (A New Jersey Corporation)
                                80 Park Plaza
                                P.O. Box 570
                          Newark, New Jersey 07101-0570
                                 973-430-7000
                             http://www.pseg.com

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

                                     Yes   X       No

As  of  April 30,  2002,  Public   Service   Electric  and  Gas  Company and had
issued and outstanding  132,450,344  shares of common stock,  without nominal or
par  value,  all of which were  privately  held,  beneficially  and of record by
Public Service Enterprise Group Incorporated.

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<PAGE>

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

                                TABLE OF CONTENTS

                                                                      PAGE
                                                                      ----
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1.  Financial Statements                                            1

Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations                            11

Item 3.  Qualitative and Quantitative Disclosures About Market Risk     15


PART II. OTHER INFORMATION
--------------------------
Item 1.  Legal Proceedings                                              19

Item 5.  Other Information                                              20

Item 6.  Exhibits and Reports on Form 8-K                               20

Signature                                                               21

<PAGE>


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

                          PART I. FINANCIAL INFORMATION
                          -----------------------------

                          ITEM 1. FINANCIAL STATEMENTS


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



                                                                         For the Quarters Ended
                                                                                March 31,
                                                                   ------------------------------------
                                                                        2002                2001
                                                                   ---------------    -----------------
<S>                                                                <C>                <C>
OPERATING REVENUES
   Electric Transmission and Distribution                          $         844      $           870
   Gas Distribution                                                          815                1,082
                                                                   ---------------    -----------------
       Total Operating Revenues                                            1,659                1,952
                                                                   ---------------    -----------------
OPERATING EXPENSES
   Electric Energy Costs                                                     532                  553
   Gas Costs                                                                 527                  787
   Operation and Maintenance                                                 249                  250
   Depreciation and Amortization                                              98                   72
   Taxes Other Than Income Taxes                                              43                   43
                                                                   ---------------    -----------------
       Total Operating Expenses                                            1,449                1,705
                                                                   ---------------    -----------------
OPERATING INCOME                                                             210                  247
Other Income and Deductions                                                    4                   11
Interest Expense-- Net                                                      (101)                 (58)
Preferred Securities Dividend Requirements                                    (3)                 (11)
                                                                   ---------------    -----------------
INCOME BEFORE INCOME TAXES                                                   110                  189
Income Taxes                                                                 (42)                 (77)
                                                                   ---------------    -----------------
NET INCOME                                                                    68                  112
Preferred Securities Dividend Requirements and Premium on
Redemption                                                                    (1)                  (3)
                                                                   ---------------    -----------------
EARNINGS AVAILABLE TO PUBLIC SERVICE
  ENTERPRISE GROUP INCORPORATED                                    $          67       $          109
                                                                   ===============    =================

See Notes to Consolidated Financial Statements.
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


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


                                                                            (Unaudited)
                                                                             March 31,          December 31,
                                                                               2002                 2001
                                                                          ----------------     ----------------
<S>                                                                       <C>                  <C>
CURRENT ASSETS
   Cash and Cash Equivalents                                              $           94       $          102
   Accounts Receivable:
     Customer Accounts Receivable                                                    675                  556
     Other Accounts Receivable                                                        87                   67
     Allowance for Doubtful Accounts                                                 (37)                 (38)
   Unbilled Revenues                                                                 221                  291
   Natural Gas                                                                       167                  415
   Materials and Supplies                                                             54                   50
   Prepayments                                                                        34                   40
   Energy Contracts                                                                   30                   32
   Restricted Cash                                                                    13                   12
   Other                                                                              29                   22
                                                                          ----------------     ----------------
     Total Current Assets                                                          1,367                1,549
                                                                          ----------------     ----------------

PROPERTY, PLANT AND EQUIPMENT
   Electric                                                                        5,543                5,501
   Gas                                                                             3,311                3,284
   Other                                                                             385                  385
                                                                          ----------------     ----------------
     Total                                                                         9,239                9,170
   Accumulated Depreciation and Amortization                                      (3,402)              (3,329)
                                                                          ----------------     ----------------
     Net Property, Plant and Equipment                                             5,837                5,841
                                                                          ----------------     ----------------

NONCURRENT ASSETS
   Regulatory Assets                                                               5,116                5,247
   Long-Term Investments                                                             116                  112
   Other Special Funds                                                               182                  130
   Other                                                                              71                   84
                                                                          ----------------     ----------------
     Total Noncurrent Assets                                                       5,485                5,573
                                                                          ----------------     ----------------
TOTAL ASSETS                                                               $      12,689         $     12,963
                                                                          ================     ================

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)
                                                                             March 31,         December 31,
                                                                               2002                2001
                                                                          ----------------    ----------------
<S>                                                                        <C>                <C>
CURRENT LIABILITIES
   Long-Term Debt Due Within One Year                                      $         823      $          668
   Accounts Payable                                                                  534                 642
   Energy Contracts                                                                   52                 169
   Accrued Taxes                                                                      97                  30
   Other                                                                             292                 277
                                                                          ----------------    ----------------
     Total Current Liabilities                                                     1,798               1,786
                                                                          ----------------    ----------------

NONCURRENT LIABILITIES
   Deferred Income Taxes and ITC                                                   2,551               2,551
   Regulatory Liabilities                                                            344                 373
   OPEB Costs                                                                        475                 466
   Other                                                                             204                 205
                                                                          ----------------    ----------------
     Total Noncurrent Liabilities                                                  3,574               3,595
                                                                          ----------------    ----------------

CAPITALIZATION

   LONG-TERM DEBT
     Long-Term Debt                                                                2,476               2,626
     Securitization Debt                                                           2,321               2,351
                                                                          ----------------    ----------------
       Total Long-Term Debt                                                        4,797               4,977

   PREFERRED SECURITIES
     Preferred Stock Without Mandatory Redemption                                     80                  80
     Subsidiaries' Preferred Securities:
     Guaranteed Preferred Beneficial Interest in Subordinated
       Debentures                                                                    155                 155
                                                                          ----------------    ----------------
       Total Preferred Securities                                                    235                 235
                                                                          ----------------    ----------------

