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

                                  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 June 30, 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            Address, and Telephone Number         Identification
  Number                                                      No.
----------  ------------------------------------------  ----------------
 1-9120          PUBLIC SERVICE ENTERPRISE GROUP          22-2625848
                            INCORPORATED
                   (A New Jersey Corporation)
                          80 Park Plaza
                          P.O. Box 1171
                  Newark, New Jersey 07101-1171
                          973 430-7000
                       http://www.pseg.com

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

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 July 31, 1998: 231,957,608

As of July 31,  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>




                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                  --------------------------------------------
                                TABLE OF CONTENTS


PART I.  FINANCIAL INFORMATION

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

    Consolidated Statements of Income for the Three and Six
      Months Ended June 30, 1998 and 1997.........................    1

    Consolidated Balance Sheets as of June 30, 1998
      and December 31, 1997.......................................    2

    Consolidated Statements of Cash Flows for the Six
      Months Ended June 30, 1998 and 1997.........................    4

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

    Consolidated Statements of Income for the Three and Six
      Months Ended June 30, 1998 and 1997.........................    5

    Consolidated Balance Sheets as of June 30, 1998 and
      December 31, 1997...........................................    6

    Consolidated Statements of Cash Flows for the Six
      Months Ended June 30, 1998 and 1997.........................    8

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

   Notes to Consolidated Financial Statements-- PSE&G.............   17

  Item 2. Management's Discussion and Analysis of Financial
            Condition and Results of Operations
    PSEG..........................................................   18
    PSE&G.........................................................   25

  Item 3. Qualitative and Quantitative Disclosures About Market
            Risk..................................................   26

PART II.  OTHER INFORMATION

  Item 1. Legal Proceedings.......................................   27

  Item 5. Other Information.......................................   29

  Item 6. Exhibits and Reports on Form 8-K........................   31

  Signatures -- PSEG..............................................   32

  Signatures -- PSE&G.............................................   32



<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                  --------------------------------------------
                          PART I. FINANCIAL INFORMATION
                          ITEM 1. FINANCIAL STATEMENTS


<PAGE>
<TABLE>
                                         PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                                               CONSOLIDATED STATEMENTS OF INCOME
                                           (Millions of Dollars, Except Per Share Data)
                                                            (Unaudited)
<CAPTION>
                                                                
                                                              Three Months Ended           Six Months Ended
                                                                   June 30,                    June 30,
                                                             ----------------------    -----------------------
                                                               1998         1997         1998         1997
                                                             ---------    ---------    ---------    ----------
<S>                                                          <C>          <C>          <C>          <C>      
OPERATING REVENUES
  Electric ...............................................   $   1,194    $     946    $   2,371    $   1,906
  Gas ....................................................         273          324          884        1,058
  Nonutility Activities ..................................          90           53          203           91
                                                             ---------    ---------    ---------    ---------
       Total Operating Revenues ..........................       1,557        1,323        3,458        3,055
                                                             ---------    ---------    ---------    ---------

OPERATING EXPENSES
Operation
  Interchanged Power and Fuel for Electric Generation ....         447          243          933          491
  Gas Purchased ..........................................         169          180          560          601
  Other ..................................................         327          268          620          517
Maintenance ..............................................          54           70          102          128
Depreciation and Amortization ............................         163          155          327          305
Taxes (Note 6)
  Income Taxes ...........................................          90           49          221          153
  Transitional Energy Facility Assessment/New Jersey
    Gross Receipts Taxes .................................          38          117           87          289
  Other ..................................................          18           22           39           42
                                                             ---------    ---------    ---------    ---------
       Total Operating Expenses ..........................       1,306        1,104        2,889        2,526
                                                             ---------    ---------    ---------    ---------

OPERATING INCOME .........................................         251          219          569          529
                                                             ---------    ---------    ---------    ---------

OTHER INCOME AND DEDUCTIONS
  Settlement of Salem Litigation - Net of Applicable
     Taxes of $29 ........................................          --           --           --          (53)
  Other - net ............................................           2            2            8            4
                                                             ---------    ---------    ---------    ---------

       Total Other Income and Deductions .................           2            2            8          (49)
                                                             ---------    ---------    ---------    ---------

INCOME BEFORE INTEREST CHARGES AND
DIVIDENDS ON PREFERRED SECURITIES ........................         253          221          577          480
                                                             ---------    ---------    ---------    ---------

INTEREST CHARGES AND PREFERRED SECURITIES
  DIVIDENDS
  Interest Expense .......................................         116          117          236          227
  Allowance for Funds Used During Construction - Debt and
    Capitalized Interest .................................          (3)          (4)          (7)         (10)
Preferred Securities Dividend Requirements of Subsidiaries          18           14           35           29
Net Loss on Preferred Stock Redemptions ..................          --            3           --            3
                                                             ---------    ---------    ---------    ---------
       Total Interest Charges and Preferred Securities
          Dividends ......................................         131          130          264          249
                                                             ---------    ---------    ---------    ---------

       NET INCOME ........................................   $     122    $      91    $     313    $     231
                                                             =========    =========    =========    =========


AVERAGE SHARES OF COMMON STOCK
   OUTSTANDING (000's) ...................................     231,958      231,958      231,958      232,014

EARNINGS PER  SHARE (Basic and Diluted) ..................   $    0.53    $    0.39    $    1.35    $    0.99
                                                             =========    =========    =========    =========

DIVIDENDS PAID PER SHARE OF COMMON STOCK .................   $    0.54    $    0.54    $    1.08    $    1.08
                                                             =========    =========    =========    =========

<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                           CONSOLIDATED BALANCE SHEETS
                                     ASSETS
                              (Millions of Dollars)
<CAPTION>

                                                                      (Unaudited)
                                                                        June 30, December 31,
                                                                          1998      1997
                                                                      ----------  --------
<S>                                                                      <C>       <C>    
UTILITY PLANT - Original cost  
  Electric ...........................................................   $13,787   $13,692
  Gas ................................................................     2,742     2,697
  Common .............................................................       576       558
                                                                         -------   -------
       Total .........................................................    17,105    16,947
  Less: Accumulated depreciation and amortization ....................     6,761     6,463
                                                                         -------   -------
       Net ...........................................................    10,344    10,484
  Nuclear Fuel in Service, net of accumulated amortization -
     1998, $297; 1997, $302 ..........................................       206       216
                                                                         -------   -------
       Net Utility Plant in Service ..................................    10,550    10,700
  Construction Work in Progress, including Nuclear Fuel in
    Process - 1998, $31; 1997, $60 ...................................       323       326
  Plant Held for Future Use ..........................................        24        24
                                                                         -------   -------
       Net Utility Plant .............................................    10,897    11,050
                                                                         -------   -------
INVESTMENTS AND OTHER NONCURRENT ASSETS
 Long-Term Investments, net of amortization - 1998, $29; 1997,
    $21, and net of valuation allowances - 1998, $23; 1997, $10 ......     2,931     2,873
 Nuclear Decommissioning and Other Special Funds .....................       588       492
 Other Noncurrent Assets,  net of amortization - 1998, $22; 1997, $16,
    and net of valuation allowances - 1998, $5; 1997, $0 .............       181       167
                                                                         -------   -------
       Total Investments and Other Noncurrent Assets .................     3,700     3,532
                                                                         -------   -------
CURRENT ASSETS
  Cash and Cash Equivalents ..........................................       115        83
  Accounts Receivable:
    Customer Accounts Receivable .....................................       510       520
    Other Accounts Receivable ........................................       242       293
    Less: Allowance for Doubtful Accounts ............................        42        41
  Unbilled Revenues ..................................................       179       270
  Fuel, at average cost ..............................................       249       310
  Materials and Supplies, at average cost, net of inventory valuation
    reserves - 1998, $12; 1997, $12 ..................................       144       142
  Prepayments ........................................................       358        48
  Miscellaneous Current Assets .......................................        29        38
                                                                         -------   -------
       Total Current Assets ..........................................     1,784     1,663
                                                                         -------   -------
DEFERRED DEBITS (Note 3)
  Unamortized Debt Expense ...........................................       129       136
  OPEB Costs .........................................................       280       289
  Environmental Costs ................................................       119       122
  Electric Energy and Gas Costs ......................................        73       167
  SFAS 109 Income Taxes ..............................................       706       725
  Demand Side Management Costs .......................................       149       116
  Other ..............................................................       130       143
                                                                         -------   -------
       Total Deferred Debits .........................................     1,586     1,698
                                                                         -------   -------
TOTAL ................................................................   $17,967   $17,943
                                                                         =======   =======
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                           CONSOLIDATED BALANCE SHEETS
                         CAPITALIZATION AND LIABILITIES
                              (Millions of Dollars)

<CAPTION>
                                                               (Unaudited)
                                                                June 30,     December 31,
                                                                  1998         1997
                                                              -----------  --------------
<S>                                                            <C>         <C>     
CAPITALIZATION
  Common Stockholders' Equity:  
    Common Stock ...........................................   $  3,603    $  3,603
    Retained Earnings ......................................      1,675       1,623
    Foreign Currency Translation Adjustment ................        (27)        (15)
                                                               --------    --------
       Total Common Stockholders' Equity ...................      5,251       5,211
 
 Subsidiaries' Preferred Securities:
    Preferred Stock Without Mandatory Redemption ...........         95          95
    Preferred Stock With Mandatory Redemption ..............         75          75
    Guaranteed Preferred Beneficial Interest in Subordinated
       Debentures (Note 8) .................................        888         513
  Long-Term Debt ...........................................      4,614       4,873
                                                               --------    --------
       Total Capitalization ................................     10,923      10,767
                                                               --------    --------
OTHER LONG-TERM LIABILITIES
  Accrued OPEB .............................................        323         289
  Decontamination and Decommissioning Costs ................         43          43
  Environmental Costs  (Note 4) ............................         69          73
  Capital Lease Obligations ................................         50          52
                                                               --------    --------       
       Total Other Long-Term Liabilities ...................        485         457
                                                               --------    --------
CURRENT LIABILITIES
  Long-Term Debt due within one year .......................        646         340
  Commercial Paper and Loans ...............................      1,069       1,448
  Accounts Payable .........................................        592         686
  Other ....................................................        346         353
                                                               --------    --------
       Total Current Liabilities ...........................      2,653       2,827
                                                               --------    --------
DEFERRED CREDITS
  Income Taxes .............................................      3,354       3,394
  Investment Tax Credits ...................................        333         343
  Other ....................................................        219         155
                                                               --------    --------
       Total Deferred Credits ..............................      3,906       3,892
                                                               --------    --------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 4) ............        --          --
                                                               --------    --------
TOTAL ......................................................   $ 17,967    $ 17,943
                                                               ========    ========
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
                 
