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 September 30, 2001

                                       OR

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

                         For the transition period from ----  to  ----

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

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

                          Yes   X       No

     As of October 31,  2001,  Public  Service  Electric and Gas Company and had
issued and outstanding  132,450,344  shares of common stock,  without nominal or
par  value,  all of which were  privately  held,  beneficially  and of record by
Public Service Enterprise Group Incorporated.

<PAGE>

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

                                TABLE OF CONTENTS

                                                                           PAGE
                                                                           ----
PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements                                               1

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

Item 3.  Qualitative and Quantitative Disclosures About Market Risk         18


PART II. OTHER INFORMATION

Item 1.  Legal Proceedings                                                  19

Item 5.  Other Information                                                  19

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

Signature                                                                   21

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

                          PART I. FINANCIAL INFORMATION

                          ITEM 1. FINANCIAL STATEMENTS


<PAGE>
<TABLE>
<CAPTION>

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


                                                                       For the Quarter Ended            For the Nine Months Ended
                                                                           September 30,                      September 30,
                                                                    -----------------------------    -------------------------------
                                                                       2001             2000            2001               2000
                                                                    -----------     -------------    ------------     --------------
<S>                                                                 <C>             <C>              <C>              <C>
OPERATING REVENUES
   Electric Transmission and Distribution                           $      446      $       410      $     1,164      $       1,145
   Power Supply                                                            677              454            1,788                613
   Gas Distribution                                                        272              280            1,706              1,346
   Generation                                                               --              104               --              1,098
   Trading                                                                  --              218               --              1,521
                                                                    -----------     -------------    ------------     --------------
       Total Operating Revenues                                          1,395            1,466            4,658              5,723
                                                                    -----------     -------------    ------------     --------------
OPERATING EXPENSES
   Power Supply Costs                                                      677              454            1,788                613
   Gas Costs                                                               177              202            1,207                881
   Generation Costs                                                         --               66               --                331
   Trading Costs                                                            --              211               --              1,472
   Operation and Maintenance                                               241              224              733                976
   Depreciation and Amortization                                           113               60              272                230
   Taxes Other than Income Taxes                                            27               35              101                123
                                                                    -----------     -------------    ------------     --------------
       Total Operating Expenses                                          1,235            1,252            4,101              4,626
                                                                    -----------     -------------    ------------     --------------
OPERATING INCOME                                                           160              214              557              1,097
Other Income and Deductions                                                  6                5               18                 17
Interest Expense - Net                                                    (108)             (52)            (261)              (246)
Preferred Securities Dividend Requirements of Subsidiaries                  (4)             (11)             (22)               (34)
                                                                    -----------     -------------    ------------     --------------
INCOME BEFORE INCOME TAXES                                                  54              156              292                834
Income Taxes                                                                11              (57)             (84)              (333)
                                                                    -----------     -------------    ------------     --------------
NET INCOME                                                                  65               99              208                501
Preferred Securities Dividend Requirements and Premium
   on Redemption                                                            --               (2)              (4)                (7)
                                                                    -----------     -------------    ------------     --------------
EARNINGS AVAILABLE TO PUBLIC SERVICE
   ENTERPRISE GROUP INCORPORATED                                    $       65      $        97      $       204      $         494
                                                                    ===========     =============    ============     ==============

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,
                                                                               2001                 2000
                                                                         -----------------     ----------------
<S>                                                                      <C>                   <C>
CURRENT ASSETS
   Cash and Cash Equivalents                                             $            304      $           39
   Restricted Cash                                                                      6                  --
   Accounts Receivable
     Customer Accounts Receivable                                                     554                 614
     Other Accounts Receivable                                                         54                  71
     Allowance for Doubtful Accounts                                                  (46)                (39)
   Unbilled Revenues                                                                  182                 357
   Fuel                                                                               450                 372
   Materials and Supplies                                                              58                  48
   Prepayments                                                                        139                   5
   Energy Contracts                                                                     1                  --
   Other                                                                               23                  24
                                                                         -----------------     ----------------
     Total Current Assets                                                           1,725               1,491
                                                                         -----------------     ----------------

PROPERTY, PLANT AND EQUIPMENT
   Transmission and Distribution                                                    8,673               8,479
   Other                                                                              418                 420
                                                                         -----------------     ----------------
     Total                                                                          9,091               8,899
   Accumulated Depreciation and Amortization                                       (3,296)             (3,139)
                                                                         -----------------     ----------------
     Net Property, Plant and Equipment                                              5,795               5,760
                                                                         -----------------     ----------------

NONCURRENT ASSETS
   Regulatory Assets                                                                5,375               4,995
   Note Receivable - Affiliated Company                                                --               2,786
   Long-Term Investments                                                              118                 109
   Other Special Funds                                                                 98                  70
   Other                                                                               71                  56
                                                                         -----------------     ----------------
     Total Noncurrent Assets                                                        5,662               8,016
                                                                         -----------------     ----------------
TOTAL ASSETS                                                             $         13,182      $       15,267
                                                                         =================     ================

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,
                                                                                2001                  2000
                                                                          ------------------    -----------------
<S>                                                                       <C>                   <C>
CURRENT LIABILITIES
   Long-Term Debt Due Within One Year                                     $             760     $           100
   Commercial Paper and Loans                                                            --               1,543
   Accounts Payable                                                                     322                 440
   Accounts Payable-Affiliated Companies                                                233                 308
   Energy Contracts                                                                     197                  --
   Other                                                                                270                 253
                                                                          ------------------    -----------------
     Total Current Liabilities                                                        1,782               2,644
                                                                          ------------------    -----------------