   COMMON STOCKHOLDER'S EQUITY
     Common Stock, 150,000,000 shares authorized, 132,450,344                        892                 892
     shares issued and outstanding
     Basis Adjustment                                                                986                 986
     Retained Earnings                                                               409                 493
     Accumulated Other Comprehensive Loss                                             (2)                 (1)
                                                                          ----------------    ----------------
       Total Common Stockholder's Equity                                           2,285               2,370
                                                                          ----------------    ----------------
         Total Capitalization                                                      7,317               7,582
                                                                          ----------------    ----------------
TOTAL LIABILITIES AND CAPITALIZATION                                       $      12,689       $      12,963
                                                                          ================    ================

See Notes to Consolidated Financial Statements.
</TABLE>


<PAGE>
<TABLE>
<CAPTION>


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

                                                                               For the Quarters Ended
                                                                                     March 31,
                                                                        -------------------------------------
                                                                             2002                  2001
                                                                        --------------      -----------------
<S>                                                                          <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                                $    68           $        112
   Adjustments to reconcile net income to net cash flows from
     operating activities:
   Depreciation and Amortization                                                  98                     72
   Market Transition Charge (MTC) Overcollections                                  8                     16
   Deferral of Gas Costs-- net                                                   (86)                   (80)
   Provision for Deferred Income Taxes and ITC-- net                              (9)                    (4)
   Net Changes in Certain Current Assets and Liabilities:
     Accounts Receivable and Unbilled Revenues                                   (70)                   (59)
     Inventory - Natural Gas and Materials and Supplies                          244                    160
     Accounts Payable                                                           (108)                  (191)
     Accrued Taxes                                                                67                     79
     Other Current Assets and Liabilities                                         13                     71
   Other                                                                          87                    (26)
                                                                        --------------      -----------------
     Net Cash Provided By Operating Activities                                   312                    150
                                                                        --------------      -----------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Additions to Property, Plant and Equipment, excluding AFDC                    (80)                   (63)
   Contributions to Other Special Funds                                          (63)                    --
   Other                                                                          (1)                    (3)
                                                                        --------------      -----------------
     Net Cash Used in Investing Activities                                      (144)                   (66)
                                                                        --------------      -----------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Net Change in Short-Term Debt                                                  --                 (1,386)
   Issuance of Long-Term Debt                                                     --                  2,525
   Deferred Issuance Costs                                                        --                   (200)
   Redemption/Purchase of Long-Term Debt                                         (24)                   (51)
   Collection of Note Receivable - Affiliated Company                             --                  2,786
   Issuance of Note Receivable -Affiliated Company                                --                 (1,084)
   Redemption of Preferred Securities                                             --                   (240)
   Return of Capital                                                              --                 (2,265)
   Cash Dividends Paid on Common Stock                                          (150)                  (112)
   Other                                                                          (2)                    (3)
                                                                        --------------      -----------------
     Net Cash Used in Financing Activities                                      (176)                   (30)
                                                                        --------------      -----------------
Net Change in Cash and Cash Equivalents                                           (8)                    54
Cash and Cash Equivalents at Beginning of Period                                 102                     39
                                                                        --------------      -----------------
Cash and Cash Equivalents at End of Period                              $         94        $            93
                                                                        ==============      =================

Income Taxes Paid                                                       $         81        $            --
Interest Paid                                                           $        112        $            84

See Notes to Consolidated Financial Statements.

</TABLE>

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Organization and Basis of Presentation

Organization

     Unless the context  otherwise  indicates,  all references to "PSE&G," "we,"
"us" or "our" herein means Public Service  Electric & Gas Company,  a New Jersey
corporation with its principal  executive offices at 80 Park Plaza,  Newark, New
Jersey 07102 and its consolidated subsidiaries. We are a wholly-owned subsidiary
of Public  Service  Enterprise  Group  Incorporated  (PSEG) and are an operating
public utility providing electric transmission and electric and gas distribution
service in certain  areas  within the State of New Jersey.  PSEG owns all of our
common stock.

Basis of Presentation

     The financial statements included herein have been prepared pursuant to the
rules and regulations of the Securities and Exchange  Commission (SEC).  Certain
information  and note  disclosures  normally  included in  financial  statements
prepared in accordance with generally accepted  accounting  principles have been
condensed or omitted  pursuant to such rules and  regulations.  However,  in the
opinion of  management,  the  disclosures  are adequate to make the  information
presented not misleading.  These Consolidated Financial Statements  (Statements)
and Notes to  Consolidated  Financial  Statements  (Notes) update and supplement
matters  discussed in our 2001 Annual  Report on Form 10-K and should be read in
conjunction with those Notes.

     The unaudited  financial  information  furnished  reflects all  adjustments
which are, in the opinion of  management,  necessary to fairly state the results
for the interim periods presented. The year-end consolidated balance sheets were
derived from the audited consolidated  financial statements included in our 2001
Annual Report on Form 10-K. Certain  reclassifications of prior period data have
been made to conform with the current presentation.

Note 2.  Accounting Matters

     On January 1, 2002, we adopted Statement of Financial  Accounting Standards
(SFAS) No. 142,  "Goodwill and Other  Intangible  Assets" (SFAS 142). Under SFAS
142,  goodwill is considered a nonamortizable  asset and is subject to an annual
review  for  impairment  and an  interim  review  when  required  by  events  or
circumstances.  We currently do not have any goodwill or other intangible assets
on our balance sheet.  Therefore,  there was no effect on our financial position
or results of operations as a result of adopting this standard.

     In July 2001, the Financial  Accounting  Standards Board (FASB) issued SFAS
No. 143,  "Accounting for Asset Retirement  Obligations"  (SFAS 143). Under SFAS
143, the fair value of a liability for an asset retirement  obligation should be
recorded in the period in which it is created  with an  offsetting  amount to an
asset. Upon settlement of the liability, an entity either settles the obligation
for its recorded  amount or incurs a gain or loss upon  settlement.  SFAS 143 is
effective  for fiscal  years  beginning  after June 15, 2002.  We are  currently
evaluating  the effect of this  guidance  and cannot  predict  the impact on our
financial  position or results of  operations.  However,  such  impact  could be
material.

     On  January  1,  2002,  we also  adopted  SFAS  No.  144,  "Accounting  for
Impairment  or  Disposal  of  Long-Lived  Assets"  (SFAS  144).  Under SFAS 144,
long-lived assets to be disposed of are measured at the lower of carrying amount
or fair value less cost to sell, whether reported in continued  operations or in
discontinued operations.