                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (Millions of Dollars)
                                   (Unaudited)
<CAPTION>

                                                                              Six Months Ended June 30,
                                                                              ------------------------
                                                                                   1998     1997
                                                                                  -----    -----
<S>                                                                               <C>      <C>  
CASH FLOWS FROM OPERATING ACTIVITIES  
 Net income ...................................................................  $ 313    $ 231
 Adjustments to reconcile net income to net cash flows from
   operating activities:
    Depreciation and Amortization ..............................................    327      305
    Amortization of Nuclear Fuel ...............................................     44       34
    Recovery of Electric Energy and Gas Costs - net ............................     94       15
    Unrealized Gains on Investments - net ......................................    (40)      (7)
    Proceeds from Leasing Activities ...........................................    (51)      47
    Changes in certain current assets and liabilities:
     Net decrease in Accounts Receivable and Unbilled Revenues .................    153      142
     Net decrease in Inventory - Fuel and Materials and Supplies ...............     59       89
     Net decrease in Accounts Payable ..........................................    (94)    (104)
     Net increase in Prepayments ...............................................   (310)    (588)
     Net change in Other Current Assets and Liabilities ........................      2      164
    Other ......................................................................     39      (29)
                                                                                  -----    -----
       Net Cash Provided By Operating Activities ...............................    536      299
                                                                                  -----    -----
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Utility Plant, excluding AFDC ...................................   (191)    (229)
  Net decrease (increase) in Long-Term Investments and Real Estate .............      2     (385)
  Contribution to Decommissioning Funds and Other Special Funds ................    (61)     (28)
  Other ........................................................................    (24)     (56)
                                                                                  -----    -----
       Net Cash Used In Investing Activities ...................................   (274)    (698)
                                                                                  -----    -----
CASH FLOWS FROM FINANCING ACTIVITIES
  Net (decrease) increase in Short-Term Debt ...................................   (379)     353
  Issuance of Long-Term Debt ...................................................    250      476
  Redemption of Long-Term Debt .................................................   (203)    (358)
  Redemption of Preferred Stock ................................................   --        (94)
  Issuance of Preferred Securities .............................................    375       95
  Retirement of Common Stock ...................................................   --        (43)
  Cash Dividends Paid on Common Stock ..........................................   (251)    (251)
  Other ........................................................................    (22)      (4)
                                                                                  -----    -----
       Net Cash (Used In) Provided By Financing Activities .....................   (230)     174
                                                                                  -----    -----
Net (Decrease) Increase In Cash And Cash Equivalents ...........................     32     (225)
Cash And Cash Equivalents At Beginning Of Period ...............................     83      279
                                                                                  -----    -----
Cash And Cash Equivalents At End Of Period .....................................  $ 115    $  54
                                                                                  =====    =====

Income Taxes Paid ..............................................................  $ 241    $  84
Interest Paid ..................................................................  $ 204    $ 187

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


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


<CAPTION>

                                                        Three Months Ended      Six Months Ended
                                                             June 30,               June 30,
                                                        ------------------    -------------------

                                                          1998       1997       1998       1997
                                                        -------    -------    -------    -------
<S>                                                      <C>        <C>        <C>        <C>    
OPERATING REVENUES
  Electric ...........................................   $ 1,194    $   946    $ 2,371    $ 1,906
  Gas ................................................       273        324        884      1,058
                                                         -------    -------    -------    -------
       Total Operating Revenues ......................     1,467      1,270      3,255      2,964
                                                         -------    -------    -------    -------

OPERATING EXPENSES
Operation
  Interchanged Power and Fuel for Electric Generation        447        243        933        491
  Gas Purchased ......................................       169        180        560        601
  Other ..............................................       291        246        549        478
Maintenance ..........................................        54         70        102        128
Depreciation and Amortization ........................       161        154        322        303
Taxes (Note 6)
  Income Taxes .......................................        80         46        196        147
  Transitional Energy Facility Assessment/New Jersey
     Gross Receipts Taxes ............................        38        117         87        289
  Other ..............................................        19         20         38         40
                                                         -------    -------    -------    -------
       Total Operating Expenses ......................     1,259      1,076      2,787      2,477
                                                         -------    -------    -------    -------

OPERATING INCOME .....................................       208        194        468        487
                                                         -------    -------    -------    -------

OTHER INCOME AND DEDUCTIONS
   Settlement of Salem Litigation - Net of Applicable        
      Taxes of $29 ...................................        --         --         --        (53)
  Other - net ........................................         3          2          5          4
                                                         -------    -------    -------    -------
       Total Other Income and Deductions .............         3          2          5        (49)
                                                         -------    -------    -------    -------

INCOME BEFORE INTEREST CHARGES AND
DIVIDENDS ON PREFERRED SECURITIES ....................       211        196        473        438
                                                         -------    -------    -------    -------

INTEREST CHARGES AND PREFERRED SECURITIES DIVIDENDS
  Interest Expense ...................................        92        101        188        197
  Allowance for Funds Used During Construction - Debt         (3)        (3)        (6)        (8)
  Preferred Securities Dividend Requirements
      of  Subsidiaries ...............................        11         11         22         22
                                                         -------    -------    -------    -------
       Total Interest Charges and Preferred Securities
         Dividends ...................................       100        109        204        211
                                                         -------    -------    -------    -------

       NET INCOME ....................................       111         87        269        227
                                                         -------    -------    -------    -------

  Preferred Stock Dividend Requirements ..............         2          3          5          7

  Net Loss on Preferred Stock Redemptions ............      --            3       --            3
                                                         -------    -------    -------    -------

EARNINGS AVAILABLE TO PUBLIC SERVICE 
ENTERPRISE GROUP INCORPORATED ........................   $   109    $    81    $   264    $   217
                                                         =======    =======    =======    =======

<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                           CONSOLIDATED BALANCE SHEETS
                                     ASSETS
                              (Millions of Dollars)

<CAPTION>
                                                                     (Unaudited)
                                                                       June 30, December 31,
                                                                        1998       1997
                                                                       -------   -------
<S>                                                                     <C>       <C>   
UTILITY PLANT - Original cost  
  Electric .........................................................   $13,787   $13,692
  Gas ..............................................................     2,742     2,697
  Common ...........................................................       576       558
                                                                       -------   -------
       Total .......................................................    17,105    16,947
  Less: Accumulated depreciation and amortization ..................     6,761     6,463
                                                                       -------   -------
       Net .........................................................    10,344    10,484
  Nuclear Fuel in Service, net of accumulated amortization -
     1998, $297; 1997, $302 ........................................       206       216
                                                                       -------   -------
       Net Utility Plant in Service ................................    10,550    10,700
  Construction Work in Progress, including Nuclear Fuel in
    Process - 1998, $31; 1997, $60 .................................       323       326
  Plant Held for Future Use ........................................        24        24
                                                                       -------   -------
       Net Utility Plant ...........................................    10,897    11,050
                                                                       -------   -------
INVESTMENTS AND OTHER NONCURRENT ASSETS
  Long-Term Investments, net of amortization - 1998, $29; 1997, $21,
    and net of valuation allowances - 1998, $9; 1997, $10 ..........       139       137
  Nuclear Decommissioning and Other Special Funds ..................       588       492
  Other Noncurrent Assets ..........................................        44        45
                                                                       -------   -------
       Total Investments and Other Noncurrent Assets ...............       771       674
                                                                       -------   -------
CURRENT ASSETS
  Cash and Cash Equivalents ........................................        32        17
  Accounts Receivable:
    Customer Accounts Receivable ...................................       468       488
    Other Accounts Receivable ......................................       226       232
    Less: Allowance for Doubtful Accounts ..........................        40        41
  Unbilled Revenues ................................................       179       270
  Fuel, at average cost ............................................       249       310
  Materials and Supplies, at average cost, net of inventory
    valuation reserves - 1998, $12; 1997, $12 ......................       144       142
  Prepayments ......................................................       354        44
  Miscellaneous Current Assets .....................................        25        37
                                                                       -------   -------
       Total Current Assets ........................................     1,637     1,499
                                                                       -------   -------
DEFERRED DEBITS (Note 3)
  Unamortized Debt Expense .........................................       128       135
  OPEB Costs .......................................................       280       289
  Environmental Costs ..............................................       119       122
  Electric Energy and Gas Costs ....................................        73       167
  SFAS 109 Income Taxes ............................................       706       725
  Demand Side Management Costs .....................................       149       116
  Other ............................................................       130       143
                                                                       -------   -------
       Total Deferred Debits .......................................     1,585     1,697
                                                                       -------   -------
TOTAL ..............................................................   $14,890   $14,920
                                                                       =======   =======
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>

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



                                                             (Unaudited)
                                                               June 30    December 31,
                                                                1998         1997
                                                             ----------  -----------
<S>                                                              <C>       <C>  
CAPITALIZATION
  Common Stockholder's Equity:    
    Common Stock ...........................................   $ 2,563   $ 2,563
    Contributed Capital ....................................       594       594
    Retained Earnings ......................................     1,365     1,352
                                                               -------   -------
       Total Common Stockholder's Equity ...................     4,522     4,509
  Preferred Stock Without Mandatory Redemption .............        95        95
  Preferred Stock  With Mandatory Redemption ...............        75        75
  Subsidiaries' Preferred Securities:
    Guaranteed Preferred Beneficial Interest in Subordinated
       Debentures (Note 8) .................................       513       513
  Long-Term Debt ...........................................     4,140     4,126
                                                               -------   -------
       Total Capitalization ................................     9,345     9,318
                                                               -------   -------
OTHER LONG-TERM LIABILITIES
  Accrued OPEB .............................................       323       289
  Decontamination and Decommissioning Costs ................        43        43
  Environmental Costs  (Note 4) ............................        69        73
  Capital Lease Obligations ................................        50        52
                                                               -------   -------
       Total Other Long-Term Liabilities ...................       485       457
                                                               -------   -------
CURRENT LIABILITIES
  Long-Term Debt due within one year .......................       252       118
  Commercial Paper and Loans ...............................       955     1,106
  Accounts Payable .........................................       510       608
  Other ....................................................       271       268
                                                               -------   -------
       Total Current Liabilities ...........................     1,988     2,100
                                                               -------   -------
DEFERRED CREDITS
  Income Taxes .............................................     2,544     2,569
  Investment Tax Credits ...................................       324       333
  Other ....................................................       204       143
                                                               -------   -------
       Total Deferred Credits ..............................     3,072     3,045
                                                               -------   -------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 4) ............      --        --
                                                               -------   -------
TOTAL ......................................................   $14,890   $14,920
                                                               =======   =======
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (Millions of Dollars)
                                   (Unaudited)