NONCURRENT LIABILITIES
   Deferred Income Taxes and ITC                                                      2,678               2,701
   Regulatory Liabilities                                                               355                 470
   OPEB Costs                                                                           460                 441
   Other                                                                                193                 223
                                                                          ------------------    -----------------
     Total Noncurrent Liabilities                                                     3,686               3,835
                                                                          ------------------    -----------------

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

CAPITALIZATION
   LONG-TERM DEBT                                                                     5,135               3,590
                                                                          ------------------    -----------------

   PREFERRED SECURITIES
     Preferred Stock Without Mandatory Redemption                                        80                  95
     Preferred Stock With Mandatory Redemption                                           --                  75
     Subsidiaries' Preferred Securities:
     Guaranteed Preferred Beneficial Interest in Subordinated
       Debentures                                                                       155                 513
                                                                          ------------------    -----------------
       Total Preferred Securities                                                       235                 683
                                                                          ------------------    -----------------

   COMMON STOCKHOLDER'S EQUITY
     Common Stock, issued and outstanding: 132,450,344 shares                           892               2,563
     Contributed Capital                                                                 --                 594
     Basis Adjustment                                                                   986                 986
     Retained Earnings                                                                  467                 375
     Accumulated Other Comprehensive Loss                                                (1)                 (3)
                                                                          ------------------    -----------------
       Total Common Stockholder's Equity                                              2,344               4,515
                                                                          ------------------    -----------------
         Total Capitalization                                                         7,714               8,788
                                                                          ------------------    -----------------
TOTAL LIABILITIES AND CAPITALIZATION                                      $          13,182     $        15,267
                                                                          ==================    =================

See Notes to Consolidated Financial Statements.
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


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

                                                                              For the Nine Months Ended
                                                                                    September 30,
                                                                        --------------------------------------
                                                                             2001                 2000
                                                                        ----------------    ------------------
<S>                                                                     <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                           $          208      $            501
   Adjustments to reconcile net income to net cash flows from
     operating activities:
   Depreciation and Amortization                                                   272                   230
   Amortization of Nuclear Fuel                                                     --                    36
   (Deferral) Recovery of Gas Costs-- net                                         (145)                   24
   Provision for Deferred Income Taxes and ITC-- net                               (23)                   (9)
   Net Changes in Certain Current Assets and Liabilities:
     Restricted Cash                                                                (6)                   --
     Accounts Receivable and Unbilled Revenues                                     259                    56
     Fuel, Materials, and Supplies                                                 (88)                  (36)
     Prepayments                                                                  (134)                  (62)
     Accounts Payable                                                             (193)                  (14)
     Other Current Assets and Liabilities                                           45                    16
   Other                                                                           (70)                   61
                                                                        ----------------    ------------------
     Net Cash Provided By Operating Activities                                     125                   803
                                                                        ----------------    ------------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Additions to Property, Plant and Equipment, excluding
     Capitalized Interest and AFDC                                                (269)                 (280)
   Other                                                                            (9)                   (2)
                                                                        ----------------    ------------------
     Net Cash Used in Investing Activities                                        (278)                 (282)
                                                                        ----------------    ------------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Net Change in Short-Term Debt                                                (1,543)                  120
   Issuance of Long-Term Debt                                                    2,525                   290
   Deferred Issuance Costs                                                        (201)                   --
   Redemption/Purchase of Long-Term Debt                                          (320)                 (621)
   Collection of Note Receivable - Affiliated Company                            2,786                    --
   Redemption of Preferred Securities                                             (448)                   --
   Return of Capital                                                            (2,265)                   --
   Cash Dividends Paid on Common Stock                                            (112)                 (450)
   Other                                                                            (4)                   (7)
                                                                        ----------------    ------------------
     Net Cash Provided By (Used In) Financing Activities                           418                  (668)
                                                                        ----------------    ------------------
Net Change in Cash and Cash Equivalents                                            265                  (147)
Cash and Cash Equivalents at Beginning of Period                                    39                   173
                                                                        ----------------    ------------------
Cash and Cash Equivalents at End of Period                              $          304      $             26
                                                                        ================    ==================

Income Taxes Paid                                                       $          253      $            509
Interest Paid                                                           $          296      $            303


See Notes to Consolidated Financial Statements.
</TABLE>

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Organization and Basis of Presentation

Organization

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

Basis of Presentation

     The financial statements included herein have been prepared pursuant to the
rules  and  regulations  of the  Securities  and  Exchange  Commission.  Certain
information  and note  disclosures  normally  included in  financial  statements
prepared in accordance with generally accepted  accounting  principles have been
condensed or omitted  pursuant to such rules and  regulations.  However,  in the
opinion of  management,  the  disclosures  are adequate to make the  information
presented not misleading.  These Consolidated Financial Statements  (Statements)
and Notes to  Consolidated  Financial  Statements  (Notes) update and supplement
matters  discussed  in PSE&G's  2000  Annual  Report on Form 10-K and  Quarterly
Reports on Form 10-Q for the quarters ended March 31, 2001 and June 30, 2001 and
should be read in conjunction with those Notes.

     The unaudited  financial  information  furnished  reflects all  adjustments
which are, in the opinion of  management,  necessary to fairly state the results
for the interim periods presented. The year-end consolidated balance sheets were
derived from the audited  consolidated  financial statements included in PSE&G's
2000 Annual Report on Form 10-K. Certain  reclassifications of prior period data
have been made to conform with the current presentation.