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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

     Discontinued  operations will no longer be measured at net realizable value
or include  amounts for operating  losses that have not yet  occurred.  SFAS 144
also broadens the  reporting of  discontinued  operations.  The adoption of this
standard  did not have any  impact  on our  financial  position  or  results  of
operations.

Note 3.  Regulatory Assets and Liabilities

     At March 31, 2002 and  December  31,  2001,  respectively,  we deferred the
following regulatory assets and liabilities on the Consolidated Balance Sheets:
<TABLE>
<CAPTION>

                                                                           --------------     -----------------
                                                                              March 31,          December 31,
                                                                                2002                 2001
                                                                           --------------     -----------------
                                                                                 (Millions of Dollars)
    <S>                                                                              <C>                   <C>
    Regulatory Assets
    Stranded Costs To Be Recovered..................................             $4,059                $4,105
    SFAS 109 Income Taxes...........................................                306                   302
    OPEB Costs......................................................                207                   212
    Societal Benefits Charges (SBC).................................                 --                     4
    Environmental Costs.............................................                 87                    87
    Unamortized Loss on Reacquired Debt and Debt Expense............                 90                    92
    Underrecovered Gas Costs........................................                166                   120
    Unrealized Losses on Gas Contracts..............................                 22                   137
    Other...........................................................                179                   188
                                                                           --------------     -----------------
          Total Regulatory Assets...................................             $5,116                $5,247
                                                                           ==============     =================

    Regulatory Liabilities
    Excess Depreciation Reserve.....................................               $282                  $319
    Non-Utility Generation Transition Charge (NTC)..................                 37                    48
    SBC.............................................................                 18                    --
    Other...........................................................                  7                     6
                                                                           --------------     -----------------
          Total Regulatory Liabilities..............................               $344                  $373
                                                                           ==============     =================
</TABLE>

Note 4.  Commitments and Contingent Liabilities

Hazardous Waste

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

Manufactured Gas Plant Remediation Program

     We are  currently  working  with the  NJDEP  under a  program  (Remediation
Program) to assess,  investigate  and,  if  necessary,  remediate  environmental
conditions at our former  manufactured gas plant sites (MGPs). To date, 38 sites
have been  identified.  The  Remediation  Program is  periodically  reviewed and
revised by us 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 at least $20 million per year could be incurred over a period of
about 30 years since  inception of the program in 1988 and that the overall cost
could be material.  The costs for this remediation  effort are recovered through
the SBC.

     At March 31, 2002 and  December  31,  2001,  our  estimated  liability  for
remediation costs through 2004 aggregated $87 million.  Expenditures beyond 2004
cannot be reasonably estimated.

Passaic River Site

     The United States Environmental Protection Agency (EPA) has determined that
a six mile stretch of the Passaic  River in the area of 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 us, may be potentially  liable
for performing  required  remedial  actions to address  potential  environmental
pollution at the Passaic River  "facility."  We and certain of our  predecessors
conducted   industrial   operations  at  properties  within  the  Passaic  River
"facility." The operations  include one operating electric  generating  station,
one former  generating  station,  and four  former  MGPs.  Our costs to clean up
former  MGPs are  recoverable  from  utility  customers  under the SBC.  We have
contracted  to sell the former  generating  site to a third  party that would be
responsible for remediation costs. Regulatory action by the state is pending. We
cannot predict what action,  if any, the EPA or any third party may take against
it with respect to these matters,  or in such event,  what costs it may incur to
address any such claims. However, such costs may be material.

Note 5.  Financial Instruments and Risk Management

     Our operations are exposed to market risks from changes in commodity prices
and interest  rates that could affect our results of  operations  and  financial
conditions.  We manage our exposure to these  market  risks  through our regular
operating and financing  activities  and, when deemed  appropriate,  hedge these
risks through the use of derivative financial instruments. We use the term hedge
to mean a strategy  designed  to manage  risks of  volatility  in prices or rate
movements on certain  assets,  liabilities  or anticipated  transactions  and by
creating a relationship  in which gains or losses on derivative  instruments are
expected to  counterbalance  the losses or gains on the assets,  liabilities  or
anticipated  transactions  exposed  to  such  market  risks.  We use  derivative
instruments  as risk  management  tools  consistent  with our business plans and
prudent business practices and not for speculative purposes.

Commodity-Related Instruments

     We  use  natural  gas  futures  and  swaps  to  reduce  exposure  to  price
fluctuations in natural gas from factors such as weather,  changes in demand and
changes  in supply to manage the price  risk  associated  with gas supply to our
customers. These instruments, in conjunction with physical gas supply contracts,
are designed to cover estimated gas customer  commitments.  We have entered into
268 and 330  MMBTU  of gas  futures,  swaps  and  options  to  hedge  forecasted
requirements  as of March 31, 2002 and  December  31, 2001  respectively.  As of
March 31, 2002 and December 31, 2001,  the fair value of those  instruments  was
$(22)  million  and  $(137)  million,  respectively,  with  a  maximum  term  of
approximately  one year.  We  utilize  derivatives  to hedge our gas  purchasing
activities  which,  when  realized,  are  recoverable  through our Levelized Gas
Adjustment Clause (LGAC). Accordingly, the offset to the change in fair value of
these derivatives is recorded as a regulatory asset or liability.

     As a result of the gas contract  transfer  that was  effective May 1, 2002,
the price risk  relating  to gas  purchases  was  transferred  to PSEG Power LLC
(Power),  an  unregulated  affiliate.  As a result,  after that date,  we are no
longer utilizing these derivative instruments in our gas distribution business.

     Through the Basic Generation Service (BGS) auction,  we have contracted for
our expected  peak load of 9,600 MW. If our peak load should  exceed this amount
or one of our  suppliers  defaults  on their  contract,  we may have to purchase
power on the open  market and use  commodity  contracts  during  periods of high
demand.  To the extent that the market prices exceed the auction contract price,
the difference  will be deferred and collected from our customers as provided in
the New Jersey  Board of Public  Utilities  (BPU)  Order  approving  the auction
process.  Given the  absence of a  Pennsylvania-New  Jersey-Maryland  Power Pool
(PJM) price cap in  situations  involving  emergency  purchases,  extreme  price
movements can occur and could have a material impact on our financial  condition
and net cash flows.

Interest Rates

     We are  subject  to the risk of  fluctuating  interest  rates in the normal
course of business.  Our policy is to manage  interest rate risk through the use
of fixed rate debt,  floating  rate debt and interest  rate swaps.  We currently
have no floating rate debt outstanding that is exposed to interest rate risk.