<CAPTION>
                                                                            Six Months Ended June 30,
                                                                           --------------------------
                                                                                  1998      1997
                                                                                ------    --------
<S>                                                                                <C>      <C>  
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income ...................................................................   $ 269    $ 227
  Adjustments to reconcile net income to net cash flows from
   operating activities:
    Depreciation and Amortization ..............................................     322      303
    Amortization of Nuclear Fuel ...............................................      44       34
    Recovery of Electric Energy and Gas Costs - net ............................      94       15
    Changes in certain current assets and liabilities:
     Net decrease in Accounts Receivable and Unbilled Revenues .................     116      161
     Net decrease in Inventory - Fuel and Materials and Supplies ...............      59       89
     Net decrease in Accounts Payable ..........................................     (98)     (86)
     Net increase in Prepayments ...............................................    (310)    (590)
     Net change in Other Current Assets and Liabilities ........................      15      186
    Other ......................................................................      27      (50)
                                                                                    -----    -----
       Net Cash Provided By Operating Activities ...............................     538      289
                                                                                    -----    -----
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Utility Plant, excluding AFDC ...................................    (191)    (229)
  Contribution to Decommissioning Funds and Other Special Funds ................     (61)     (28)
  Other ........................................................................     (12)     (21)
                                                                                    -----    -----
       Net Cash Used In Investing Activities ...................................    (264)    (278)
                                                                                    -----    -----
CASH FLOWS FROM FINANCING ACTIVITIES
  Net (decrease) increase in Short-Term Debt ...................................    (151)     224
  Issuance of Long-Term Debt ...................................................     250      279
  Redemption of Long-Term Debt .................................................    (102)    (276)
  Redemption of Preferred Stock ................................................      --      (94)
  Issuance of Preferred Securities .............................................      --       95
  Cash Dividends Paid ..........................................................    (256)    (259)
  Other ........................................................................      --       (8)
                                                                                    -----    -----
       Net Cash Used In Financing Activities ...................................    (259)     (39)
                                                                                    -----    -----
Net (Decrease) Increase In Cash And Cash Equivalents ...........................      15      (28)
Cash And Cash Equivalents At Beginning Of Period ...............................      17       47
                                                                                    -----    -----
Cash And Cash Equivalents At End Of Period .....................................    $ 32     $ 19
                                                                                    =====    =====

Income Taxes Paid ..............................................................    $241     $137
Interest Paid ..................................................................    $193     $161

<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/Organization

   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 and the
Quarterly  Report on Form 10-Q for the quarter ended March 31, 1998. These Notes
update and supplement  matters  discussed in the 1997 Annual Report on Form 10-K
and the Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.

   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.

   On June 12, 1998, Public Service Enterprise Group Incorporated (PSEG) renamed
certain  of  its  principal  non-utility  subsidiaries.  Enterprise  Diversified
Holdings  Incorporated was renamed PSEG Energy Holdings Inc. (Energy  Holdings);
Community  Energy  Alternatives   Incorporated  was  renamed  PSEG  Global  Inc.
(Global);  Energis Resources  Incorporated was renamed PSEG Energy  Technologies
Inc. (Energy  Technologies) and Public Service Resources Corporation was renamed
PSEG Resources Inc. (Resources).

Note 2.  Rate Matters

   New Jersey Energy Master Plan

   As  previously  reported,  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.  The  decision of the BPU in the
Energy  Master Plan  proceedings,  which include  hearings  before the Office of
Administrative   Law  (OAL)   (stranded   costs  and  unbundling)  and  the  BPU
(restructuring),   including  management  audit  reports,  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 and the  establishment of generic rules regarding a regulated
utility's relationships with its affiliates.

   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
certain  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  management  audit reports were approved for release by the BPU on January
29, 1998 and March 5, 1998, respectively, and are being considered by the BPU 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 its proposal.


<PAGE>



   The BPU requested the OAL to hold  evidentiary  hearings  regarding  stranded
costs and unbundling  issues.  These  hearings  concluded on March 18, 1998. The
management  audit report released in January 1998 is being considered as part of
this proceeding.  Briefs have been filed by the parties in these hearings and an
OAL decision is expected in August 1998.

   Hearings  at the BPU  addressing  other  restructuring  issues such as market
power,  functional separation and consumer protection concluded on May 28, 1998.
The management audit report released in March 1998, relating to these issues, is
being  considered  as part of this  proceeding.  Briefs  have been  filed by the
parties in these hearings and a decision is pending.

   The BPU has indicated its intent to submit draft  legislation to the Governor
by Fall 1998 to provide it requisite  authority to implement  certain aspects of
wholesale and retail electric competition in New Jersey.  Legislative leadership
has indicated its intent to consider passage of a legislative  package providing
such authority by year end 1998.

   PSEG and  PSE&G  cannot  predict  the  outcome  of these  administrative  and
legislative proceedings. However, such proceedings could have a material adverse
effect on PSEG's and PSE&G's financial condition,  results of operations and net
cash flows.

   Non-utility Generation Buydown

   As previously  reported,  PSE&G is seeking to restructure  certain of its BPU
approved contracts with Non-utility Generators (NUGs), which are estimated to be
$1.6 billion above assumed  future market  prices.  In June 1998,  PSE&G and the
Union County  Utilities  Authority  (UCUA) announced an agreement to amend their
Power Purchase and  Interconnection  Agreement  originally signed in 1990. Under
Federal  and State  regulations,  utilities  have been  required  to enter  into
long-term  power  purchase  agreements  with NUGs at prices  which  subsequently
proved to be above market.  In accordance  with a July 17, 1998 BPU Decision and
Order  and based on the  Amendment  to the Power  Purchase  and  Interconnection
Agreement,  PSE&G will pay UCUA a lump sum amount of $7.75  million in  exchange
for a $15.6 million  savings to  ratepayers  on a net present  value basis.  The
payment  of  $7.75  million  by  PSE&G  will be  recovered  through  the LEAC or
successor  mechanisms for recovery of NUG costs, to be determined by the outcome
of the Energy Master Plan proceedings.

   Levelized Gas Adjustment Clause (LGAC)

   On November 14, 1997,  PSE&G filed a 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%. On February 18, 1998, the BPU approved a Stipulation agreed
to by the parties in the proceeding  providing for an interim increase in annual
LGAC revenues of approximately  $31 million,  excluding State sales and use tax,
or an increase of 3.5% on a typical residential bill. On June 26, 1998, an Order
was  executed  by the BPU making  the terms of the  interim  Stipulation  final,
without modification.

   On July 10, 1998,  PSE&G filed a motion with the BPU requesting a $27 million
annual  increase  in its LGAC for the period  October 1, 1998 to  September  30,
1999,  representing an increase on a typical  residential  bill of approximately
2.8%.  Also included in the revised LGAC rate is an increase in the  Remediation
Adjustment  Clause  (RAC)  component,  a decrease in the Demand Side  Adjustment
Factor  (DSAF) and a request  to  change,  on a monthly  basis,  the  over/under
collection  component of the LGAC rate for  residential  customers.  On July 28,
1998, the matter was transmitted to the OAL for review. PSE&G cannot predict the
outcome of this proceeding.


<PAGE>


   Gas Unbundling Pilot Program

   In April 1997,  the BPU  approved  PSE&G's  proposal  for a  residential  gas
unbundling  pilot  program   (SelectGas),   which  allows  approximately  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,  none of these eligible  customers 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 (Energy Choice).
Under Energy Choice, as proposed, a total of 300,000 residential customers could
be permitted to choose their gas supplier on a first-come,  first-served  basis.
This  expanded  program  would  commence  by the later of sixty days after a BPU
order  authorizing  this program or September 30, 1998.  PSE&G's  proposal would
permit its remaining  residential customers to choose their gas supplier by July
1, 1999 or such alternate date as may be established by the BPU.

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

   As  previously  reported,  on April 1, 1998,  the BPU approved an  annualized
increase of $150.8 million in the DSAF component of the LEAC.  This increase was
effective  for service  rendered on or after April 3, 1998.  The Division of the
Ratepayer  Advocate has  appealed the BPU's order  seeking to overturn the BPU's
decision.  PSE&G cannot predict the outcome of the appeal process but the impact
on PSE&G's future financial condition,  results of operations and net cash flows
could be materially adverse if such an appeal is successful.

   As previously reported, 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 Demand Side Management (DSM), to be adjusted based on
changes in such costs. At June 30, 1998,  PSE&G had an  underrecovered  balance,
including  interest,  of  approximately  $156  million  related to electric  DSM
programs.  Such  amount is  included  in  Deferred  Debits on PSEG's and PSE&G's
Consolidated  Balance Sheets.  PSE&G estimates that the underrecovered  electric
DSM balance at December 31, 1998 will be  approximately  $135 million.  PSEG and
PSE&G cannot predict the final outcome of DSM and other mandated  societal costs
recovery  under the Energy  Master Plan but  inability  to recover  such amounts
could have a material adverse impact on PSEG's and PSE&G's financial  condition,
results  of  operations  and net  cash  flows.  For  further  discussion  of the
potential  impact on PSEG and PSE&G of the Energy Master Plan  proceedings,  see
New Jersey Energy Master Plan.

   Remediation Adjustment Charge (RAC)

   As  previously  reported,  on August 1, 1997,  PSE&G  requested  that the BPU
approve  recovery of $6.8 million through PSE&G's RAC for manufactured gas plant
remediation  costs. This request represents an increase in the amount of PSE&G's
recovery of such costs by approximately $2 million over current rate levels.  On
October 9, 1997, this matter was transferred to the OAL. The rates were approved
for recovery on June 26, 1998 (see LGAC).

   On July 10,  1998,  PSE&G  filed a motion  before the BPU  requesting  a $1.5
million  annual  increase  in its RAC for the period  August 1, 1997 to July 31,
1998,  representing an increase on a typical  residential  bill of approximately
0.03%. On July 28, 1998, the motion was transferred to the OAL for review. PSE&G
cannot predict the outcome of this proceeding.

