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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                  For the quarterly period ended September 30, 1997

                                       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.
--------------------------------------------------------------------------------

     1-9120    PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED        22-2625848
                        (A New Jersey Corporation)
                               80 Park Plaza
                               P.O. Box 1171
                       Newark, New Jersey 07101-1171
                               973 430-7000
                            http://www.pseg.com

     1-973        PUBLIC SERVICE ELECTRIC AND GAS COMPANY          22-1212800
                        (A New Jersey Corporation)
                               80 Park Plaza
                               P.O. Box 570
                       Newark, New Jersey 07101-0570
                               973 430-7000


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

                                  Yes  x       No

The  number  of  shares   outstanding   of  Public  Service   Enterprise   Group
Incorporated's  sole class of common stock, as of the latest  practicable  date,
was as follows:

                     Class: Common Stock, without par value

                  Outstanding at October 31, 1997: 231,957,608

As of October 31, 1997,  Public Service  Electric and Gas Company had issued and
outstanding  132,450,344  shares of common stock,  without nominal or par value,
all of which were privately held,  beneficially  and of record by Public Service
Enterprise Group Incorporated.


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<PAGE>


                                TABLE OF CONTENTS

                                                                           Page

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

Public Service Enterprise Group Incorporated (Enterprise):

  Consolidated Statements of Income for the Three and Nine
  Months Ended September 30, 1997 and 1996...............................    1

  Consolidated Balance Sheets as of September 30, 1997
  and December 31, 1996..................................................    2

  Consolidated Statements of Cash Flows for the Nine
  Months Ended September 30, 1997 and 1996...............................    4

  Consolidated Statements of Retained Earnings for the Three and Nine
  Months Ended September 30, 1997 and 1996...............................    5

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

  Consolidated Statements of Income for the Three and Nine
  Months Ended September 30, 1997 and 1996...............................    7

  Consolidated Balance Sheets as of September 30, 1997
  and December 31, 1996..................................................    8

  Consolidated Statements of Cash Flows for the Nine
  Months Ended September 30, 1997 and 1996...............................   10

  Consolidated Statements of Retained Earnings for the Three and Nine
  Months Ended September 30, 1997 and 1996...............................   11

Notes to Consolidated Financial Statements - Enterprise..................   12

Notes to Consolidated Financial Statements - PSE&G.......................   16

Item 2. Management's Discussion and Analysis of Financial
        Condition and Results of Operations
      Enterprise.........................................................   17
      PSE&G   ...........................................................   25


PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings...............................................   26

Item 5.  Other Information...............................................   27

Item 6.  Exhibits and Reports on Form 8-K................................   30

Signatures - Public Service Enterprise Group Incorporated................   31

Signatures - Public Service Electric and Gas Company.....................   31

<PAGE>

<TABLE>
<CAPTION>

                                             PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                                                   CONSOLIDATED STATEMENTS OF INCOME
                                             (Millions of Dollars, except per share data)
                                                             (Unaudited)

                                                                  Three Months Ended                    Nine Months Ended
                                                                     September 30,                        September 30,
                                                           ------------------------------       ------------------------------
                                                                1997              1996               1997              1996
                                                           -------------     ------------       ------------      ------------
<S>                                                        <C>               <C>                <C>               <C>          
OPERATING REVENUES
  Electric                                                 $       1,227     $      1,055       $      3,133      $      3,004
  Gas                                                                270              215              1,328             1,309
  Nonutility Activities                                               71               65                162               157
                                                           -------------     ------------       ------------      ------------
       Total Operating Revenues                                    1,568            1,335              4,623             4,470
                                                           -------------     ------------       ------------      ------------
OPERATING EXPENSES
Operation:
  Fuel for Electric Generation and Interchanged Power                372              254                863               686
  Gas Purchased                                                      144              140                745               783
  Other                                                              281              237                798               744
Maintenance                                                           69               62                197               245
Depreciation and Amortization                                        156              152                462               456
Taxes:
  Federal Income Taxes                                                93               70                245               224
  New Jersey Gross Receipts Taxes                                    132              133                421               452
  Other                                                               20               22                 63                68
                                                           -------------     ------------       ------------      ------------
       Total Operating Expenses                                    1,267            1,070              3,794             3,658
                                                           -------------     ------------       ------------      ------------
OPERATING INCOME                                                     301              265                829               812
OTHER INCOME AND DEDUCTIONS
  Settlement of Salem Litigation - Net of Applicable
     Taxes of  $29                                                    --               --                (53)               --
  Other - net                                                          2               (3)                 6                (7)
                                                           -------------     ------------       ------------      ------------
       Total Other Income and Deductions                               2               (3)               (47)               (7)
                                                           -------------     ------------       ------------      ------------
INCOME BEFORE INTEREST CHARGES AND
DIVIDENDS ON PREFERRED SECURITIES                                    303              262                782               805
                                                           -------------     ------------       ------------      ------------
INTEREST EXPENSE AND PREFERRED DIVIDENDS
  Interest Expense                                                   119              113                345               339
  Allowance for Funds Used During Construction - Debt and
  Capitalized Interest                                                (6)              (4)               (15)              (13)
  Preferred Securities Dividend Requirements                          14               13                 42                38
  Net Loss (Gain) on Preferred Stock Redemptions                      --               --                  3               (19)
                                                           -------------     ------------       ------------      ------------
       Total Interest Expense and Preferred Dividends                127              122                375               345
                                                           -------------     ------------       ------------      ------------
INCOME FROM CONTINUING OPERATIONS                                    176              140                407               460
Discontinued Operations:
  Discontinued Operations - Net of Taxes (Note 5)                     --                3                 --                11
  Gain on Sale of Discontinued Operations                             --               13                 --                13
                                                           -------------     ------------       ------------      ------------
NET INCOME                                                 $         176     $        156       $        407      $        484
                                                           =============     ============       ============      ============

AVERAGE SHARES OF COMMON STOCK
   OUTSTANDING (000's)                                           231,958          243,114            231,995           244,166
EARNINGS PER AVERAGE SHARE
  Income From Continuing Operations                                $0.76            $0.57              $1.75             $1.88
  Income From Discontinued Operations                                 --             0.01                 --              0.04
  Gain on Sale of Discontinued Operations                             --             0.06                 --              0.06
                                                           -------------     ------------       ------------      ------------
       TOTAL EARNINGS PER AVERAGE SHARE                            $0.76            $0.64              $1.75             $1.98
                                                           =============     ============       ============      ============

DIVIDENDS PAID PER SHARE OF COMMON
  STOCK                                                            $0.54            $0.54              $1.62             $1.62
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

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


                                                                                 (Unaudited)
                                                                                 September 30,         December 31,
                                                                                    1997                  1996
                                                                                -------------         ------------
<S>                                                                               <C>                   <C>    
UTILITY PLANT - Original cost
  Electric                                                                        $13,605               $13,314
  Gas                                                                               2,659                 2,556
  Common                                                                              559                   530
                                                                                  -------               -------
       Total                                                                       16,823                16,400
  Less: Accumulated depreciation and amortization                                   6,353                 5,889
                                                                                  -------               -------
       Net                                                                         10,470                10,511
  Nuclear Fuel in Service, net of accumulated amortization -
     1997, $308; 1996, $259                                                           147                   199
                                                                                  -------               -------
       Net Utility Plant in Service                                                10,617                10,710
  Construction Work in Progress, including Nuclear Fuel in
    Process - 1997, $138; 1996, $70                                                   405                   445
  Plant Held for Future Use                                                            24                    24
                                                                                  -------               -------
       Net Utility Plant                                                           11,046                11,179
                                                                                  -------               -------
INVESTMENTS AND OTHER NONCURRENT ASSETS
 Long-Term Investments, net of amortization - 1997, $19; 1996,
    $13, and net of valuation allowances - 1997, $12; 1996, $13                     2,357                 1,854
 Nuclear Decommissioning and Other Special Funds                                      463                   382
 Other Noncurrent Assets                                                              159                   116
                                                                                  -------               -------
       Total Investments and Other Noncurrent Assets                                2,979                 2,352
                                                                                  -------               -------
CURRENT ASSETS
  Cash and Cash Equivalents                                                            88                   279
  Accounts Receivable:
    Customer Accounts Receivable                                                      421                   500
    Other Accounts Receivable                                                         229                   245
    Less: Allowance for Doubtful Accounts                                              39                    46
  Unbilled Revenues                                                                   169                   248
  Fuel, at average cost                                                               325                   313
  Materials and Supplies, at average cost, net of inventory valuation
    reserves - 1997, $14; 1996, $16                                                   147                   148
  Prepaid Gross Receipts Taxes                                                        169                    --
  Miscellaneous Current Assets                                                         82                    57
                                                                                  -------               -------
       Total Current Assets                                                         1,591                 1,744
                                                                                  -------               -------
DEFERRED DEBITS
  Property Abandonments                                                                41                    52
  Oil and Gas Property Write-Down                                                      27                    31
  Unamortized Debt Expense                                                            138                   139
  Deferred OPEB Costs  (Note 2)                                                       297                   226
  Unrecovered Environmental Costs  (Note 2)                                           125                   126
  Unrecovered Plant and Regulatory Study Costs                                         33                    34
  Underrecovered Electric Energy and Gas Costs  (Note 6)                              153                   176
  Unrecovered SFAS 109 Deferred Income Taxes                                          732                   752
  Deferred Decontamination and Decommissioning Costs                                   43                    47
  Deferred Demand Side Management Costs  (Notes 2 and 6)                               98                    40
  Other                                                                                 3                    17
                                                                                  -------               -------
       Total Deferred Debits                                                        1,690                 1,640
                                                                                  -------               -------
Total                                                                             $17,306               $16,915
                                                                                  =======               =======
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

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


                                                                                 (Unaudited)
                                                                                 September 30,         December 31,
                                                                                     1997                 1996
                                                                                 -------------         ------------
<S>                                                                                <C>                  <C>    
CAPITALIZATION
  Common Equity:
    Common Stock                                                                   $ 3,603              $ 3,627
    Retained Earnings                                                                1,596                1,586
                                                                                   -------              -------
       Total Common Equity                                                           5,199                5,213
  Subsidiaries' Preferred Securities:
    Preferred Stock Without Mandatory Redemption                                        95                  114
    Preferred Stock With Mandatory Redemption                                           75                  150
    Monthly Guaranteed Preferred Beneficial Interest in PSE&G's
       Subordinated Debentures                                                         210                  210
    Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's
      Subordinated Debentures                                                          303                  208
  Long-Term Debt                                                                     4,623                4,580
                                                                                   -------              -------
       Total Capitalization                                                         10,505               10,475
                                                                                   -------              -------
OTHER LONG-TERM LIABILITIES
  Decontamination and Decommissioning Costs                                             43                   47
  Environmental Costs                                                                   80                   86
  Capital Lease Obligations                                                             52                   52
                                                                                   -------              -------
       Total Other Long-Term Liabilities                                               175                  185
                                                                                   -------              -------
CURRENT LIABILITIES
  Long-Term Debt due within one year                                                   471                  548
  Commercial Paper and Loans                                                         1,060                  638
  Accounts Payable                                                                     665                  697
  Other Taxes Accrued                                                                   26                   32
  Interest Accrued                                                                     103                   96
  Other                                                                                177                  261
                                                                                   -------              -------
       Total Current Liabilities                                                     2,502                2,272
                                                                                   -------              -------
DEFERRED CREDITS
  Deferred Income Taxes                                                              3,357                3,250
  Deferred Investment Tax Credits                                                      348                  361
  Deferred OPEB Costs                                                                  297                  226
  Other                                                                                122                  146
                                                                                   -------              -------
       Total Deferred Credits                                                        4,124                3,983
                                                                                   -------              -------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 3)                                         --                   --
                                                                                   -------              -------
Total                                                                              $17,306              $16,915
                                                                                   =======              =======
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (Millions of Dollars)
                                   (Unaudited)