     PSE&G Transition Funding (Transition Funding), our wholly-owned subsidiary,
has  entered  into an  interest  rate swap on its sole  class of  floating  rate
transition   bonds.   The  notional   amount  of  the  interest  rate  swap  was
approximately $497 million. The interest rate swap is indexed to the three-month
LIBOR rate.  The fair value of the interest  rate swap was  approximately  $(11)
million as of March 31, 2002 and $(18)  million as of December  31, 2001 and was
recorded as a derivative  liability,  with an  offsetting  amount  recorded as a
regulatory asset on the Consolidated  Balance Sheet.  This amount will vary over
time as a result of changes in market conditions.
<PAGE>
Note 6.  Income Taxes
<TABLE>
<CAPTION>

     Our effective income tax rate is as follows:

                                                                                          Quarter Ended
                                                                                            March 31,
                                                                                   -----------------------------
                                                                                        2002             2001
                                                                                   -----------      ------------
     <S>                                                                               <C>               <C>
     Federal tax provision at statutory rate............................                35.0%             35.0%
     New Jersey Corporate Business Tax, net of Federal benefit..........                 5.9%              5.9%
     Other-- net........................................................                (2.7)%            (0.2)%
                                                                                   -----------      ------------
          Effective Income Tax Rate.....................................                38.2%             40.7%
                                                                                   ===========      ============

</TABLE>


<PAGE>


Note 7.  Financial Information by Business Segments

     Following the transfer of our generation-related  assets to Power in August
2000, we continue to own and operate our  transmission  and  distribution  (T&D)
business as our only reportable segment.

Note 8.  Comprehensive Income
<TABLE>
<CAPTION>

     Comprehensive Income, Net of Tax:

                                                                    Comprehensive Income
                                                                -------------------------------
                                                                        Quarter Ended
                                                                          March 31,
                                                                -------------------------------
                                                                    2002              2001
                                                                --------------      -----------
                                                                     Millions of Dollars
<S>                                                                     <C>              <C>
Net Income.............................................                 $68              $112
Pension Adjustment, Net of Tax $1......................                  (1)               --
                                                                --------------      -----------
Comprehensive Income...................................                 $67              $112
                                                                ==============      ===========
</TABLE>

Note 9.  Property, Plant and Equipment
<TABLE>
<CAPTION>

Information related to our Property, Plant and Equipment is detailed below:

                                                                    March 31,       December 31,
                                                                      2002              2001
                                                                 ----------------  ----------------
                                                                        Millions of Dollars
     <S>                                                                <C>               <C>
     Property, Plant and Equipment
        Electric Plant in Service:
          Transmission......................................            $1,221            $1,201
          Distribution......................................             4,293             4,254
                                                                 ----------------  ----------------
               Total Electric Plant in Service..............             5,514             5,455
                                                                 ----------------  ----------------
        Construction Work in Progress.......................                10                26
        Plant Held for Future Use...........................                19                20
                                                                 ----------------  ----------------
               Total Electric Plant                                      5,543             5,501
                                                                 ----------------  ----------------
        Gas Plant in Service:
          Transmission......................................                75                74
          Distribution......................................             3,147             3,121
          Other.............................................                89                89
                                                                 ----------------  ----------------
               Total Gas Plant in Service...................             3,311             3,284
                                                                 ----------------  ----------------
        Other Plant in Service..............................               385               385
                                                                 ----------------  ----------------
               Total    Property, Plant and Equipment.......            $9,239            $9,170
                                                                 ================  ================
</TABLE>

<PAGE>


================================================================================
                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
================================================================================
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Concluded

Note 10.  Related-Party Transactions

     In August 2000, we transferred our electric  generating  assets to Power in
exchange for a $2.786 billion  Promissory Note.  Interest on the Promissory Note
was payable at an annual rate of 14.23%,  which represented our weighted average
cost of capital.  For the period from  January 1, 2001 to January 31,  2001,  we
recorded interest income of approximately $34 million relating to the Promissory
Note. Power repaid the Promissory Note on January 31, 2001.

     In  addition,  on January 31,  2001,  we loaned  $1.084  billion to PSEG at
14.23% per annum and  recorded  interest  income of  approximately  $26  million
relating to the loan for the quarter ended March 31, 2001.  PSEG repaid the loan
on April 16, 2001. We also returned $2.265 billion of capital to PSEG on January
31, 2001 utilizing proceeds from the $2.525 billion  securitization  transaction
and the generation  asset  transfer,  as required by the Final Order, as part of
the recapitalization.

     Effective  with the transfer of the  electric  generation  business,  Power
charges us for the Market  Transition  Charge  (MTC) and the energy and capacity
provided to meet our BGS requirements. For the quarters ended March 31, 2002 and
2001, we were charged by Power  approximately  $460 million and $463 million for
the MTC and BGS.  As of March 31, 2002 and  December  31,  2001,  our payable to
Power relating to these costs was  approximately  $154 million and $158 million.
For the quarters  ended March 31, 2002 and 2001,  we sold energy and capacity to
Power at the market price of approximately $28 million and $43 million, which we
purchased under various  non-utility  generation  (NUG) contracts at costs above
market  prices.  As of March 31, 2002 and  December  31,  2001,  our  receivable
related to these purchases was  approximately  $11 million and $7 million.  As a
result of the Final  Order,  we have  established  an NTC to  recover  the above
market costs related to these NUG contracts.  The  difference  between our costs
and  recovery of costs  through the NTC and sales to Power,  which are priced at
the  locational  marginal  price  (LMP)  set by the PJM ISO  for  energy  and at
wholesale market prices for capacity, is deferred as a regulatory asset.

     PSEG Services Corporation provides and bills administrative  services to us
on a monthly basis.  Our costs related to such service amounted to approximately
$52 million and $55 million for the quarters  ended March 31, 2002 and 2001.  As
of March 31, 2002 and December  31, 2001 our related  party  payable  related to
these costs was approximately $20 million and $25 million.

<PAGE>


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

                 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     Unless the context  otherwise  indicates,  all references to "PSE&G," "we,"
"us" or "our" herein means Public Service Electric & Gas Company (PSE&G),  a New
Jersey  corporation  with its  principal  executive  offices  at 80 Park  Plaza,
Newark,  New Jersey 07102.  This discussion  makes reference to our Consolidated
Financial Statements and related Notes to the Consolidated  Financial Statements
(Notes) and should be read in conjunction with such statements and notes.