   Order Adopting Auction Standards

   On June  16,  1998,  the BPU  adopted  standards  applicable  to the  auction
processes  being  used by GPU  Energy and  Rockland  Electric  Company to divest
themselves of certain of their generating plants. At this time, PSE&G's strategy
is to retain  its  generation  assets.  The BPU  order  adopting  these  auction
standards  indicated that the standards would be reviewed and possibly modified,
if deemed appropriate.  If, at some time in the future,  PSE&G were to decide or
be required to sell its generation assets, PSE&G would determine whether to seek
such review or modification.

Note 3.  Regulatory Assets and Liabilities

   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 June 30,  1998 and  December  31,  1997,  respectively,  reflect
underrecovered costs as follows:

                                                 June 30, December 31,
                                                   1998       1997
                                                --------  -----------
                                                (Millions of Dollars)
    Underrecovered Electric Energy Costs......     $8        $91
    Underrecovered Gas Fuel Costs.............     65         76
                                                -------    -------
       Total..................................    $73       $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.

Note 4.  Commitments and Contingent Liabilities

   Nuclear Operating Performance Standard (OPS)

   PECO Energy Company (PECO Energy),  Delmarva Power & Light Company (DP&L) and
PSE&G, three of the co-owners of the Salem Nuclear Generating  Station,  Units 1
and 2 (Salem) and the Peach Bottom  Atomic Power  Station,  Units 2 and 3 (Peach
Bottom),  have agreed to an OPS through  December 31, 2011 for Salem and through
December  31,  2007 for Peach  Bottom.  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 City
Electric  Company)  commencing  in  January  2001 if the  three-year  historical
average net maximum  dependable  capacity  factor (MDC) (defined below) for that
station,  calculated as of December 31 of each year commencing with December 31,
2000,  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 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 PSEG'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 six months ended June 30, 1998, $12 million of costs related to
Year 2000 readiness were incurred.  Management  estimates the total cost of this
effort to  approximate  $92 million,  to be incurred  from 1997 through 2001, of
which $37 million is  expected to be incurred in 1998.  A portion of these costs
is not likely to be incremental to PSEG or PSE&G,  but rather,  will represent a
redeployment of existing personnel/resources.

   PSEG and PSE&G are  continuing to work with their supplier base to assess the
Year 2000  status of  vendors  who  provide  critical  materials  and  services.
Sufficient  information  has not yet been received from all critical  vendors to
confirm the vendors' preparedness for Year 2000. PSEG and PSE&G are aggressively
pursuing the key vendors who have been unresponsive; however, PSEG and PSE&G are
not yet able to determine  whether all of their critical vendors will be able to
meet Year 2000 requirements.

   As previously reported,  the Nuclear Regulatory Commission (NRC) had proposed
to issue a generic  letter which would  require all nuclear  plant  operators to
provide it with information  concerning their programs,  planned or implemented,
to address Year 2000 computer and systems issues at their facilities. On May 11,
1998, the NRC issued a Generic Letter requiring submission of a written response
within 90 days of the date of the Generic Letter  indicating  whether or not the
operators  have pursued and continue to pursue Year 2000 programs and addressing
the programs' scope,  assessment process, plans for corrective actions,  quality
assurance measures,  contingency plans and regulatory compliance.  Additionally,
the Generic Letter requires  submission of a written response upon completion of
the operators'  Year 2000 program or no later than July 1, 1999  confirming that
their  facilities are Year 2000 ready,  or will be Year 2000 ready, by 2000 with
regard to compliance  with the terms and  conditions  of their  licenses and NRC
regulations.  On July 23, 1998, PSE&G provided its written response to the first
requirement  noted above,  outlining for the NRC its Nuclear Business Unit (NBU)
Year 2000 program and indicating that planned  implementation will allow the NBU
to be Year  2000  ready and  compliant  with the  terms  and  conditions  of its
operating licenses and NRC regulations by January 1, 2000.

   If PSEG,  PSE&G,  their domestic and  international  subsidiaries,  the other
members  of the  Pennsylvania--New  Jersey--Maryland  Interconnection  (PJM)  or
PSEG's or PSE&G's  critical  vendors are unable to meet the Year 2000  deadline,
such  inability  could have a  material  adverse  impact on PSEG'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, PSEG
and PSE&G do not  expect its  expenditures  for any such site to have a material
effect on their financial conditions, 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,  among others, 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 and 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  PSEG's  and  PSE&G's
financial condition, results of operations and net cash flows.

Note 5.  Financial Instruments and Risk Management

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

   PSEG

   Interest Rate Swap

   PSEG entered into an interest rate swap on June 26, 1998 to hedge  Enterprise
Capital Trust II's $150 million of Floating Rate Capital  Securities,  Series B,
due 2028,  which were sold to a group of  institutional  investors in June 1998.
The  basis  for both  the  interest  rate  swap and the  Floating  Rate  Capital
Securities is the quarterly  London Interbank  Offered Rate (LIBOR).  Enterprise
Capital Trust II is a special  purpose  statutory  business trust  controlled by
PSEG.  This interest rate swap  effectively  hedges the  underlying  debt for 10
years at an effective rate of 7.2%.

   PSEG Energy Holdings Inc.

   Equity Securities

   Resources,  a wholly-owned  subsidiary of Energy Holdings, has investments in
equity  securities  and  partnerships  which  invest in equity  securities.  The
aggregate  carrying value of Resource's  portfolio  approximated its fair market
value of $231  million  and $185  million as of June 30, 1998 and  December  31,
1997, respectively.

   PSE&G

   Nuclear Decommissioning Trust Funds

   Contributions made into the Nuclear  Decommissioning Trust Funds are invested
in debt and equity  securities.  The  carrying  value of $509  million  and $459
million of these funds  approximates their fair market value as of June 30, 1998
and December 31, 1997, respectively.


<PAGE>


Note 6.  Taxes

   As  previously  reported,  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 PSEG 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
completed its  administrative  review of the filings of all New Jersey utilities
and approved  permanent  rates for 1998 on July 13, 1998 in a final Order.  As a
result  of the July 13,  1998 BPU  Order,  utilities  are  subject  to  mandated
adjustments  which  will be  incorporated  into their 1999  rates,  pending  BPU
approval.

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

                                  Quarter Ended    Six Months Ended
                                     June 30,           June 30,
                                  ----------------  -----------------
                                    1998     1997     1998      1997
                                  -------  -------  -------   -------

Federal tax provision at         
  statutory rate................   35.0 %   35.0 %   35.0 %    35.0 %
New Jersey Corporate Business
  Tax, net of Federal benefit...    5.9 %    --       5.9 %      --
Other -- net....................    1.3 %   (0.7)%    0.7 %    (0.6)%
                                  -------  -------  -------   -------
    Effective Income Tax Rate...   42.2 %   34.3 %   41.6 %    34.4 %
                                  =======  =======  =======   =======

Note 7.  Accounting Matters

   In  June  1997,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Statement of Financial Accounting Standards (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.  PSEG and PSE&G adopted SFAS 130 effective January 1, 1998.
The effects of adoption of SFAS 130 are not material for PSEG or PSE&G.

   Also in June 1997, the FASB issued SFAS 131,  "Disclosures  about Segments of
an  Enterprise  and Related  Information"  (SFAS 131),  which is  effective  for
financial  statements  for periods  beginning  after  December  15,  1997.  This
Statement  need not be applied to interim  financial  statements  in the initial
year of its application.  SFAS 131 supersedes SFAS 14, "Financial  Reporting for
Segments of a Business  Enterprise" and requires that companies disclose segment
data based on how  management  makes  decisions  about  allocating  resources to
segments  and  measuring  their  performance.  Since  SFAS  131  solely  revises
disclosure  requirements,  the  adoption  of SFAS 131  will not have a  material
impact on the financial  condition,  results of operations and net cash flows of
PSEG or PSE&G.



<PAGE>
   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 PSEG and PSE&G.

   In  June  1998,  the  FASB  issued  SFAS  133,   "Accounting  for  Derivative
Instruments and Hedging Activities" (SFAS 133), which is effective for financial
statements  for all fiscal  quarters of fiscal  years  beginning  after June 15,
1999.  SFAS 133  establishes  accounting and reporting  standards for derivative
instruments and hedging activities. An entity is to recognize all derivatives as
assets or liabilities  on the balance sheet at fair value.  Accounting for gains
and losses  resulting from changes in the fair value of a derivative  depends on
the  intended  use of the  derivative  and  the  resulting  designation  of that
derivative. PSEG and PSE&G are currently evaluating the impact of SFAS 133.

   In April 1998, the American Institute of Certified Public Accountants (AICPA)
issued  Statement of Position  (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 requires the expensing of the
costs of start-up activities as incurred.  Additionally,  previously capitalized
start-up  costs  must  be  written  off as a  Cumulative  Change  in  Accounting
Principle.  PSEG and PSE&G are currently  evaluating the impact,  if any, of SOP
98-5.

Note  8.  Guaranteed Preferred Beneficial Interest in Subordinated Debentures

   The  Guaranteed  Preferred  Beneficial  Interest in  Subordinated  Debentures
includes  the  monthly  guaranteed  preferred  beneficial  interest  in  PSE&G's
subordinated  debentures  and  the  quarterly  guaranteed  preferred  beneficial
interest in PSEG's and PSE&G's subordinated debentures.  The balances as of June
30, 1998 and December 31, 1997 of these preferred securities are as follows:

                                                          June 30, December 31,
                                                            1998       1997
                                                          --------  -----------
                                                          (Millions of Dollars)
    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
    Quarterly Guaranteed Preferred Beneficial
      Interest in PSEG's Subordinated Debentures.......        375          0
                                                           -------    -------
       Total...........................................       $888       $513
                                                           =======    =======

   The increase in the Quarterly  Guaranteed  Preferred  Beneficial  Interest in
PSEG's Subordinated Debentures since December 31, 1997 is due to the issuance in
January 1998 and June 1998 of $225 million of 7.44% Trust  Originated  Preferred
Securities,  Series A and $150  million of  Floating  Rate  Capital  Securities,
Series B, respectively.  Additionally, Quarterly Guaranteed Preferred Beneficial
Interest in PSEG's  Subordinated  Debentures  increased  as a result of the July
1998 issuance of $150 million of 7.25% Trust  Originated  Preferred  Securities,
Series C by PSEG Capital Trust III.



