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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 March 31, 1998

                                        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 April 30, 1998: 231,957,608

As of April 30,  1998  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


PART I.  FINANCIAL INFORMATION

  Item 1.   Financial Statements
                                                                       Page
   Public Service Enterprise Group Incorporated (Enterprise):

     Consolidated Statements of Income for the Three
     Months Ended March 31, 1998 and 1997............................    1

     Consolidated Balance Sheets as of March 31, 1998
     and December 31, 1997...........................................    2

     Consolidated Statements of Cash Flows for the Three
     Months Ended March 31, 1998 and 1997............................    4

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

     Consolidated Statements of Income for the Three
     Months Ended March 31, 1998 and 1997............................    5

     Consolidated Balance Sheets as of March 31, 1998
     and December 31, 1997...........................................    6

     Consolidated Statements of Cash Flows for the Three
     Months Ended March 31, 1998 and 1997............................    8

   Notes to Consolidated Financial Statements -- Enterprise..........    9

   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...........................................................   22

  Item 3. Qualitative and Quantitative Disclosures About Market Risk.   23

PART II.  OTHER INFORMATION

  Item 1. Legal Proceedings...........................................   24

  Item 4. Submission of Matters to a Vote of Security Holders.........   25

  Item 5. Other Information...........................................   26

  Item 6. Exhibits and Reports on Form 8-K............................   28

  Signatures -- Enterprise............................................   29

  Signatures -- PSE&G.................................................   29



<PAGE>



                   PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

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

                           PART I. FINANCIAL INFORMATION
                           ITEM 1. FINANCIAL STATEMENTS


<PAGE>
<TABLE>
<CAPTION>

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


                                                                              Three Months Ended
                                                                                   March 31,
                                                                             ---------    ---------          
                                                                                1998         1997
                                                                             ---------    ---------
<S>                                                                          <C>          <C>      
OPERATING REVENUES
      Electric ............................................................  $   1,177    $     960
      Gas .................................................................        612          734
      Nonutility Activities ...............................................        112           38
                                                                             ---------    ---------
           Total Operating Revenues .......................................      1,901        1,732
                                                                             ---------    ---------

OPERATING EXPENSES
Operation
      Fuel for Electric Generation and Interchanged Power .................        486          248
      Gas Purchased .......................................................        391          422
      Other ...............................................................        291          249
Maintenance ...............................................................         48           58
Depreciation and Amortization .............................................        164          150
Taxes (Note 6)
      Income Taxes ........................................................        132          103
      Transitional Energy Facility Assessment/New Jersey
           Gross Receipts Taxes ...........................................         49          172
      Other ...............................................................         22           21
                                                                             ---------    ---------
           Total Operating Expenses .......................................      1,583        1,423
                                                                             ---------    ---------

OPERATING INCOME ..........................................................        318          309
                                                                             ---------    ---------

OTHER INCOME AND DEDUCTIONS
  Settlement of Salem Litigation - Net of Applicable
   Taxes of $29 ...........................................................        --           (53)
  Other - net .............................................................          6            2
                                                                             ---------    ---------
      Total Other Income and Deductions ...................................          6          (51)
                                                                             ---------    ---------

INCOME BEFORE INTEREST CHARGES AND
      DIVIDENDS ON PREFERRED SECURITIES ...................................        324          258
                                                                             ---------    ---------

INTEREST CHARGES AND PREFERRED SECURITIES DIVIDENDS
      Interest Expense ....................................................        120          110
     Allowance for Funds Used During Construction -
        Debt and Capitalized Interest .....................................         (4)          (6)
      Preferred Securities Dividend Requirements of Subsidiaries ..........         17           14
                                                                             ---------    ---------
           Total Interest Charges and Preferred Securities Dividends ......        133          118
                                                                             ---------    ---------

NET INCOME ................................................................  $     191    $     140
                                                                             =========    =========

AVERAGE SHARES OF COMMON STOCK
      OUTSTANDING (000's) .................................................    231,958      232,072

EARNINGS PER AVERAGE SHARE (Basic and Diluted) ............................  $    0.82    $    0.60
                                                                             =========    =========

DIVIDENDS PAID PER SHARE OF COMMON STOCK ..................................  $    0.54    $    0.54
                                                                             =========    =========
<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)
                                                                                March 31,  December 31,
                                                                                  1998        1997
                                                                                 -------   ------------
<S>                                                                              <C>         <C>    
UTILITY PLANT - Original cost 
  Electric ..................................................................... $13,731     $13,692
  Gas ..........................................................................   2,718       2,697
  Common .......................................................................     564         558
                                                                                 -------     -------
       Total ...................................................................  17,013      16,947
  Less: Accumulated depreciation and amortization ..............................   6,606       6,463
                                                                                 -------     -------
       Net .....................................................................  10,407      10,484
  Nuclear Fuel in Service, net of accumulated amortization -
     1998, $272; 1997, $302 ....................................................     208         216
                                                                                 -------     -------
       Net Utility Plant in Service ............................................  10,615      10,700
  Construction Work in Progress, including Nuclear Fuel in
    Process - 1998, $53; 1997, $60 .............................................     328         326
  Plant Held for Future Use ....................................................      24          24
                                                                                 -------     -------
       Net Utility Plant .......................................................  10,967      11,050
                                                                                 -------     -------
INVESTMENTS AND OTHER NONCURRENT ASSETS
 Long-Term Investments, net of amortization - 1998, $23; 1997,
    $21, and net of valuation allowances - 1998, $10; 1997 $10 .................   2,881       2,873
 Nuclear Decommissioning and Other Special Funds ...............................     545         492
 Other Noncurrent Assets,  net of amortization - 1998, $17; 1997, $16, .........     167         167
                                                                                 -------     -------
       Total Investments and Other Noncurrent Assets ...........................   3,593       3,532
                                                                                 -------     -------
CURRENT ASSETS
  Cash and Cash Equivalents ....................................................      77          83
  Accounts Receivable:
    Customer Accounts Receivable ...............................................     631         520
    Other Accounts Receivable ..................................................     219         293
    Less: Allowance for Doubtful Accounts ......................................      45          41
  Unbilled Revenues ............................................................     189         270
  Fuel, at average cost ........................................................     170         310
  Materials and Supplies, at average cost, net of inventory valuation
    reserves - 1998, $12; 1997, $12 ............................................     146         142
  Miscellaneous Current Assets .................................................     145          86
                                                                                 -------     -------
       Total Current Assets ....................................................   1,532       1,663
                                                                                 -------     -------
DEFERRED DEBITS (Note 3)
  Unamortized Debt Expense .....................................................     130         136
  Deferred OPEB Costs ..........................................................     285         289
  Unrecovered Environmental Costs ..............................................     120         122
  Underrecovered Electric Energy and Gas Costs .................................     139         167
  Unrecovered SFAS 109 Deferred Income Taxes ...................................     716         725
  Deferred Demand Side Management Costs ........................................     148         116
  Other ........................................................................     134         143
                                                                                 -------     -------
       Total Deferred Debits ...................................................   1,672       1,698
                                                                                 -------     -------
TOTAL .......................................................................... $17,764     $17,943
                                                                                 =======     =======
<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)
                                                                                March 31,     December 31,
                                                                                  1998           1997
                                                                                ---------     -----------
<S>                                                                              <C>           <C>     
CAPITALIZATION
  Common Stockholders' Equity:
    Common Stock ............................................................... $  3,603      $  3,603
    Retained Earnings ..........................................................    1,679         1,623
    Foreign Currency Translation Adjustment ....................................      (21)          (15)
                                                                                 --------      --------
       Total Common Stockholders' Equity .......................................    5,261         5,211
  Subsidiaries' Preferred Securities:
    Preferred Stock Without Mandatory Redemption ...............................       95            95
    Preferred Stock With Mandatory Redemption ..................................       75            75
    Trust Originated Preferred Securities ......................................      225            --
    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           303
  Long-Term Debt ...............................................................    4,733         4,873
                                                                                 --------      --------
       Total Capitalization ....................................................   10,902        10,767
                                                                                 --------      --------
OTHER LONG-TERM LIABILITIES
  Decontamination and Decommissioning Costs ....................................       43            43
  Environmental Costs  (Note 4) ................................................       70            73
  Capital Lease Obligations ....................................................       50            52
                                                                                 --------      --------
       Total Other Long-Term Liabilities .......................................      163           168
                                                                                 --------      --------
CURRENT LIABILITIES
  Long-Term Debt due within one year ...........................................      358           340
  Commercial Paper and Loans ...................................................      970         1,448
  Accounts Payable .............................................................      613           686
  Other Accrued Taxes ..........................................................      254            70
  Other ........................................................................      329           283
                                                                                 --------      --------
       Total Current Liabilities ...............................................    2,524         2,827
                                                                                 --------      --------
DEFERRED CREDITS
  Deferred Income Taxes ........................................................    3,335         3,394
  Deferred Investment Tax Credits ..............................................      338           343
  Deferred OPEB Costs ..........................................................      306           289
  Other ........................................................................      196           155
                                                                                 --------      --------
       Total Deferred Credits ..................................................    4,175         4,181
                                                                                 --------      --------
COMMITMENTS AND CONTINGENT LIABILITIES  (Note 4) ...............................     --            --
                                                                                 --------      --------
TOTAL .......................................................................... $ 17,764      $ 17,943
                                                                                 ========      ========
<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)