Restricted Cash

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

Power Supply Revenues and Costs

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

Note 2.  Accounting Matters

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

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

     The Financial Accounting  Standards Board (FASB) Derivative  Implementation
Group (DIG) issued  guidance,  effective  January 1, 2002,  regarding the normal
purchases  and normal sales  exception  for  option-type  contracts  and forward
contracts  in  electricity.  In  addition,  the  DIG  issued  amended  guidance,
effective  April 1, 2002,  regarding  the  normal  purchases  and  normal  sales
exception to contracts  that combine a forward  contract and a purchased  option
contract.  PSE&G is currently evaluating this guidance in light of its potential
impacts and cannot  predict the impact on its  financial  position or results of
operations;  however,  such  impact  could  be  material.  PSE&G  has  evaluated
additional guidance issued by the DIG which was effective July 1, 2001 which had
no material effect on PSE&G's financial position or results of operations.

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

     Also in July  2001,  the FASB  issued  SFAS No.  142,  "Goodwill  and Other
Intangible  Assets"  (SFAS  142).  Under  SFAS 142,  goodwill  is  considered  a
nonamortizable  asset and will be subject to an annual review for impairment and
an interim review when events or circumstances  occur. SFAS 142 is effective for
all fiscal years  beginning  after  December  15, 2001.  PSE&G does not have any
goodwill on its balance  sheets.  Therefore,  there will be no effect on PSE&G's
financial  position  or  results  of  operations  as a result of  adopting  this
standard.

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

     In August 2001,  FASB issued SFAS No. 144,  "Accounting  for  Impairment or
Disposal of Long-Lived  Assets" (SFAS 144). Under SFAS 144 long-lived  assets to
be disposed of should be measured at the lower of carrying  amount or fair value
less cost to sell,  whether reported in continued  operations or in discontinued
operations. Discontinued operations will no longer be measured at net realizable
value or include  amounts for operating  losses that have not yet occurred.  The
statement also broadens the reporting of  discontinued  operations.  SFAS 144 is
effective for fiscal years beginning after December 15, 2001. PSE&G is currently
evaluating  this  guidance  and does not  believe  that it will have a  material
impact on its financial position or results of operations.

Note 3.  Regulatory Issues

New Jersey Energy Master Plan Proceedings and Related Orders

     In August 1999, following the enactment of the New Jersey Electric Discount
and Energy  Competition  Act,  the New Jersey  Board of Public  Utilities  (BPU)
rendered a Final Order relating to PSE&G's rate  unbundling,  stranded costs and
restructuring  proceedings (Final Order) providing,  among other things, for the
transfer to Power of all of PSE&G's electric  generation  facilities,  plant and
equipment  for  $2.443  billion  and  all  other  related  property,   including
materials,  supplies  and  fuel at the net book  value  thereof,  together  with
associated  rights and liabilities.  PSE&G  transferred its electric  generating
business  to Power in August 2000 in exchange  for a $2.786  billion  promissory
note, which was repaid by Power on January 31, 2001.

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

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

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

     On March 6, 2001,  Co-Steel filed a Petition of Writ of Certiorari with the
United States  Supreme Court seeking  limited  review of the New Jersey  Supreme
Court decision. In October 2001, the Supreme Court denied Co-Steel's petition.

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

Note 4.  Regulatory Assets and Liabilities

     At the dates shown, PSE&G had deferred the following  regulatory assets and
liabilities on the Consolidated Balance Sheets:
<TABLE>
<CAPTION>


                                                                         September 30, 2001         December 31, 2000
                                                                       ------------------------   ------------------------
                                                                                     (Millions of Dollars)
<S>                                                                                   <C>                        <C>
Regulatory Assets:
   Stranded Costs to be Recovered.............................                        $4,158                     $4,093
   SFAS 109 Income Taxes......................................                           307                        285
   OPEB Costs.................................................                           217                        232
   Societal Benefits Charges (SBC)............................                            15                         74
   Underrecovered Gas Costs...................................                           121                         --
   Environmental Costs........................................                            74                         74
   Unamortized Loss on Reacquired Debt and Debt Expense.......                            97                        104
   Non-Utility Generation Transition Charge (NTC).............                             7                          7
   Other......................................................                           379                        126
                                                                       ------------------------   ------------------------
       Total Regulatory Assets................................                        $5,375                     $4,995
                                                                       ========================   ========================

Regulatory Liabilities:
   Excess Depreciation Reserve................................                          $350                       $444
   Overrecovered Gas Costs....................................                           --                          26
   Other......................................................                             5                         --
                                                                       ------------------------   ------------------------
       Total Regulatory Liabilities...........................                          $355                       $470
                                                                       ========================   ========================
</TABLE>

<PAGE>
Note 5.  Commitments and Contingent Liabilities

Hazardous Waste

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

Manufactured Gas Plant Remediation Program

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

     Net of  recoveries,  costs  incurred  through  September  30,  2001 for the
Remediation Program amounted to approximately  $158.5 million.  In addition,  at
September 30, 2001,  PSE&G's  estimated  liability for remediation costs through
2003 aggregated  $74.0 million.  Expenditures  beyond 2003 cannot  reasonably be
estimated.

Passaic River Site

     The United States Environmental Protection Agency (EPA) has determined that
a six mile  stretch of the Passaic  River in Newark,  New Jersey is a "facility"
within the  meaning of that term under the Federal  Comprehensive  Environmental
Response,  Compensation  and  Liability  Act of 1980 and that, to date, at least
thirteen corporations, including PSE&G, may be potentially liable for performing
required  remedial actions to address potential  environmental  pollution at the
Passaic  River  "facility."  PSE&G  and  certain  of its  predecessors  operated
industrial  facilities at properties  within the Passaic River "facility," which
include one  operating  electric  generating  station and one former  generating
station.  PSE&G 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.