                                                                           Nine Months Ended September 30,
                                                                           -------------------------------
                                                                                1997              1996
                                                                               -----           -------
<S>                                                                            <C>             <C>    
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                                                   $ 407           $   484
  Adjustments to reconcile net income to net cash flows from
   operating activities:
    Depreciation and Amortization                                                462               456
    Amortization of Nuclear Fuel                                                  47                43
    Recovery (deferral) of Electric Energy and Gas Costs - net                    23               (33)
    Unrealized Gains on Investments - net                                        (37)              (19)
    Provision for Deferred Income Taxes - net                                     16                25
    Investment Tax Credits - net                                                 (13)              (15)
    Allowance for Funds Used During Construction - Debt and
      Capitalized Interest                                                       (15)              (13)
    Proceeds from Leasing Activities                                              76                58
    Changes in certain current assets and liabilities:
     Net decrease in Accounts Receivable and Unbilled Revenues                   167               215
     Net increase in Inventory - Fuel and Materials and Supplies                 (11)              (57)
     Net decrease in Accounts Payable                                            (32)              (38)
     Net change in Prepaid / Other Accrued Taxes                                (175)              (99)
     Net change in Other Current Assets and Liabilities                         (102)               78
    Other                                                                        (35)              (26)
    Net cash provided by operating activities - Discontinued
      Operations                                                                  --                54
                                                                               -----           -------
       Net cash provided by operating activities                                 778             1,113
                                                                               -----           -------
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Utility Plant, excluding AFDC                                    (383)             (428)
  Net increase in Long-Term Investments and Real Estate                         (438)              (14)
  Contribution to Decommissioning Funds and Other Special Funds                  (43)              (18)
  Cost of Plant Removal - net                                                    (23)              (20)
  Other                                                                          (42)              (15)
  Net Proceeds from the Sale of Discontinued Operations                           --               707
  Change in Net Assets - Discontinued Operations                                  --              (395)
                                                                               -----           -------
       Net cash used in investing activities                                    (929)             (183)
                                                                               -----           -------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net increase  in Short-Term Debt                                               422                76
  Issuance of Long-Term Debt                                                     454               370
  Redemption of Long-Term Debt                                                  (488)             (435)
  Long-Term Debt Issuance and Redemption Costs                                    (8)              (38)
  Redemption of Preferred Stock                                                  (94)             (212)
  Issuance of Preferred Securities of Subsidiaries                                95               208
  Retirement of Common Stock                                                     (43)             (105)
  Cash Dividends Paid on Common Stock                                           (376)             (395)
  Other                                                                           (2)               (7)
                                                                               -----           -------
       Net cash used in financing activities                                     (40)             (538)
                                                                               -----           -------
Net (decrease) increase in Cash and Cash Equivalents                            (191)              392
Cash and Cash Equivalents at Beginning of Period                                 279                62
                                                                               =====           =======
Cash and Cash Equivalents at End of Period                                     $  88           $   454
                                                                               =====           =======

Income Taxes Paid                                                              $ 118           $   112
Interest Paid                                                                  $ 302           $   353
<FN>
   See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                  CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
                              (Millions of Dollars)
                                   (Unaudited)


                                                     Three Months Ended September 30,   Nine Months Ended September 30,
                                                     --------------------------------   -------------------------------
                                                           1997            1996            1997            1996
                                                         ------          ------          ------          ------
<S>                                                      <C>             <C>             <C>             <C>   
Balance at Beginning of Period                           $1,544          $1,695          $1,586          $1,637

Add:  Net Income                                            176             156             407             484
                                                         ------          ------          ------          ------

       Total                                              1,720           1,851           1,993           2,121
                                                         ------          ------          ------          ------

Deduct:
  Cash Dividends on Common Stock                            124             131             376             395
  Retirement of Common Stock                                 --              45              18              45
  Preferred Securities Issuance Expenses                     --              --               3               6
                                                         ------          ------          ------          ------

       Total Deductions                                     124             176             397             446
                                                         ------          ------          ------          ------

Balance at End of Period                                 $1,596          $1,675          $1,596          $1,675
                                                         ======          ======          ======          ======

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



                      [THIS PAGE INTENTIONALLY LEFT BLANK]

<PAGE>
<TABLE>
<CAPTION>

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

                                                                  Three Months Ended                    Nine Months Ended
                                                                     September 30,                        September 30,
                                                            -----------------------------        ------------------------------
                                                                1997              1996               1997              1996
                                                            ------------     ------------        ------------      ------------
<S>                                                         <C>              <C>                 <C>               <C>          
OPERATING REVENUES
  Electric                                                  $      1,227     $      1,055         $     3,133      $      3,004
  Gas                                                                270              215               1,328             1,309
                                                            ------------     ------------        ------------      ------------
       Total Operating Revenues                                    1,497            1,270               4,461             4,313
                                                            ------------     ------------        ------------      ------------

OPERATING EXPENSES
Operation:
  Fuel for Electric Generation and Interchanged Power                372              254                 863               686
  Gas Purchased                                                      144              140                 745               783
  Other                                                              259              220                 736               698
Maintenance                                                           69               62                 197               245
Depreciation and Amortization                                        155              150                 459               453
Taxes:
  Federal Income Taxes                                                84               60                 231               204
  New Jersey Gross Receipts Taxes                                    132              133                 421               452
  Other                                                               18               21                  58                63
                                                            ------------     ------------        ------------      ------------
       Total Operating Expenses                                    1,233            1,040               3,710             3,584
                                                            ------------     ------------        ------------      ------------

OPERATING INCOME                                                     264              230                 751               729

OTHER INCOME AND DEDUCTIONS
   Settlement of Salem Litigation - Net of Applicable
      Taxes of  $29                                                   --               --                 (53)               --
  Other - net                                                          2               (4)                  6                (6)
                                                            ------------     ------------        ------------      ------------

       Total Other Income and Deductions                               2               (4)                (47)               (6)
                                                            ------------     ------------        ------------      ------------

INCOME BEFORE INTEREST CHARGES AND
DIVIDENDS ON PREFERRED SECURITIES                                    266              226                 704               723
                                                            ------------     ------------        ------------      ------------

INTEREST EXPENSE AND PREFERRED SECURITIES
   DIVIDENDS
  Interest Expense                                                   100               99                 296               302
  Allowance for Funds Used During Construction - Debt                 (4)              (4)                (12)              (12)
  Preferred Securities Dividend Requirement
      of  Subsidiaries                                                11                9                  33                19
                                                            ------------     ------------        ------------      ------------

       Total Interest Expense and Preferred Securities
             Dividends                                               107              104                 317               309
                                                            ------------     ------------        ------------      ------------

NET INCOME                                                           159              122                 387               414

  Preferred Stock Dividend Requirements                                2                4                  10                19

  Net Loss (Gain) on Preferred Stock Redemptions                      --               --                   3               (19)
                                                            ------------     ------------        ------------      ------------

EARNINGS AVAILABLE TO PUBLIC SERVICE
ENTERPRISE GROUP INCORPORATED                               $        157     $        118        $        374      $        414
                                                            ============     ============        ============      ============
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

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

                                                                                    (Unaudited)
                                                                                    September 30,               December 31,
                                                                                        1997                       1996
                                                                                    -------------               ------------
<S>                                                                                    <C>                        <C>   
UTILITY PLANT - Original cost
  Electric                                                                             $13,605                    $13,314
  Gas                                                                                    2,659                      2,556
  Common                                                                                   559                        530
                                                                                       -------                    -------
       Total                                                                            16,823                     16,400
  Less: Accumulated depreciation and amortization                                        6,353                      5,889
                                                                                       -------                    -------
       Net                                                                              10,470                     10,511
  Nuclear Fuel in Service, net of accumulated amortization -
    1997, $308; 1996, $259                                                                 147                        199
                                                                                       -------                    -------
       Net Utility Plant in Service                                                     10,617                     10,710
  Construction Work in Progress, including Nuclear Fuel in
    Process - 1997, $138; 1996, $70                                                        405                        445
  Plant Held for Future Use                                                                 24                         24
                                                                                       -------                    -------
       Net Utility Plant                                                                11,046                     11,179
                                                                                       -------                    -------
INVESTMENTS AND OTHER NONCURRENT ASSETS
  Long-Term Investments, net of amortization - 1997, $19; 1996,
    $13, and net of valuation allowances - 1997, $10; 1996, $10                            136                        134
  Nuclear Decommissioning and Other Special Funds                                          463                        382
  Other Noncurrent Assets                                                                   19                         19
                                                                                       -------                    -------
       Total Investments and Other Noncurrent Assets                                       618                        535
                                                                                       -------                    -------
CURRENT ASSETS
  Cash and Cash Equivalents                                                                 25                         48
  Accounts Receivable:
    Customer Accounts Receivable                                                           421                        500
    Other Accounts Receivable                                                              174                        179
    Less: Allowance for Doubtful Accounts                                                   39                         46
  Accounts Receivable - Associated Companies - net                                          --                          4
  Unbilled Revenues                                                                        169                        248
  Fuel, at average cost                                                                    325                        313
  Materials and Supplies, at average cost, net of inventory
    valuation reserves - 1997, $14; 1996, $16                                              147                        148
  Prepaid Gross Receipts Taxes                                                             169                         --
  Miscellaneous Current Assets                                                              78                         53
                                                                                       -------                    -------
       Total Current Assets                                                              1,469                      1,447
                                                                                       -------                    -------
DEFERRED DEBITS
  Property Abandonments                                                                     41                         52
  Oil and Gas Property Write-Down                                                           27                         31
  Unamortized Debt Expense                                                                 137                        138
  Deferred OPEB Costs  (Note 2)                                                            297                        226
  Unrecovered Environmental Costs  (Note 2)                                                125                        126
  Unrecovered Plant and Regulatory Study Costs                                              33                         34
  Underrecovered Electric Energy and Gas Costs  (Note 6)                                   153                        176
  Unrecovered SFAS 109 Deferred Income Taxes                                               732                        752
  Deferred Decontamination and Decommissioning Costs                                        43                         47
  Deferred Demand Side Management Costs  (Notes 2 and 6)                                    98                         40
  Other                                                                                      3                         16
                                                                                       -------                    -------
       Total Deferred Debits                                                             1,689                      1,638
                                                                                       -------                    -------
Total                                                                                  $14,822                    $14,799
                                                                                       =======                    =======

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

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



                                                                                       (Unaudited)
                                                                                       September 30,                December 31,
                                                                                           1997                        1996
                                                                                     -----------------            ----------------
<S>                                                                                         <C>                         <C>    
CAPITALIZATION
  Common Equity:
    Common Stock                                                                            $ 2,563                     $ 2,563
    Contributed Capital from Enterprise                                                         594                         594
    Retained Earnings                                                                         1,345                       1,365
                                                                                            -------                     -------
       Total Common Equity                                                                    4,502                       4,522
  Preferred Stock Without Mandatory Redemption                                                   95                         114
  Preferred Stock  With Mandatory Redemption                                                     75                         150
  Subsidiaries' Preferred Securities:
    Monthly Guaranteed Preferred Beneficial Interest in PSE&G's
       Subordinated Debentures                                                                  210                         210
    Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's
      Subordinated Debentures                                                                   303                         208
  Long-Term Debt                                                                              4,126                       4,107
                                                                                            -------                     -------
       Total Capitalization                                                                   9,311                       9,311
                                                                                            -------                     -------
OTHER LONG-TERM LIABILITIES
  Decontamination and Decommissioning Costs                                                      43                          47
  Environmental Costs                                                                            80                          86
  Capital Lease Obligations                                                                      52                          52
                                                                                            -------                     -------
       Total Other Long-Term Liabilities                                                        175                         185
                                                                                            -------                     -------

CURRENT LIABILITIES
  Long-Term Debt due within one year                                                            268                         424
  Commercial Paper and Loans                                                                    928                         638
  Accounts Payable                                                                              594                         627
  Accounts Payable - Associated Companies - net                                                  21                          --
  Other Taxes Accrued                                                                            33                          33
  Interest Accrued                                                                               83                          87
  Other                                                                                         143                         221
                                                                                            -------                     -------
       Total Current Liabilities                                                              2,070                       2,030
                                                                                            -------                     -------
DEFERRED CREDITS
  Deferred Income Taxes                                                                       2,521                       2,557
  Deferred Investment Tax Credits                                                               338                         352
  Deferred OPEB Costs                                                                           297                         226
  Other                                                                                         110                         138
                                                                                            -------                     -------
       Total Deferred Credits                                                                 3,266                       3,273
                                                                                            -------                     -------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 3)                                                  --                          --
                                                                                            -------                     -------
Total                                                                                       $14,822                     $14,799
                                                                                            =======                     =======