                                                                              Three Months Ended March 31,
                                                                              ----------------------------
                                                                                  1998       1997
                                                                                 -----      -----
<S>                                                                              <C>        <C>  
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income ................................................................... $ 191      $ 140
  Adjustments to reconcile net income to net cash flows from
   operating activities:
    Depreciation and Amortization ..............................................   164        150
    Amortization of Nuclear Fuel ...............................................    19         17
    Recovery (deferral) of Electric Energy and Gas Costs - net .................    28        (31)
    Unrealized Losses (Gains) on Investments - net .............................   (35)        14
    Proceeds from Leasing Activities ...........................................   (59)        14
    Changes in certain current assets and liabilities:
     Net decrease in Accounts Receivable and Unbilled Revenues .................    48         15
     Net decrease in Inventory - Fuel and Materials and Supplies ...............   136        178
     Net decrease in Accounts Payable ..........................................   (73)       (84)
     Net change in Prepaid / Other Accrued Taxes ...............................   184        232
     Net change in Other Current Assets and Liabilities ........................   (13)      (121)
    Other ......................................................................    (4)        (5)
                                                                                 -----      -----
       Net cash provided by operating activities ...............................   586        519
                                                                                 -----      -----
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Utility Plant, excluding AFDC ...................................   (81)      (107)
  Net decrease (increase) in Long-Term Investments and Real Estate .............    51        (74)
  Contribution to Decommissioning Funds and Other Special Funds ................   (29)        (7)
  Other ........................................................................   (17)       (12)
                                                                                 -----      -----
       Net cash used in investing activities ...................................   (76)      (200)
                                                                                 -----      -----
CASH FLOWS FROM FINANCING ACTIVITIES
  Net decrease in Short-Term Debt ..............................................  (478)       (96)
  Redemption of Long-Term Debt .................................................  (122)       (57)
  Redemption of Preferred Stock ................................................  --          (19)
  Issuance of Preferred Securities .............................................   225         95
  Retirement of Common Stock ...................................................  --          (43)
  Cash Dividends Paid on Common Stock ..........................................  (125)      (125)
  Other ........................................................................   (16)        (2)
                                                                                 -----      -----
       Net cash used in financing activities ...................................  (516)      (247)
                                                                                 -----      -----
Net (decrease) increase in Cash and Cash Equivalents ...........................    (6)        72
Cash and Cash Equivalents at Beginning of Period ...............................    83        279
                                                                                 -----      -----
Cash and Cash Equivalents at End of Period ..................................... $  77      $ 351
                                                                                 =====      =====

Income Taxes Paid .............................................................. $  50      $   3
Interest Paid .................................................................. $ 109      $  74
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>

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

                                                                      Three Months Ended
                                                                          March 31,
                                                                     -------    -------
                                                                      1998       1997
                                                                     -------    -------
<S>                                                                  <C>        <C>    
OPERATING REVENUES     
      Electric ...................................................   $ 1,177    $   960
      Gas ........................................................       612        734
                                                                     -------    -------
              Total Operating Revenues ...........................     1,789      1,694
                                                                     -------    -------

OPERATING EXPENSES
Operation
      Fuel for  Electric Generation and Interchanged Power .......       486        248
      Gas Purchased ..............................................       391        422
      Other ......................................................       259        232
Maintenance ......................................................        48         58
Depreciation and Amortization ....................................       162        149
Taxes (Note 6)
      Income Taxes ...............................................       115        102
      Transitional Energy Facility Assessment/New Jersey
         Gross Receipts Taxes ....................................        49        172
      Other ......................................................        20         19
                                                                     -------    -------
              Total Operating Expenses ...........................     1,530      1,402
                                                                     -------    -------

OPERATING INCOME .................................................       259        292
                                                                     -------    -------

OTHER INCOME AND DEDUCTIONS
      Settlement of Salem Litigation - Net of  Applicable
         Taxes of $29 ............................................      --          (53)
      Other - net ................................................         2          2
                                                                     -------    -------
            Total Other Income and Deductions ....................         2        (51)
                                                                     -------    -------

INCOME BEFORE INTEREST CHARGES AND
  DIVIDENDS ON PREFERRED SECURITIES ..............................       261        241
                                                                     -------    -------

INTEREST CHARGES AND PREFERRED SECURITIES DIVIDENDS
      Interest Expense ...........................................        96         96
      Allowance for Funds Used During Construction - Debt ........        (3)        (5)
      Preferred Securities Dividend Requirements of Subsidiaries .        11         10
                                                                     -------    -------
         Total Interest Charges and Preferred Securities Dividends       104        101
                                                                     -------    -------

NET INCOME .......................................................       157        140
                                                                     -------    -------

Preferred Stock Dividend Requirements ............................         2          4
                                                                     -------    -------

EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE
  GROUP INCORPORATED .............................................   $   155    $   136
                                                                     =======    =======

<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)
                                                                                  March 31,  December 31,
                                                                                   1998          1997
                                                                                  -------    ------------
<S>                                                                               <C>         <C>    
UTILITY PLANT - Original cost  
  Electric .....................................................................  $13,731     $13,692
  Gas ..........................................................................    2,718       2,697
  Common .......................................................................      564         558
                                                                                  -------     -------
       Total ...................................................................   17,013      16,947
  Less: Accumulated depreciation and amortization ..............................    6,606       6,463
                                                                                  -------     -------
       Net .....................................................................   10,407      10,484
  Nuclear Fuel in Service, net of accumulated amortization -
     1998, $272; 1997, $302 ....................................................      208         216
                                                                                  -------     -------
       Net Utility Plant in Service ............................................   10,615      10,700
  Construction Work in Progress, including Nuclear Fuel in
    Process - 1998, $53; 1997, $60 .............................................      328         326
  Plant Held for Future Use ....................................................       24          24
                                                                                  -------     -------
       Net Utility Plant .......................................................   10,967      11,050
                                                                                  -------     -------
INVESTMENTS AND OTHER NONCURRENT ASSETS
  Long-Term Investments, net of amortization - 1998, $23; 1997, $21,
    and net of valuation allowances - 1998, $10; 1997, $10 .....................      139         137
  Nuclear Decommissioning and Other Special Funds ..............................      545         492
 Other Noncurrent Assets .......................................................       46          45
                                                                                  -------     -------
       Total Investments and Other Noncurrent Assets ...........................      730         674
                                                                                  -------     -------
CURRENT ASSETS
  Cash and Cash Equivalents ....................................................       18          17
  Accounts Receivable:
    Customer Accounts Receivable ...............................................      572         488
    Other Accounts Receivable ..................................................      186         232
    Less: Allowance for Doubtful Accounts ......................................       43          41
  Unbilled Revenues ............................................................      189         270
  Fuel, at average cost ........................................................      170         310
  Materials and Supplies, at average cost, net of inventory
    valuation reserves - 1998, $12; 1997, $12 ..................................      146         142
  Miscellaneous Current Assets .................................................       73          81
                                                                                  -------     -------
       Total Current Assets ....................................................    1,311       1,499
                                                                                  -------     -------
DEFERRED DEBITS (Note 3)
  Unamortized Debt Expense .....................................................      129         135
  Deferred OPEB Costs ..........................................................      285         289
  Unrecovered Environmental Costs ..............................................      120         122
  Underrecovered Electric Energy and Gas Costs .................................      139         167
  Unrecovered SFAS 109 Deferred Income Taxes ...................................      716         725
  Deferred Demand Side Management Costs ........................................      148         116
  Other ........................................................................      134         143
                                                                                  -------     -------
       Total Deferred Debits ...................................................    1,671       1,697
                                                                                  -------     -------
TOTAL ..........................................................................  $14,679     $14,920
                                                                                  =======     =======
<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)
                                                                              March 31,    December 31,
                                                                                1998           1997
                                                                              --------     -----------

<S>                                                                           <C>          <C>    
CAPITALIZATION
  Common Stockholder's Equity:         
    Common Stock ..........................................................   $ 2,563      $ 2,563
    Contributed Capital ...................................................       594          594
    Retained Earnings .....................................................     1,382        1,352
                                                                              -------      -------
       Total Common Stockholder's Equity ..................................     4,539        4,509
  Preferred Stock Without Mandatory Redemption ............................        95           95
  Preferred Stock  With Mandatory Redemption ..............................        75           75
  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          303
  Long-Term Debt ..........................................................     4,123        4,126
                                                                              -------      -------
       Total Capitalization ...............................................     9,345        9,318
                                                                              -------      -------
OTHER LONG-TERM LIABILITIES
  Decontamination and Decommissioning Costs ...............................        43           43
  Environmental Costs  (Note 4) ...........................................        70           73
  Capital Lease Obligations ...............................................        50           52
                                                                              -------      -------
       Total Other Long-Term Liabilities ..................................       163          168
                                                                              -------      -------
CURRENT LIABILITIES
  Long-Term Debt due within one year ......................................        18          118
  Commercial Paper and Loans ..............................................       822        1,106
  Accounts Payable ........................................................       584          608
  Other Accrued Taxes .....................................................       116           34
  Other ...................................................................       255          234
                                                                              -------      -------
       Total Current Liabilities ..........................................     1,795        2,100
                                                                              -------      -------
DEFERRED CREDITS
  Deferred Income Taxes ...................................................     2,559        2,569
  Deferred Investment Tax Credits .........................................       328          333
  Deferred OPEB Costs .....................................................       306          289
  Other ...................................................................       183          143
                                                                              -------      -------
       Total Deferred Credits .............................................     3,376        3,334
                                                                              -------      -------
                                                                            
COMMITMENTS AND CONTINGENT LIABILITIES (Note 4) ...........................      --            --
                                                                              -------      -------
TOTAL .....................................................................   $14,679      $14,920
                                                                              =======      =======
<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)

                                                                     Three Months Ended March 31,
                                                                     ---------------------------
                                                                            1998      1997
                                                                           -------   -------
<S>                                                                         <C>      <C>  
CASH FLOWS FROM OPERATING ACTIVITIES  
  Net income .............................................................. $ 157    $ 140
  Adjustments to reconcile net income to net cash flows from
   operating activities:
    Depreciation and Amortization .........................................   162      149
    Amortization of Nuclear Fuel ..........................................    19       17
    Recovery (deferral) of Electric Energy and Gas Costs - net ............    28      (31)
    Changes in certain current assets and liabilities:
     Net decrease in Accounts Receivable and Unbilled Revenues ............    45       14
     Net decrease in Inventory - Fuel and Materials and Supplies ..........   136      178
     Net decrease in Accounts Payable .....................................   (24)     (25)
     Net change in Prepaid / Other Accrued Taxes ..........................    82      171
     Net change in Other Current Assets and Liabilities ...................    29      (91)
    Other .................................................................    (1)     (16)
                                                                            -----    -----
       Net cash provided by operating activities ..........................   633      506
                                                                            -----    -----
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Utility Plant, excluding AFDC ..............................   (81)    (107)
  Contribution to Decommissioning Funds and Other Special Funds ...........   (29)      (7)
  Other ...................................................................    (8)     (10)
                                                                            -----    -----
       Net cash used in investing activities ..............................  (118)    (124)
                                                                            -----    -----
CASH FLOWS FROM FINANCING ACTIVITIES
  Net decrease in Short-Term Debt .........................................  (284)     (95)
  Redemption of Long-Term Debt ............................................  (103)     (25)
  Redemption of Preferred Stock ...........................................    --      (19)
  Issuance of Preferred Securities ........................................    --       95
  Cash Dividends Paid .....................................................  (127)    (131)
  Other ...................................................................    --       (3)
                                                                            -----    -----
       Net cash used in financing activities ..............................  (514)    (178)
                                                                            -----    -----
Net increase in Cash and Cash Equivalents .................................     1      204
Cash and Cash Equivalents at Beginning of Period ..........................    17       47
                                                                            -----    -----
Cash and Cash Equivalents at End of Period ................................ $  18    $ 251
                                                                            =====    =====

Income Taxes Paid ......................................................... $  28    $   4
Interest Paid ............................................................. $ 105    $  71
<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 consolidated  financial statements and Notes to
Consolidated Financial Statements (Notes) should be read in conjunction with the
Registrant's Notes contained in the 1997 Annual Report on Form 10-K. These Notes
update and supplement matters discussed in the 1997 Annual Report on Form 10-K.