<PAGE>
Note 6.  Financial Instruments and Risk Management

Commodity-Related Instruments

     PSE&G  enters  into swaps,  options  and  futures for its gas  distribution
business to reduce exposure to price  fluctuations from factors such as weather,
changes in demand and changes in supply. These instruments,  in conjunction with
physical  gas supply  contracts,  are designed to cover  estimated  gas customer
commitments.  PSE&G has entered into 349 MMBTU of gas futures, swaps and options
to hedge  forecasted  requirements.  As of September 30, 2001, the fair value of
those  instruments was $(196) million with a maximum term of  approximately  one
year. PSE&G utilizes  derivatives to hedge its gas purchasing  activities which,
when  realized,  are  recoverable  through its Levelized Gas  Adjustment  Clause
(LGAC). Accordingly, the offset to the change in fair value of these derivatives
is specified as a regulatory asset or liability.

Interest Rates

     PSE&G is subject to the risk of  fluctuating  interest  rates in the normal
course of business.  PSE&G's policy is to manage  interest rate risk through the
use of fixed  rate debt,  floating  rate debt and  interest  rate  swaps.  As of
September 30, 2001, a  hypothetical  10% change in market  interest  rates would
result in a $5 million change in annual interest costs related to short-term and
floating rate debt at PSE&G.

     Transition Funding has entered into an interest rate swap on its sole class
of floating rate transition bonds. The notional amount of the interest rate swap
is  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  $(32)  million as of  September  30,  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.

Note 7.  Income Taxes

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

                                                                    Quarter Ended              Nine Months Ended
                                                                    September 30,                September 30,
                                                               -------------------------    -------------------------
                                                                 2001          2000          2001           2000
                                                               ----------    -----------    ---------     -----------
<S>                                                               <C>           <C>            <C>           <C>
Federal tax provision at statutory rate...................        35.0%         35.0%          35.0%         35.0%
New Jersey Corporate Business Tax, net of Federal benefit          5.9%          5.9%           5.9%          5.9%
Plant Related Adjustments.................................       (57.4)%         0.6%         (10.6)%          --
Other-- net...............................................        (3.9)%        (5.0)%         (1.5)%        (1.0)%
                                                               ----------    -----------    ---------     -----------
Effective Income Tax Rate.................................       (20.4)%        36.5%         28.8%           39.9%
                                                               ==========    ===========    =========     ===========
</TABLE>

     The  decrease in the  effective  tax rate,  for the quarter and nine months
ended September 30, 2001, as compared to the same periods for 2000, is primarily
due to  adjustments as a result of closing the 1994-96 IRS audit and upon filing
our actual tax returns for the year 2000.

<PAGE>
Note 8.  Financial Information by Business Segments

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

<TABLE>
<CAPTION>

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

                                                                                                     Consolidated
                                                           Generation       Trading       T & D         Total
                                                          ---------------  -----------  ----------- ----------------
                                                                           (Millions of Dollars)
       <S>                                                           <C>        <C>       <C>              <C>
       For the Quarter Ended September 30, 2001:
       Total Operating Revenues........................              $--         $--       $1,395           $1,395
       Segment Operating Income........................              $--         $--         $160             $160
       Segment Earnings Available to PSEG..............              $--         $--          $65              $65
                                                          ===============  ===========  =========== ================

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

       For the Quarter Ended September 30, 2000:
       Total Operating Revenues........................             $104        $218       $1,144           $1,466
       Segment Operating Income........................              $38          $7         $169             $214
       Segment Earnings Available to PSEG..............              $26          $4          $67              $97
                                                          ===============  ===========  =========== ================

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

       For the Nine Months Ended September 30, 2001:
       Total Operating Revenues........................              $--         $--       $4,658           $4,658
       Segment Operating Income........................              $--         $--         $557             $557
       Segment Earnings Available to PSEG..............              $--         $--         $204             $204
                                                          ===============  ===========  =========== ================

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

       For the Nine Months Ended September 30, 2000:
       Total Operating Revenues........................           $1,098      $1,521       $3,104           $5,723
       Segment Operating Income........................             $366         $49         $682           $1,097
       Segment Earnings Available to PSEG..............             $199         $29         $266             $494
                                                          ===============  ===========  =========== ================

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

       As of September 30, 2001:
       Total Assets....................................              $--         $--      $13,182          $13,182
                                                          ===============  ===========  =========== ================

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

       As of December 31, 2000:
       Total Assets....................................              $--         $--      $15,267          $15,267
                                                          ===============  ===========  =========== ================

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

</TABLE>

<PAGE>
Note 9.  Comprehensive Income

<TABLE>
<CAPTION>

     Comprehensive Income, Net of Tax:


                                                                    Comprehensive Income
                                          --------------------------------------------------------------------------
                                                   Quarter Ended                         Nine Months Ended
                                                   September 30,                           September 30,
                                          ----------------------------------      ----------------------------------
                                                2001                2000                2001               2000
                                          ---------------     --------------      ---------------    ---------------

<S>                                             <C>                <C>                 <C>                <C>
Net Income.............................         $65                $99                 $208               $501
Other Comprehensive Income....                   --                 --                    2                 --
                                           ---------------     --------------      ---------------    ---------------
Comprehensive Income............                $65                $99                 $210               $501
                                          ===============     ==============      ===============    ===============
</TABLE>

Note 10.  Related Party Transactions

     In August 2000, PSE&G  transferred its 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 PSE&G's weighted
average  cost of  capital.  For the period  from  January 1, 2001 to January 31,
2001, PSE&G recorded  interest income of  approximately  $34 million relating to
the Promissory Note. Power repaid the Promissory Note on January 31, 2001.