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

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


                                                                                         Nine Months Ended September 30,
                                                                                         --------------------------------
                                                                                             1997                1996
                                                                                         -------------      -------------
<S>                                                                                        <C>                <C>     
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                                                               $    387           $    414
  Adjustments to reconcile net income to net cash flows from
   operating activities:
    Depreciation and Amortization                                                               458                452
    Amortization of Nuclear Fuel                                                                 47                 43
    Recovery (deferral) of Electric Energy and Gas Costs - net                                   23                (33)
    Provision for Deferred Income Taxes - net                                                   (16)                 6
    Investment Tax Credits - net                                                                (14)               (14)
    Allowance for Funds Used During Construction - Debt                                         (12)               (12)
    Changes in certain current assets and liabilities:
     Net decrease in Accounts Receivable and Unbilled Revenues                                  160                223
     Net increase in Inventory - Fuel and Materials and Supplies                                (11)               (57)
     Net decrease in Accounts Payable                                                           (12)               (37)
     Net change in Prepaid / Other Accrued Taxes                                               (169)              (143)
     Net change in Other Current Assets and Liabilities                                        (107)                72
    Other                                                                                       (38)               (20)
                                                                                           --------          ---------
       Net cash provided by operating activities                                                696                894
                                                                                           --------          ---------
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Utility Plant, excluding AFDC                                                   (383)              (428)
  Net increase in Long-Term Investments                                                         (10)               (37)
  Contribution to Decommissioning Funds and Other Special Funds                                 (43)               (18)
  Cost of Plant Removal - net                                                                   (23)               (20)
                                                                                           --------          ---------
       Net cash used in investing activities                                                   (459)              (503)
                                                                                           --------          ---------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net increase in Short-Term Debt                                                               290                 76
  Issuance of Long-Term Debt                                                                    279                370
  Redemption of Long-Term Debt                                                                 (416)              (413)
  Long-Term Debt Issuance and Redemption Costs                                                   (7)               (39)
  Redemption of Preferred Stock                                                                 (94)              (212)
  Net (Loss) Gain on Preferred Stock Redemptions                                                 (3)                19
  Issuance of Preferred Securities of Subsidiaries                                               95                208
  Cash Dividends Paid                                                                          (401)              (404)
  Other                                                                                          (3)                (5)
                                                                                           --------          ---------
       Net cash used in financing activities                                                   (260)              (400)
                                                                                           --------          ---------
Net decrease in Cash and Cash Equivalents                                                       (23)                (9)
Cash and Cash Equivalents at Beginning of Period                                                 48                 32
                                                                                           --------          ---------
Cash and Cash Equivalents at End of Period                                                 $     25           $     23
                                                                                           ========           ========
Income Taxes Paid                                                                          $    205           $    163
Interest Paid                                                                              $    271           $    295
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

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


                                                      Three Months Ended September 30,     Nine Months Ended September 30,
                                                      --------------------------------     -------------------------------
                                                             1997             1996             1997              1996
                                                           -------          -------          -------           -------
<S>                                                        <C>              <C>              <C>               <C>    
Balance at Beginning of Period                             $ 1,327          $ 1,398          $ 1,365           $ 1,366

Add:  Net Income                                               159              122              387               414
                                                           -------          -------          -------           -------

       Total                                                 1,486            1,520            1,752             1,780
                                                           -------          -------          -------           -------

Deduct:
  Cash Dividends on Common Stock                               138              127              391               385
  Preferred Stock, at required rates                             3                4               10                19
  Preferred Securities Issuance Expenses                        --               --                3                 6
                                                           -------          -------          -------           -------

       Total Deductions                                        141              131              404               410
                                                           -------          -------          -------           -------

Net (Loss) Gain on Preferred Stock Redemptions                  --               --               (3)               19
                                                           -------          -------          -------           -------

Balance at End of Period                                   $ 1,345          $ 1,389          $ 1,345           $ 1,389
                                                           =======          =======          =======           =======

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






                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 1.  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 financial  statements and Notes to Consolidated
Financial  Statements  (Notes) should be read in conjunction with the respective
Registrant's  Notes  contained  in the 1996  Annual  Report on Form 10-K and the
quarterly  reports on Form 10-Q for the  quarters  ended March 31, 1997 and June
30, 1997. These Notes update and supplement matters discussed in the 1996 Annual
Report  on Form 10-K and the  quarterly  reports  on Form 10-Q for the  quarters
ended March 31, 1997 and June 30, 1997.

     The unaudited  financial  information  furnished  reflects all  adjustments
which are, in the opinion of  management,  necessary to fairly state the results
for the interim periods presented. The year-end consolidated balance sheets were
derived from the audited consolidated  financial statements included in the 1996
Annual Report on Form 10-K. Certain  reclassifications  of the prior year's data
have been made to conform with the current presentation.

Note 2.  Rate Matters

     Interim Competition Transition Charge (ICTC)

     On April 24, 1997, the New Jersey Board of Public  Utilities (BPU) issued a
generic  order to  investigate  policy issues  related to whether  customers who
cease to receive  electric  service from a utility and go to on-site  generation
should be charged an exit fee.  As a result,  Public  Service  Electric  and Gas
Company's (PSE&G) petition and motions concerning its September 1996 ICTC filing
have been placed in abeyance  pending the  conclusion  of the  separate  generic
proceeding  on this issue.  The generic ICTC matter  continues to be reviewed by
the BPU. PSE&G cannot predict the outcome of this proceeding.

     Levelized Gas Adjustment Charge (LGAC)

     On July 30, 1997, the BPU authorized PSE&G to hedge or lock-in up to 50% of
its residential  natural gas portfolio,  which may be accomplished  using either
physical or financial hedging  mechanisms,  beginning with the 1997-1998 heating
season.  Such hedges are intended to provide  price  stability  for  residential
customers (see Note 4 - Financial Instruments and Risk Management).

     On November 14, 1997,  PSE&G filed its 1997/98 LGAC  petition  with the BPU
requesting a $45 million  increase on an annual basis in its LGAC for the period
January 1, 1998 to December 31, 1998.  Current rates will remain in effect until
a change is approved by the BPU. This increase amounts to approximately  4.8% on
a typical residential bill.

     Demand Side Adjustment Factor (DSAF)

     On February 24,  1997,  PSE&G  requested  that the BPU grant a $151 million
increase for its DSAF to reflect  increases in the costs associated with PSE&G's
Demand Side  Management  (DSM)  Programs.  That request is presently  before the
Office of  Administrative  Law (OAL).  The increase had been requested to become
effective on May 1, 1997 and continue  through  December 31, 1998. A hearing was
held before the OAL on September  23, 1997 and this  proceeding  is currently in
the briefing process. PSE&G cannot predict the outcome of this proceeding or the
impact on PSE&G's future financial condition, results of operations and net cash
flows (see Note 6 - Deferred Items).


<PAGE>


     Remediation Adjustment Charge (RAC)

     On August 1, 1997,  PSE&G  requested that the BPU approve  recovery of $6.8
million through PSE&G's RAC for manufactured gas plant  remediation  costs. This
request  represents an increase in the amount of PSE&G's  recovery of such costs
by approximately  $2 million over current rate levels.  On October 9, 1997, this
matter was  transferred  to the OAL.  PSE&G  cannot  predict the outcome of this
proceeding.

     Postretirement Benefits Other Than Pensions (OPEB)

     BPU  consideration  of PSE&G's  petition to resolve the regulatory and rate
issues  associated  with  Statement of Financial  Accounting  Standards  No. 106
"Employers'  Accounting for  Postretirement  Benefits Other Than Pensions" (SFAS
106)  continues.  The petition  requests the BPU to recognize  that current base
rates are sufficient to recover  PSE&G's  accrued and deferred OPEB costs.  This
petition  was filed in response  to a January 8, 1997 BPU Order which  adopted a
stipulation of the parties for determining accrual expense recognition under one
of the  rate  mechanisms  established  in  the  BPU's  August  1,  1996  Generic
Proceeding. PSE&G cannot predict the outcome of this proceeding or the impact on
PSE&G's future financial condition, results of operations and net cash flows.

Note 3.  Commitments and Contingent Liabilities

     Hazardous Waste

     Certain Federal and State laws authorize the U.S. Environmental  Protection
Agency (EPA) and the New Jersey Department of Environmental  Protection (NJDEP),
among other agencies,  to issue orders and bring  enforcement  actions to compel
responsible parties to investigate and take remedial actions at any site that is
determined  to present an imminent and  substantial  danger to the public or the
environment  because of an actual or threatened release of one or more hazardous
substances.  Because of the nature of PSE&G's business, including the production
of electricity,  the distribution of gas and, formerly,  the manufacture of gas,
various by-products and substances are or were produced or handled which contain
constituents classified as hazardous.  PSE&G generally provides for the disposal
or processing  of such  substances  through  licensed  independent  contractors.
However,  these  statutory  provisions  impose joint and several  responsibility
without regard to fault on all responsible parties,  including the generators of
the hazardous  substances,  for certain  investigative  and remediation costs at
sites where these  substances  were  disposed  of or  processed.  PSE&G has been
notified  with  respect  to a number  of such  sites and the  investigation  and
remediation of these potentially hazardous sites is receiving attention from the
government agencies involved.  Generally,  actions directed at funding such site
investigations  and  remediation  include  all  suspected  or known  responsible
parties.  Except as discussed below with respect to the  Manufactured  Gas Plant
Remediation  Program  (Remediation  Program),  Public Service  Enterprise  Group
Incorporated (Enterprise) and PSE&G do not expect expenditures for any such site
to have a material effect on financial condition,  results of operations and net
cash flows.

     The NJDEP has recently revised  regulations  concerning site  investigation
and  remediation.  These  regulations  will require an ecological  evaluation of
potential   injuries  to  natural   resources  in  connection  with  a  remedial
investigation  of contaminated  sites.  The NJDEP is presently  working with the
utility industry to develop procedures for implementing these regulations. PSE&G
is  presently  unable to  determine  or  estimate  the  impact of these  revised
regulations  on its future  financial  condition,  results of operations and net
cash flows.

     PSE&G Manufactured Gas Plant Remediation Program

     PSE&G is  currently  working  with the  NJDEP  under a program  to  assess,
investigate  and, if necessary,  remediate  environmental  concerns at 38 former
manufactured gas plant sites. The Remediation  Program is periodically  reviewed
and  revised by PSE&G  based on  regulatory  requirements,  experience  with the
Remediation  Program and  available  remediation  technologies.  The cost of the
Remediation  Program  cannot be  reasonably  estimated,  but  experience to date
indicates  that costs of  approximately  $20  million per year could be incurred
over a period of more than 30 years and that the overall  cost could be material
to Enterprise's and PSE&G's financial  condition,  results of operations and net
cash flows (see Note 2 - Rate Matters - Remediation Adjustment Charge).


<PAGE>


     Settlement of Salem Litigation

     On May 12,  1997,  PSE&G  settled  the lawsuit  brought  against it by PECO
Energy Company (PECO) and Delmarva Power & Light Company  (DP&L),  two co-owners
of the Salem Nuclear  Generating  Station  (Salem),  related to alleged  damages
resulting  from the outage of the facility.  Under the terms of the  settlement,
PSE&G will pay a total of $82  million to PECO and DP&L by  December  31,  1997.
This  settlement  resulted in an after-tax  charge to earnings,  recorded in the
first  quarter of 1997,  of $53 million or $.23 per share of  Enterprise  common
stock.  PSE&G is also  obligated to pay $1.4 million for each reactor month that
the outage continues  beyond an aggregate  outage of 64 reactor months,  up to a
maximum payment under this provision of $17 million.  As of October 31, 1997, an
aggregate  of  approximately  56  reactor  months had  accumulated  due to Salem
outages. PSE&G does not expect to make any payments under this provision.  Salem
2 returned  to service on August 30,  1997 and is  currently  operating  at 100%
power. Salem 1 is expected to return to service in the first quarter of 1998.

     PECO, DP&L and PSE&G have also agreed to an operating  performance standard
through  December 31, 2011 for Salem and through  December 31, 2007 for the PECO
operated Peach Bottom Atomic Power Station (Peach Bottom).  Under this standard,
the operator of each  respective  station  would be required to make payments to
the non-operating owners if the three-year capacity factor, determined annually,
of such station falls below 40 percent,  subject to a maximum of $25 million per
year. The initial  three-year  period begins on January 1, 1998 for Peach Bottom
and on the date the later of the two Salem  units  (Salem 1)  returns to service
for Salem.  The parties have further agreed to forego  litigation in the future,
except for limited cases in which the operator would be responsible  for damages
of no more than $5 million per year.