     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 1997
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

     New Jersey Energy Master Plan

     As reported in the 1997 Form 10-K, on April 30, 1997,  the New Jersey Board
of Public  Utilities  (BPU)  issued its final report  regarding  Phase II (final
Phase II report) of the  Energy  Master  Plan  addressing  wholesale  and retail
electric  competition  in New  Jersey.  In  accordance  with the final  Phase II
report,  Public  Service  Electric  and Gas  Company  (PSE&G)  filed a  proposal
regarding competition and rates with the BPU on July 15, 1997. The BPU is in the
process  of  reviewing  filings  of all New  Jersey  electric  utilities  and is
currently holding hearings.  The hearings on PSE&G's proposal commenced in early
February  1998 and are expected to conclude  during the second  quarter of 1998,
with a decision  expected  during the third quarter of 1998. The decision of the
BPU in the  Energy  Master  Plan  proceeding  and the  legislation  required  to
implement certain aspects of electric  restructuring,  if enacted into law, 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.

     Also,  as  previously  reported,  by Order  dated  June 25,  1997,  the BPU
commenced  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  included,  but was not limited to, reviews of electric
utility  filings in response to the Energy  Master Plan.  The  management  audit
process  for  PSE&G  concluded  in  December  1997  with a report  of the  BPU's
management consultants relating to issues of stranded costs,  securitization and
consumer rate reductions. A second report on restructuring was filed on February
27, 1998.  These audit  reports were  approved for release by the BPU on January
29, 1998 and March 5, 1998,  respectively,  and are being  considered as part of
the proceedings  discussed below. The BPU can adopt,  reject or modify the audit
reports' results in its decision on PSE&G's  proposal.  PSE&G cannot predict the
extent to which the BPU will  rely on the  results  of these  audit  reports  in
evaluating PSE&G's proposal.

     The  BPU  requested  the  Office  of  Administrative   Law  (OAL)  to  hold
evidentiary  hearings  regarding  stranded  costs and unbundling  issues.  These
hearings  concluded on March 18, 1998. The audit report released in January 1998
is being  considered  as part of this  proceeding.  Both initial and reply legal
briefs  regarding  those  issues were filed with the OAL in April 1998.  The OAL
Judge  has 45 days  from the  filing of such  briefs  to  render  his  advisory,
non-binding decision to the BPU.

<PAGE>


                   PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

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

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


 Hearings at the BPU began on April 27, 1998 addressing other  restructuring
issues, such as market power,  affiliate  transactions and consumer  protection.
The audit  report  released in March 1998,  relating to these  issues,  is being
considered as part of this  proceeding.  Those hearings are expected to last one
month.

     The BPU has  indicated  its  intent  to  submit  draft  legislation  to the
Governor  later this  Spring to  provide it  requisite  authority  to  implement
wholesale and retail electric competition in New Jersey.  Legislative leadership
has  indicated  that it  probably  will not  consider  passage of a  legislative
package  providing  such  authority  until  this  Fall.  The  outcome  of  these
administrative and legislative  proceedings could have a material adverse effect
on Public  Service  Enterprise  Group  Incorporated's  (Enterprise)  and PSE&G's
financial  condition,  results of operations and net cash flows.  Enterprise and
PSE&G cannot predict the outcome of this matter.

     Levelized Gas Adjustment Clause (LGAC)

     On November 14, 1997,  PSE&G filed an LGAC petition with the BPU requesting
a $45  million  annual  increase  in its LGAC for the period  January 1, 1998 to
December 31, 1998,  which as filed would increase a typical  residential bill by
approximately  4.8%.  Public hearings were held on February 3, 1998. On February
18,  1998,  the BPU  approved  a  Stipulation  agreed to by the  parties  in the
proceeding  providing for an interim  increase in LGAC revenues of approximately
$31  million,  excluding  State  sales and use tax,  or an increase of 3.5% on a
typical  residential  bill. The parties continue to litigate this matter.  PSE&G
cannot predict the final outcome of this proceeding.

     In April 1997,  the BPU approved  PSE&G's  proposal for a  residential  gas
unbundling pilot program  (SelectGas)  allowing 65,000  residential  natural gas
customers,  out  of a  total  of  1.4  million  residential  gas  customers,  to
participate in the  competitive  marketplace  effective May 1, 1997. To date, of
the 65,000 eligible customers, none have subscribed to the program. On April 30,
1998,  PSE&G  filed  a  report  with  the  BPU on  SelectGas  and  its  proposed
refinements  for a  permanent  residential  gas  unbundling  program.  PSE&G has
proposed  that under  SelectGas  300,000  residential  customers be permitted to
choose their gas supplier on a  first-come,  first-served  basis.  This expanded
program is  expected  to  commence  by the later of sixty days after a BPU order
resolving  this matter or September 30, 1998.  PSE&G proposes that the remaining
residential  customers  be eligible to choose their gas supplier by July 1, 1999
or such date set by the BPU.

     Electric Levelized Energy Adjustment Clause (LEAC)/Demand Side Adjustment
     Factor (DSAF)

     On February 24, 1997,  PSE&G  requested  an  annualized  increase of $151.8
million in the DSAF component of the LEAC effective for the period from May 1997
through  December 1998. The request  included  recovery of electric  Demand Side
Management  (DSM)/conservation  costs related to BPU-approved programs. On April
1, 1998, the BPU approved  $150.8 million of PSE&G's  requested  increase.  This
increase was effective for service rendered on or after April 3, 1998.

     At March 31, 1998, PSE&G had an underrecovered balance, including interest,
of approximately  $155 million related to electric DSM programs.  Such amount is
included in Deferred Debits on  Enterprise's  and PSE&G's  Consolidated  Balance
Sheets (see Note 3. Regulatory Assets and Liabilities).

     As reported in the 1997 Form 10-K,  while  PSE&G's  proposal in response to
the final Phase II report of the Energy  Master Plan  provides  for a transition
period  of  seven  years  with  basic   tariff   rates  being   capped  and  the
discontinuation  of the LEAC effective December 31, 1998, such proposal provides
for recovery of mandated societal costs,  including DSM, to be adjusted based on
changes in such costs.  PSE&G  estimates  that the  underrecovered  electric DSM
programs  balance at December 31, 1998 will be approximately  $130 million.  For
further discussion of the potential impact on Enterprise and PSE&G of the Energy
Master Plan proceedings, see New Jersey Energy Master Plan.

<PAGE>


Note 3.  Regulatory Assets and Liabilities

   Regulatory  assets  and  liabilities  are  recorded  in  accordance  with the
provisions of Statement of Financial Accounting Standards (SFAS) 71, "Accounting
for the Effects of Certain Types of Regulation" (SFAS 71). At March 31, 1998 and
December 31, 1997, respectively, Enterprise and PSE&G had deferred the following
regulatory assets on the Consolidated Balance Sheets:

                                                          March 31, December 31,
                                                            1998        1997
                                                          --------- ------------
                                                           (Millions of Dollars)
   Unamortized Debt Expense.............................      $129        $135
   Deferred OPEB Costs..................................       285         289
   Unrecovered Environmental Costs......................       120         122
   Underrecovered Electric Energy and Gas Costs.........       139         167
   Unrecovered SFAS 109 Income Taxes....................       716         725
   Deferred Demand Side Management Costs................       148         116
   Deferred Decontamination and Decommissioning Costs...        43          43
   Property Abandonments................................        33          37
   Unrecovered Plant and Regulatory Study Costs.........        33          34
   Oil and Gas Property Write-Down......................        24          26
                                                            ------      ------
      Total Regulatory Assets...................            $1,670      $1,694
                                                            ======      ======

   Underrecovered  Electric Energy and Gas Costs:  Recoveries of electric energy
and gas  costs  are  determined  by the BPU  under  the LEAC and  LGAC.  PSE&G's
deferred fuel balances as of March 31, 1998 and December 31, 1997, respectively,
reflect underrecovered costs as follows:

                                                   
                                                    March 31,   December 31,
                                                      1998         1997
                                                    ---------   ------------   
                                                    (Millions of Dollars)
   Underrecovered Electric Energy Costs.........      $60         $91
   Underrecovered Gas Fuel Costs................       79          76
                                                      ---         ---
     Total......................................     $139        $167
                                                     ====        ====

   The BPU Order dated December 31, 1996 provides PSE&G the opportunity, but not
a 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.
Management  believes  that it will  recover this amount by December 31, 1998 and
continues to follow deferred accounting treatment for the LEAC.


<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 March 31, 1998 and December 31, 1997,  respectively,  reflects
underrecovered/(overrecovered) costs as follows:

                                                    March 31,   December 31,
                                                      1998         1997
                                                    ---------   ------------   
                                                    (Millions of Dollars)
   Deferred DSM (Including Interest)--Electric...     $155        $122
   Deferred DSM (Including Interest)--Gas........       (7)         (6)
                                                       ----        ----
     Total.......................................      $148        $116
                                                       ====        ====

    The increase  in the  electric  balance  is  primarily  due  to the  ongoing
underrecovery of DSM costs (see Note 2. Rate Matters).