<PAGE>



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


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

      Note 1.   Basis of Presentation/Organization
      Note 2.   Rate Matters
      Note 3.   Regulatory Assets and Liabilities
      Note 4.   Commitments and Contingent Liabilities
      Note 5.   Financial Instruments and Risk Management
      Note 6.   Taxes
      Note 7.   Accounting Matters
      Note 8.   Guaranteed Preferred Beneficial Interest in Subordinated
                  Debentures
      

Note 6.  Taxes

   The effective income tax rate is as follows:

                                 Quarter Ended     Six Months Ended
                                     June 30,           June 30,
                                  ---------------   -----------------
                                    1998    1997      1998     1997
                                  -------  ------   -------  --------

Federal tax provision at
  statutory rate................    35.0%    35.0%    35.0%     35.0%
New Jersey Corporate Business
  Tax, net of Federal benefit...     5.9%      --      5.9%       --
Other-- net.....................     1.7%     0.2%     1.8%     (0.2)%
                                  -------   ------   -------  --------
    Effective Income Tax Rate...    42.6%    35.2%    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 (PSEG) 1997 Annual Report on
Form 10-K and the Quarterly  Report on Form 10-Q for the quarter ended March 31,
1998  affecting  the  consolidated   financial  condition  and  the  results  of
operations  of  PSEG  and  its  subsidiaries.  This  discussion  refers  to  the
Consolidated Financial Statements (Statements) and related Notes to Consolidated
Financial Statements (Notes) of PSEG and should be read in conjunction with such
Statements and Notes.

Results of Operations

   Basic and diluted earnings per share of PSEG common stock (Common Stock) were
$0.53 for the quarter ended June 30, 1998,  representing an increase of $0.14 or
36% per share from the comparable  1997 period.  Basic and diluted  earnings per
share  were  $1.35 for the six  months  ended  June 30,  1998,  representing  an
increase of $0.36 or 36% 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  and six months  ended June 30, 1998
increased  $0.12 and $0.21 from the comparable 1997 periods,  respectively.  The
increases for the quarter and six months ended June 30, 1998 were  primarily due
to profits realized from energy trading and other wholesale power activities and
decreased operating and maintenance expenses related to the return to service of
PSE&G's Salem Nuclear Generating Station (Salem).  For a discussion of commodity
trading, see Item 3. Qualitative and Quantitative Disclosures about Market Risk.
The results of  operations  for the six months  ended June 30, 1998 were further
impacted  by the  one-time  charge to earnings of $55 million or $0.24 per share
recorded in the first quarter of 1997  resulting from the settlement of lawsuits
filed by the co-owners of Salem.  The increase for the six months ended June 30,
1998 was partially  offset by higher  operation  expenses,  including  Year 2000
readiness  (see Note 4.  Commitments  and  Contingent  Liabilities of Notes) and
depreciation expenses.

   PSEG Energy  Holdings Inc.'s (Energy  Holdings)  contribution to earnings per
share of  Common  Stock for the  quarter  and six  months  ended  June 30,  1998
increased  $0.02 and  $0.15  from the  comparable  1997  periods,  respectively,
primarily due to greater earnings of PSEG Resources Inc. (Resources). Resources'
earnings  increased for the quarter and six months ended June 30, 1998 primarily
due to higher income from investments in partnerships. The results of operations
for the six months ended June 30, 1998 were further impacted by a gain resulting
from the exercise of an early buyout  option in the first quarter of 1998 by the
lessee in a leveraged lease investment of Resources.

PSE&G -- Revenues

   Electric

   Revenues  increased  $248  million  or 26% and  $465  million  or 24% for the
quarter and six months ended June 30, 1998 from the comparable  periods in 1997,
respectively, primarily due to an increase in energy trading activity and higher
sales to large industrial customers (see PSE&G -- Expenses -- Interchanged Power
and Fuel for Electric Generation).

   These increases were partially  offset by a decrease to revenue caused by New
Jersey  energy  tax  reform  in 1998  (see  Note 6.  Taxes of Notes and PSE&G --
Expenses -- Income Taxes). Collection of New Jersey Gross Receipts and Franchise
Tax (NJGRT) was  reflected in revenue and expense in 1997. As a result of energy
tax reform, the portion of NJGRT replaced by the New Jersey 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.

<PAGE>

   Gas

   Revenues decreased $51 million or 16% and $174 million or 16% for the quarter
and six  months  ended  June 30,  1998  from  the  comparable  periods  in 1997,
respectively.  The decreases  were primarily due to lower recovery of fuel costs
and  decreased  therm sales  resulting  from milder  winter  weather in 1998 and
energy tax reform (see PSE&G --Revenues -- Electric above).

PSE&G -- Expenses

   Interchanged Power and Fuel for Electric Generation

   Interchanged Power and Fuel for Electric Generation increased $204 million or
84% and $442  million or 90% for the quarter and six months  ended June 30, 1998
from the comparable 1997 periods, respectively,  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  $11  million  or 6% and $41  million or 7% for the
quarter and six months  ended June 30, 1998 from the  comparable  1997  periods,
respectively.  The decreases  were primarily due to the milder 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.

   Operation and Maintenance

   Operation  and  maintenance  expenses  increased  $29  million  or 9% and $45
million  or 7% for the  quarter  and six  months  ended  June 30,  1998 from the
comparable  1997  periods,  respectively.  The increases  were  primarily due to
higher demand side management  recovery,  resulting in a greater  recognition of
previously  deferred  expenses,  and  higher  expenses  related  to  information
technology, including Year 2000 readiness. These increases were partially offset
by lower  operation  and  maintenance  expenses  related  to  Salem's  return to
service.  Demand side  management  costs are currently  recoverable  through the
demand side  adjustment  factor of the LEAC,  are  recorded in both  expense and
revenue and therefore, have no direct effect on earnings (see Note 2.
Rate Matters of Notes).

   Income Taxes

   PSE&G became  subject to New Jersey State  income tax,  effective  January 1,
1998,  due to energy tax reform in the State of New Jersey (see Note 6. Taxes of
Notes). Income Taxes increased $34 million or 74% and $49 million or 33% for the
quarter and six months  ended June 30, 1998 from the  comparable  1997  periods,
respectively. These increases are primarily due to the inclusion of State income
tax of $25 million and $56 million for the quarter and six months ended June 30,
1998, respectively. In the quarter ended June 30, 1998, there was an increase of
$9 million in Federal income taxes due to higher pre-tax operating  income.  For
the six  months  ended  June 30,  1998,  there was a  decrease  of $7 million in
Federal income taxes due to lower pre-tax operating income.

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

   TEFA/NJGRT  decreased  $79  million  or 67% and $202  million  or 70% for the
quarter and six months  ended June 30, 1998 from the  comparable  1997  periods,
respectively,  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. Taxes
of Notes for other impacts of New Jersey energy tax reform.


<PAGE>


Year 2000 Expenses -- PSEG and PSE&G

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

PSEG Energy Holdings Inc. -- Earnings

                                              Increase (Decrease)
                                      ----------------------------------
                                       Quarter Ended    Six Months Ended
                                           June 30,          June 30,
                                        1998 vs. 1997      1998 vs. 1997
                                      ----------------------------------
                                           (Millions of Dollars)
    PSEG Resources Inc. (Resources)..        $6             $36
    PSEG Global Inc. (Global)........        (2)              -
    PSEG Energy Technologies Inc.       
      (Energy Technologies)..........         -              (1)
                                            -----         -------
        Total........................        $4             $35
                                            =====         =======

   Energy  Holdings'  earnings  were $14 million and $49 million for the quarter
and six months ended June 30, 1998, respectively,  an increase of $4 million and
$35 million,  respectively.  These  increases  were  primarily due to Resources'
higher income from  investments  in  partnerships  and a gain resulting from the
exercise of an early buyout option in the first quarter of 1998 by the lessee in
a leveraged lease.

Liquidity and Capital Resources

   PSEG

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

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

   Dividend  payments  on Common  Stock  were $1.08 per share and  totaled  $251
million for the six months ended June 30, 1998.  PSE&G paid common  dividends of
$251  million  to PSEG  during  the six  months  ended  June 30,  1998 and 1997,
respectively.  Due to the growth in Energy Holdings' investment  activities,  no
dividends on Energy  Holdings'  common stock were paid or anticipated in the six
months  ended June 30, 1998 and 1997 or are  anticipated  for the  remainder  of
1998.  Energy  Holdings  paid $6 million of dividends  related to its  preferred
stock issued to PSEG for the six months ended June 30, 1998. Energy Holdings had
no preferred  stock  outstanding in the period ended June 30, 1997.  Amounts and
dates of such  dividends  on Common  Stock as may be declared in the future will
necessarily be dependent upon PSEG's future earnings, financial requirements and
other factors including the receipt of dividend payments from its subsidiaries.

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

   As of June 30, 1998, PSEG's capital structure consisted of 48% common equity,
42% long-term debt and 10% preferred stock and other preferred securities.


<PAGE>


   As a  result  of the 1992  focused  audit of  PSEG's  non-utility  businesses
(Focused Audit),  the New Jersey Board of Public Utilities (BPU) approved a plan
which,  among  other  things,  provides  that:  (1) PSEG will not permit  Energy
Holdings'  non-utility  investments to exceed 20% of PSEG's  consolidated assets
without  prior  notice  to the BPU  (such  investments  at June  30,  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 Energy Holdings
will not adversely  affect PSE&G;  (3) PSEG will (a) limit debt supported by the
minimum net worth maintenance agreement between PSEG 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)  Energy  Holdings  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.  PSEG and Energy  Holdings 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 PSEG's  intent  that  Energy  Holdings  and its  subsidiaries
provide  growth  vehicles for PSEG,  financing  requirements  connected with the
continued  growth of Energy Holdings,  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 PSEG 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 Energy  Holdings and  accordingly,  PSEG's future
prospects,  including  financial  condition,  results of operations and net cash
flows (see Note 2. Rate Matters of Notes).

   PSE&G

   For the six months ended June 30, 1998,  PSE&G had utility  plant  additions,
including  Allowance for Funds Used During  Construction of $196 million,  a $41
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 generate  all of its  construction  and capital  requirements
over the next five years  internally,  assuming  adequate and timely recovery of
costs,  as to which no  assurances  can be given  (see Note 2. Rate  Matters  of
Notes).

   PSEG Energy Holdings Inc.

   In June and July 1998,  PSEG  invested  $147  million and $145  million,  the
proceeds of the sale of Capital  Securities and Trust  Securities  (see External
Financings),  in Energy Holdings, which issued to PSEG like amounts of its 4.80%
and 4.875% Cumulative  Preferred Stock and made additional equity investments in
Global and Resources.