     In addition,  on January 31, 2001,  PSE&G loaned $1.084  billion to PSEG at
14.23% per annum and  recorded  interest  income of  approximately  $33  million
relating to the loan in 2001.  PSEG repaid the loan to PSE&G on April 16,  2001.
PSE&G also  returned  $2.265  billion of  capital  to PSEG on January  31,  2001
utilizing  proceeds from the $2.525 billion  securitization  transaction and the
generation  asset  transfer,  as  required  by the Final  Order,  as part of its
recapitalization. (See Note 3 "Regulatory Issues").

     Effective  with the transfer of the  electric  generation  business,  Power
charges  PSE&G for MTC and the energy and capacity  provided to meet PSE&G's BGS
requirements.  For the quarter and nine months ended  September 30, 2001,  PSE&G
was charged by Power  approximately  $568  million and $1.5  billion for MTC and
BGS. As of September 30, 2001,  PSE&G's payable to Power relating to these costs
was approximately $159 million.  For the quarter and nine months ended September
30,  2001,  PSE&G sold  energy  and  capacity  to Power at the  market  price of
approximately $55 million and $135 million, respectively,  which PSE&G purchased
under  various  Non-Utility  Generation  (NUG)  contracts  at costs above market
prices. As of September 30, 2001,  PSE&G's receivable related to these purchases
was  approximately  $10  million.  PSE&G,  as a result of the Final  Order,  has
established  an NTC to  recover  the above  market  costs  related  to these NUG
contracts.  The  difference  between  PSE&G's  cost and their  recovery of costs
through the NTC and sales to Power,  which are at the locational  marginal price
(LMP) set by the PJM  Interconnection LLC Independent System Operator for energy
and at wholesale market prices for capacity, is deferred as a regulatory asset.

     PSEG Services  Corporation  provides and bills  administrative  services to
PSE&G on a monthly  basis.  PSE&G's  costs  related to such service  amounted to
approximately $81 million and $282 million for the quarter and nine months ended
September  30, 2001,  respectively.  As of September 30, 2001,  PSE&G's  payable
related to these costs was approximately $21 million.

<PAGE>

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

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

     Following  are the  significant  changes  in or  additions  to  information
reported in the PSE&G's 2000 Annual Report on Form 10-K and Quarterly Reports on
Form 10-Q for the quarters  ended March 31, 2001 and June 30, 2001 affecting the
consolidated  financial  condition and the results of operations of PSE&G.  This
discussion  refers to the  Statements  and related  Notes of PSE&G and should be
read in conjunction with such Statements and Notes.

Results of Operations

     PSE&G's Net Income decreased $34 million or 34% and $293 million or 58% for
the quarter and the nine months  ended  September  30, 2001 from the  comparable
periods in 2000, respectively.  The decreases were primarily due to the transfer
of the  generation  business to Power in August 2000. In addition,  Depreciation
and  Amortization  increased  in 2001 due to  amortization  of the  regulatory
asset recorded for PSE&G's  stranded costs.  Also  contributing to the decrease
for the quarter ended  September 30, 2001 as compared to the same period in 2000
was lower interest earned from Power for the  intercompany  loan relating to the
generation business transfer which was repaid to PSE&G in January 2001.

Operating Revenues

     Electric Transmission and Distribution

     Transmission and Distribution  revenues increased $36 million or 9% and $19
million or 2% for the quarter and the nine months ended  September 30, 2001 from
the comparable periods in 2000, respectively. These increases were primarily due
to warmer  weather  conditions  in the third  quarter of 2001 as compared to the
third quarter of 2000.

     Power Supply

     Power  Supply  revenues  were $677 million and $1.8 billion for the quarter
and nine months  ended  September  30, 2001 as compared to $454 million and $613
million for the comparable periods in 2000,  respectively.  These increases were
primarily due to the generation  asset  transfer to Power in August 2000.  These
revenues  represent  the  BGS and MTC  tariff  rates  charged  by  PSE&G  to its
customers who did not choose another  supplier and NTC rates charged by PSE&G to
its customers to recover the above market costs  related to energy  purchased by
PSE&G under various NUG  Contracts.  Power Supply  revenues in 2001 also include
sales to Power of energy purchased under the NUG contracts. These sales are made
to Power at the LMP in the PJM Market.  For periods prior to the transfer of the
generation  business to Power in August 2000,  Power Supply revenues include the
sales of energy purchased under the NUG Contracts at LMP. Any difference between
the  amounts  PSE&G pays  under the NUG  Contracts  and the  amount it  recovers
through  the  NTC and  sales  at LMP  are  deferred  as a  regulatory  asset  or
liability.  The BGS and MTC  revenues are offset by a  corresponding  expense in
Power Supply Costs for the amount paid to Power under the BGS Contract.