Note 4.  Commitments and Contingent Liabilities

   Settlement of Salem Litigation

    As  reported  in the 1997 Form 10-K,  on May 12,  1997,  PSE&G  settled  the
lawsuit  brought  against it by PECO Energy  Company  (PECO Energy) and Delmarva
Power & Light  Company  (DP&L),  two  co-owners  of  Units 1 and 2 of the  Salem
Nuclear Generating Station (Salem 1 and 2), related to alleged damages resulting
from the outage of the facility.  One aspect of this settlement  obligated PSE&G
to pay $1.4 million for each reactor month that the outage  continued  beyond an
aggregate  outage of 64  reactor  months,  up to a maximum  payment  under  this
provision of $17 million.  PSE&G will not make any payments under this provision
since the  aggregate  Salem  outage was 61 reactor  months.  Salem 2 returned to
service on August 30, 1997 and Salem 1 returned to service on April 17, 1998.

   PECO  Energy,  DP&L and PSE&G have also  agreed to an  operating  performance
standard  (OPS)  applicable  to Salem and the Peach Bottom  Atomic Power Station
Units 2 and 3 (Peach  Bottom)  through  their  retirements,  now  scheduled  for
December 31, 2011 and December 31, 2007, respectively.  PSE&G is the operator of
Salem and PECO  Energy  is the  operator  of Peach  Bottom.  Under the OPS,  the
station  operator  is  required to make  payments  to the  non-operating  owners
(excluding  Atlantic  Electric  Company)  commencing  in  January  2001  if  the
three-year  historical average maximum  dependable  capacity net capacity factor
(MDC) (defined below) for that station for the preceding year,  calculated as of
December  31 of such year,  falls  below 40%.  Any such  payment is limited to a
maximum  of $25  million  per year.  MDC is the gross  electrical  output  for a
station  measured at the output terminals of its turbine  generators  during the
most  restrictive  seasonal  conditions,  less the station's  service load.  The
initial  three-year  period for Peach Bottom began  January 1, 1998 and will end
December 31, 2000. The initial  three-year period for Salem began April 17, 1998
and will end December 31, 2000. Excluded from the three-year  calculation is any
period of time to which force majeure (as defined in the OPS) is applicable. 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.

   Year 2000

   Many  of  Enterprise's  and  PSE&G's  systems,   which  include   information
technology  applications,  plant control and  telecommunications  infrastructure
systems,  must be modified due to computer  program  limitations  in recognizing
dates beyond 1999. During the first quarter of 1998, $5 million of costs related
to Year 2000  readiness were  incurred.  Management  estimates the total cost of
this effort to be about $92 million to be incurred  from 1997 through  2001,  of
which $41 million is  expected to be incurred in 1998.  A portion of these costs
are not likely to be  incremental  to  Enterprise  or PSE&G,  but  rather,  will
represent a redeployment of existing personnel/resources.
<PAGE>

   An inability of Enterprise,  PSE&G,  their  subsidiaries,  both  domestic and
overseas   holdings,   members   of   the   Pennsylvania--New   Jersey--Maryland
Interconnection  (PJM) or Enterprise's or PSE&G's critical suppliers to meet the
Year 2000 deadline  could have a material  adverse  impact on  Enterprise's  and
PSE&G's  operations,  financial  condition,  results of operations  and net cash
flows.

   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 actual or  potential  threat to human  health 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 its  Remediation  Program,
Enterprise and PSE&G do not expect its  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. These
regulations may substantially increase the costs of remedial  investigations and
remediations,  where  necessary,  particularly at sites located on surface water
bodies. PSE&G and predecessor companies owned and/or operated facilities located
on surface water bodies,  certain of which are currently the subject of remedial
activities.  The financial impact of these  regulations on these projects is not
currently  estimable.  PSE&G does not anticipate  that the compliance with these
regulations  will have a  material  adverse  effect on its  financial  position,
results of operations or net cash flows.

   PSE&G Manufactured Gas Plant Remediation Program (Remediation Program)

   In 1988,  NJDEP  notified  PSE&G that it had  identified  the need for PSE&G,
pursuant  to  a  formal  arrangement,  to  systematically  investigate  and,  if
necessary,  resolve environmental concerns extant at PSE&G's former manufactured
gas plant sites. To date, NJDEP and PSE&G have identified 38 former manufactured
gas plant  sites.  PSE&G is  currently  working  with  NJDEP  under a program to
assess, investigate and, if necessary, remediate environmental concerns at these
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 about 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.


<PAGE>


Note 5.  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.

   Equity Securities -- Enterprise Diversified Holdings Incorporated (EDHI)

   Public Service  Resources  Corporation  (PSRC), a wholly-owned  subsidiary of
EDHI, has  investments in equity  securities  and  partnerships  which invest in
equity  securities.  The aggregate  carrying value  approximates the fair market
value of $201  million and $185  million as of March 31, 1998 and  December  31,
1997, respectively.

   Natural Gas Hedging -- EDHI

   As  of  March  31,  1998,  Energis  Resources   Incorporated   (Energis),   a
wholly-owned  subsidiary  of EDHI,  had  outstanding  futures  contracts  to buy
natural gas related to fixed-price natural gas sales commitments. Such contracts
hedged  approximately  100% of its fixed  price sales  commitments  at March 31,
1998.  As of March  31,  1998,  Energis  had net  unrealized  hedge  gains of $4
million.

   Nuclear Decommissioning Trust Funds -- PSE&G

   Contributions made into the Nuclear  Decommissioning Trust Funds are invested
in debt and equity  securities.  The  carrying  value of $492  million  and $459
million of these funds  approximates  the fair market value as of March 31, 1998
and December 31, 1997, respectively.

Note 6.  Income Taxes

     As  reported  in the 1997 Form 10-K,  the New  Jersey  Gross  Receipts  and
Franchise Tax (NJGRT) was eliminated effective January 1, 1998 and replaced with
a combination of the New Jersey  Corporate  Business Tax which is a State income
tax, the State sales and use tax and a Transitional  Energy Facility  Assessment
(TEFA),  with  no  material  impact  on  the  financial  condition,  results  of
operations and net cash flows of Enterprise  and PSE&G.  The TEFA will be phased
out over five years.  While under NJGRT, PSE&G was subject to an effective state
tax on unit sales equal to  approximately  13% of receipts,  as a result of such
tax  reform,  after  the phase out of the  TEFA,  the  effective  state tax rate
applicable  to  PSE&G  will  be  substantially   reduced.   Interim  rates  were
implemented with regard to the new tax structure effective with service rendered
on and after January 1, 1998. The BPU continues its administrative review of the
filings of all New Jersey  utilities and is expected to approve  permanent rates
no later than July 1, 1998.

   Therefore,  effective January 1, 1998, PSE&G became subject to the New Jersey
Corporate Business Tax. Consequently, the effective income tax rate differs from
the statutory Federal income tax rate as follows:

                                     Quarter Ended      Quarter Ended
                                    March 31, 1998     March 31, 1997
                                    ----------------   ----------------

    Federal tax provision at            35.0%                 35.0%
      statutory rate
    New Jersey Corporate Business
      Tax, net of Federal benefit        5.9%                   --
    Other-- net                          0.2%                 (0.4)%
                                        -----                 ------
       Effective Income Tax Rate        41.1%                 34.6%
                                        =====                 ======



<PAGE>


                   PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

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

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)


Note 7.  Accounting Matters

   In June 1997,  the Financial  Accounting  Standards  Board (FASB) issued SFAS
130, "Reporting  Comprehensive Income" (SFAS 130), which is effective for fiscal
years  beginning  after  December  15, 1997.  SFAS 130  dictates  that all items
required  to  be  recognized  under   accounting   standards  as  components  of
comprehensive  income be reported in a financial  statement  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.  Enterprise and PSE&G have
adopted SFAS 130 effective with this filing. The effects of adoption of SFAS 130
are not material for Enterprise or PSE&G.

   In February 1998,  the FASB issued SFAS 132,  "Employers'  Disclosures  about
Pensions and Other  Postretirement  Benefits" (SFAS 132), which is effective for
financial  statements  for periods  beginning  after  December  15,  1997.  This
statement revises and standardizes disclosure requirements for pension and other
postretirement  benefit plans but does not change the measurement or recognition
of those  plans.  Since SFAS 132 solely  revises  disclosure  requirements,  the
adoption of SFAS 132 will not have a material impact on the financial condition,
results of operations and net cash flows of Enterprise and PSE&G.

   In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued  Statement of Position (SOP) 98-1,  "Accounting for the Costs of Computer
Software  Developed or Obtained for Internal Use" (SOP 98-1), which is effective
for financial statements for fiscal years beginning after December 15, 1998. SOP
98-1 provides criteria for capitalizing certain internal-use software costs. The
adoption of SOP 98-1 is not expected to have a material  impact on the financial
condition, results of operations and net cash flows of Enterprise and PSE&G.

   In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities" (SOP 98-5),  which is effective for financial  statements for fiscal
years  beginning after December 15, 1998. SOP 98-5 provides for the expensing of
the costs of start-up activities as incurred. Enterprise and PSE&G are currently
evaluating the impact, if any, of SOP 98-5.


<PAGE>


                      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. Regulatory Assets and Liabilities
      Note 4. Commitments and Contingent Liabilities
      Note 5. Financial Instruments and Risk Management
      Note 7. Accounting Matters

Note 6.  Income Taxes

     As  reported  in the 1997 Form 10-K,  the New  Jersey  Gross  Receipts  and
Franchise Tax (NJGRT) was eliminated effective January 1, 1998 and replaced with
a combination of the New Jersey  Corporate  Business Tax which is a State income
tax, the State sales and use tax and a Transitional  Energy Facility  Assessment
(TEFA),  with  no  material  impact  on  the  financial  condition,  results  of
operations and net cash flows of Enterprise  and PSE&G.  The TEFA will be phased
out over five years.  While under NJGRT, PSE&G was subject to an effective state
tax on unit sales equal to  approximately  13% of receipts,  as a result of such
tax  reform,  after  the phase out of the  TEFA,  the  effective  state tax rate
applicable  to  PSE&G  will  be  substantially   reduced.   Interim  rates  were
implemented with regard to the new tax structure effective with service rendered
on and after January 1, 1998. The BPU continues its administrative review of the
filings of all New Jersey  utilities and is expected to approve  permanent rates
no later than July 1, 1998.