     Following  are the  significant  changes  in or  additions  to  information
reported  in our 2001  Annual  Report on Form 10-K  affecting  the  consolidated
financial  condition and the results of operations of our  subsidiaries  and us.
This discussion refers to our Consolidated Financial Statements (Statements) and
related Notes to Consolidated Financial Statements (Notes) and should be read in
conjunction with such Statements and Notes.

RESULTS OF OPERATIONS

Operating Revenues

Electric Transmission and Distribution

     Transmission and Distribution  revenues  decreased $26 million or 3% in the
first quarter of 2002 as compared to the first quarter of 2001  primarily due to
the  implementation  of two electric rate  reductions  and the effects of warmer
weather.  In accordance with the New Jersey Energy Master Plan, an electric rate
reduction  of 2% started  in  February  of 2001 and  another  2%  electric  rate
reduction was implemented in August of 2001.

Gas Distribution

     Gas  distribution  revenue  decreased  by $267  million or 25% in the first
quarter of 2002 as compared to the first  quarter of 2001  primarily  due to the
effects of warmer weather and decreased  commodity rates offset by increased gas
base rates. For the quarter ended March 31, 2002, we experienced an 18% decrease
in degree days, as compared to the first quarter 2001.

Operating Expenses

Electric Energy Costs

     Electric  Energy costs  decreased $21 million or 4% in the first quarter of
2002  as  compared  to  the  first   quarter  of  2001   primarily  due  to  the
implementation  of two  electric  rate  reductions  and the  effects  of  warmer
weather.

Gas Costs

     Gas Costs  decreased  $260  million or 33% in the first  quarter of 2002 as
compared  to the first  quarter of 2001  primarily  due to the effects of warmer
weather and decreased commodity costs.

<PAGE>
Depreciation and Amortization

     Depreciation  and  Amortization  increased  $26 million or 36% in the first
quarter of 2002 as compared to the first quarter of 2001 primarily due to a full
period's  recognition of amortization  of the regulatory  asset recorded for our
stranded costs, whose amortization began in February 2001 and an increase in gas
depreciation expense recorded in accordance with our increased gas base rates.

Interest Expense

     Net Interest  Expense  increased $43 million or 74% in the first quarter of
2002 as compared to the first quarter of 2001  primarily  due to lower  interest
income.  In 2001,  we recorded  approximately  $60  million of  interest  income
relating to an intercompany  note from Power. This was offset by lower levels of
long-term  and  short-term  debt in the first quarter of 2002 as compared to the
first quarter of 2001.

Preferred Securities Dividends

     Preferred  Securities  Dividends  decreased  $8  million  or 73% in 2002 as
compared to 2001 primarily due to redemptions in March 2001 and June 2001.

Income Taxes

     Income  taxes  decreased  $35  million or 45% in 2002 as  compared  to 2001
primarily due to lower pre-tax income in the current year.

LIQUIDITY AND CAPITAL RESOURCES

Financing Methodology

     Our capital  requirements are met through liquidity  provided by internally
generated  cash flow and external  financings.  Any excess funds are invested in
accordance with guidelines adopted by our Board of Directors.

     External  funding  to meet our  needs is  comprised  of  corporate  finance
transactions. The debt incurred is our direct obligation. External financing may
consist of public and private capital market debt and equity transactions,  bank
revolving credit and term loan facilities and/or commercial paper.

     The  availability  and cost of  external  capital  could be affected by our
performance as well as by the performance of our affiliates.  This could include
the degree of structural or regulatory separation between us and our non-utility
affiliates and the potential  impact of affiliate  ratings on  consolidated  and
unconsolidated   credit  quality.   Additionally,   compliance  with  applicable
financial  covenants  will depend upon future  financial  position and levels of
earnings and net cash flows, as to which no assurances can be given.

     All of our publicly traded debt has received  investment grade ratings from
each of the three  major  credit  rating  agencies.  The  changes  in the energy
industry  and the recent  bankruptcy  of Enron Corp.  are  attracting  increased
attention  from  the  rating  agencies,  which  regularly  assess  business  and
financial matters. Given the changes in the industry,  attention to and scrutiny
of our  performance,  capital  structure  and  competitive  strategies by rating
agencies will likely continue. These changes could affect the bond ratings, cost
of capital and market prices of our securities. We will continue to evaluate our
capital structure,  financing  requirements,  competitive  strategies and future
capital expenditures to maintain our current credit ratings.

Cross Default Provisions, Material Adverse Changes and Ratings Triggers

     Our  credit  agreements  contain  cross-default  provisions  under  which a
default by us involving $50 million or more of aggregate  indebtedness  in other
agreements  would result in a default and the potential  acceleration of payment
under such credit agreements.

     Such  lenders,  or the debt  holders  under  any of our  indentures,  could
determine  that debt payment  obligations  may be  accelerated  as a result of a
cross-default. These occurrences could severely limit our liquidity and restrict
our ability to meet our debt,  capital and, in extreme cases,  operational  cash
requirements.  Any  inability to satisfy  required  covenants  and/or  borrowing
conditions  would have a similar  impact.  This  would  have a material  adverse
effect on our financial condition, results of operations and net cash flows.

     In addition, our credit agreements generally contain provisions under which
the lenders  could  refuse to advance  loans in the event of a material  adverse
change in our  business  or  financial  condition.  In the event  that we or the
lenders in any of our credit agreements determine that a material adverse change
has occurred, loan funds may not be advanced.

     Our debt  indentures  and credit  agreements  do not contain  any  "ratings
triggers"  that  would  cause  an  acceleration  of the  required  interest  and
principal payments in the event of a ratings downgrade. However, in the event of
a downgrade we may be subject to increased interest costs on certain bank debt.

Regulatory Restrictions

     Capital  resources  and  investment  requirements  could be affected by the
outcome of  proceedings by the BPU pursuant to its Energy Master Plan and Energy
Competition Act and the  requirements of the 1992 Focused Audit conducted by the
BPU of the  impact of Public  Service  Enterprise  Group's  Incorporated  (PSEG)
non-utility  businesses,  owned by PSEG Energy Holdings, Inc. (Energy Holdings),
on us. As a result of the  Focused  Audit,  the BPU  ordered  that,  among other
things:

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

     (2)  Our Board of Directors would provide an annual  certification that the
          business and  financing  plans of Energy  Holdings  will not adversely
          affect us;

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

     (4)  Energy  Holdings will pay us an affiliation  fee of up to $2 million a
          year, which is to be used to reduce customer rates.