     The MTC tariff  rate  decreased  2% in  February  2001  effective  with the
implementation  of  securitization  in  accordance  with the BPU's Final  Order.
Effective August 1, 2001,  PSE&G  implemented an additional 2% rate reduction as
required by the Final Order, bringing the total rate decrease to 9% since August
1, 1999.  These rate reductions  amounted to  approximately  $37 million and $65
million for the quarter and the nine months  ended  September  30, 2001 and were
funded through the MTC component of rates,  which,  along with BGS revenues,  is
passed  along to Power  through  Power Supply  Costs.  An  additional  4.9% rate
reduction, effective August 1, 2002, will further reduce revenues and costs.


<PAGE>
     Gas Distribution

     Gas Distribution  revenues decreased $8 million or 3% for the quarter ended
September  30,  2001  from the  comparable  period  in 2000  primarily  due to a
decrease in revenues from interruptible customers. Interruptible customers rates
vary  monthly.  These rates are based on oil market  prices,  and PSE&G does not
retain  margins from these  customers.  This  decrease was  partially  offset by
higher  residential  revenues due to BPU approved  rate  increases  earlier this
year.

     Gas Distribution revenues increased $360 million or 27% for the nine months
ended  September 30, 2001 from the  comparable  periods in 2000 primarily due to
higher gas rates.  Customer  rates in all classes of business have  increased in
2001 to recover a portion of the higher  natural gas costs.  The  commercial and
industrial  classes fuel  recovery  rates vary  monthly  according to the market
price of gas.  The BPU also  approved  increases  in the fuel  component  of the
residential  class  rates of 16% in  November  2000 and 2% for each  month  from
December 2000 through July 2001. These increased  revenues were offset by higher
gas distribution costs discussed below.

     PSE&G has filed  petitions  with the BPU for  authority  to revise  its gas
property  depreciation  rates and is requesting an increase in gas base rates of
$171 million for gas delivery  service  (Gas Base Rate Case).  If approved,  the
requested  increase would result in an overall gas revenue  increase of 7.06% to
reflect current costs.  Present gas rates will remain in effect pending approval
by the BPU. PSE&G cannot predict the outcome of these matters.

     Generation

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

     Trading

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

Operating Expenses

     Power Supply Costs

     Power  Supply  Costs were $677 million and $1.8 billion for the quarter and
the nine months  ended  September  30, 2001 as compared to $454 million and $613
million for the  comparable  periods in 2000,  respectively.  For 2001 and 2000,
following  the  transfer  of the  generation  business  to  Power,  these  costs
represent the amount paid to Power under PSE&G's contract with Power pursuant to
which Power delivers energy and capacity to PSE&G under its BGS Contract.  These
amounts also include  purchases of energy under various NUG contracts.  Prior to
August 2000, the Power Supply costs  represented  only purchases of energy under
various NUG contracts as PSE&G operated its own generation business. The BGS and
MTC costs paid to Power reflect the rate reductions discussed above.

     Gas Costs

     Gas Costs  decreased $25 million or 12% for the quarter ended September 30,
2001 from the comparable period in 2000 primarily due to lower natural gas costs
in the third quarter 2001 as compared to the same period in 2000.

     Gas Costs increased $326 million or 37% for the nine months ended September
30, 2001 from the comparable  period in 2000 primarily due to higher natural gas
costs.  Due to the Levelized Gas Adjustment  Clause,  gas costs are increased or
decreased to offset a  corresponding  increase or decrease in fuel revenues with
no impact on income.

     Generation Costs

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

     Trading Costs

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

     Operations and Maintenance

     Operations  and  Maintenance  expense  increased  $17 million or 8% for the
quarter ended September 30, 2001 from the comparable  period in 2000,  primarily
due to a greater  proportion of expenditures used for operations and maintenance
rather than capital  project work in the third  quarter of 2001  compared to the
comparable  2000 period  combined with higher fringe  benefits.  These increases
were partially offset by the elimination of Operations and Maintenance  expenses
resulting from the transfer of the generation business to Power in August 2000.

     Operations and  Maintenance  expense  decreased $243 million or 25% for the
nine  months  ended  September  30,  2001  from the  comparable  period in 2000,
primarily due to the  elimination of $328 million in Operations and  Maintenance
expenses  resulting  from the  transfer of the  generation  business to Power in
August  2000.  The  decrease  was  partially  offset  as a result  of a  greater
proportion of  expenditures  used for  operations  and  maintenance  rather than
capital project work in 2001 than in 2000.

Depreciation and Amortization

     Depreciation and Amortization  expense increased $53 million or 88% and $42
million or 18% for the quarter and the nine months ended September 30, 2001 from
the comparable periods in 2000, respectively.  The increases for the quarter and
nine months ended  September 30, 2001 were primarily due to $61 million and $126
million,  respectively,  of  amortization  of the regulatory  asset recorded for
PSE&G's  stranded  costs,  which  commenced  with the issuance of the transition
bonds.  These  increases were partially  offset by the elimination of $9 million
and $77 million of Depreciation  and  Amortization  expenses for the quarter and
nine months ended September 30, 2001, respectively,  resulting from the transfer
of the generation business to Power in August 2000.

Interest Expense

     Net Interest  Expense  increased  $56 million or 108% for the quarter ended
September 30, 2001 from the comparable period in 2000, primarily due to interest
of  approximately  $43  million  on the bonds  issued by  Transition  Funding on
January 31, 2001,  discussed  below,  combined with $44 million  lower  interest
earned in 2001,  as compared to 2000,  from Power and PSEG for the  intercompany
loans relating to the generation business transfer which were repaid to PSE&G in
April 2001,  which reduced  interest expense in 2000. The increase was partially
offset by $31 million in lower interest resulting from reduced short-term debt.