   Therefore,  effective January 1, 1998, PSE&G became subject to the New Jersey
Corporate Business Tax. Consequently, the effective income tax rate differs from
the statutory Federal income tax rate as follows:

                                              Quarter Ended      Quarter Ended
                                              March 31, 1998     March 31, 1997
                                              --------------     --------------

    Federal tax provision at statutory rate         35.0%              35.0%
    New Jersey Corporate Business Tax,                                 
       net of Federal benefit                        5.9%               --  
    Other -- net                                     1.8%              (0.2)%
                                                    -----              ------
       Effective Income Tax Rate                    42.7%              34.8%
                                                    =====              ======


<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) 1997
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

   Basic and diluted  earnings  per share of  Enterprise  common  stock  (Common
Stock) were $0.82 for the quarter ended March 31, 1998, representing an increase
of $0.22 or 37% per share from the comparable 1997 period.

   Public Service  Electric and Gas Company's  (PSE&G)  contribution to earnings
per share of Common Stock for the quarter ended March 31, 1998  increased  $0.09
from the comparable 1997 period primarily due to the one-time charge to earnings
of $55 million or $0.24 per share in the first  quarter of 1997  resulting  from
the  settlements of lawsuits filed by the co-owners of Salem.  This increase was
partially  offset by lower  revenues due to the mild winter weather in the first
quarter of 1998 as well as higher operation and depreciation expenses.

   Enterprise   Diversified  Holdings   Incorporated's  (EDHI)  contribution  to
earnings  per  share of Common  Stock  for the  quarter  ended  March  31,  1998
increased  $0.13  from the  comparable  1997  period  primarily  due to  greater
earnings  of  Public  Service  Resources  Corporation  (PSRC).  PSRC's  earnings
increase  was due to higher  income from  investments  in  leveraged  buyout and
venture  capital  partnerships,  a gain  resulting from the exercise of an early
buyout  option by the lessee in a leveraged  lease and higher  earnings from new
leveraged lease investments.

PSE&G -- Revenues

   Electric

   Revenues  increased  $217 million or 23% for the quarter ended March 31, 1998
from   the  comparable  period  in 1997  primarily  due  to  an   increase   in
energy  trading  activity and higher sales to large industrial  customers.  See
PSE&G -- Expenses -- Fuel for Electric Generation and Interchanged Power.

   These  increases were  partially  offset with a decrease to revenue caused by
New  Jersey  energy  tax  reform in 1998 (see Note 6.  Income  Taxes of  Notes).
Collection of New Jersey Gross  Receipts and Franchise Tax (NJGRT) was reflected
in revenue in 1997, but with energy tax reform, the portion of NJGRT replaced by
the State sales and use tax is no longer  reflected in revenue or expense on the
income  statement.  State  sales  and use tax is a  liability  of the  customer,
collected by PSE&G and remitted to the State and is recorded in Tax  Collections
Payable  which is  included in Other  Current  Liabilities  on the  Consolidated
Balance Sheets.

   Gas

   Revenues  decreased  $122 million or 17% for the quarter ended March 31, 1998
from the  comparable  period in 1997.  The decrease was  primarily  due to lower
recovery of fuel costs and decreased therm sales due to milder winter weather in
1998 and energy tax reform (see PSE&G -- Revenues -- Electric above).


<PAGE>



PSE&G -- Expenses

   Fuel for Electric Generation and Interchanged Power

   Fuel for Electric Generation and Interchanged Power increased $238 million or
96% for the  quarter  ended  March 31,  1998  from the  comparable  1997  period
primarily due to an increase in energy trading  activity.  Effective  January 1,
1998, the amount included for Electric Levelized Energy Adjustment Clause (LEAC)
under/overrecovery  represents the difference between fuel-related  revenues and
fuel-related  expenses  which  are  comprised  of the  cost  of  generation  and
interchanged  power at the PJM market clearing  price.  Effective April 1, 1998,
the PJM locational marginal price replaced the PJM market clearing price. To the
extent fuel revenue and expense flow  through the LEAC  mechanism,  variances in
fuel revenues and expenses offset and thus have no direct effect on earnings.

   Gas Purchased

   Gas  purchased  decreased  $31 million or 7% for the quarter  ended March 31,
1998 from the comparable 1997 period. The decrease was primarily due to the mild
winter  weather in 1998.  Due to the operation of the  Levelized Gas  Adjustment
Clause (LGAC)  mechanism,  variances in fuel revenues and expenses  offset,  and
have no direct effect on earnings.

   Income Taxes

   PSE&G  became  subject to State income tax  effective  January 1, 1998 due to
energy  tax  reform in the State of New  Jersey  (see  Note 6.  Income  Taxes of
Notes).  Income Taxes  increased  $13 million or 13% for the quarter ended March
31, 1998 from the comparable 1997 period.  This increase is due to the inclusion
of State  income tax of $31 million,  partially  offset by a decrease in Federal
income tax of $18 million due to a decrease in pre-tax operating income.

   Transitional Energy Facility Assessment (TEFA)/New Jersey Gross Receipts and
   Franchise Tax (NJGRT)

   TEFA/NJGRT decreased $123 million or 72% for the quarter ended March 31, 1998
from the comparable  1997 period due to New Jersey energy tax reform.  For 1998,
the amount  represents  TEFA unit based taxes  while the 1997 amount  represents
NJGRT unit based  taxes.  The TEFA unit tax rates are  approximately  30% of the
NJGRT unit tax rates.  See PSE&G -- Revenues  and Income Taxes above and Note 6.
Income Taxes of Notes for other impacts of New Jersey energy tax reform.

Year 2000 Expenses -- Enterprise and PSE&G

   For a  discussion  of  Year  2000  expenses,  see  Note 4.   Commitments  and
Contingent Liabilities of Notes.

EDHI -- Earnings

                                                            Increase (Decrease)
                                                            --------------------
                                                            Three Months Ended
                                                                 March 31,
                                                               1998 vs. 1997
                                                           --------------------
                                                           (Millions of Dollars)
    PSRC                                                            $31 
    Community Energy Alternatives Incorporated (CEA)                  2   
    Energis Resources Incorporated (Energis)                         (1)
    Enterprise Group Development Corporation (EGDC)                  --
                                                                    ---
                    Total                                           $32
                                                                    ===

   EDHI's  earnings  were $36 million for the quarter  ended March 31, 1998,  an
increase of $32 million  from the  comparable  1997  period.  The  increase  was
primarily due to PSRC's higher income from  investments in leveraged  buyout and
venture  capital  partnerships,  a gain  resulting from the exercise of an early
buyout  option by the lessee in a leveraged  lease and higher  earnings from new
leveraged lease investments.

Liquidity and Capital Resources

   Enterprise

   Enterprise is a public utility holding company and as such, has no operations
of its own. The  following  discussion  of  Enterprise's  liquidity  and capital
resources  is on a  consolidated  basis,  noting the uses and  contributions  of
Enterprise's two direct subsidiaries, PSE&G and EDHI.

   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, cash generated from EDHI's operations and equity capital.

   Dividend  payments  on Common  Stock  were $0.54 per share and  totaled  $125
million for the quarter ended March 31, 1998. Since 1986, PSE&G has made regular
cash payments to Enterprise  in the form of dividends on  outstanding  shares of
PSE&G's common stock. PSE&G has paid quarterly  dividends on its common stock in
each year  commencing in 1948,  the year of the  distribution  of PSE&G's common
stock by Public Service  Corporation of New Jersey,  the former parent of PSE&G.
PSE&G paid  dividends of $125  million to  Enterprise  during the quarter  ended
March 31, 1998.  From 1992  through  1996,  EDHI made  regular cash  payments to
Enterprise  in the form of  dividends  on  outstanding  shares of EDHI's  common
stock. Due to the growth in EDHI investment  activities,  no dividends on EDHI's
common stock were paid in the first quarter of 1998 or are anticipated for 1998.
In the first quarter of 1998,  EDHI paid $2 million of dividends  related to its
preferred stock issued to Enterprise.

   Enterprise  has paid  quarterly  dividends in each year  commencing  with the
corporate restructuring of PSE&G in 1985 when Enterprise became the owner of all
the  outstanding  common stock of PSE&G.  While a key  objective of the Board of
Directors of Enterprise is to keep the Common Stock dividend secure, amounts and
dates of such  dividends as may be declared will  necessarily  be dependent upon
Enterprise's future earnings, financial requirements and other factors including
the receipt of dividend payments from its subsidiaries.

   Enterprise and PSE&G have issued Deferrable Interest Subordinated  Debentures
in connection with the issuance of tax deferred  preferred  securities.  If, and
for as long as, payments on those Deferrable  Interest  Subordinated  Debentures
have been  deferred,  or  Enterprise  or PSE&G has  defaulted  on the  indenture
related thereto or its guarantee  thereof,  neither Enterprise nor PSE&G may pay
any dividends on their common and preferred stock.

   As of March 31, 1998,  Enterprise's capital structure consisted of 48% common
equity,   44%  long-term  debt  and  8%  preferred  stock  and  other  preferred
securities.

     As  a  result  of  the  1992  focused  audit  of  Enterprise's  non-utility
businesses  (Focused  Audit),  the New Jersey  Board of Public  Utilities  (BPU)
approved a plan which,  among other things,  provides that: (1) Enterprise  will
not  permit  EDHI's  non-utility  investments  to  exceed  20%  of  Enterprise's
consolidated  assets without prior notice to the BPU (such  investments at March
31, 1998 were  approximately  17% of assets);  (2) the PSE&G Board of  Directors
will provide an annual  certification  that the business and financing  plans of
EDHI will not  adversely  affect  PSE&G;  (3)  Enterprise  will (a)  limit  debt
supported by the minimum net worth maintenance  agreement between Enterprise and
Capital to $750  million  and (b) make a  good-faith  effort to  eliminate  such
support  over a six to ten year period  from April  1993;  and (4) EDHI will pay
PSE&G an  affiliation  fee of up to $2  million  a year to be  applied  by PSE&G
through its LGAC and its LEAC to reduce  utility  rates.  Beginning in 1995, the
debt  supported by such minimum net worth  maintenance  agreement was limited to
$650 million and the  affiliation fee has been  proportionately  reduced as such
supported debt is reduced.  Enterprise and EDHI and its subsidiaries continue to
reimburse  PSE&G for the cost of all  services  provided to them by employees of
PSE&G.