     In the Final Order  relating  to our rate  unbundling,  stranded  costs and
restructuring proceedings, the BPU noted that, due to significant changes in the
industry and, in  particular,  our corporate  structure as a result of the Final
Order,  modifications  to or  relief  from  the  Focused  Audit  order  might be
warranted.  We have notified the BPU that PSEG will  eliminate PSEG Capital debt
by the end of the  second  quarter  of 2003 and that we  believe  that the Final
Order otherwise  supercedes the  requirements  of the Focused Audit.  The BPU is
expected to address  this  matter  later this year.  While we believe  that this
issue will be satisfactorily resolved, no assurances can be given.

     In addition,  if PSEG were no longer to be exempt under the Public  Utility
Holding  Company  Act of  1935  (PUHCA),  we  would  be  subject  to  additional
regulation  by the SEC with respect to financing and  investing  activities.  We
believe  that this would not have a  material  adverse  effect on our  financial
condition, results of operations and net cash flows.

     Over the next  several  years,  we will be required to  refinance  maturing
debt, incur additional debt and retain earnings 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 our financial condition, results of operations and net
cash flows.

Liquidity

     We have the following credit facilities for various funding purposes and to
provide  liquidity  for  our  $550  million  commercial  paper  program.   These
agreements are with a group of banks and provide for borrowings  with maturities
of up to one year. As of March 31, 2002, we had no commercial paper outstanding.

The following table summarizes our various facilities as of March 31, 2002:
<TABLE>
<CAPTION>

                                                                             Expiration       Total     Primary
 Company                                                                        Date         Facility   Purpose
--------------------------------------------------------------------------   ----------     ---------   ----------
                                                                                  (Millions of Dollars)
<S>                                                                          <C>             <C>        <C>
 364-day Credit Facility .................................................   June 2002*      $275       CP Support
 5-year Credit Facility ..................................................   June 2002*      $275       CP Support
 Uncommitted Bilateral Credit Agreement ..................................   N/A              **        Funding

*Expected to be refinanced in the second quarter of 2002.
**Availability varies based on market conditions.

</TABLE>
     Under our  Mortgage,  we may issue new First and Refunding  Mortgage  Bonds
against  previous  additions and  improvements  and/or  retired  Mortgage  Bonds
provided  that our ratio of earnings to fixed  charges  calculated in accordance
with our  Mortgage is at least 2:1. At March 31,  2002,  our  Mortgage  coverage
ratio  was  3:1.  As  of  March  31,  2002,  the  Mortgage  would  permit  up to
approximately $1 billion aggregate  principal amount of new Mortgage Bonds to be
issued  against  previous   additions  and   improvements.   We  also  need  BPU
authorization to issue any financing for our capital program including refunding
of maturing debt and opportunistic  refinancing.  We have authorization from the
BPU to issue $1 billion of  long-term  debt  through  December  31, 2003 for the
refunding of maturing debt and opportunistic refinancing of debt.

     On December 27, 2001, we filed a shelf  registration  statement on Form S-3
for the  issuance of $1 billion of debt and tax deferred  preferred  securities,
which was declared effective by the SEC in February 2002.

     Since  1986,  we have made  regular  cash  payments  to PSEG in the form of
dividends  on  outstanding  shares of our common  stock.  We paid  common  stock
dividends of $150 million and $112 million to PSEG for the quarters  ended March
31, 2002 and 2001, respectively.

     In prior years, we have issued Deferrable Interest Subordinated  Debentures
in  connection  with the issuance of  tax-deductible  preferred  securities.  If
payments on those Deferrable Interest  Subordinated  Debentures are deferred, in
accordance  with  their  terms,  we may not pay any  dividends  on our common or
preferred  stock  until such  deferral  is cured.  Currently,  there has been no
deferral or default.

CAPITAL REQUIREMENTS

     We  have  substantial  commitments  as  part  of our  ongoing  construction
programs.  We expect that the majority of our capital requirements over the next
five years will come from  internally  generated  funds,  with the balance to be
provided by the issuance of debt and equity contributions from PSEG.

     For the quarter  ended March 31, 2002,  we made net plant  additions of $80
million,  excluding Allowance for Funds Used During Construction (AFDC), related
to improvements in our  transmission  and  distribution  system,  gas system and
common  facilities.  Our projected  construction  expenditures for the next five
years range from $440 million to $485 million per year. Our plant  additions for
the quarter ended March 31, 2002 were included in our current year's forecast.

     Our  construction  expenditures  are  primarily  to maintain the safety and
reliability of our electric and gas transmission  and  distribution  facilities.
Our ongoing  construction  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 our
ability to raise necessary capital.

                      ITEM 3. QUALITATIVE AND QUANTITATIVE
                          DISCLOSURES ABOUT MARKET RISK

     The market  risk  inherent  in our market risk  sensitive  instruments  and
positions is the potential loss arising from adverse changes in commodity prices
and  interest  rates  as  discussed  in  the  Notes  to  Consolidated  Financial
Statements.  Our policy is to use derivatives to manage risk consistent with our
business  plans and  prudent  practices.  PSEG has a Risk  Management  Committee
comprised  of  executive  officers,  which we utilize  for an  independent  risk
oversight function to ensure compliance with corporate policies and prudent risk
management practices.

Commodity Contracts

     We  use  natural  gas  futures  and  swaps  to  reduce  exposure  to  price
fluctuations  from  factors  such as  weather,  changes in demand and changes in
supply to manage the price  risk  associated  with gas supply to our  customers.
These  instruments,  in  conjunction  with  physical gas supply  contracts,  are
designed to cover estimated gas customer  commitments.  As of March 31, 2002, we
have  entered  into  268  MMBTU  of gas  futures,  swaps  and  options  to hedge
forecasted  requirements.  As of  March  31,  2002,  the  fair  value  of  those
instruments was $(22) million with a maximum term of approximately  one year. We
utilize derivatives to hedge our gas purchasing activities which, when realized,
are recoverable through our LGAC. Accordingly,  the offset to the change in fair
value of these derivatives is recorded as a regulatory asset or liability.