     PSE&G and Atlantic  City  Electric  Company (ACE) entered into an operating
agreement  which  resulted  in the  dismissal  of a  lawsuit  related  to  Salem
performance  initiated by ACE.  Under the  agreement,  ACE pays a portion of its
share of the 1997 operation and  maintenance  (O&M) expenses based on the amount
of  generation  of the Salem units.  PSE&G  expects to incur  approximately  $13
million  of ACE's  share of 1997 O&M  expenses,  of which $10  million  has been
expensed as of September  30, 1997,  since Salem 2 did not operate for the first
eight  months of 1997 and Salem 1 is not  expected  to return to service  during
1997.

     Year 2000

     Many of Enterprise's  and PSE&G's  computer systems must be modified due to
computer  program  limitations  in  recognizing  dates beyond 1999.  Substantial
changes to, and some replacements of,  Enterprise's and PSE&G's present computer
systems  are being made to allow the  information  and  operating  systems to be
"Year 2000"  compliant.  Costs,  which may be  material,  are being  expensed as
incurred.  An  inability  to meet this  deadline  could have a material  adverse
impact on Enterprise's and PSE&G's operations,  financial condition,  results of
operations and net cash flows.

Note 4.  Financial Instruments and Risk Management

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

     Natural Gas

     Through  September  30,  1997,  Energis  Resources   Incorporated  (Energis
Resources), a subsidiary of Enterprise Diversified Holdings Incorporated (EDHI),
entered into  futures  contracts  to buy an  aggregate  of  13,060,000  mmbtu of
natural gas at average prices of $2.37 per mmbtu related to fixed-price  natural
gas  sales  commitments.   Such  contracts,   together  with  physical  purchase
contracts,  hedged  approximately  96% of its fixed-price  sales  commitments at
September  30, 1997.  Energis  Resources  had net  unrealized  hedge gains of $4
million at September 30, 1997.

     PSE&G enters into forward physical contracts and uses financial derivatives
to mitigate  its future  natural  gas price risk.  During  October  1997,  PSE&G
entered  into  contracts  to  hedge a  limited  quantity  of gas  against  price
movements in the winter months of 1997 - 1998 and 1998 - 1999 (see Note 2 - Rate
Matters - Levelized Gas Adjustment Charge).


<PAGE>


     Electricity

     PSE&G enters into forward physical contracts and uses financial derivatives
to manage price risk related to forecasted  electric  sales to customers.  These
contracts,  in conjunction with owned generating capacity, are designed to cover
estimated electric retail customer commitments.  Remaining requirements, if any,
would be satisfied by power purchased from the Pennsylvania-New  Jersey-Maryland
Interconnection (PJM) spot market or through daily or weekly purchase contracts.

     Interest Rate Swap

     On June 2, 1997,  an indirect  subsidiary of EDHI entered into an agreement
to swap  floating  rate  borrowings  into fixed rate  borrowings.  The  interest
differential  to be received or paid under the interest  rate swap  agreement is
recorded over the life of the agreement as an adjustment to the interest expense
of the related borrowing. The swap terminates on May 28, 1999.

     The notional amount and interest rates are as follows:

Pay-fixed swap
      Notional amount                                  $43,522,000
      Pay rate                                               6.65%
      Average receive rate - YTD                             5.69%
      September 30, 1997 receive rate                        5.73%

Note 5.  Discontinued Operations

     Prior year operating  results of Energy  Development  Corporation (EDC) are
summarized below:

                                   Three Months Ended        Nine Months Ended
                                   September 30, 1996        September 30, 1996
                                   ------------------        ------------------
                                               (Millions of Dollars)
  Revenues                                $--                       $126
  Operating income                         --                         23
  Earnings before income taxes             --                          9
  Income taxes                             (3)                        (2)
  Net income                                3                         11

* EDC was sold on July 31, 1996.

Note 6.  Deferred Items

     Underrecovered Electric Energy and Gas Costs

     Recoveries of electric energy and gas costs are determined by the BPU under
the Electric  Levelized Energy Adjustment Clause (LEAC) and the LGAC (see Note 2
- Rate  Matters -  Levelized  Gas  Adjustment  Charge).  PSE&G's  deferred  fuel
balances as of September  30, 1997 and December 31, 1996 reflect  underrecovered
costs as follows:

                                        September 30,        December 31,
                                            1997                 1996
                                        -------------        ------------
                                               (Millions of Dollars)
Underrecovered Electric Energy Costs          $88                  $151
Underrecovered Gas Fuel Costs                  65                    25
                                        -------------        ------------
             Total                           $153                  $176
                                        =============        ============

     PSE&G has the opportunity,  but no guarantee,  during the period January 1,
1997  through  December  31,  1998,  to fully  recover  its  December  31,  1996
underrecovered  LEAC balance of $151  million  without any change in the current
energy  component of the LEAC charge.  While  management  believes  that it will
recover  this  amount by  December  31, 1998 and  continues  to follow  deferred
accounting  treatment  for the LEAC,  full recovery of this balance is dependent
upon PSE&G's ability to successfully manage the cost of providing electricity.

<PAGE>
     Deferred Demand Side Management Costs

     Recoveries of DSM/conservation costs (related to BPU-approved programs) are
determined by the BPU. PSE&G's deferred DSM balance as of September 30, 1997 and
December 31, 1996, respectively, reflects  underrecovered/(overrecovered)  costs
as follows:

                                             September 30,        December 31,
                                                 1997                 1996
                                             -------------        ------------
                                                   (Millions of Dollars)
Deferred DSM (Including Interest) - Electric      $104                  $45
Deferred DSM (Including Interest) - Gas             (6)                  (5)
                                             -------------        ------------
                    Total                         $ 98                  $40
                                             =============        ============

     The  increase  in the  electric  balance is  primarily  due to the  ongoing
underrecovery of DSM costs. In February 1997, PSE&G filed for an increase in the
DSAF,  which is a component of the LEAC.  Approval of the filing would result in
recovery of the current  deferred DSM balance as well as the estimated  costs of
these  programs  through  December 1998 (see Note 2 - Rate Matters - Demand Side
Adjustment Factor).

Note 7.  Subsequent Events

     In October  1997,  Community  Energy  Alternatives  Incorporated  (CEA),  a
subsidiary of EDHI, as part of a three-member  consortium,  acquired a Brazilian
electric  distribution  company serving  customers in the State of Rio Grande Do
Sul, located in southern Brazil.  CEA's ownership of the company is 30.25%.  The
total purchase price was $1.49 billion of which CEA's share was $498 million.  A
portion of CEA's share,  $136 million,  was financed with nonrecourse debt. This
investment is considered an exempt foreign utility company.

     On October 21, 1997,  Enterprise  increased  its  uncommitted  bank line of
credit to $75 million from $25 million.  Enterprise  borrowed $75 million  under
this line of credit  which was  primarily  used to purchase  $75 million of 4.1%
Cumulative  Preferred  Stock sold by EDHI to  Enterprise.  Also in October 1997,
PSEG  Capital  Corporation  issued an  additional  $165  million of MTNs with an
average interest rate of 6.9%.  Enterprise  Capital Funding  Corporation's  debt
outstanding increased from $260 million as of September 30, 1997 to $392 million
as of October 31, 1997.

     On  November  1, 1997,  $150  million of PSE&G's 7 1/8% Series GG First and
Refunding  Mortgage Bonds  matured.  The redemption of these bonds was funded by
the issuance of commercial paper.




                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The  Notes  to   Consolidated   Financial   Statements  of  Enterprise  are
incorporated by reference insofar as they relate to PSE&G and its subsidiaries:

         Note 1.    Basis of Presentation
         Note 2.    Rate Matters
         Note 3.    Commitments and Contingent Liabilities
         Note 4.    Financial Instruments and Risk Management
         Note 6.    Deferred Items
         Note 7.    Subsequent Events


<PAGE>


                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS


     Following  are the  significant  changes  in or  additions  to  information
reported in the Public Service Enterprise Group  Incorporated  (Enterprise) 1996
Annual Report on Form 10-K affecting the  consolidated  financial  condition and
the results of operations of Enterprise and its  subsidiaries.  This  discussion
refers to the Consolidated  Financial Statements  (Statements) and related Notes
to Consolidated Financial Statements (Notes) of Enterprise and should be read in
conjunction with such Statements and Notes.

Results of Operations

     Earnings per share of Enterprise  common stock (Common  Stock) was $.76 for
the quarter ended  September 30, 1997,  representing  an increase of $.12 or 19%
per share from the comparable 1996 period.  Earnings per share was $1.75 for the
nine month period ended  September 30, 1997  representing  a decrease of $.23 or
12% per share from the comparable 1996 period.

     Public Service Electric and Gas Company's (PSE&G)  contribution to earnings
per share for the  quarter  ended  September  30, 1997  increased  $.16 from the
comparable 1996 period due to the one-time  charge to earnings,  $.25 per share,
in the third quarter of 1996 resulting from the resolution of certain regulatory
issues  with the BPU,  including  the "used and  useful"  issue  related  to the
extended outage of the Salem Nuclear Generating  Station (Salem).  This increase
was partially offset by higher nuclear operation and maintenance  expenses (O&M)
due to a  refueling  outage in the third  quarter of 1997 at Hope Creek  Nuclear
Generating Station (Hope Creek) and higher 1997 administrative costs,  including
Year 2000 compliance and technology consulting services.

     PSE&G's  contribution  to  earnings  per  share for the nine  months  ended
September  30,  1997  decreased  $.17 from the  comparable  1996  period  due to
decreased  revenues as a result of less  favorable  weather  conditions in 1997,
higher  administrative  costs  attributable  to legal fees  associated  with the
settlement of Salem co-owner  litigation and Year 2000 compliance and technology
consulting  services and a gain recorded in the second  quarter of 1996 from the
repurchase of a portion of PSE&G's  outstanding  cumulative  preferred  stock at
discounts  to par.  These  decreases  were  partially  offset by lower  1997 O&M
expenses at Hope Creek and Salem.  The nine month  periods  ended  September 30,
1997 and 1996 were each negatively impacted by one-time charges to earnings. The
settlement  of a lawsuit  filed by two of the  co-owners  of Salem  impacted the
first  quarter  of 1997 by $.26  per  share  and  the  Salem  regulatory  issues
settlement impacted the third quarter of 1996 by $.25 per share.

     Enterprise  Diversified  Holdings  Incorporated's  (EDHI)  contribution  to
earnings  per share for the  quarter and nine months  ended  September  30, 1997
decreased  $.08  and  $.15,  respectively,  from  the  comparable  1996  periods
primarily  due to the  absence  of 1996  earnings  related  to the  discontinued
operations of Energy Development Corporation (EDC) and higher operating expenses
of Energis Resources Incorporated (Energis Resources).  Public Service Resources
Corporation's (PSRC) earnings were lower for the nine months ended September 30,
1997 as a result of certain investment gains realized in 1996.

     As a result of  Enterprise's  stock  repurchase  program which concluded on
January 17,  1997,  earnings  per share of Common Stock for the quarter and nine
months ended September 30, 1997 increased $.04 and $.09, respectively,  from the
comparable  1996 periods.  A total of 12.7 million shares were  repurchased at a
cost of $350 million under this program.


<PAGE>


PSE&G - Revenues

     Electric

                                Increase (Decrease)        Increase (Decrease)
                              ------------------------   ----------------------
                                Three Months Ended          Nine Months Ended
                                   September 30,              September 30,
                                   1997 vs. 1996              1997 vs. 1996
                              ------------------------   ----------------------
                               (Millions of Dollars)      (Millions of Dollars)
                            
 Kilowatt-hour revenues                $ 49                         $(35)
 Recovery of energy costs               123                          183
 Non-margin revenues (A)                 (7)                         (24)
 Other operating revenues                 7                            5
                                       ----                         ----
  Total Electric Revenues              $172                         $129
                                       ====                         ====

     Revenues  increased $172 million or 16% for the quarter ended September 30,
1997  from the  comparable  period  in 1996.  Kilowatt-hour  revenues  increased
primarily  due to a charge to  revenue  in the third  quarter of 1996 due to the
Salem  regulatory  issues  settlement.  This increase was partially  offset by a
charge to revenue  recorded in the third quarter of 1997 resulting from a change
in  estimates  of  unbilled  electric  revenue  due to  refinements  of  PSE&G's
methodology.  Recovery of energy  costs  increased  primarily  as a result of an
increase in energy sales to wholesale customers.

     Revenues  increased $129 million or 4% for the nine months ended  September
30, 1997 from the comparable period in 1996, primarily due to higher recovery of
energy costs resulting from an increase in energy sales to wholesale customers.