   In April 1998,  Resources closed on its investment in the lease of a domestic
gas-fired steam electric  generating  station to a domestic utility.  Resource's
equity investment was approximately $39 million.

   In May 1998,  Global  sold its 50%  interests  in two  domestic  cogeneration
plants,  resulting in proceeds to Energy Holdings of $70 million, which resulted
in an after-tax gain of approximately $5 million.

   In June 1998,  Enterprise Group Development  Corporation  (EGDC) sold its 75%
interest in one of its properties for  approximately $5 million,  resulting in a
minimal loss which had been previously reserved through a valuation allowance.

   In July 1998,  Resources purchased a 33.3% interest in a leveraged lease of a
natural gas-fired generating station in the United Kingdom for approximately $40
million.

   For a  discussion  of the  source of Energy  Holdings'  funds,  see  External
Financings.  Over the next several years,  Energy Holdings 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.


<PAGE>


External Financings

   PSEG

   On June 30,  1998,  PSEG had a $25 million line of credit with a bank with no
debt  outstanding  under this line of  credit.  Also,  at that date,  PSEG had a
committed $150 million  revolving credit facility which expires in December 2002
with no debt outstanding under this facility.

   In June  1998,  Enterprise  Capital  Trust  II, a special  purpose  statutory
business  trust  controlled  by PSEG,  issued $150 million of its Floating  Rate
Capital  Securities,  Series B.  Proceeds were lent to PSEG and are evidenced by
its deferrable interest subordinated debentures.  PSEG used the proceeds to make
a $147 million  preferred equity  investment in Energy Holdings.  The debentures
and their related  indenture  constitute a full and  unconditional  guarantee by
PSEG of the preferred  securities  issued by the trust.  If, and for as long as,
payments on PSEG's  debentures have been deferred,  or PSEG has defaulted on the
indenture  related  thereto  or its  guarantee  thereof,  PSEG  may  not pay any
dividends on its Common Stock (see Liquidity and Capital  Resources -- PSEG). At
the time of issuance,  PSEG's floating rate obligation  under its debentures was
swapped for a fixed rate payment  resulting  in an  effective  rate of 7.2% (see
Note 5. Financial Instruments and Risk Management of Notes).

   In July 1998,  Enterprise  Capital  Trust III,  a special  purpose  statutory
business  trust  controlled  by PSEG,  issued  $150  million of its 7.25%  Trust
Originated  Preferred  Securities,  Series C. Proceeds were lent to PSEG and are
evidenced by its  deferrable  interest  subordinated  debentures.  PSEG used the
proceeds to make a $145 million  preferred equity investment in Energy Holdings.
The debentures and their related  indenture  constitute a full and unconditional
guarantee by PSEG of the preferred  securities  issued by the trust. If, and for
as long as,  payments  on  PSEG's  debentures  have been  deferred,  or PSEG has
defaulted on the indenture  related thereto or its guarantee  thereof,  PSEG may
not pay any dividends on its Common Stock (see  Liquidity and Capital  Resources
-- PSEG).

   As  previously  disclosed,  both  PSEG  and  PSE&G  have  issued  a total  of
approximately  $525  million  and  $513  million,  respectively,  of  deferrable
interest  subordinated  debentures  which are  treated as debt to the issuer for
Federal income tax purposes and as preferred equity for financial accounting and
rating  agency  purposes.  In a case not involving  PSEG or PSE&G,  the Internal
Revenue Service (IRS) has proposed to disallow  interest  deductions  claimed by
Enron Corp. (Enron) on two issues of similar long-term subordinated  debentures.
That issue is now in litigation (Enron Corp. v.  Commissioner,  Tax Court Docket
No.  6149-98).  There  can be no  assurance  that  Enron  will  prevail  in this
litigation  if it is not  settled  or,  if  Enron  does  prevail,  that  the IRS
nevertheless  may seek to disallow the deductions that PSEG and PSE&G have taken
and will claim for interest paid on such  debentures.  The  annualized  interest
expense for these  debentures for PSEG and PSE&G together is  approximately  $82
million.  In total for 1994 through 1997, PSEG and PSE&G took  approximately $89
million in interest deductions for these debentures,  which equates to about $31
million in tax  benefits.  If challenged by the IRS, PSEG and PSE&G would expect
to  vigorously  defend  the  deductibility  of the  interest  payments  taken as
deductions  on  previously  filed  Federal  tax  returns.  In the  event  of the
occurrence  of a Tax Event as defined in the  respective  debenture  indentures,
such  as the  receipt  of an  opinion  of  counsel  that  there  is a more  than
insubstantial  risk that  interest  payable  on the  debentures  will not be tax
deductible, PSEG and PSE&G have the right to redeem the preferred securities and
issue the  debentures to the preferred  securities  holders or to refinance such
obligations as allowed in the respective debenture indentures.

   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 June 30,  1998,  the  coverage  ratio under  PSE&G's  Mortgage was
3.66:1. As of June 30, 1998, the Mortgage would permit up to approximately  $3.5
billion  aggregate  principal  amount of new Bonds to be issued against previous
additions and improvements.

   In April 1998, $8 million of PSE&G's 7.50% Bonds,  Series OO, were  purchased
in the open market. On August 3, 1998, the remaining outstanding $234 million of
the Series OO Bonds were redeemed.

   In May 1998,  PSE&G sold $250 million of its Bonds,  Remarketable  Series YY,
due 2023,  Mandatorily  Tendered 2008. The Series YY Bonds will bear interest at
the rate of 6.375%  per annum  until May 1,  2008.  PSE&G  also  entered  into a
Remarketing Agreement with a third party that granted the third party the option
to call and remarket the Series YY Bonds on May 1, 2008 for the  remaining  term
of the Series YY Bonds. If not called by the third party,  the Bonds must be put
by the holders to PSE&G.  The proceeds of the sale were used primarily to redeem
PSE&G's Series OO Bonds.

   On July 1, 1998, $18 million of PSE&G's 6% Debenture Bonds matured.

   To provide  liquidity  for its  commercial  paper  program,  PSE&G has a $650
million  revolving  credit  agreement  expiring in June 1999 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 June 30, 1998,  there
were no borrowings outstanding under these credit agreements.

   The BPU has  authorized  PSE&G to issue and have  outstanding at any one time
through  January 2, 1999, not more than $1.3 billion of short-term  obligations,
consisting of commercial  paper and other  unsecured  borrowings  from banks and
other  lenders.  On June 30,  1998,  PSE&G had $888 million of  short-term  debt
outstanding,  including $124 million borrowed against its uncommitted bank lines
of credit which lines of credit totaled $250 million at June 30, 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 June 30,  1998,  Fuelco had $67
million of commercial paper outstanding under this program.

   PSEG Energy Holdings Inc.

   At  June  30,  1998,  PSEG  Capital  Corporation  (Capital),  a  wholly-owned
subsidiary  of Energy  Holdings,  had total debt  outstanding  of $596  million,
including  $573  million of Medium  Term Notes  (MTNs) and $23 million of Senior
Notes. In July 1998, $75 million of Capital's 9.00% MTNs matured. As a result of
the  Focused  Audit,  Capital  debt is being  phased  out over a six to ten year
period from April 1993 (see Liquidity and Capital Resources).

   As of June 30, 1998,  Enterprise  Capital Funding  Corporation  (Funding),  a
wholly-owned  subsidiary of Energy  Holdings,  had $300 million and $150 million
revolving   credit   facilities   expiring  in  July  1999  and  November  1998,
respectively,  with two  groups  of banks  under  which  facilities  no debt was
outstanding.  On June 1, 1998,  $83 million of  Funding's  Series E 9.95% Senior
Notes  matured.  Funding  had  $45  million  of  privately-placed  Senior  Notes
outstanding  as of June 30, 1998. As of June 30, 1998,  Funding had $159 million
of total debt outstanding.

   Energy Holdings, Resources and Global are subject to restrictive business and
financial  covenants  contained in existing debt agreements.  Energy Holdings 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  June  30,  1998,  Energy  Holdings  had a
consolidated  debt to equity ratio of 1.00:1.  For the twelve  months ended June
30, 1998,  the EBIT coverage  ratio,  as defined to exclude the effects of EGDC,
was 2.61:1.  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, Energy Holdings' ability to continue to grow its business
will depend to a significant  degree on PSEG's and Energy  Holdings'  ability to
obtain  additional  financing  beyond  current levels (see Liquidity and Capital
Resources).

Nuclear Operations

   As previously reported,  PSE&G's Salem Units 1 and 2 (Salem 1 and 2) returned
to service on April 17,  1998 and August  30,  1997,  respectively.  On June 30,
1998, the Nuclear  Regulatory  Commission (NRC) closed its  Confirmatory  Action
Letter (CAL)  concerning  Salem noting that all  commitments of the CAL had been
satisfactorily addressed. For a discussion of the operating performance standard
applicable to Salem,  see Note 4.  Commitments  and  Contingent  Liabilities  of
Notes.

   At the July 1998 semi-annual NRC Senior Management  Meeting,  the NRC removed
Salem 1 and 2 from  the NRC  Watch  List.  The NRC  noted  that  plant  material
condition,  safety  culture  and  management  oversight  and  effectiveness  had
substantially  improved.  The NRC also  observed  that,  while  the  maintenance
backlog  resulting from discovery  efforts during the outage remains high, PSE&G
is  effectively  managing  the  prioritization  and  resolution  of those items.
Additionally,  the NRC noted that PSE&G's  management team has instituted robust
safety oversight and self-assessment at the site and that Salem has demonstrated
sustained successful plant performance.

Competitive Environment

   Rate Matters

   For discussions of the New Jersey Energy Master Plan,  non-utility generation
buydown,  the LGAC,  the Gas  Unbundling  Pilot Program,  the  LEAC/Demand  Side
Adjustment Factor,  the RAC and other rate matters,  see Note 2. Rate Matters of
Notes. The outcome of these  proceedings could have a material adverse impact on
PSEG's and  PSE&G's  financial  condition,  results of  operations  and net cash
flows.

   Federal Energy Regulatory 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).  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 FERC  requirements.
LMP provides for an allocation of congestion costs to transmission  users within
the PJM control area.  Sufficient data is not yet available to determine whether
LMP will  ultimately  result  in  increases  or  decreases  in  PSE&G's  cost of
Interchanged Power and Fuel for Electric Generation or whether such increases or
decreases will be material.