     Net Interest Expense  increased $15 million or 6% for the nine months ended
September 30, 2001 from the comparable period in 2000, primarily due to interest
of  approximately  $114  million on the bonds  issued by  Transition  Funding on
January 31, 2001. The increase was partially offset by approximately $22 million
of higher interest earned from Power and PSEG for the intercompany loans and $70
million in lower interest resulting from reduced short-term debt.

Preferred Securities Dividends

     Preferred  Securities Dividends decreased $7 million or 64% and $12 million
or 35% for the quarter and nine months ended  September 30, 2001,  respectively,
as compared to the same  periods in 2000,  primarily  due to the  redemption  of
preferred securities in March 2001 and June 2001.

Income Taxes

     Income taxes  decreased $68 million or 119% and $249 million or 75% for the
quarter and nine months ended  September 30, 2001 as compared to the same period
in 2000.  These decreases were primarily due to lower pre-tax  operating  income
due to the transfer of the  generation  business to Power in August of 2000.  In
addition,  taxes decreased due to adjustments as a result of closing the 1994-96
IRS audit and upon filing our actual tax return for the year 2000.

Liquidity and Capital Resources

     On January 31,  2001,  $2.525  billion of  transition  bonds were issued by
Transition Funding, a  bankruptcy-remote,  wholly-owned  subsidiary.  PSE&G also
received  payment  from  Power on its  $2.786  billion  Promissory  Note used to
finance the transfer of PSE&G's generation business to Power in August 2000. The
proceeds from these  transactions were used to pay for certain debt issuance and
related  costs for  securitization,  redeem a  portion  of  PSE&G's  outstanding
short-term  debt,  reduce PSE&G common equity by $2.265  billion,  loan funds to
PSEG of $1.084 billion and make various short-term investments.  PSEG repaid the
loan to PSE&G on April 16, 2001. These funds are expected to be used for further
debt and/or equity  reductions in 2001 including payment of maturing and certain
redeemable  securities.  Any inability to obtain  required  additional  external
capital or to extend or replace  maturing  debt and/or  existing  agreements  at
current  levels  and  reasonable  interest  rates may affect  PSE&G's  financial
condition, results of operations and net cash flows.

     Cash  generated  from PSE&G's  transmission  and  distribution  business is
expected to provide  the  majority of the funds for its  business  needs.  Since
1986,  PSE&G has made regular cash  payments to PSEG in the form of dividends on
outstanding shares of PSE&G's common stock. PSE&G paid common stock dividends of
$112 million and $450 million to PSEG for the nine-month periods ended September
30, 2001 and 2000, respectively.

Capital Requirements

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

     Construction   expenditures   are  related  to   improvements   in  PSE&G's
transmission and distribution system, gas system and common facilities.  For the
nine month periods ended  September 30, 2001 and 2000,  respectively,  PSE&G had
net plant  additions of $269 million and $280 million,  excluding  Allowance for
Funds Used During Construction (AFDC).

External Financings

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

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

     In March  2001,  PSE&G  reduced the maximum  size of its  commercial  paper
program from $1.5 billion to $900 million. To provide back up liquidity for this
program,  PSE&G maintains $900 million in revolving credit  facilities,  each of
which expire in June 2002.  As of September  30, 2001,  there were no borrowings
outstanding under these facilities.  In addition,  PSE&G has an uncommitted line
of credit with a bank.  As of September 30, 2001,  PSE&G had no short-term  debt
outstanding, and no borrowings against its uncommitted line of credit.

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

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

     On November 1, 2001, $100 million of Mortgage Bonds, Series FF matured.

Regulatory Matters

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

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

(2)  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

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

     In its Final Order  requiring  PSE&G to transfer its  generation  assets to
Power,  the BPU noted that, due to  significant  changes in the industry and, in
particular,  PSEG's  corporate  structure  as  a  result  of  the  Final  Order,
modifications  to or relief  from the Focused  Audit  order might be  warranted.
PSE&G must make a filing in the first quarter of 2002 to address the  provisions
of the Focused  Audit in light of the Final Order.  PSE&G  believes that the BPU
Order issued in 1986 with  respect to the  formation  of PSEG  (Holding  Company
Order),  the Final Order and Energy  Competition  Act  provide  the  appropriate
regulatory framework in the restructured  electric and gas markets, and that the
provisions of the Focused Audit,  if applicable,  will not adversely  affect its
financial  condition,  results  of  operations  or net  cash  flows.  Regulatory
oversight by the BPU to assure that there is no harm to utility  ratepayers from
non-utility investments is expected to continue under the Holding Company Order.
At September 30, 2001, Energy Holdings' assets were  approximately 28% of PSEG's
consolidated assets and PSE&G Capital debt amounted to $615 million.

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

Business Environment

     PSE&G is currently  evaluating the economic  consequences  of the September
11, 2001  terrorist  attacks on the United States and  subsequent  developments,
particularly their impact on accelerating the continued economic slowdown in the
United  States and  worldwide.  The  consequences  of a prolonged  recession and
market conditions may include the continued uncertainty of energy prices and the
capital and  commodity  markets.  PSE&G  cannot  predict the impact of continued
economic  slowdown,  including  any impacts on customers  collections  and lower
energy prices.  However, such impact could have a material adverse effect on its
financial condition, results of operations and net cash flows.

Accounting Matters

     For a discussion of EITF 99-19, SFAS 133 and related DIG issues,  SFAS 141,
SFAS 142,  SFAS 143 and SFAS 144, see Note 2.  Accounting  Matters,  and Note 6.
Financial Instruments and Risk Management of Notes.