     As a result of Enterprise's  intent that EDHI and its subsidiaries  provide
growth  vehicles  for  Enterprise,  financing  requirements  connected  with the
continued  growth of EDHI,  changes to the utility  industry  expected  from the
final outcome of the Energy  Master Plan  proceedings  and potential  accounting
impacts  resulting  from the  deregulation  of the  generation  of  electricity,
modifications  will be  required  to  certain of the  restrictions  agreed to by
Enterprise  with the BPU in response to the Focused Audit.  Inability to achieve
satisfactory  resolution of these matters could impact the future  relative size
and financing of the non-utility businesses and accordingly Enterprise's future
prospects (see Note 2. Rate Matters of Notes).
<PAGE>
   PSE&G

   For the quarter  ended March 31,  1998,  PSE&G had utility  plant  additions,
including Allowance for Funds Used During Construction (AFDC), of $84 million, a
$27 million  decrease  from the  corresponding  1997  period.  The  decrease was
primarily due to the  replacement  of Salem 1 steam  generators  in 1997.  PSE&G
expects that it will be able to internally  generate all of its construction and
capital  requirements  over the next five years,  assuming  adequate  and timely
recovery  of costs,  as to which no  assurances  can be given  (see Note 2. Rate
Matters of Notes).

   EDHI

     CEA,  PSRC and Energis  are  expected  to be growth  vehicles  for EDHI and
Enterprise. During the next five years, EDHI's capital requirements are expected
to be provided from additional debt financing, operational cash flows and equity
capital.  A  significant  portion of CEA's  growth is  expected  to occur in the
international arena due to the current and anticipated growth in electric demand
and the  privatization  of  electric  transmission  and  distribution  assets in
certain  regions  of the  world.  PSRC will  continue  its focus on  investments
related to the energy  business.  Energis is expected to expand upon the current
energy related  services  being provided to industrial and commercial  customers
(see Liquidity and Capital Resources - Enterprise).

   In January 1998, EDHI sold $218 million of 5.01%  Cumulative  Preferred Stock
to Enterprise and used the proceeds to make additional equity investments in its
subsidiaries and to retire $75 million of its 4.10%  Cumulative  Preferred Stock
held by Enterprise.

   In the  first  quarter  of  1998,  PSRC  received  proceeds  from  investment
liquidations resulting from the exercise of an early buyout option by the lessee
in a leveraged lease and from sales of investments  held in leveraged buyout and
venture  capital  partnerships.  In May 1998,  CEA sold its 50% interests in two
domestic  cogeneration  plants.  The  aggregate  proceeds to EDHI from the above
investment liquidations amounted to approximately $175 million.

   In March and April 1998, EGDC entered into separate agreements to sell two of
its properties for a total of approximately $12 million.

   In  March  1998,  PSRC  entered  into a  leveraged  lease  of a  natural  gas
distribution  network in the Netherlands and, in April 1998, acquired a lease of
a domestic gas-fired steam electric generating  station.  The aggregate of these
investments totaled approximately $130 million.

   For a discussion of the source of EDHI's funds, see External Financings. 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 growth.
Any inability to obtain  required  additional  external  capital or to extend or
replace maturing debt and/or existing  agreements at current levels and interest
rates may affect future earnings.

External Financings

   Enterprise

   On March 31,  1998,  Enterprise  had a $25 million line of credit with a bank
with no debt  outstanding  under this line of credit.  Also,  at March 31, 1998,
Enterprise had a committed $150 million  revolving credit facility which expires
in December 2002 with no debt outstanding under this revolving credit facility.

   In January  1998,  Enterprise  Capital Trust I, a special  purpose  statutory
business trust controlled by Enterprise,  issued $225 million of its 7.44% Trust
Originated  Preferred  Securities.  Proceeds  were  lent to  Enterprise  and are
evidenced by deferrable interest  subordinated  debentures.  Enterprise used the
proceeds to make a $218 million  equity  investment in EDHI.  The debentures and
their  related  indenture  constitute  a full  and  unconditional  guarantee  by
Enterprise of the preferred  securities  issued by the trust. If and for as long
as payments on  Enterprise's  debentures  have been deferred,  or Enterprise has
defaulted on the indenture related thereto or its guarantee thereof,  Enterprise
may not pay any  dividends  on its  Common  Stock  (see  Liquidity  and  Capital
Resources -- Enterprise).

<PAGE>


   PSE&G

   PSE&G has received  authority  from the BPU,  through  December 31, 1998,  to
opportunistically  refinance essentially all of its long-term debt and to refund
up to $250 million of matured debt.

   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 March 31, 1998,  the  coverage  ratio under  PSE&G's  Mortgage was
3.68:1.  As of March 31,  1998,  the  Mortgage  would  permit up to $3.3 billion
aggregate  principal amount of new Bonds to be issued against previous additions
and improvements.

   In January 1998, $100 million of PSE&G's 6.00% Bonds, Series NN, matured.

   In April 1998, $8 million of PSE&G's 7.50% Bonds,  Series OO, were  purchased
in the open market.

   To provide  liquidity  for its  commercial  paper  program,  PSE&G has a $650
million  revolving  credit  agreement  expiring in June 1998 and a $650  million
revolving  credit  agreement  expiring  in June 2002 with a group of  commercial
banks,  which provide for borrowings of up to one year. On March 31, 1998, there
were no borrowings  outstanding under these credit agreements.  PSE&G expects to
be able to renew the credit agreement expiring in 1998.

   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 March 31, 1998,  PSE&G had $748 million of  short-term  debt
outstanding,  including $74 million  borrowed against its uncommitted bank lines
of credit which lines of credit totaled $174 million at March 31, 1998.

   PSE&G Fuel Corporation  (Fuelco),  a wholly-owned  subsidiary of PSE&G, has a
$125  million  commercial  paper  program to finance  its 42.49%  share of Peach
Bottom  nuclear  fuel,  which  program is supported by a $125 million  revolving
credit  facility  expiring on June 28, 2001.  PSE&G has guaranteed  repayment of
Fuelco's  obligations  under  this  program.  At  March  31,  1998,  Fuelco  had
commercial paper of $74 million outstanding under this program.

   EDHI

   At March 31, 1998,  PSEG Capital  Corporation,  a wholly-owned  subsidiary of
EDHI,  had total debt  outstanding  of $596 million,  including  $573 million of
Medium Term Notes and $23 million of Senior Notes.

   As of March 31, 1998,  Enterprise Capital Funding  Corporation  (Funding),  a
wholly-owned  subsidiary  of EDHI,  had $300 million and $150 million  revolving
credit  facilities with two groups of banks and had $128 million of Senior Notes
outstanding.  As of March 31,  1998,  Funding  had $276  million  of total  debt
outstanding.

     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 to interest (EBIT)  coverage ratio of at least 1.50:1.  As of
March 31, 1998, EDHI had a consolidated debt to equity ratio of 1.29:1.  For the
twelve  months  ended March 31, 1998,  the EBIT  coverage  ratio,  as defined to
exclude the effects of EGDC, was 2.68:1.  Compliance with  applicable  financial
covenants will depend upon future financial position and levels of earnings,  as
to which no assurance 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 (see Liquidity and
Capital Resources).


<PAGE>


Nuclear Operations

   As  previously  reported,  PSE&G's  Salem  Units 1 and 2 (Salem 1 and 2) were
taken out of  service in the second  quarter of 1995 with Salem 2  returning  to
service on August 30, 1997.  Salem 1 returned to service on April 17, 1998.  The
Nuclear Regulatory  Commission (NRC) has stated that it will continue to closely
monitor  activities  at Salem.  For a discussion  of the  operating  performance
standard applicable to Salem, see Note 4. Commitments and Contingent Liabilities
of Notes.

Competitive Environment

   Rate Matters

   For  discussions  of the  Energy  Master  Plan,  the LGAC,  the  Demand  Side
Adjustment Factor and other rate matters, see Note 2. Rate Matters of Notes.

   Federal Regulatory Energy Commission (FERC) Order No. 888 (Order No. 888)

   As  previously  reported,  numerous  parties,  including  PSE&G,  have  filed
petitions for judicial review of Orders No. 888, 888A and 888B before the Courts
of Appeals for the District of Columbia and the Second Circuits.  In March 1998,
all of these appeals were  consolidated in the Court of Appeals for the District
of Columbia Circuit (D.C.  Circuit),  Transmission  Access Policy Study Group v.
Federal  Energy  Regulatory  Commission,  United  States Court of Appeals in the
District of Columbia  Circuit,  Docket No. 97-1715.  On April 30, 1998, the D.C.
Circuit entered an order permitting  certain additional parties to intervene and
establishing certain procedural guidelines for the hearing of these appeals.

   Pennsylvania--New Jersey--Maryland Interconnection (PJM)

     Effective April 1, 1998, PJM implemented  locational marginal pricing (LMP)
for  congestion  costs within the PJM control area pursuant to the FERC November
25,  1997  Order.  LMP  provides  for  an  allocation  of  congestion  costs  to
transmission  users  within  the  PJM  control  area.   Depending  on  operating
conditions,  the use of LMP may have an effect on the cost of Fuel for  Electric
Generation and Interchanged  Power.  Since LMP is in its infancy,  its effect on
Enterprise's and PSE&G's financial condition, results of operations and net cash
flows is not presently determinable.

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; and Competitive Environment.


<PAGE>


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",  "hypothetical",  "potential" 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;  market
risk; 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.

        ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

   There are no material changes in or additions to information  reported in the
 Public  Service  Enterprise  Group  Incorporated  (Enterprise)  and the  Public
 Service  Electric  and Gas  Company  (PSE&G)  1997  Annual  Report on Form 10-K
 regarding  qualitative  and  quantitative  disclosures  about  market  risk  of
 Enterprise, PSE&G and their subsidiaries.