     (A)   Non-margin  revenues  primarily  reflect  recoveries  for Demand Side
           Management  (DSM)  Program  costs,  nuclear   decommissioning  costs,
           uncollectibles and NJ Gross Receipts and Franchise Taxes (NJGRT).

      Gas

                                Increase (Decrease)        Increase (Decrease)
                              ------------------------   ----------------------
                                Three Months Ended          Nine Months Ended
                                   September 30,              September 30,
                                   1997 vs. 1996              1997 vs. 1996
                              ------------------------   ----------------------
                               (Millions of Dollars)      (Millions of Dollars)
                            
 Therm revenues                         $45                         $72
 Recovery of fuel costs                   5                         (32)
 Non-margin revenues (B)                  3                         (22)
 Other operating revenues                 2                           1
                                        ---                         ---
  Total Gas Revenues                    $55                         $19
                                        ===                         ===

    Revenues increased $55 million or 26% and $19 million or 1% for the quarter
and nine months ended  September  30, 1997,  respectively,  from the  comparable
periods in 1996.  The  increases  were  primarily  due to higher therm  revenues
resulting  from a change in estimates of unbilled gas revenue due to refinements
of PSE&G's  methodology.  The increase for the nine months ended  September  30,
1997 was partially  offset by lower  recovery of fuel costs due to milder winter
weather in 1997.

     (B) Non-margin  revenues primarily reflect  recoveries for  uncollectibles,
DSM Program costs and NJGRT.

PSE&G - Expenses

     Fuel for Electric Generation and Interchanged Power

     Fuel for Electric  Generation and Interchanged Power increased $118 million
or 47% and $177 million or 26% for the quarter and nine months  ended  September
30, 1997,  respectively,  from the comparable  1996 periods.  The increases were
primarily due to an increase in energy sales to wholesale customers.  Due to the
operation of the Electric  Levelized Energy  Adjustment Clause (LEAC) mechanism,
variances  in fuel  revenues  and  expenses  offset,  with no  direct  effect on
earnings.  However,  under the New Jersey Energy Master Plan,  future changes in
electric fuel and replacement power costs could impact earnings (see Competitive
Environment).

     Other Operation and Maintenance Expenses

     Other operation and maintenance  expenses  increased $46 million or 16% for
the quarter ended September 30, 1997, from the comparable 1996 period, primarily
due to an  increase  in  refueling  outage  expenses  at Hope Creek and  various
administrative  costs including Year 2000  compliance and technology  consulting
services.

     Net Loss (Gain) on Preferred Stock Redemptions

     Net Loss (Gain) on Preferred  Stock  Redemptions  decreased $22 million for
the nine months ended  September 30, 1997 from the comparable  1996 period.  The
decrease  was  primarily  due to an $18  million net gain on the  repurchase  of
certain of PSE&G's outstanding cumulative preferred stock at discounts to par in
the second quarter of 1996.

EDHI - Net Income

                                  Increase (Decrease)        Increase (Decrease)
                              ------------------------   ----------------------
                                Three Months Ended          Nine Months Ended
                                   September 30,              September 30,
                                   1997 vs. 1996              1997 vs. 1996
                              ------------------------   ----------------------
                               (Millions of Dollars)      (Millions of Dollars)
                            
 PSRC                                        $ --                  $ (8)
 CEA                                           --                     2
 Energis Resources                             (2)                   (9)
 Enterprise Group Development Corp.- EGDC      --                     1
                                             -----                  ----
 Continuing Operations                         (2)                  (14)
 Discontinued Operations - EDC                (17)                  (24)
                                             -----                 -----
      Total                                  $(19)                 $(38)
                                             =====                 =====

     Continuing Operations

     EDHI's income from  continuing  operations  was $19 million for the quarter
and $33 million for the nine months  ended  September  30,  1997,  respectively.
PSRC's  earnings  for  the  nine  months  decreased  primarily  due  to  certain
investment  gains which were  realized in 1996.  Community  Energy  Alternatives
Incorporated's  (CEA) income increased due to improved financial  performance of
several  projects.  The loss  for  Energis  Resources  increased  due to  higher
selling, general and administrative expenditures.

     Discontinued Operations

     EDC was sold on July 31, 1996.

Liquidity and Capital Resources

     Enterprise

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

     As of September 30, 1997, Enterprise's capital structure consisted of 49.5%
common equity, 44.0% long-term debt and 6.5% preferred stock and other preferred
securities.

     Dividend  payments on Common  Stock were $1.62 per share and  totaled  $376
million for the nine months ended September 30, 1997. Since 1992, Enterprise has
maintained  a constant  rate of  dividends  on Common  Stock.  A key  Enterprise
objective is to keep the Common Stock dividend secure. The ability of Enterprise
to declare and pay  dividends is  contingent  upon receipt of dividend  payments
from its subsidiaries.

     PSE&G paid dividends of $391 million and $385 million to Enterprise  during
the nine  months  ended  September  30, 1997 and 1996,  respectively.  EDHI paid
dividends  of $354  million  during the nine months  ended  September  30, 1996,
primarily  from  proceeds  from  the  sale of EDC.  No  dividends  from  EDHI to
Enterprise were paid, or are contemplated, in 1997 due to the anticipated growth
in EDHI subsidiary investment activities.

<PAGE>

     PSE&G

     During the period  January 1, 1997 through  September  30, 1997,  PSE&G had
utility plant additions,  including AFDC, of $395 million,  primarily due to the
replacement of the Salem 1 steam generators.

     EDHI

     In July 1997,  PSRC  entered  into a leveraged  lease of a  waste-to-energy
facility located in the Netherlands. The aggregate of PSRC's investments made in
1997 is approximately $150 million.

     In October  1997,  CEA, as part of a  three-member  consortium,  acquired a
Brazilian  electric  distribution  company serving customers in the State of Rio
Grande Do Sul,  located in southern  Brazil.  CEA's  ownership of the company is
30.25%. The total purchase price was $1.49 billion of which CEA's share was $498
million.  A portion of CEA's share, $136 million,  was financed with nonrecourse
debt.  Additional  funds were provided by EDHI's  financing  subsidiaries and by
Enterprise  (see External  Financings).  This investment is considered an exempt
foreign  utility  company.  The aggregate of CEA's  investments  made in 1997 is
approximately $820 million,  of which $233 million was financed with nonrecourse
debt.

     In October 1997, EDHI sold $75 million of 4.1%  Cumulative  Preferred Stock
to Enterprise.

     Over the next several years,  EDHI and its subsidiaries will be required to
refinance their maturing debt and provide  additional debt and equity  financing
for future  growth.  Any  inability  to extend or replace  maturing  debt and/or
existing  agreements  at current  levels and  interest  rates may affect  future
earnings.   As  of  September  30,  1997,  EDHI's  embedded  cost  of  debt  was
approximately 8%. During 1997, EDHI provided additional long-term debt financing
of $265 million at an average interest rate of 7%.

External Financings

     Enterprise

     On October 21, 1997,  Enterprise  increased  its  uncommitted  bank line of
short-term  credit to $75 million  from $25  million.  Enterprise  borrowed  $75
million  under this line of credit  which was  primarily  used to  purchase  $75
million of 4.1%  Cumulative  Preferred  Stock of EDHI (see Liquidity and Capital
Resources - EDHI).

     PSE&G

     PSE&G has New Jersey Board of Public Utilities (BPU) authority  through the
end  of  1997  to  issue  approximately   $4.455  billion  aggregate  amount  of
Bonds/Medium-Term   Notes   (MTNs)/Preferred   Stock/Preferred   Securities  for
refunding purposes. On November 14, 1997, PSE&G filed a petition with the BPU to
extend such authority through December 31, 1998.

     Under its  First and  Refunding  Mortgage  (Mortgage),  PSE&G may issue new
First and  Refunding  Mortgage  Bonds  (Bonds)  against  previous  additions and
improvements  and/or  retired Bonds provided that its ratio of earnings to fixed
charges is at least 2:1. At September 30, 1997,  this Mortgage ratio of earnings
to fixed charges was 3.07:1. As of September 30, 1997, the Mortgage would permit
up to $3.2 billion aggregate  principal amount of new bonds to be issued against
previous additions and improvements.

     On November 1, 1997,  $150 million of 7 1/8 % Series GG First and Refunding
Mortgage Bonds matured. The redemption of these bonds was funded by the issuance
of commercial paper.

     To provide  liquidity for its commercial  paper  program,  PSE&G has a $650
million one-year  revolving  credit  agreement  expiring in June 1998 and a $650
million five-year  revolving credit agreement expiring in June 2002 with a group
of  commercial  banks,  which  provide  for  borrowings  of up to one  year.  On
September  30, 1997,  there were no  borrowings  outstanding  under these credit
agreements.

     The BPU has authorized  PSE&G to issue and have outstanding at any one time
through  January 2, 1999, not more than $1.3 billion of short-term  obligations,
consisting of commercial  paper and other  unsecured  borrowings  from banks and
other lenders.  On September 30, 1997, PSE&G had $842 million of short-term debt
outstanding,  including $95 million  borrowed against its uncommitted bank lines
of credit  which  increased  to $204  million from $114 million as of October 1,
1997.

<PAGE>

     PSE&G Fuel Corporation (Fuelco) has a $125 million commercial paper program
to finance a 42.49% share of Peach Bottom  Atomic Power Station  (Peach  Bottom)
nuclear fuel, supported by a $125 million revolving credit facility with a group
of banks,  which  expires on June 28, 2001.  PSE&G has  guaranteed  repayment of
Fuelco's  respective  obligations under this program.  As of September 30, 1997,
Fuelco had commercial paper of $86 million outstanding under the program.

     EDHI

     PSEG  Capital  Corporation's   (Capital)  Medium-Term  Note  (MTN)  program
provides for an  aggregate  principal of up to $650  million.  At September  30,
1997, Capital had total debt outstanding of $476 million, including $413 million
of MTNs. In October 1997, Capital issued an additional $165 million of MTNs with
an  average  interest  rate of  6.9%,  which  was used to fund  CEA's  Brazilian
investment.

     As of September 30, 1997,  Enterprise Capital Funding Corporation (Funding)
had a $300 million  revolving credit facility with a consortium of banks and had
$128 million of Senior Notes  outstanding.  As of September 30, 1997 and October
31,  1997,  Funding  had $260  million  and $392  million  of debt  outstanding,
respectively.  Funds  borrowed  in  October  were used to fund  CEA's  Brazilian
investment.

     EDHI,  PSRC and CEA are  subject  to  restrictive  business  and  financial
covenants contained in existing debt agreements.  EDHI is required to maintain a
debt to equity ratio of no more than 2.00:1 and a twelve-months  earnings before
interest and taxes (EBIT) coverage ratio of at least 1.50:1. As of September 30,
1997,  EDHI  had  a  consolidated  debt  to  equity  ratio  of  1.39:1.   EDHI's
consolidated  debt to equity  ratio as of  October  31,  1997 was  approximately
1.83:1. For the twelve months ended September 30, 1997, the EBIT coverage ratio,
as  defined  to  exclude  the  effects  of EGDC,  was  2.13:1.  Compliance  with
applicable  financial  covenants will depend upon future financial  position and
levels of earnings, as to which no assurances can be given. In addition,  EDHI's
ability to continue to grow its business will depend to a significant  degree on
Enterprise's  and EDHI's ability to obtain  additional  financing beyond current
levels, as to which no assurances can be given.

Nuclear Operations

     PSE&G's Salem Units 1 and 2 were taken out of service in the second quarter
of 1995.  Salem 2  returned  to  service  on August  30,  1997 and is  currently
operating  at 100% power.  The NRC has stated  that it will  continue to closely
monitor  activities  at Salem 2 and will perform a final  assessment in December
1997. The NRC's June 9, 1995  Confirmatory  Action Letter was amended to include
the condition that the NRC will perform the final assessment.

     Installation of Salem 1 steam generators has been completed and the unit is
expected to return to service in the first  quarter of 1998.  Restart of Salem 1
is also subject to NRC approval.  The inability to successfully return this unit
to  continuous,  safe  operation  could  have a material  adverse  impact on the
financial condition,  results of operations and net cash flows of Enterprise and
PSE&G (see Forward Looking Statements).