Forward Looking Statements

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

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

                      ITEM 3. QUALITATIVE AND QUANTITATIVE
                          DISCLOSURES ABOUT MARKET RISK

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

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

                           PART II. OTHER INFORMATION

                            ITEM 1. LEGAL PROCEEDINGS

     Certain information  reported under Item 3 of Part I of PSE&G's 2000 Annual
Report on Form 10-K or  Quarterly  Report  on Form 10-Q for the  quarters  ended
March 31, 2001 and June 30, 2001 is updated below:

     Form 10-K,  page 3 and June 30,  2001 Form  10-Q,  page 18. See Page 19 for
information on proceedings  before the BPU in the matter of the PSE&G's  filings
with  the BPU  regarding  its  auction  proposal  for BGS  supply,  Docket  Nos.
EX01050303.

     Form 10-K,  page 12 and June 30,  2001 Form 10-Q,  page 18. See Page 19 for
information on proceedings  before the BPU in the matter of the PSE&G's  filings
with the BPU to transfer its gas contracts, Docket No. GR00080564.

     June  30,  2001  Form  10-Q,  page  18.  See  Page  20 for  information  on
proceedings before the BPU in the matter of the PSE&G's filings with the BPU for
increased  gas base rates and revised gas property  depreciation  rates,  Docket
Nos. GR01050328 and GR01050297.

                            ITEM 5. OTHER INFORMATION

     Certain information  reported under PSE&G's 2000 Annual Report on Form 10-K
and  Quarterly  Reports on Form 10-Q for the  quarters  ended March 31, 2001 and
June 30, 2001 is updated below.  References are to the related pages on the Form
10-K and Forms 10-Q as printed and distributed.

     Electric Operation and Supply

     Form  10-K,  page 3 and  June 30,  2001  Form  10-Q,  page  19.  PSE&G  has
contracted with Power to provide the capacity and electricity  necessary for the
BGS obligation through July 31, 2002. On June 29, 2001 PSE&G and the other three
BPU regulated New Jersey electric utility companies  submitted a joint filing to
the BPU  setting  forth an  auction  proposal  for the  provision  of BGS supply
beginning  August 1,  2002.  In  addition,  each  company  also  filed  specific
contingency plans and accounting information.

     Gas Contract Transfer

     Form 10-K, page 12 and June 30, 2001 Form 10-Q, page 19. On March 16, 2001,
the New Jersey Ratepayer Advocate (RPA) filed a motion to dismiss this case. The
motion is pending before the Administrative Law Judge. A settlement meeting on a
Stipulation  of Settlement by PSE&G and several  parties was conducted  with the
BPU staff on July 24, 2001. PSE&G submitted a settlement agreement. PSE&G agreed
to  modify  its  proposals  and an oral  agreement  with the BPU  staff has been
reached.  However, the RPA opposes PSE&G's proposal and presented their position
to the BPU on October  31,  2001.  The case has been  returned  to the BPU for a
decision.

     FERC RTO Orders

     Form 10-K, page 14 and June 30, 2001 Form 10-Q, page 19. The Federal Energy
Regulatory  Commission  (FERC), in a series of orders issued in July 2001 called
for the creation of four large  regional  transmission  organizations  (RTOs) to
facilitate  competitive  regional  markets  in the U.S.  FERC  rejected  several
smaller RTO proposals and directed  transmission  owners and independent  system
operators (ISOs) to combine into much larger RTOs,  dramatically  altering their
proposed geographic size and configuration.

     In the Northeast region,  FERC conditionally  approved the PJM RTO proposal
(subject to several  modifications and compliance  filings) and rejected the New
York ISO and  ISO-New  England  RTO  proposals.  FERC  directed  that the  three
existing ISOs for PJM, New York and New England, as well as the systems involved
in PJM West, form a single  Northeast RTO, based on the "PJM platform" and "best
practices"  of all three  ISOs.  FERC  directed  that the  parties in the region
engage in mediation  (with FERC  oversight)  to prepare a proposal and timetable
for the merger of the ISOs into a single RTO. At the end of the 45-day mediation
period, the Administrative Law Judge assigned to the matter will submit a report
to the  Commission  with an attached  business  plan for  implementation  of the
single  northeast RTO possibly as soon as the fourth  quarter of 2003.  Numerous
details must still be negotiated.

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

     Gas Base Rate Filings

     June 30,  2001 Form 10-Q,  page 19. On May 4, 2001,  PSE&G filed a petition
with  the BPU for  authority  to  revise  its gas  property  depreciation  rates
(Depreciation  Case). In this filing, PSE&G requested authority to implement its
proposed  depreciation  rates  simultaneously  for book purposes and  ratemaking
purposes when the BPU implements new tariffs  designed to recover the additional
annual  revenues  resulting from the gas base rate case discussed  below. On May
25, 2001, PSE&G filed a petition with the BPU requesting an increase in gas base
rates of $171  million  for gas  delivery  service  (Gas  Base  Rate  Case).  If
approved, the requested increase would result in an overall gas revenue increase
of 7.06% to reflect  current  costs.  Present  gas rates  will  remain in effect
pending  approval by the BPU. PSE&G believes that the current gas base rates, in
effect since November 1991, do not reasonably  reflect  capital  investments and
other costs  required to maintain  the gas utility  infrastructure.  The BPU has
consolidated the  Depreciation  Case and the Gas Base Rate Case. All hearings in
the case were completed in October 2001.

                    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(A)       Computation of Ratios of Earnings to Fixed Charges

         12(B)       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: November 1, 2001