     Currently, the PJM Operating Agreement dictates that energy sold in the PJM
interchange  energy market from  generation  located within the PJM control area
shall not exceed the variable cost of producing such energy.  Transactions  that
are bid into the PJM pool from  generation  located outside the PJM control area
are  capped  at $1,000  per  megawatt  hour.  In the  event  that all  available
generation  within the PJM control area is  insufficient  to cover  demand,  PJM
could institute  emergency  purchases from adjoining  regions.  The cost of such
emergency  purchases is dependent upon market  conditions and not subject to any
PJM price cap.  Certain of the PJM member  companies  have requested the FERC to
revise the PJM Operating  Agreement to allow  submission of market based bids to
the PJM interchange energy market.  PSEG and PSE&G cannot predict the outcome of
this  request or the impact on PSEG's and PSE&G's  future  financial  condition,
results of  operations  and net cash flows if such  request is  successful.  For
further  discussion of price volatility of electricity,  see Item 3. Qualitative
and Quantitative Disclosures About Market Risk.


<PAGE>


Future Outlook

   PSEG continues to pursue its  strategies to grow its business.  As previously
reported,  more emphasis will be placed on finding  opportunities  for expansion
outside of traditional utility services and markets. PSE&G's strategy is to size
its electric generation fleet in New Jersey to meet its anticipated needs, while
seeking to increase its value through wholesale trading. PSE&G will also seek to
capitalize  on  synergies  which may exist with its natural gas  purchasing  and
trading activities. PSE&G's transmission and distribution strategy, both gas and
electric, is to provide cost-effective,  high quality service, while considering
opportunities  for expansion of this  business  through  business  combinations.
Global's  strategy  is  to  invest  in  both  generation  and  transmission  and
distribution  facilities  worldwide with the goal of creating  long-term  value.
Resources' strategy is to continue focusing on passive investments in the energy
sector  worldwide  seeking  to  provide  earnings  and  economic  value.  Energy
Technologies'  strategy is to expand upon the current energy related services it
provides to industrial and commercial customers to create long-term value.

   Successful implementation of these strategies, coupled with the restructuring
of the electric industry,  could significantly  change PSEG's earnings mix. Most
significant  among  the  changes  would be the shift in  earnings  away from the
domestic generation business into the international generation, transmission and
distribution  businesses,  and to a  lesser  extent,  into the  energy  services
business.

PSE&G

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

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.  PSEG 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 PSEG and  PSE&G  prior to the
effective date of the Act.


<PAGE>


                      ITEM 3. QUALITATIVE AND QUANTITATIVE
                          DISCLOSURES ABOUT MARKET RISK

Commodities

   The availability and price of energy  commodities are subject to fluctuations
from factors such as weather, environmental policies, changes in demand, changes
in supply and state and Federal regulatory policies. To reduce price risk caused
by market fluctuations, PSE&G enters into physical forward and options contracts
and financial  derivatives including forwards,  futures,  swaps and options with
approved  counterparties,  to hedge its anticipated demand. These contracts,  in
conjunction  with owned  electric  generating  capacity,  are  designed to cover
estimated electric and gas customer commitments. Gains and losses resulting from
physical forward and options contracts and financial  derivatives are recognized
as a component  of fuel revenue and expense  upon  maturity of these  contracts.
Additionally,  PSE&G enters into physical forward and options contracts that are
speculative in nature which are  immaterial to PSE&G's  market  portfolio and do
not have a material impact on PSE&G's financial condition, results of operations
and net cash flows.

   PSE&G uses a  value-at-risk  model to assess the market risk of its commodity
business.  This model includes fixed price sales commitments,  owned generation,
native  load   requirements,   physical   contracts  and  financial   derivative
instruments.   Value-at-risk  represents  the  potential  gains  or  losses  for
instruments or portfolios due to changes in market factors, for a specified time
period and confidence level. PSE&G estimates  value-at-risk across its commodity
business  using a model  with  historical  volatilities  and  correlations.  The
measured  value-at-risk using a  variance/co-variance  model with a 97.5 percent
confidence  level  and  assuming  a one  week  horizon  at  June  30,  1998  was
approximately $18 million.  PSE&G's calculated value-at-risk exposure represents
an estimate of potential net losses that could be recognized on its portfolio of
physical and financial  derivative  instruments assuming historical movements in
future market rates. These estimates, however, are not necessarily indicative of
actual results which may occur, since actual future gains and losses will differ
from those historical  estimates based upon actual fluctuations in market rates,
operating exposures, and the timing thereof, and changes in PSE&G's portfolio of
hedging instruments during the year.

   PSE&G is generally in a short (or deficit)  position when  comparing  average
on-peak demand to its average  expected  economic  generating  capability.  As a
result of  unseasonably  warm  weather  increasing  the demand for  electricity,
coupled with scheduled and unscheduled  generating  plant outages in the Midwest
in June 1998,  forward prices of electricity rose to  unprecedented  high levels
for the summer months of 1998 and 1999. In addition,  the volatility  factor for
those months increased sharply.  The value-at-risk at June 30, 1998 increased by
approximately  $11 million from  December 31, 1997 due to the large net long (or
surplus) position (created by anticipated economic generation) multiplied by the
increased volatility rate.

   As discussed in Results of Operations of Item 2. Management's  Discussion and
Analysis,  energy trading operations at PSE&G positively impacted the results of
operations  for the six months ended June 30, 1998.  Other  utilities  and power
marketers have experienced significant losses in their energy trading operations
during that period.  These losses were primarily  attributable  to  counterparty
defaults as a result of extreme market volatility, as noted above.

   PSEG  is  exposed  to  credit  losses  in the  event  of  non-performance  or
non-payment by counterparties.  PSEG has a Risk Management  Committee made up of
executive  officers and an independent  risk  oversight  function to enhance its
risk management  practices.  PSEG also has a credit management  process which is
used to assess,  monitor and mitigate counterparty exposure for PSE&G and Energy
Holdings.  In the event of nonperformance or nonpayment by a major counterparty,
there  may  be a  material  adverse  impact  on  PSEG's  and  PSE&G's  financial
conditions, results of operations and net cash flows.


   There  are no other  material  changes  in or  additions  to the  information
reported  in the PSEG and the PSE&G 1997  Annual  Report on Form 10-K  regarding
qualitative and  quantitative  disclosures  about market risk of PSEG, PSE&G and
their subsidiaries.


<PAGE>


                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                  --------------------------------------------
                           PART II. OTHER INFORMATION
                            ITEM 1. LEGAL PROCEEDINGS

   Certain  information  reported  under  Item  3 of  Part I of  Public  Service
Enterprise  Group  Incorporated's  (PSEG) and Public  Service  Electric  and Gas
Company's  (PSE&G) 1997 Annual Report on Form 10-K and the  Quarterly  Report on
Form 10-Q for the quarter ended March 31, 1998 is updated below.

  (1) Form 10-K, Pages 19-20. As previously reported,  PSE&G has been named as a
      potentially  responsible  party and alleged to be liable for contamination
      at the Metal Bank Cottman  Avenue  Superfund  Site,  a former  non-ferrous
      scrap reclamation  facility located in Philadelphia,  Pennsylvania.  PSE&G
      estimates that its share of the cost of performing the remedy  selected by
      the U.S. Environmental  Protection Agency (EPA) could be $4 to $8 million.
      On June 26,  1998,  EPA  Region  III  issued an  Administrative  Order For
      Remedial Design And Remedial Action, Docket No. III-98-082-DC, to thirteen
      Respondents  including  PSE&G,  other  utilities,  and other  persons  and
      entities, ordering the Respondents to implement the remedy selected in the
      Record of  Decision  (ROD)  issued by EPA  Region III in  December,  1997.
      Additionally,  with  respect  to this site,  on July 1,  1998,  the United
      States of America moved in the matter  entitled  United States of America,
      et. al., v. Union Corporation,  et. al., Civil Action No. 80-1589,  United
      States District Court for the Eastern  District of  Pennsylvania,  seeking
      leave  of court to file an  amended  complaint  adding  claims  under  the
      Federal Comprehensive  Environmental Response,  Compensation and Liability
      Act of 1980  (CERCLA).  PSE&G  and  one  other  utility  are  third  party
      defendants in the foregoing  captioned matter. On July 28, 1998, PSE&G and
      seven  other  utilities  named  as  Respondents  in  the  above-referenced
      Administrative  Order  filed  with EPA  Region  III a Notice  of Intent to
      Comply With Administrative  Order for Remedial Design and Remedial Action,
      Metal Bank Cottman Avenue Site, Docket No. III-98-082-DC.

   (2)Form 10-K,  Page 27 and March 31, 1998 Form 10-Q,  Page 24. As  previously
      reported, in October 1995, PSEG 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 PSEG and  certain  changes  in the  composition  of
      PSEG'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 a 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. On May 21, 1998, the defendants filed
      additional  motions for complete  summary judgment in the third and fourth
      cases. All of these motions are pending.  By stipulation filed on June 15,
      1998,  the  individual  plaintiff  in the  action  filed in March 1996 was
      voluntarily  dismissed as a plaintiff in the action.  The outcome of these
      matters cannot be predicted.

   (3)Form 10-K, Page 45. As previously reported,  in October 1997, Old Dominion
      Electric  Cooperative  (ODEC)  filed a  complaint  at the  Federal  Energy
      Regulatory  Commission  (FERC)  seeking to modify its 1992  agreement with
      PSE&G for a ten year sale of 150  megawatts  of capacity  and  energy.  On
      August 4, 1998, FERC dismissed ODEC's complaint,  determining that certain
      issues   relating  to  rate   "pancaking"  for   transmission   were  more
      appropriately  addressed  in the pending  FERC docket  relating to the PJM
      Interconnection and that ODEC had failed to show it was entitled to relief
      on the remaining  issues.  PSE&G cannot  predict  whether ODEC will appeal
      this ruling or the final outcome of these proceedings.