     As a result of the gas contract  transfer  that was  effective May 1, 2002,
the price risk relating to gas purchases was  transferred to Power. As a result,
after that date, we are not utilizing  these  derivative  instruments in our gas
distribution business.

     Through the BGS auction,  we have  contracted  for our energy needs for our
expected  peak load of 9,600 MW for the period  August 1, 2002  through July 31,
2003.  If our peak  load  should  exceed  this  amount  or one of our  suppliers
defaults on their contract, we may have to purchase power on the open market and
use commodity  contracts  during periods of high demand.  To the extent that the
market prices exceed the auction contract price, the difference will be deferred
and  collected  from our  customers as provided in the BPU Order  approving  the
auction process.

     Given the  absence  of a PJM price cap in  situations  involving  emergency
purchases, extreme price movements can occur and could have a material impact on
our financial condition and net cash flows.

Interest Rate Risk

     We are  subject  to the risk of  fluctuating  interest  rates in the normal
course of business.  Our policy is to manage  interest rate risk through the use
of fixed rate debt,  floating  rate debt and interest  rate swaps.  We currently
have no floating rate debt outstanding that is exposed to interest rate risk.

     Transition Funding has entered into an interest rate swap on its sole class
of floating rate transition bonds. The notional amount of the interest rate swap
is  approximately  $497  million.  The  interest  rate  swap is  indexed  to the
three-month   LIBOR  rate.  The  fair  value  of  the  interest  rate  swap  was
approximately  $(11)  million  as of  March  31,  2002  and  was  recorded  as a
derivative  liability,  with an offsetting amount recorded as a regulatory asset
on the Consolidated  Balance Sheet.  This amount will vary over time as a result
of changes in market conditions.

Credit Risk

     We are  exposed  to  credit  losses  in the  event  of  non-performance  or
non-payment by counterparties.  We also have a credit management process,  which
is used to assess,  monitor and mitigate our counterparty exposure. In the event
of  non-performance  or  non-payment  by a major  counterparty,  there  may be a
material adverse impact on our financial condition, results of operations or net
cash flows.

ACCOUNTING ISSUES

Critical Accounting Policies and Other Accounting Matters

     Our most critical accounting policies include the application of: Statement
of Financial  Accounting  Standards (SFAS) No. 71 "Accounting for the Effects of
Certain  Types of  Regulation"  (SFAS  71) for our  regulated  transmission  and
distribution  business and SFAS No. 133, "Accounting for Derivative  Instruments
and  Hedging  Activities",  as amended  (SFAS  133),  to account for our various
hedging transactions.

Accounting for the Effects of Regulation

     We prepare our financial  statements in accordance  with the  provisions of
SFAS No. 71, which differs in certain respects from the application of Generally
Accepted Accounting Principles (GAAP) by non-regulated  businesses.  In general,
SFAS 71 recognizes that accounting for rate-regulated enterprises should reflect
the economic effects of regulation.  As a result, a regulated entity is required
to defer the  recognition  of costs (a regulatory  asset) or the  recognition of
obligations  (a  regulatory  liability)  if it is  probable  that,  through  the
rate-making  process,  there will be a  corresponding  increase  or  decrease in
future  rates.  Accordingly,  we have  deferred  certain  costs,  which  will be
amortized over various  future  periods.  To the extent that  collection of such
costs or payment of liabilities is no longer  probable as a result of changes in
regulation and/or our competitive  position,  the associated regulatory asset or
liability  is  charged  or  credited  to  income.

     As a result of New Jersey  deregulation  legislation and regulatory  orders
issued by the BPU, certain regulatory assets and liabilities were recorded.  Two
of these  items  will have a  significant  effect on our annual  earnings.  They
include the estimated  amount of Market  Transition  Charge (MTC) revenues to be
collected in excess of the  authorized  amount of $540 million and the amount of
excess electric distribution depreciation reserves.

     The MTC was  authorized by the BPU as an  opportunity to recover up to $540
million (net of tax) of our unsecuritized generation-related stranded costs on a
net  present  value  basis.  As a result of the  appellate  reviews of the Final
Order,  our  securitization  transaction  was delayed until the first quarter of
2001,  causing a delay in the  implementation of the  Securitization  Transition
Charge (STC),  which would have reduced the MTC. As a result,  the MTC was being
recovered at a faster rate than intended under the Final Order and a significant
overrecovery  was probable.  In order to properly  recognize the recovery of the
allowed  unsecuritized  stranded costs over the transition period, we recorded a
regulatory liability and a charge to net income of $76 million,  pre-tax, or $45
million,  after tax, in the third quarter of 2000 for the  cumulative  amount of
estimated collections in excess of the allowed unsecuritized  stranded costs for
the period  prior to the  generation-related  asset  transfer to Power.  We then
began  deferring  a  portion  of these  revenues  each  month to  recognize  the
estimated collections in excess of the allowed unsecuritized  stranded costs. As
of March 31, 2002,  this deferred amount was $177 million and is aggregated with
the Societal Benefits Clause.

     The amortization of the Excess Electric  Distribution  Depreciation Reserve
is another significant  regulatory liability affecting our earnings. As required
by the BPU, we reduced our  depreciation  reserve for our electric  distribution
assets by $569 million and recorded such amount as a regulatory  liability to be
amortized  over the period from January 1, 2000 to July 31, 2003.  Through March
31,  2002,  $287  million has been  amortized  and  recorded  as a reduction  of
depreciation  expense  pursuant to the Final Order, of which $37 million relates
to 2002. The remaining $282 million will be amortized through July 31, 2003.

     See Note 3. Regulatory  Assets and  Liabilities  for further  discussion of
these and other regulatory issues.

SFAS 133 - Accounting for Derivative Instruments and Hedging Activities

     SFAS 133  established  accounting  and reporting  standards for  derivative
instruments,   including  certain  derivative   instruments  embedded  in  other
contracts,  and for hedging  activities.  It requires an entity to recognize the
fair  value of  derivative  instruments  held as  assets or  liabilities  on the
balance sheet. In accordance with SFAS 133, the effective  portion of the change
in the fair value of a derivative  instrument designated as a cash flow hedge is
reported in other  comprehensive  income  (OCI),  net of tax, or as a Regulatory
Asset or Liability.  Amounts in  accumulated  OCI are  ultimately  recognized in
earnings when the related hedged forecasted  transaction  occurs.  The change in
the  fair  value  of  the  ineffective  portion  of  the  derivative  instrument
designated as a cash flow hedge is recorded in earnings.  Derivative instruments
that have not been  designated  as hedges are  adjusted  to fair  value  through
earnings.  We  have  entered  into  several  derivative  instruments,  including
interest  rate swaps which have been  designated  as cash flow hedges.  The fair
value of the derivative  instruments is determined by reference to quoted market
prices,   listed   contracts,    published   quotations   or   quotations   from
counterparties.