<PAGE>


Competitive Environment

     New Jersey Energy Master Plan

     In  accordance  with the April 30, 1997 final report of the BPU on Phase II
of the New Jersey  Energy  Master  Plan  (Energy  Master  Plan),  PSE&G  filed a
proposal regarding  competition and rates with the BPU on July 15, 1997. The BPU
is  expected  to take at least a year to  review  and hold  public  hearings  on
PSE&G's proposal,  rendering a decision by October 1998. The decision of the BPU
in the Energy Master Plan  proceeding,  and the legislation to be adopted by the
New Jersey  Legislature  required to implement  certain  aspects of the electric
restructuring  in the State,  will  establish the industry rules for the future.
These actions are expected to fundamentally  change the electric industry in the
State by  introducing  retail  competition  to  replace  the  utilities'  former
monopoly  position and  potentially  requiring or resulting in the separation or
sale of  generation  assets.  Depending  upon the outcome of these  proceedings,
these  fundamental  industry  changes  could have a  material  affect on PSE&G's
operations,  financial  condition,  results of  operations,  and net cash flows.
Enterprise and PSE&G cannot predict the outcome of this matter.

     PSE&G's  proposal  in  response  to the Energy  Master  Plan  includes  the
following key elements:

         A rate  decrease  of  between 5% and 10%,  effective  January 1, 1999,
         dependent upon BPU approval of several key elements of the proposal.

         Allow all  customers  in all classes to register  for their  choice of
         energy supplier  beginning October 1, 1998. Those customers  choosing a
         supplier  other  than  PSE&G  would be  permitted  to switch  effective
         January 1, 1999.

         A  transition  period of seven years with basic  tariff  rates  capped
         during that period.  During the transition period, PSE&G would maintain
         responsibility for system reliability of energy and capacity supply.

         Recovery   of   transition   costs   through   asset   securitization,
         restructuring   of  certain   non-utility   generation   contracts  and
         depreciation accounting changes (see Stranded Costs, Securitization and
         Depreciation below).

         Recovery of mandated societal costs,  such as nuclear  decommissioning
         and DSM, would be adjusted based on changes in these costs.

         Discontinuation  of PSE&G's LEAC  effective  December 31, 1998.  PSE&G
         would be responsible for all risks associated with fuel prices, changes
         in operation and maintenance  expenses and mitigation of the transition
         costs of non-securitized  generation production assets within the price
         capped rates.

         Transfer of PSE&G's nuclear and fossil generation  assets, at net book
         value,  to a separate entity  functionally  independent of PSE&G at the
         conclusion of the transition period.

         PSE&G  would  file a rate  case or a plan  for a form  of  alternative
         regulation for its electric distribution delivery service functions one
         year prior to the end of the transition period.

         At the end of the  transition  period,  responsibility  for generation
         reliability  would shift to the  marketplace and PSE&G would retain its
         obligation  to  connect  and  deliver  energy  and  would  offer  basic
         generation service.

     Pursuant  to  actions  taken  by the  BPU  under  its  Energy  Master  Plan
proceeding,  various  BPU-sponsored  working groups have been created to resolve
certain issues regarding restructuring.  PSE&G is participating in these working
groups including the Consumer Protection Task Force, Phase-In Mechanisms Working
Group,  Customer Services Working Group and DSM and Renewables Working Group. In
addition, PSE&G is participating in BPU proceedings dealing with certain generic
issues, including exit fees, market power, affiliate relationships, mechanics of
customer  phase-in  and fair  competition.  The  working  groups and the generic
issues  proceedings  are  running  concurrently  with  the  Energy  Master  Plan
proceedings.


<PAGE>


     An evidentiary  hearing schedule,  before the Office of Administrative  Law
(OAL),  has been established for the Stranded Cost Proceeding and Unbundled Rate
Proceeding. Hearings are to be conducted and initial briefs and reply briefs are
to be completed  during the second quarter of 1998, with a non-binding  decision
from the Administrative Law Judge anticipated during the second quarter of 1998.

     Stranded Costs

     PSE&G has identified its potentially  stranded costs associated with fossil
and nuclear generating stations at $3.9 billion,  based on certain  assumptions,
including  future market prices of  electricity  and  performance  of generating
units.  Changes  in these  assumptions  could  materially  alter  the  amount of
estimated stranded costs. PSE&G is proposing to securitize $2.5 billion of these
costs,  with the remainder to be mitigated through cost saving measures during a
transition  period of seven years. In addition,  PSE&G is seeking to restructure
certain of its BPU approved contracts with Non-utility  Generators (NUGs), which
are  estimated  to be $1.6  billion  above  assumed  future  market  prices.  As
presently  proposed,  the Energy  Master  Plan  would  allow  recovery  of these
restructuring costs in rates (see Forward Looking Statements).

     Securitization

     PSE&G is proposing to securitize $2.5 billion of its  potentially  stranded
costs  through the issuance of  transition  bonds with an  estimated  term of 15
years. Securitization is a method of refinancing potentially stranded costs with
lower cost debt.  The credit  quality of the debt would be enhanced via enabling
state  legislation  and  approval by the BPU of an  irrevocable,  non-bypassable
charge to service the interest and  principal  payments on the debt.  The use of
securitization as a means to reduce rates depends on enabling legislation, which
the New Jersey  Legislature  is not  expected  to  consider  prior to the second
quarter of 1998. If  legislative  approval is not granted,  PSE&G will alter its
Energy Master Plan  proposal and  projected  rate  reduction  range.  Accounting
treatment for  securitization  under current  accounting  guidance  continues to
evolve (see Accounting for the Effects of Regulation).

     Depreciation

     PSE&G is  proposing  to  lengthen  the  depreciable  lives of its  electric
distribution  assets,  which are  expected  to remain  regulated,  from 28 to 45
years.  The excess  depreciation  reserve,  calculated  based on this  change in
depreciable  lives,  would be amortized over the seven year  transition  period.
This  adjustment  is expected to result in a  reduction  of annual  depreciation
expense of $94 million a year during  such  transition  period and $32 million a
year  thereafter over the remaining life of these assets.  Additionally,  within
its Energy Master Plan proposal,  PSE&G is requesting regulatory  flexibility to
make more timely adjustments in electric  production-related  depreciation rates
to match changing service lives and other market measures and pressures over the
seven year  transition  period.  Accounting  treatment  for  depreciation  under
current accounting  guidance continues to evolve (see Accounting for the Effects
of Regulation).

     New Jersey Gross Receipts and Franchise Tax (NJGRT)

     On July 14, 1997,  Governor Whitman signed legislation  eliminating the 13%
NJGRT,  effective on January 1, 1998.  The NJGRT,  collected  by utilities  from
their customers,  will be replaced with a combination of corporate business tax,
state sales and use tax and a transitional  tax assessment  which will be phased
out  over  five  years.  The  new tax  structure  is  expected  to  improve  the
competitive  position of PSE&G  vis-a-vis  non-utility  energy  providers in New
Jersey who are not subject to the NJGRT.  On  September  19,  1997,  PSE&G filed
tariff  schedules  and  other  pertinent  information,  in  compliance  with the
legislation, to become effective on January 1, 1998, pending BPU approval.

     Electric and Magnetic Fields

     The New Jersey Commission on Radiation Protection voted in May 1997 to stop
pursuing  regulations  to limit  magnetic  field  levels  from new and  modified
transmission lines operating at 100 kilovolts and higher.

Accounting for the Effects of Regulation

     PSE&G  accounts for the effects of regulation in accordance  with Statement
of Financial  Accounting  Standards  (SFAS) 71,  "Accounting  for the Effects of
Certain Types of  Regulation"  (SFAS 71). In accordance  with the  provisions of
SFAS  71,  PSE&G  defers  certain  expenses  (regulatory  assets)  and  revenues
(regulatory  liabilities)  on the basis that they will be recovered from or paid
to customers through the ratemaking process.  The regulatory changes proposed in
the Energy Master Plan will create a shift from regulated pricing to competitive
market  pricing for  electric  generation.  These  proposed  changes  will limit
Enterprise's and PSE&G's ability to continue to meet the applicable  criteria of
SFAS 71 for the generation portion of PSE&G's business.

     In  response  to  the  continuing  deregulation  of  the  electric  utility
industry,  the Financial Accounting Standards Board (FASB), through its Emerging
Issues Task Force (EITF), undertook an initiative designated as EITF Issue 97-4,
"Deregulation  of the Pricing of Electricity"  (EITF 97-4).  The purpose of this
initiative was to develop  guidance for the application of SFAS 101,  "Regulated
Enterprises  Accounting for the Discontinuation of Application of FASB Statement
No. 71" (SFAS 101). SFAS 101 addresses how an enterprise that ceases to meet the
criteria  for  application  of SFAS 71 to all or part of its  operations  should
report that event in its general-purpose financial statements.

     In May and  July  1997,  the  EITF  met to  deliberate  EITF  97-4.  In its
discussions,  the EITF  reached a consensus  that an  enterprise  is required to
discontinue  the  application  of  SFAS 71 for the  deregulated  portion  of its
business once  legislation  is passed or a rate order is issued which contains a
sufficiently  detailed  plan to  transition  from  regulated  pricing  to market
pricing.  In addition,  the EITF  concluded  that an enterprise  may continue to
carry on its books the regulatory  assets and  liabilities of the portion of the
business  to which SFAS 101 is being  applied,  provided  that  regulators  have
approved a regulated cash flow stream. This also applies to costs or obligations
not  yet  recorded  as  regulatory  assets  or  liabilities  regardless  of when
incurred.  The  discontinuance  of  SFAS  71  also  requires  an  enterprise  to
reevaluate the impact of SFAS 121,  "Accounting for the Impairment of Long-Lived
Assets  and for  Long-Lived  Assets  to be  Disposed  Of" (SFAS  121).  SFAS 121
requires that regulatory  assets be written off once they are no longer probable
of recovery and that  impairment  losses be recorded for long-lived  assets when
related future cash flows are less than the carrying value of the assets.

     The impact to Enterprise and PSE&G will be determined  based on the outcome
of PSE&G's  proposal  filed in response  to the Energy  Master  Plan.  Under its
proposal,  PSE&G would have the  opportunity,  through  various  mechanisms,  to
recover its electric generation related potentially  stranded costs.  Management
cannot predict the outcome of the Energy Master Plan  proceeding and the related
impact of EITF 97-4 on  Enterprise's  and PSE&G's  future  financial  condition,
results of operations and net cash flows. However,  depending on legislative and
regulatory  actions  taken  in New  Jersey  with  respect  to  electric  utility
deregulation, there could be a material adverse effect on such results.

Impact of New Accounting Pronouncements

     In March 1997, FASB issued SFAS 128,  "Earnings per Share" (SFAS 128) which
is effective for financial  statements  issued after December 15, 1997. SFAS 128
supersedes  Accounting  Principles  Board Opinion 15,  "Earnings per Share" (APB
15), and replaces the  presentation  of Primary EPS with a presentation of Basic
EPS.  It also  requires  presentation  of Basic and  Diluted  EPS on the  income
statement for all entities with complex capital structures.

     In June 1997, the FASB issued SFAS 130,  "Reporting  Comprehensive  Income"
(SFAS 130),  which is effective for fiscal years  beginning  after  December 15,
1997. SFAS 130 requires that all items that are required to be recognized  under
accounting  standards as  components  of  comprehensive  income be reported in a
financial  statement  that is  displayed  with  the  same  prominence  as  other
financial  statements.  It also requires that an  enterprise  classify  items of
other comprehensive  income by their nature in a financial statement and display
the accumulated balance of other  comprehensive  income separately from retained
earnings and additional  paid-in capital in the equity section of a statement of
financial position.

     Also in June 1997, FASB issued SFAS 131,  "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131), which is effective for financial
statements for periods  beginning  after December 15, 1997.  This Statement need
not be  applied to  interim  financial  statements  in the  initial  year of its
application. SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of a
Business  Enterprise"  (SFAS 14), and requires that companies  disclose  segment
data based on how  management  makes  decisions  about  allocating  resources to
segments and measuring their performance.

     The  adoption of SFAS 128,  SFAS 130 and SFAS 131 is not expected to have a
material impact on the financial  condition,  results of operations and net cash
flows of Enterprise and PSE&G.


<PAGE>


PSE&G

     The information  required by this item is incorporated  herein by reference
to the following portions of Enterprise's  Management's  Discussion and Analysis
of  Financial  Condition  and Results of  Operations,  insofar as they relate to
PSE&G  and its  subsidiaries:  Results  of  Operations;  Liquidity  and  Capital
Resources;  External Financings;  Nuclear Operations;  Competitive  Environment;
Accounting  for  the  Effects  of  Regulation;  and  Impact  of  New  Accounting
Pronouncements.