<PAGE>


                            PART II. OTHER INFORMATION
                             ITEM 1. LEGAL PROCEEDINGS


   Certain  information  reported  under  Item  3 of  Part I of  Public  Service
Enterprise Group Incorporated's (Enterprise) and Public Service Electric and Gas
Company's (PSE&G) 1997Annual Report on Form 10-K is updated below.

     (1) Form 10-K, Page 27. As previously reported, in October 1995, Enterprise
         received a letter  from a  representative  of a  purported  shareholder
         demanding that it commence legal action against certain of its officers
         and directors with regard to nuclear operations of Salem and Hope Creek
         Nuclear  Generating  Stations  (Salem  and Hope  Creek).  The  Board of
         Directors promptly commenced an investigation and advised the purported
         shareholder thereof. While the investigation was pending, the purported
         shareholder  nevertheless  commenced,  by  complaint  filed in December
         1995,  a  shareholder  derivative  action  against  the then  incumbent
         directors,  except Dr. Remick. Similar derivative complaints were filed
         by two profit  sharing  plans and one  individual in February and March
         1996 against Messrs.  Ferland,  Codey, Eliason and others. On March 19,
         1996, the Board's investigation was concluded, and the Board determined
         that this  litigation  should  not have been  instituted  and should be
         terminated.  On July 3, 1996, another individual purported  shareholder
         filed a  similar  complaint  naming  the same  defendants  as the first
         derivative  lawsuit.  The four  complaints  generally  seek recovery of
         damages for alleged losses purportedly arising out of PSE&G's operation
         of Salem and Hope Creek, together with certain other relief,  including
         removal of  certain  executive  officers  of PSE&G and  Enterprise  and
         certain changes in the composition of Enterprise's  Board of Directors.
         On August 21, 1996,  all  defendants  filed motions to dismiss all four
         derivative  actions,  which  motions were denied and attempts to appeal
         were  unsuccessful.  Pursuant to Court Order, on December 31, 1997, the
         defendants  filed  motions for  summary  judgment to dismiss two of the
         cases. In one of the other two cases,  separate motions for partial and
         complete  summary  judgment  were filed by the  defendants  on April 1,
         1998.  In the  fourth  case,  on April 1, 1998 the  defendants  filed a
         motion for partial summary judgment.  All of these motions are pending.
         On April 30,  1998,  the Court  issued a  decision  limiting  discovery
         solely to those  issues  relevant to summary  judgment in the first two
         cases.  The  defendants  expect to file  motions for  complete  summary
         judgment  in the  remaining  two cases.  The  outcome of these  matters
         cannot be predicted.

    Other Matters.  As previously  reported,  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.  Thereafter, the parties entered into
settlement   discussions  which  culminated  in  the  parties  entering  into  a
comprehensive  settlement  agreement  resolving  all  outstanding  issues in the
dispute.  On January  15,  1998,  the  Superior  Court  entered a consent  order
dismissing the complaint, counterclaim and third party complaint with prejudice.
The  settlement  does not have a  material  effect on the  financial  condition,
results of operations and net cash flows of Enterprise or PSE&G. (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)Pages  9 and 10.  Proceedings  before  the  New  Jersey  Board  of  Public
      Utilities  (BPU)  in the  matter  of  the  Energy  Master  Plan  Phase  II
      Proceeding  to  investigate  the future  structure of the  Electric  Power
      Industry, Docket Nos. EX94120585Y, EO97070462 and EO97070463.


<PAGE>



   (2)Page  9.  Proceeding   before  the  BPU  in  the  Matter  of  the  Board's
      Determination a Management Audit be Performed on PSE&G, Docket No.
      EA97060397.

   (3)Page 10.  Proceedings  before the BPU relating to the  Electric  Levelized
      Energy  Adjustment  Clause  (LEAC) rate  increase  to recover  Demand Side
      Management (DSM) costs, Docket No. ER97020101.

   (4)Page 10.  Proceeding  before the BPU  relating  to PSE&G's  Levelized  Gas
      Adjustment Clause (LGAC) filed on November 14, 1997, Docket No.GR97110839.

   (5)Page 22.  Proceedings  before the  Federal  Energy  Regulatory  Commission
      (FERC)  relating to  competition  and electric  wholesale  power  markets.
      (Inquiry Concerning the Pricing Policy for Transmission  Services Provided
      by Utilities Under the Federal Power Act, Docket No. RM93-19.)

   (6)Page 22.  Proceeding  before FERC relating to the development by PSE&G and
      other regional  transmission  owners in PJM of a new transmission  service
      tariff and an Independent System Operator, FERC Docket Nos.
      OA97-261-000, et. al.

   (7)Page 27.  Proceedings  before  FERC  relating  to a  declaratory  judgment
      action challenging  PSE&G's  interpretation of the capacity release rules,
      Texas Eastern Transmission Corporation, FERC Docket No. RP98-83-000.


            ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

   Enterprise's  Annual  Meeting  of  Stockholders  was held on April 21,  1998.
Proxies for the meeting  were  solicited  pursuant to  Regulation  14A under the
Securities Act of 1934.  There was no  solicitation  of proxies in opposition to
management's  nominees as listed in the proxy  statement and all of management's
nominees  were  elected  to the Board of  Directors.  Details  of the voting are
provided below:

<TABLE>
<CAPTION>
                                                      Votes For           Votes Withheld
                                                     ---------------     --------------------
<S>                                                  <C>                     <C>      
Proposal 1 -- Election of Directors
     Class II -- Term expiring 2001          
          E. James Ferland                           186,232,059             4,820,546
          Irwin Lerner                               186,251,093             4,801,512
          Marilyn M. Pfaltz                          186,294,278             4,758,327
          Richard J. Swift                           186,456,176             4,596,429

     Class III -- Term expiring 1999
          Conrad K. Harper                           186,070,164             4,982,441
</TABLE>

<TABLE>
<CAPTION>

                                                      Votes For            Votes Against          Abstentions
                                                     -------------     --------------------     ---------------
<S>                                                  <C>                     <C>                   <C>    
Proposal 2 -- Ratification  of the  Appointment of
Deloitte  & Touche  LLP as  Independent  Auditors
for 1998                                             188,689,601             1,040,396             1,205,963

</TABLE>

<TABLE>
<CAPTION>

                                                        Votes                  Votes                                    Broker
                                                         For                  Against             Abstentions          Non-Votes
                                                     -------------     --------------------     ---------------   --------------
<S>                                                  <C>                    <C>                    <C>                <C>       
Proposal 3 --  Stockholder  proposal  relating  to
the Salem Nuclear Generating Station                 21,040,358             130,833,390            12,229,248         26,949,609
</TABLE>


   With respect to Proposals 2 and 3,  abstentions  and/or broker  non-votes are
not counted in the vote totals and, therefore, have no effect on the vote.


<PAGE>


                             ITEM 5. OTHER INFORMATION

   Certain  information  reported  under  Enterprise's  and PSE&G's  1997 Annual
Report to the SEC is updated  below.  References are to the related pages of the
Form 10-K as printed and distributed.

Nuclear Operations

   Form 10-K, Page 9

   PECO Energy has advised  PSE&G that Peach Bottom Unit 3 (Peach  Bottom 3) was
shut down  from  March 13  through  March  31,  1998 to  repair  cracks in three
recirculation  system jet pump  risers  within  the  reactor  vessel.  Permanent
repairs  have been  completed,  and Peach  Bottom 3 has  returned  to full power
operation.

   Form 10-K, Page 10

   In a March 1998 letter to PSE&G, the Nuclear Regulatory Commission (NRC) said
that two  issues  identified  at Hope  Creek  have  resulted  in two  Level  III
violations and an associated $55,000 civil penalty. PSE&G met with NRC officials
earlier this year and discussed these issues,  including  corrective actions and
improvements.  These were implemented  across the Nuclear Business Unit (NBU) to
ensure the continued safe,  reliable  operation of all three nuclear units.  The
first issue was  identified  at Hope Creek during an NRC  inspection in November
1997,  while the unit was shut down for normal  refueling  maintenance.  The NRC
noted that certain plant conditions  required more strict  procedure  compliance
and  management  oversight  than was  provided.  This resulted in one of the two
Level III  violations  and the civil  penalty.  The NRC issued the civil penalty
because a similar issue had been identified in 1996.

   The second issue concerned the  implementation of the Maintenance Rule, which
requires  utilities to monitor the effectiveness of equipment  reliability.  The
NRC said that PSE&G's  Maintenance  Rule  program did not include all  necessary
equipment.  Because  this issue was  self-identified  and  immediate  corrective
actions were taken, the NRC issued a Level III violation with no civil penalty.

   Form 10-K, Page 10

   As  previously  reported,  on  December  9, 1997,  predecisional  enforcement
conferences  were held to discuss two allegations  concerning  security  program
issues which occurred at Salem and Hope Creek. On April 24, 1998, the NRC issued
a severity  Level III violation for one of these matters and informed PSE&G that
it would await issuance of the Secretary of Labor's  Administrative Review Board
decision before making an enforcement decision in the other matter. There was no
civil  penalty  issued by the NRC for this  violation.  PSE&G does not intend to
contest this violation. PSE&G cannot predict what other actions, if any, the NRC
may take in regard to the second matter.

   Form 10-K, Page 27

   As previously  reported, a lawsuit filed by PECO Energy and DP&L as co-owners
of Salem in 1996 against Enterprise and PSE&G in the U.S. District Court for the
Eastern  District  of  Pennsylvania  alleging  mismanagement  by  PSE&G  in  its
operation  of Salem was settled on May 12,  1997.  This  settlement  included an
obligation  for PSE&G to pay $1.4 million for each reactor month that the outage
continued  beyond an  aggregate  outage of 64  reactor  months,  up to a maximum
payment  under this  provision of $17 million.  PSE&G will not make any payments
under this  provision  since the aggregate  Salem outage was 61 reactor  months.
Salem Unit 2 returned to service on August 30, 1997 and Salem Unit 1 returned to
service on April 17, 1998.

   For  a  discussion  of  the  operating  performance  standard,  see  Note  4.
Commitments and Contingent Liabilities of Notes.