     For additional information regarding Derivative Financial Instruments,  See
Note 5 - Financial Instruments and Risk Management.

<PAGE>
Other Accounting Issues

     For   additional   information   on  our   accounting   policies   and  the
implementation of recently issued accounting standards, see Note 1. Organization
and Basis of Presentation and Note 2. Accounting Matters, respectively.

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. We 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 our  disclosures  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:

     o    failure to obtain  adequate and timely rate relief may have an adverse
          impact;

     o    deregulation  and the  unbundling of energy  supplies and services and
          the establishment of a competitive energy marketplace;

     o    inability to raise  capital on favorable  terms to refinance  existing
          indebtedness or to fund capital commitments;

     o    changes in the economic and  electricity  and gas  consumption  growth
          rates;

     o    environmental regulation  may  limit  our  operations;

     o    insurance coverage may not be sufficient; and

     o    recession, acts of war or terrorism could have an adverse impact.

     Consequently, all of the forward-looking statements made in this report are
qualified  by these  cautionary  statements  and we cannot  assure  you that the
results or developments anticipated by us will be realized, or even if realized,
will  have  the  expected  consequences  to or  effects  on us or  our  business
prospects,  financial  condition or results of operations.  You should not place
undue  reliance on these  forward-looking  statements  in making any  investment
decision.  We  expressly  disclaim  any  obligation  or  undertaking  to release
publicly any updates or revisions to these forward-looking statements to reflect
events or circumstances that occur or arise or are anticipated to occur or arise
after  the  date  hereof.  In  making  any  investment  decision  regarding  our
securities,  we are not  making,  and you should not infer,  any  representation
about  the  likely   existence  of  any  particular   future  set  of  facts  or
circumstances.  The  forward-looking  statements  contained  in this  report are
intended  to  qualify  for the safe  harbor  provisions  of  Section  27A of the
Securities Act of 1933, as amended,  and Section 21E of the Securities  Exchange
Act of 1934, as amended.
<PAGE>
                           PART II. OTHER INFORMATION
                           --------------------------

                            ITEM 1. LEGAL PROCEEDINGS

    Certain  information  reported  under  Item 3 of Part I of  Public  Service
Electric and Gas  Company's  (PSE&G) 2001 Annual  Report on Form 10-K is updated
below.

     New Matter. On November 15, 2001,  Consolidated  Edison,  Inc. (Con Edison)
filed a complaint against us at the Federal Energy Regulatory  Commission (FERC)
pursuant to Section 206 of the Federal Power Act asserting  that we had breached
agreements  covering 1,000 MW of transmission by curtailing  service and failing
to maintain  sufficient system capacity to satisfy all our service  obligations.
We denied the  allegations  set forth in the  complaint.  While finding that Con
Edison's   presentation  of  evidence  failed  to  demonstrate  several  of  the
allegations,  on  April  26,  2002,  FERC  found  sufficient  reason  to set the
complaint for hearing. The hearing will be conducted on an expedited basis, with
an Initial  Decision  to be issued by the end of May and a FERC Order by the end
of June.  If Con Edison is  successful,  we could be required to provide  future
transmission services with uneconomic generation resources at a substantial cost
to us. We  believe we have  complied  with the terms of the  Agreement  and will
vigorously  defend our  position.  The nature and cost of any  remedy,  which is
expected to be prospective only, cannot be predicted. Docket No. EL02-23-000.

     In addition see the following at the pages hereof indicated:

     (1)  Form  10-K,  Pages  7 and 8.  See  Pages  8 and 16  regarding  our Gas
          Contract Transfer, Docket Nos. GR01050328 and GR01050297.

     (2)  Form 10-K,  Pages 10 and 49. See Page 7 regarding our MGP  remediation
          program.

     (3)  Form  10-K,  Page  49.  See  Page  7.   Investigation  and  additional
          investigation by the EPA regarding the Passaic River site.  Docket No.
          EX93060255.
<PAGE>
                            ITEM 5. OTHER INFORMATION

Employee Relations

     Form 10-K, page 20. As previously disclosed,  we have collective bargaining
arrangements   with  the  Utility   Co-Workers   Association,   (UWUA)  covering
approximately  1,400 employees  primarily in the customer  operations area. This
contract  expired on April 30,  2002,  and was  extended  through May 6, 2002. A
tentative agreement was reached on May 7, 2002, and is subject to a ratification
vote by union membership.

Gas Contract Transfer

     Form 10K, page 7. On August 11, 2000, we filed a gas merchant restructuring
plan with the BPU. The BPU approved an amended stipulation, which authorized the
transfer of our gas supply business,  including our interstate capacity, storage
and gas supply  contracts to Power which will,  under a  requirements  contract,
provide gas supply to us to serve our Basic Gas Supply Service (BGSS) customers.
The transfer was effective May 1, 2002. On May 1, 2002,  the Ratepayer  Advocate
requested rehearing by the BPU of its decision, but did not seek a stay.

     The gas  contract  transfer is expected  to reduce  volatility  in our cash
flows.  Gas  residential   commodity  costs  are  currently   recovered  through
adjustment  charges  that are  periodically  trued-up to actual costs and reset.
After the gas contract transfer,  we will pay Power the amount we charge our gas
distribution  customers  for  the  commodity.  Industrial  and  commercial  BGSS
customers will be priced under our Market Priced Gas Service (MPGS). Residential
BGSS  customers  will remain under current  pricing  until April 1, 2004,  after
which,  subject to further BPU approval,  those  residential gas customers would
also move to MPGS service.


<PAGE>


                    ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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

         Exhibit Number   Document
         --------------   --------
         12               Computation of Ratios of Earnings to Fixed Charges

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

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

<PAGE>
                                    SIGNATURE

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


                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                                  (Registrant)

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

Date: May 15, 2002