 New Matter

   On June 25, 1998, a complaint was filed  against the  directors of PSEG,  and
PSEG as a  nominal  defendant,  by the same  purported  shareholder  of PSEG who
instituted  the December 1995  shareholder  derivative  suit,  alleging that the
1996, 1997 and 1998 proxy statements provided to shareholders of PSEG were false
and  misleading by reason,  among other things,  of failure to disclose  certain
material facts relating to (i) the controls over and oversight of PSEG's nuclear
operations,  (ii) the  condition  of problems at and  reserves  with  respect to
PSEG's  nuclear  operations,  (iii) a  demand  letter  relating  to an  earlier
shareholder derivative suit, (iv) PSEG's liabilities to the Salem co-owners as a
result  of the  shutdown  of the Salem  plants  and (v) a  shareholder  proposal
relating to  operations of Salem 1 and 2 which was voted upon at the 1998 annual
meeting of shareholders.  The complaint seeks to have declared illegal the 1996,
1997 and 1998  elections  of  directors  of PSEG,  the vote  upon a  stockholder
proposal at the 1998 annual meeting, ratification of the selection of Deloitte &
Touche as PSEG's auditors at those annual meetings,  requiring PSEG to conduct a
special  meeting of shareholders  providing for election of directors  following
timely  dissemination  of a proxy  statement  approved by the court hearing this
matter,  which will include as nominees for election as directors persons having
no previous  relationship  with PSEG or the current  directors and other relief.
PSEG is currently  reviewing the  complaint.  PSEG cannot predict the outcome of
this matter.  G.E. Stricklin v. E. James Ferland,  et al, United States District
Court for the Eastern District of Pennsylvania, Civil Action No. 98-3279.

   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.

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

   (4)Page 11.  Proceeding  before the Superior  Court of New Jersey,  Appellate
      Division in the matter of the motion of PSE&G to increase the level of the
      Electric   Demand   Side   Adjustment   Factor,   Appellate   Docket   No.
      A-005257-97T2.

   (5)Page 11.  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.

   (6)Page  11.  Proceedings  before  the  BPU in  the  Matter  of the  Electric
      Restructuring  Plans  Filed by  Atlantic  City  Electric  Company,  Jersey
      Central Power & Light Company,  D/B/A GPU Energy,  Public Service Electric
      and Gas Company, and Rockland Electric Company - General Auction Standards
      and  Review  Criteria,  Order  Adopting  Auction  Standards,  Docket  Nos.
      EX94120585Y, EO97070457, EO97070460, EO97070463, and EO97070466.

   (7)Page 24.  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.)

   (8)Page 24. Proceedings  before the United States Court of Appeals,  District
      of Columbia Circuit,  in the matter of appeal of FERC Orders No. 888, 888A
      and 888B.  (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.)

   (9)Page 24.  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.

   (10) Page 29. Proceedings before the United States Court of Appeals, District
      of Columbia Circuit, in the matter of the DOE's  unconditional  obligation
      to begin spent fuel acceptance by January 31, 1998,  Northern States Power
      v. Department of Energy, Docket No. 97-1064.

   (11) Page 30.  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 5. OTHER INFORMATION

   Certain  information  reported under PSEG's and PSE&G's 1997 Annual and March
31, 1998  Quarterly  Report to the SEC is updated  below.  References are to the
related  pages of the Form  10-K and the  Quarterly  Report on Form 10-Q for the
quarter ended March 31, 1998 as printed and distributed.

Discretionary Proxy Voting Authority

   New Matter

   The SEC has recently  amended its proxy rules regarding use of  discretionary
voting authority with respect to certain shareholder  proposals.  If PSEG is not
notified by January  23,  1999 of any  proposal  intended  to be  presented  for
consideration at the 1999 Annual Meeting of Stockholders, then the proxies named
by PSEG management with respect to the meeting shall have  discretionary  voting
authority with respect to such proposal if presented at the meeting.

Credit Ratings

   Form 10-K, Page 5

   During the second quarter of 1998, Standard and Poor's,  Moody's and Duff and
Phelps  reconfirmed  the credit  ratings for PSEG and PSE&G as  disclosed in the
1997 Form 10-K.  Additionally,  Moody's  changed  its outlook  from  negative to
stable.

Nuclear Fuel Disposal

   Form 10-K, Page 12

   As  previously  reported,  in  accordance  with the Nuclear  Waste Policy Act
(NWPA), PSE&G has entered into contracts with the Department of Energy (DOE) for
the disposal of spent nuclear fuel.  Payments made to the DOE for disposal costs
are based on nuclear  generation and are included in Interchanged Power and Fuel
for  Electric  Generation  in the  Statements  of Income.  These costs are being
recovered through the LEAC (see Note 2. Rate Matters of Notes).

   DOE construction of a permanent  disposal  facility has not begun and DOE has
announced  that it does not expect a facility to be available  until 2010 at the
earliest.  Accordingly,  legislation  which  would  have  the  DOE  establish  a
centralized interim spent fuel storage facility has been introduced in Congress.
In  cases  brought  by  PSE&G,  40 other  utilities  and many  state  and  local
governments,  the United  States  Court of Appeals for the  District of Columbia
Circuit reaffirmed DOE's unconditional obligation to begin spent fuel acceptance
by January 31, 1998.  In November  1997,  the court ruled that the utilities had
fulfilled  their  obligations  under  their  respective  contracts  with  DOE by
contributing  to the Nuclear  Waste  Fund.  The court  further  ruled that DOE's
argument of unavoidable delay to meet its obligation was without merit. However,
the court did not order DOE to  commence  spent fuel  acceptance  by January 31,
1998;  instead,  it decided that the standard  contract  provided a  potentially
adequate remedy in the form of payment of damages if DOE failed its obligations.
In May 1998 the court denied a petition by PSE&G, 40 other  utilities,  and many
states  and  state  agencies  to  order  DOE  to  begin  spent  fuel  acceptance
immediately  and declare that the  utilities are allowed to escrow their Nuclear
Waste Fund fees until DOE begins spent fuel acceptance. Following this decision,
DOE  proposed  a  settlement  of  issues  related  to its  failure  to meet  its
obligation,  which the utilities  unanimously  rejected.  PSE&G is continuing to
work with the utility industry to develop a methodology for determining  damages
incurred as a result of DOE's failure to meet its  obligation and a strategy for
its implementation.  PSE&G is presently studying options to recover damages from
DOE. No assurances  can be given as to the ultimate  availability  of a disposal
facility.

Nuclear Operations

   Form 10-K, Page 8

   On June 8, 1998, the NRC issued its latest Systematic  Assessment of Licensee
Performance (SALP) Report for Hope Creek for the period November 10, 1996 to May
16, 1998. In the areas of Operations,  Maintenance and  Engineering,  Hope Creek
was rated Category 2 or "good" performance.  In the area of Plant Support,  Hope
Creek  received a  "superior",  or Category 1,  rating.  The NRC noted  improved
performance in all functional areas during the period,  with marked  improvement
in the Plant  Support  area,  particularly  concerning  security  and  emergency
preparedness.  The NRC also noted that although several human performance issues
associated with procedure violations, attention to detail and work controls were
evident  during  the fall 1997  outage,  operation  since  then has been  nearly
event-free.

   On July 29, 1998,  the NRC notified PSE&G that Salem 1 and 2 had been removed
from the NRC's Watch List (see Item 2.  Management's  Discussion and Analysis --
Nuclear Operations).

   Form 10-K, Page 10

   PECO Energy has advised PSE&G that the NRC held a  predecisional  enforcement
conference on May 21, 1998 to discuss two apparent violations concerning failure
to maintain  the  operability  of a Peach  Bottom Unit 3 emergency  core cooling
system pump. On June 11, 1998,  the NRC issued an aggregate  Level III violation
and a civil penalty of $55,000. PECO will not dispute the violation.

Low Level Radioactive Waste (LLRW)

   Form 10-K, Page 12 and March 31, 1998 Form 10-Q, Page 27

   As a by-product of their  operations,  nuclear  generating  units,  including
those in which PSE&G owns an interest,  produce LLRW. Such wastes include paper,
plastics, protective clothing, water purification materials and other materials.
LLRW  materials are  accumulated  on site and disposed of at licensed  permanent
disposal facilities in Barnwell, South Carolina and Clive, Utah.

   PECO Energy has advised PSE&G that on June 18, 1998, the  Appalachian  States
LLRW Compact Commission unanimously agreed to suspend efforts to site a radwaste
storage facility in Pennsylvania.  The Secretary of the Pennsylvania  Department
of Environmental Protection had suggested ending the search due to the declining
amounts of radwaste  produced by  hospitals,  nuclear  power plants and research
facilities.  The other compact  members  (Delaware,  Maryland and West Virginia)
have asked  Pennsylvania  to make  provisions to resume the search if conditions
change.

Other State Regulatory Matters

   Form 10-K, Page 4 and March 31, 1998 Form 10-Q, Page 27

   As previously  reported,  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.  On June
26, 1998,  PSE&G filed a petition for review of FERC's order with the U.S. Court
of Appeals, District of Columbia Circuit.

Air Pollution Control

   Form 10-K, Page 15

     As previously  reported,  in September 1997, the NJDEP proposed regulations
implementing a memorandum of understanding  among 11 Northeastern states and the
District of Columbia,  establishing  a regional  plan for reducing NOx emissions
from utility and large  industrial  boilers.  In June 1998,  NJDEP adopted final
regulations  implementing a NOx budget program and establishing the formulas for
NOx allocations. The extent of investment in control technologies or operational
changes  required to comply with these  regulations  will be directly related to
the number of allowances  PSE&G  receives.  PSE&G does not expect to receive its
final NOx  budget  allocation  under the rule until  early 1999 and thus  cannot
access the potential costs at this time, but such costs could be material.

               ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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

       PSEG
----------------------
Exhibit      Document
Number
----------------------
     3       Amended and  Restated  Trust  Agreement  for  Enterprise
             Capital Trust II

     4a      First  Supplemental  Indenture to Indenture  dated as of January 1,
             1998 between Public Service Enterprise Group Incorporated and First
             Union National  Bank, as Trustee,  dated June 1, 1998 providing for
             the  issuance of Floating  Rate  Deferrable  Interest  Subordinated
             Debentures, Series B (relating to Trust Preferred Securities)

     4b      Second  Supplemental  Indenture to Indenture dated as of January 1,
             1998 between Public Service Enterprise Group Incorporated and First
             Union National  Bank, as Trustee,  dated July 1, 1998 providing for
             the issuance of Deferrable Interest Subordinated Debentures, Series
             C (relating to Trust Preferred Securities)

     10      Employment  Agreement with E. James Ferland,  dated June  16, 1998

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

     27(A)   Financial Data Schedule (PSEG)

       PSE&G
----------------------
Exhibit      Document
Number
----------------------
     10      Employment  Agreement with E. James Ferland,  dated June
             16, 1998

     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: August 14, 1998