Forward Looking Statements

     The Private  Securities  Litigation Reform Act of 1995 (the Act) provides a
"safe  harbor" for  forward-looking  statements  to encourage  such  disclosures
without the threat of litigation  providing  those  statements are identified as
forward-looking  and  are  accompanied  by  meaningful,   cautionary  statements
identifying  important  factors  that could  cause the actual  results to differ
materially  from those  projected in the statement.  Forward-looking  statements
have been made in this report. Such statements are based on management's beliefs
as  well  as  assumptions  made  by  and  information   currently  available  to
management.  When used  herein,  the  words  "will",  "anticipate",  "estimate",
"expect",   "objective"  and  similar   expressions  are  intended  to  identify
forward-looking  statements.  In addition to any  assumptions  and other factors
referred to  specifically in connection  with such  forward-looking  statements,
factors  that  could  cause  actual  results  to differ  materially  from  those
contemplated  in any  forward-looking  statements  include,  among  others,  the
following:  deregulation and the unbundling of energy supplies and services;  an
increasingly   competitive  energy  marketplace;   sales  retention  and  growth
potential in a mature service territory and a need to contain costs;  ability to
obtain adequate and timely rate relief,  cost recovery,  including the potential
impact of stranded costs, and other necessary regulatory approvals;  federal and
state  regulatory  actions;  costs  of  construction;   operating  restrictions,
increased  cost  and   construction   delays   attributable   to   environmental
regulations;  nuclear  decommissioning  and the availability of reprocessing and
storage  facilities for spent nuclear fuel;  licensing and  regulatory  approval
necessary for nuclear and other operating stations;  and credit market concerns.
Enterprise  and PSE&G  undertake no obligation to publicly  update or revise any
forward-looking  statements,  whether  as a result  of new  information,  future
events or otherwise.  The foregoing review of factors pursuant to the Act should
not be construed as  exhaustive  or as any  admission  regarding the adequacy of
disclosures made by Enterprise and PSE&G prior to the effective date of the Act.



<PAGE>


                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                           PART II. OTHER INFORMATION


Item 1.  Legal Proceedings

     Certain  information  reported under Item 3 of Part I of  Enterprise's  and
PSE&G's 1996 Annual Report on Form 10-K and the  quarterly  reports on Form 10-Q
for the quarters ended March 31, 1997 and June 30, 1997 is updated below.

     (1) Form 10-K, Pages 17 and 25. The  Environmental  Protection Agency (EPA)
         has determined  that a six mile stretch of the Passaic River in Newark,
         New Jersey (Site) is a "facility" within the meaning of that term under
         CERCLA and that approximately  thirteen corporations may be potentially
         liable  for  performing  required  remedial  actions  to  address  this
         condition.   The  EPA   anticipates   identifying   other   potentially
         responsible  parties.  One potentially  responsible party  (Cooperating
         Party)  has  entered  into a  consent  decree  with  the  EPA  in  1994
         obligating it to conduct a remedial investigation and feasibility study
         of available and applicable corrective actions for the Site.

         The Cooperating Party has reported that it has incurred  approximately
         $30 million to date in connection with the  implementation  of required
         remedial  actions  for the Site and that future  costs for  prospective
         remedial actions may be material.

         PSE&G and certain of its predecessors  operated industrial  facilities
         at properties  along the Passaic River. In April 1996, the EPA directed
         PSE&G to provide information  concerning the nature and quantity of raw
         materials,  by-products  and  wastes  which  may have  been  generated,
         treated,  stored or disposed  of at certain  PSE&G  facilities  located
         along the  Passaic  River  Site.  The  facilities  are  PSE&G's  former
         Harrison  Gas Plant  and  Essex  Generating  Station.  PSE&G  submitted
         responses  to the EPA requests in August  1996.  In July 1997,  the EPA
         named  PSE&G as a  potentially  responsible  party for the Site.  PSE&G
         cannot predict what action, if any, the EPA or any third party may take
         against  PSE&G with  respect to the Site or, in such event,  what costs
         PSE&G  may  incur to  address  any such  claims.  Such  costs  could be
         material.

     (2) Form  10-K,  Page 24. In the  shareholder  derivative  litigation,  the
         Appellate  Division  sustained the trial court's  denial of defendants'
         motions to dismiss the  complaints.  Defendants'  appeal of this denial
         was recently  dismissed by the New Jersey Supreme Court. On November 6,
         1997,  the Judge  ordered  that  discovery be halted in two of the four
         cases and that the  defendants  file  motions for  summary  judgment by
         December  31,  1997  to  dismiss  these  two  cases.  Discovery  in the
         remaining two cases is continuing.

     (3) Form 10-K,  Page 24. PSE&G and the three other co-owners of Salem filed
         suit in February  1996 in the U.S.  District  Court for the District of
         New Jersey against  Westinghouse  Electric  Corporation  (Westinghouse)
         seeking  damages to recover the cost of replacing the steam  generators
         at Salem Units 1 and 2. The suit  alleges  fraud and breach of contract
         by  Westinghouse  in the  sale,  installation  and  maintenance  of the
         generators.  In  April  1996,  Westinghouse  filed an  answer  and $2.5
         million  counterclaim  for unpaid  work  related to  services at Salem.
         Discovery  is  proceeding.  On October 1,  1997,  Westinghouse  filed a
         motion for summary judgment.  PSE&G cannot predict the outcome of these
         proceedings. Ernest H. Drew, a Director of Enterprise but not of PSE&G,
         became Chief  Executive  Officer - Industries and  Technology  Group of
         Westinghouse on July 1, 1997.

     (4) Form 10-K,  Page 24. PSE&G  settled the lawsuit  brought  against it by
         PECO and DP&L,  two  co-owners  of Salem,  relating to alleged  damages
         resulting from the current  outage of the facility.  Under the terms of
         the settlement,  PSE&G will pay a total of $82 million to PECO and DP&L
         by December 31, 1997.  PSE&G is also  obligated to pay $1.4 million for
         each reactor month that the outage continues beyond an aggregate outage
         of 64 reactor  months,  up to a maximum payment under this provision of
         $17 million.  As of October 31, 1997, an aggregate of  approximately 56
         reactor months had  accumulated  due to Salem  outages.  PSE&G does not
         expect to make any payments under this provision. The parties have also
         agreed to an operating  performance  standard through December 31, 2007
         for Peach Bottom  (operated by PECO) and through  December 31, 2011 for
         Salem.  Under this standard,  the operator of each  respective  station
         would be required to make payments to the  non-operating  owners if the
         three year capacity factor,  determined annually, of such station falls
         below 40 percent,  subject to a maximum of $25  million  per year.  The
         initial  three-year  period  begins for Peach Bottom on January 1, 1998
         and for Salem on the date the later of the two  Salem  units  (Salem 1)
         returns  to  service.   The  parties  have  further  agreed  to  forego
         litigation  in the  future,  except  for  limited  cases in  which  the
         operator  would be  responsible  for damages of no more than $5 million
         per year (see Results of Operations of MD&A and Note 3 Commitments  and
         Contingent Liabilities).

     March 31, 1997 Form 10-Q, Page 22

     On March  18,  1997,  Public  Service  Conservation  Resources  Corporation
(PSCRC),  an  indirect  wholly-owned  subsidiary  of  Enterprise  and  a  direct
wholly-owned  subsidiary  of PSE&G,  filed a  collection  action  against  Sycom
Enterprises Limited Partnership (SYCOM) in connection with PSCRC's DSM business.
PSCRC  alleged  that SYCOM has breached a number of  different  loan  agreements
under which PSCRC is owed  approximately  $13 million in principal and interest.
On May 7, 1997,  SYCOM  filed a  counterclaim  against  PSCRC and a  third-party
complaint against an officer and certain consultants of PSCRC,  alleging damages
of $750 million and asserting  claims that pursuant to statute,  if  successful,
would have permitted treble damages. On July 11, 1997, the Superior Court of New
Jersey,  Law  Division,  in  response  to a motion  to  dismiss  filed by PSCRC,
dismissed the State  Racketeering  Influenced  Corrupt  Organization  Act (RICO)
counts in SYCOM's  counterclaim.  SYCOM  voluntarily  withdrew  its Federal RICO
counts.  Consequently,  SYCOM no longer  has a  statutory  basis for  requesting
treble  damages.  PSCRC and SYCOM  have  jointly  requested  that the court stay
future proceedings in this matter until December 5, 1997, in order to enable the
parties to engage in settlement  discussions.  PSCRC believes that the remaining
counts of SYCOM's  counterclaim  and  third-party  complaint  are  spurious  and
without merit and PSCRC will  vigorously  contest such claims.  At September 30,
1997,  Enterprise  and PSE&G had aggregate  investments in PSCRC of $95 million,
including intercompany loans. (Public Service Conservation Resources Corporation
v. Sycom Enterprises Limited Partnership, Docket No. L-2744-97 Superior Court of
New Jersey, Law Division, Middlesex County)

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

     (1)  Page 12.  Generic  proceeding  before the BPU relating to  Competitive
          Transition Charges, Docket No. ET96090669. Form 10-K, Page 55.

     (2)  Page 12.  Proceedings  before the BPU relating to PSE&G's  Demand Side
          Adjustment Factor, Docket No. ER97020101.

     (3)  Page 12.  Proceedings  before the BPU relating to PSE&G's  Remediation
          Adjustment Charge (RAC) filed July 30, 1997, Docket No. GR97080573.

     (4)  Page 12.  Proceeding  before the BPU relating to PSE&G's Levelized Gas
          Adjustment Clause,  Docket No.  GR96070554.  Proceeding before the BPU
          relating to PSE&G's  Levelized Gas Adjustment Clause filed on November
          14, 1997, Docket No. to be assigned.

     (5)  Page 13.  General  proceeding  before the BPU relating to Statement of
          Financial  Accounting  Standards No. 106,  "Employers'  Accounting for
          Postretirement  Benefits Other than Pensions"  (SFAS-106),  Docket No.
          ER97070470.

     (6)  Page 20.  Proceeding before the BPU relating to PSE&G's request for an
          extension of authority to issue debt, Docket No. to be assigned.

     (7)  Page  29.  Proceeding  before  the BPU in the  Matter  of the  Board's
          Determination  a Management  Audit be  Performed on PSE&G,  Docket No.
          EA97060397.

Item 5.  Other Information

     Certain information reported under Enterprise's and PSE&G's 1996 Annual and
1997  Quarterly  Reports  to the SEC is  updated  below.  References  are to the
related  pages of the Form 10-K and the  quarterly  reports on Form 10-Q for the
quarters ended March 31, 1997 and June 30, 1997 as printed and distributed.


<PAGE>


Nuclear Operations

     Form 10-K, Page 8 and June 30, 1997 Form 10-Q, Page 24

     On July 8, 1997, a predecisional  enforcement  conference was held with the
NRC  to  discuss  apparent  violations  at  Salem.  These  apparent  violations,
identified  in  May  and  June  1997,  concern  emergency  core  cooling  system
switchover  and related  residual  heat removal  system  (RHR) flow issues,  and
Appendix R (fire protection)  issues. In a letter dated October 8, 1997, the NRC
informed  PSE&G that a Level III violation was cited for the issues  surrounding
the RHR system and Level IV violations were cited for the two Appendix R issues.
There was no civil penalty issued by the NRC.

     Form 10-K, Page 9 and March 31, 1997 Form 10-Q, Page 23

     In 1990,  General  Electric  (GE)  reported  that  crack  indications  were
discovered near the seam welds of the core shroud assembly in a GE Boiling Water
Reactor (BWR) located outside the United States. As a result, GE issued a letter
requesting  that the owners of GE BWR plants take  interim  corrective  actions.
PSE&G (Hope Creek) participated in a GE BWR Owners' Group to evaluate this issue
and develop  long-term  corrective  actions.  During its 1994 refueling  outage,
PSE&G inspected the shroud of Hope Creek in accordance with GE's recommendations
and found no cracks. In June 1994, an industry group was formed and subsequently
established  generic inspection  guidelines which were approved by the NRC. Hope
Creek was initially  placed in the lowest  susceptibility  category  under these
guidelines.  Due  to  Hope  Creek's  operating  time,  it  now  falls  into  the
intermediate susceptibility category. Another shroud inspection was performed by
PSE&G  during  Hope  Creek's  current  refueling  outage in  September  1997 and
preliminary results from that inspection have been deemed to be satisfactory.

     Form 10-K, Page 9 and June 30, 1997 Form 10-Q, Page 24

     A predecisional  enforcement conference was held with the NRC on August 12,
1997 to discuss  apparent  violations at Hope Creek relating to the installation
of cross-tie  valves in the residual heat removal  system at Hope Creek in 1994.
On October 20,  1997,  the NRC issued a severity  Level III  violation  for this
matter. There was no civil penalty issued by the NRC.