<PAGE>


Low Level Radioactive Waste (LLRW)

   Form 10-K, Page 12

   As previously  reported,  on February 10, 1998, the State agency  responsible
for locating a site for a LLRW  disposal  facility  recommended  to the Governor
that this effort be  abandoned.  The Governor has accepted the agency's  plan to
reduce  the  scope of siting  activities  since the  development  of a  disposal
facility  in New Jersey  may not be  economically  feasible  in light of current
out-of-state  disposal options. As a result, the LLRW budget already adopted for
fiscal year 1999 and attention to the unspent funds paid by waste  generators in
New Jersey to finance the siting process will be reconsidered.

Other State Regulatory Matters

   Form 10-K, Page 4

   As previously reported in the 1997 Form 10-K, on December 3, 1997, one of the
interstate   pipeline  companies  from  which  PSE&G  obtains  service  filed  a
declaratory judgment action with FERC challenging PSE&G's  interpretation of the
capacity  release  rules.  Under the  interpretation  proposed by the interstate
pipeline company, PSE&G would be required to guarantee the performance of Public
Service Energy Trading Company (PSETC) under the transferred  agreements.  PSE&G
disagreed with these claims and filed a protest challenging the December 3, 1997
filing.  On February 11, 1998,  FERC ruled in favor of the  interstate  pipeline
company finding that it was not  unreasonable for the pipeline company to refuse
to discharge PSE&G under the circumstances  addressed in the order. On April 29,
1998, FERC issued an order on rehearing in which it denied PSE&G's request for a
rehearing.  Management  of  Enterprise  and  PSE&G is  reviewing  its  legal and
regulatory options.



<PAGE>


                     ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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

      Enterprise
-----------------------
Exhibit Number Document
     4d(2)     Supplemental  Indenture  between PSE&G and First  Fidelity  Bank,
               National Association (now known as First Union National Bank), as
               Trustee,   dated  September  1,  1995  providing  for  Deferrable
               Interest Subordinated  Debentures,  Series B (relating to Monthly
               Preferred Securities)

     4e(1)     Indenture between PSE&G and First Union National Bank, as
               Trustee, dated June 1, 1996 providing for Deferrable Interest
               Subordinated Debentures in Series (relating to Quarterly
               Preferred Securities)

     4e(2)     Supplemental  Indenture  between  PSE&G and First Union  National
               Bank, as Trustee, dated February 1, 1997 providing for Deferrable
               Interest Subordinated Debentures, Series B (relating to Quarterly
               Preferred Securities)

     4f        Indenture  between Public Service  Enterprise Group  Incorporated
               and First Union National Bank, as Trustee,  dated January 1, 1998
               providing  for  Deferrable  Interest  Subordinated  Debentures in
               Series (relating to Quarterly Preferred Securities)

     12        Computation of Ratios of Earnings to Fixed Charges (Enterprise)

     27(A)     Financial Data Schedule (Enterprise)

        PSE&G
-----------------------
Exhibit Number Document
     4d(2)     Supplemental  Indenture  between PSE&G and First  Fidelity  Bank,
               National Association (now known as First Union National Bank), as
               Trustee,   dated  September  1,  1995  providing  for  Deferrable
               Interest Subordinated  Debentures,  Series B (relating to Monthly
               Preferred Securities)

     4e(1)     Indenture between PSE&G and First Union National Bank, as
               Trustee, dated June 1, 1996 providing for Deferrable Interest
               Subordinated Debentures in Series (relating to Quarterly
               Preferred Securities)

     4e(2)     Supplemental  Indenture  between  PSE&G and First Union  National
               Bank, as Trustee, dated February 1, 1997 providing for Deferrable
               Interest Subordinated Debentures, Series B (relating to Quarterly
               Preferred Securities)

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

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

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

(B)  Reports on Form 8K: 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: May 13, 1998


<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,                    March
                                                                                             31,
                               ----------- ----------- ----------- ----------- -----------
                                1993 (B)      1994        1995        1996        1997       1998
                               ----------- ----------- ----------- ----------- ----------- ---------
                                             (Millions of Dollars, where applicable)
<S>                                  <C>         <C>         <C>         <C>        <C>        <C> 
Earnings as Defined in
  Regulation S-K (A):
Income from Continuing               
  Operations (C)                     $549        $667        $627        $588       $560       $611
Income Taxes (D)                      296         320         348         297        313        371
Fixed Charges                         539         535         549         528        543        556
                               ----------- ----------- ----------- ----------- ---------   ---------
Earnings                            1,384       1,522       1,524       1,413     $1,416     $1,538
                               =========== =========== =========== =========== ==========  =========


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

Total Interest Expense (F)           $471        $462        $464        $453       $470       $481
Interest Factor in Rentals             11          12          12          12         11         11
Subsidiaries' Preferred
Securities Dividend 
  Requirements                         --           2          16          28         44         48
Preferred Stock Dividends              38          41          34          23         12         10
Adjustment to Preferred Stock
  Dividends to state on a
  pre-income tax basis                 19         18           23          12          6          6
                               ----------- -----------  ----------- ----------- ----------  ---------
Total Fixed Charges                  $539        $535        $549        $528       $543       $556
                               =========== =========== =========== =========== ==========  =========
Ratio of Earnings to Fixed           
  Charges                            2.57        2.84        2.78        2.68       2.61       2.77
                               =========== =========== =========== =========== ==========  =========

<FN>
(A)  The term  "earnings"  shall be defined  as pretax  income  from  continuing
     operations.  Add to pretax income the amount of fixed  charges  adjusted to
     exclude (a) the amount of any  interest  capitalized  during the period and
     (b) the actual  amount of any  preferred  stock  dividend  requirements  of
     majority-owned  subsidiaries  which were  included  in such  fixed  charges
     amount but not deducted in the determination of pretax income.

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

(C)  Excludes income from discontinued operations.

(D)  Includes State income taxes and Federal income taxes for other income.

(E)  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  and preferred stock  dividends,  increased to
     reflect the pre-tax  earnings  requirement  for Public  Service  Enterprise
     Group Incorporated.

(F)  Excludes interest expense from discontinued operations.
</FN>
</TABLE>


<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,                   March
                                                                                               31,
                                   ---------  ---------- ----------  ----------  ----------
                                     1993       1994       1995        1996        1997       1998
                                   ---------  ---------- ----------  ----------  ----------  --------
                                                (Millions of Dollars, where applicable)
<S>                                    <C>         <C>        <C>         <C>         <C>       <C> 
Earnings as Defined in 
  Regulation S-K (A):
Net Income                             $615        $659       $617        $535        $528      $546
Income Taxes (B)                        307         302        326         268         286       329
Fixed Charges                           401         408        419         438         450       450
                                   ---------  ---------- ----------  ----------  ---------- ---------
Earnings                             $1,323      $1,369     $1,362      $1,241      $1,264    $1,325
                                   =========  ========== ==========  ==========  ========== =========


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

Total Interest Expense                 $390        $396       $407        $399        $395      $395
Interest Factor in Rentals               11          12         12          11          11        11
Subsidiaries' Preferred Securities
    Dividend Requirements                --          --         --          28          44        44
                                   ---------  ---------- ----------  ----------  ---------- ---------
Total Fixed Charges                    $401        $408       $419        $438        $450      $450
                                   =========  ========== ==========  ==========  ========== =========

Ratio of Earnings to Fixed Charges     3.30        3.35       3.25        2.83        2.81      2.94
                                   =========  ========== ==========  ==========  ========== =========

<FN>

(A) The term  "earnings"  shall be  defined  as pretax  income  from  continuing
    operations.  Add to pretax  income the amount of fixed  charges  adjusted to
    exclude (a) the amount of any interest capitalized during the period and (b)
    the  actual  amount  of  any  preferred   stock  dividend   requirements  of
    majority-owned subsidiaries which were included in such fixed charges amount
    but not deducted in the determination of pretax income.

(B) Includes State income taxes and Federal income taxes for other income.

(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,   and  (d)  Preferred  Securities  Dividend
    Requirements of subsidiaries.
</FN>
</TABLE>



<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,                  March 31,
                                  ---------- ----------  ----------  ----------  ----------
                                    1993       1994        1995        1996        1997       1998
                                  ---------- ----------  ----------  ----------  ---------- ----------
                                                (Millions of Dollars, where applicable)
<S>                                    <C>         <C>        <C>         <C>         <C>        <C> 
Earnings as Defined in 
  Regulation S-K (A):

Net Income                             $615        $659       $617        $535        $528       $546
Income Taxes (B)                        307         302        326         268         286        329
Fixed Charges                           401         408        419         438         450        450
                                  ---------- ----------- ----------  ----------  ---------- ----------
Earnings                             $1,323      $1,369     $1,362      $1,241      $1,264     $1,325
                                  ========== =========== ==========  ==========  ========== ==========

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

Total Interest Expense                 $390        $396       $407        $399        $395       $395
Interest Factor in Rentals               11          12         12          11          11         11
Subsidiaries' Preferred
  Securities Dividend 
  Requirements                           --          --         --          28          44         44
Preferred Stock Dividends                38          42         49          23          12         10
Adjustment to Preferred Stock
  Dividends to state on a
  pre-income tax basis                   19          19         24          12           6          6
                                  ---------- ----------- ----------  ----------  ---------- ----------
Total Fixed Charges                    $458        $469       $492        $473        $468       $466
                                  ========== =========== ==========  ==========  ========== ==========

Ratio of Earnings to Fixed
  Charges                              2.89        2.92       2.77        2.62        2.70       2.84
                                  ========== =========== ==========  ==========  ========== ==========

<FN>
(A) The term  "earnings"  shall be  defined  as pretax  income  from  continuing
    operations.  Add to pretax  income the amount of fixed  charges  adjusted to
    exclude (a) the amount of any interest capitalized during the period and (b)
    the  actual  amount  of  any  preferred   stock  dividend   requirements  of
    majority-owned subsidiaries which were included in such fixed charges amount
    but not deducted in the determination of pretax income.

(B) Includes State income taxes and Federal income taxes for other income.

(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,   and  (d)  preferred  securities  dividend
    requirements of subsidiaries  and preferred  stock  dividends,  increased to
    reflect the pre-tax earnings requirement for Public Service Electric and Gas
    Company.
</FN>
</TABLE>