     Form 10-K, Page 10 and March 31, 1997 Form 10-Q, Page 23

     In a separate matter, as a result of several BWRs experiencing  clogging of
some emergency core cooling  system suction  strainers,  which supply water from
the suppression pool for emergency  cooling of the core and related  structures,
the NRC issued a  Bulletin  in May 1996 to  operators  of BWRs  requesting  that
measures be taken to minimize the potential  for clogging.  The NRC has proposed
three  resolution  options and requires  that actions be completed by the end of
the unit's first refueling outage after January 1, 1997.  Alternative resolution
options  will be  subject  to NRC  approval.  PSE&G  has  responded  to the NRC,
indicating its intention to comply with the Bulletin.  PSE&G installed a portion
of the  required  large  capacity  passive  strainers  at Hope Creek  during the
current refueling outage. On October 31, 1997, the NRC agreed to permit PSE&G to
defer  installation of the remaining  strainers until the next refueling outage,
currently  scheduled  for  February  1999.  PECO has  advised  PSE&G  that large
capacity passive strainers were installed at Peach Bottom 3 during its refueling
outage in October 1997.  Passive  strainers  will be installed at Peach Bottom 2
during its next  refueling  outage in October  1998.  PSE&G cannot  predict what
other actions, if any, the NRC may take in this matter.

     New Matter

     A predecisional  enforcement  conference has been scheduled for December 9,
1997 to  discuss  two  allegations  concerning  security  program  issues  which
occurred  at Salem and Hope  Creek in 1996.  PSE&G  cannot  predict  what  other
actions, if any, the NRC may take in this matter.


<PAGE>


Nuclear Fuel

     Form 10-K, Page 11

     The supply of fuel for nuclear  generating  units  involves  the mining and
milling  of  uranium  ore to  uranium  concentrate,  conversion  of the  uranium
concentrate to uranium hexafluoride, enrichment of the uranium hexafluoride gas,
conversion  of  the  enriched  gas to  fuel  pellets  and  fabrication  of  fuel
assemblies.

     PSE&G has several long-term contracts with ore operators to process uranium
ore to uranium concentrate to meet the currently projected  requirements for the
Salem and Hope Creek units fully  through the year 2001 and  thereafter,  50% of
their requirements through the year 2003.

     PSE&G has been  advised by PECO that it has  contracts  for the purchase of
uranium which will extend through 2002 to meet the  requirements of Peach Bottom
2 and 3.

     Currently,  there is an  adequate  supply of nuclear  fuel for Salem,  Hope
Creek and Peach Bottom.

Other State Regulatory Matters

     Form 10-K, Page 4 and June 30, 1997 Form 10-Q, Page 23

     In an Order dated June 25, 1997, the BPU determined to commence  management
audits of all New Jersey electric utilities,  with the assistance of one or more
consulting firms,  under the direction of its own audit staff. The audit process
is to  include,  but not be limited  to,  focused  reviews of  electric  utility
filings in response to the Energy Master Plan. The  management  audit process is
currently underway for PSE&G.

Pennsylvania - New Jersey - Maryland Interconnection (PJM)

     Form 10-K, Page 6, March 31, 1997 Form 10-Q, Page 24 and June 30, 1997 Form
10-Q, Page 24

     On July 14,  1997,  PJM set a new record  peak of 49,408 MW,  making it the
third largest power pool in the world.  PJM has  implemented a bid-based  energy
market.  FERC continues to review the PJM filings submitted in June 1997. PJM is
taking measures to support retail choice programs within the control area.

Air Pollution Control

     Form 10-K, Page 15 and June 30, 1997 Form 10-Q, Page 24

     On October  10,  1997,  the EPA took steps to limit  Nitrogen  Oxide  (NOx)
emissions from 22 states  located in the eastern half of the United States.  The
proposal  recognizes NOx as one of the pollutants  responsible for the formation
of ground level ozone and is based upon recommendations from the Ozone Transport
Assessment Group (OTAG). The EPA anticipates that the identified reductions will
support  attainment  of the  ambient  air  quality  standards  for  ozone in the
Northeast.  While impact to the  operation of PSE&G  facilities  cannot be fully
assessed  at this time,  PSE&G  supports  the EPA's  position  since  scientific
evidence  indicates  the change  will  improve air quality in New Jersey and the
region.  Additionally,  the proposal recognizes the role of Midwestern pollution
on the air quality in New Jersey.

     In September 1997, the New Jersey  Department of  Environmental  Protection
proposed regulations  implementing the Ozone Transport Commission  Memorandum of
Understanding  (MOU) on reducing  regional NOx emissions  from large  stationary
sources.  This MOU affects  electric  utilities in the 12 state Ozone  Transport
Region (OTR).  New Jersey's  proposed rule calls for a 65% reduction in NOx from
1990  levels  starting  in 1999 and a 90%  reduction  starting  in  2003.  These
reductions will be achieved through a regional emission trading program, similar
to the Federal Acid Rain Program.  PSE&G is currently  assessing the  compliance
options under this proposal. The extent of investment in control technologies or
operational  changes will be directly  related to the number of allowances PSE&G
receives. PSE&G will not know the final allocation until the rule is adopted and
thus cannot assess the potential cost at this time.


<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 (Enterprise).

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

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

     27(A) Financial Data Schedule (Enterprise).

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

     (b)   Reports on Form 8-K:

           None


<PAGE>


                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

                                   SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrants  have duly  caused  these  reports to be signed on their  respective
behalf by the undersigned thereunto duly authorized.

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                                  (Registrants)

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

Date:  November 14, 1997


<PAGE>
<PAGE>
<TABLE>
<CAPTION>


                                                                      EXHIBIT 12
                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

               COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES



                                                                            12 Months
                                                                              Ended
                                       YEARS ENDED DECEMBER 31,             September
                                                                               30,
                             -------  -------  ------  -------  ---------
                              1992     1993    1994     1995      1996         1997
                             -------  -------  ------  -------  ---------  -------------
                                                 (Millions of Dollars)
<S>                           <C>      <C>      <C>      <C>      <C>           <C>
Earnings as Defined in
Regulation
S-K:

Net Income (A)                  475      549     667      627       588             535
Federal Income Taxes (B)        238      296     320      348       297             294
Fixed Charges                   538      539     535      549       528             532
                             -------  -------  ------  -------   -------   -------------
Earnings                      1,251    1,384   1,522    1,524     1,413           1,361
                             =======  =======  ======  =======   =======   =============


Fixed Charges as Defined in Regulation S-K (C):

Total Interest Expense (D)      481      471     462      464       453             459
Interest Factor in Rentals        9       11      12       12        12              11
Subsidiaries' Preferred
Securities Dividend
    Requirements                 --       --       2       16        28              42
Preferred Stock Dividends        32       38      41       34        23              13
Adjustment to Preferred and
    Preference Stock
Dividends to state on a 
    pre-income tax basis         15       19      18       23        12               7

                             -------  -------  ------  -------   -------   -------------
Total Fixed Charges             537      539     535      549       528             532
                             =======  =======  ======  =======   =======   =============

Ratio of Earnings to Fixed    
Charges                        2.33     2.57    2.84     2.78      2.68            2.56
                             =======  =======  ======  =======   =======   =============
</TABLE>

(A)  Excludes 1993 cumulative effect of $5.4 million credit to income reflecting
     a change in income taxes.

(B) Includes state income taxes and federal income taxes for other incomes.

(C)  Fixed Charges represent (a) interest, whether expensed or capitalized,  (b)
     amortization  of debt  discount,  premium and  expense,  (c) an estimate of
     interest   implicit  in  rentals,   (d)   Preferred   Securities   Dividend
     Requirements   of   subsidiaries,   and  (e)   Preferred   Stock   Dividend
     Requirements,  increased to reflect the pre-tax  earnings  requirement  for
     Public Service Enterprise Group Incorporated.

(D)  Excludes  1992  interest  expense  on  decommissioning   costs  of  $5,208.
     Effective January 1, 1992,  accounting was changed to follow Federal Energy
     Regulatory Commission guidelines.



<PAGE>
<TABLE>
<CAPTION>


                                                                  EXHIBIT 12 (A)
                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY

               COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES


                                                                             12 Months
                                                                               Ended
                                      YEARS ENDED DECEMBER 31,               September
                                                                                30,
                             -------  ------  -------  -------   -------
                              1992    1993     1994     1995      1996         1997
                             -------  ------  -------  -------   -------    ------------
                                                  (Millions of Dollars)
<S>                           <C>      <C>      <C>      <C>       <C>              <C>
Earnings as Defined in
Regulation S-K:

Net Income                      476     615      659      617       535             508
Federal Income Taxes (A)        224     307      302      326       268             269
Fixed Charges                   411     401      408      419       438             446
                             -------  ------  -------  -------   -------    ------------
Earnings                      1,111   1,323    1,369    1,362     1,241           1,223
                             =======  ======  =======  =======   =======    ============


Fixed Charges as Defined in
Regulation S-K (B)

Total Interest Expense (C)      402     390      396      407       399             393
Interest Factor in Rentals        9      11       12       12        11              11
Subsidiaries' Preferred
Securities Dividend
  Requirements                   --      --       --       --        28              42

                             -------  ------  -------  -------   -------    ------------
Total Fixed Charges             411     401      408      419       438             446
                             =======  ======  =======  =======   =======    ============

Ratio of Earnings to Fixed
 Charges                       2.70    3.30     3.35     3.25      2.83            2.74
                             =======  ======  =======  =======   =======    ============
</TABLE>

(A) Includes state income taxes and federal income taxes for other income.

(B)  Fixed Charges represent (a) interest, whether expensed or capitalized,  (b)
     amortization  of debt  discount,  premium and  expense,  (c) an estimate of
     interest  implicit  in  rentals,  and  (d)  Preferred  Securities  Dividend
     Requirements of subsidiaries.

(C)  Excludes  1992  interest  expense  on  decommissioning   costs  of  $5,208.
     Effective January 1, 1992,  accounting was changed to follow Federal Energy
     Regulatory Commission guidelines.




<PAGE>
<TABLE>
<CAPTION>

                                                                  EXHIBIT 12 (B)
                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY

                    COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
                     PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS


                                                                               12 Months
                                                                                 Ended
                                         YEARS ENDED DECEMBER 31,              September
                                                                                  30,
                             -------- --------  -------  -------   -------
                              1992     1993      1994     1995      1996          1997
                             -------- --------  -------  -------   -------    -------------
                                                 (Millions of Dollars)
<S>                           <C>      <C>      <C>      <C>       <C>              <C>
Earnings as Defined in
Regulation
S-K:
Net Income                       476      615      659      617       535              508
Federal Income Taxes (A)         224      307      302      326       268              269
Fixed Charges                    411      401      408      419       438              446
                             -------- -------- --------  -------   -------    -------------
Earnings                       1,111    1,323    1,369    1,362     1,241            1,223
                             ======== ======== ========  =======   =======    =============

Fixed Charges as Defined in Regulation S-K (B):

Total Interest Expense (C)       402      390      396      407       399              393
Interest Factor in Rentals         9       11       12       12        11               11
Subsidiaries' Preferred
Securities Dividend
  Requirements                    --       --       --       --        28               42

Preferred Stock Dividends         32       38       42       49        23               13
Adjustment to Preferred and
    Preference Stock
Dividends to state on a
    pre-income tax basis          15       19       19       24        12                7
                             -------- -------- --------  -------   -------    -------------
Total Fixed Charges              458      458      469      492       473              466
                             ======== ======== ========  =======   =======    =============

Ratio of Earnings to Fixed
  Charges                       2.43     2.89     2.92     2.77      2.62             2.62
                             ======== ======== ========  =======   =======    =============
</TABLE>

(A) Includes state income taxes and federal income taxes for other income.

(B) Fixed Charges represent (a) interest,  whether expensed or capitalized,  (b)
    amortization  of debt  discount,  premium  and  expense,  (c) an estimate of
    interest implicit in rentals, (d) Preferred Securities Dividend Requirements
    of subsidiaries, and (e) Preferred Stock Dividend Requirements, increased to
    reflect the pre-tax earnings requirement for Public Service Electric and Gas
    Company.

(C) Excludes 1992 interest expense on decommissioning costs of $5,208. Effective
    January 1, 1992,  accounting was changed to follow Federal Energy Regulatory
    Commission guidelines.