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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

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

                  For the quarterly period ended June 30, 2002

                                       OR

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

                For the transition period from _______ to ______

Commission            Registrant, State of Incorporation,      I.R.S. Employer
File Number              Address, and Telephone Number        Identification No.
--------------------------------------------------------------------------------

 000-32503                PSEG ENERGY HOLDINGS INC.              22-2983750
                          (A New Jersey Corporation)
                              80 Park Plaza-T22
                        Newark, New Jersey 07102-4194
                                973-456-3581
                             http://www.pseg.com

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes [X]  No [ ]

Registrant is a  wholly-owned  subsidiary  of Public  Service  Enterprise  Group
Incorporated. Registrant meets the conditions set forth in General Instruction H
(1) (a) and (b) of Form 10-Q and is filing  this  Quarterly  Report on Form 10-Q
with the reduced disclosure format authorized by General Instruction H.

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                            PSEG ENERGY HOLDINGS INC.
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                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----
PART I.  FINANCIAL INFORMATION

   Item 1. Financial Statements............................................    1

   Item 2. Management's Discussion and Analysis of Financial
           Condition and Results of Operations.............................   28

PART II.  OTHER INFORMATION

   Item 1. Legal Proceedings...............................................   44

   Item 5. Other Information ..............................................   44

   Item 6. Exhibits and Reports on Form 8-K................................   45

   Signature...............................................................   45


                                       i
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                            PSEG ENERGY HOLDINGS INC.
================================================================================

                          PART I. FINANCIAL INFORMATION

                          ITEM 1. FINANCIAL STATEMENTS
<PAGE>

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                            PSEG ENERGY HOLDINGS INC.
================================================================================

                            PSEG ENERGY HOLDINGS INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                              (Millions of Dollars)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                                   For the Six
                                                                              For the Quarter Ended               Months Ended
                                                                                    June 30,                         June 30,
                                                                              ---------------------           ---------------------
                                                                              2002            2001            2002            2001
                                                                              -----           -----           -----           -----
<S>                                                                           <C>             <C>             <C>             <C>
OPERATING REVENUES
   Electric Generation and Distribution Revenues ...................          $  61           $  --           $ 132           $  --
   Income from Capital and Operating Leases ........................             58              51             116              98
   Gain on Withdrawal from Partnership Interest ....................             39              --              47              51
   Income From Joint Ventures and Partnerships .....................             18              27              38              60
   Interest and Dividend Income ....................................             15               9              24              14
   Net Losses on Investments .......................................            (33)             (1)            (38)            (15)
   Other ...........................................................              2               2               1               2
                                                                              -----           -----           -----           -----
       Total Operating Revenues ....................................            160              88             320             210
                                                                              -----           -----           -----           -----
OPERATING EXPENSES
   Electric Energy Costs ...........................................             28              --              58              --
   Operation and Maintenance .......................................              4               1              10               2
   Depreciation and Amortization ...................................              6               2              13               3
   Write-down of Project Investments ...............................            506              --             506              --
   Administrative and General ......................................             29              18              46              35
                                                                              -----           -----           -----           -----
       Total Operating Expenses ....................................            573              21             633              40
                                                                              -----           -----           -----           -----
OPERATING (LOSS) INCOME ............................................           (413)             67            (313)            170

OTHER (LOSS) INCOME
   Foreign Currency Transaction Loss ...............................            (17)             --             (69)             --
   Change in Fair Value of Derivative Financial Instruments ........             (8)             --               2               1
   Other ...........................................................             --              (1)             --              --
                                                                              -----           -----           -----           -----
       Total Other (Loss) Income ...................................            (25)             (1)            (67)              1
                                                                              -----           -----           -----           -----
INTEREST EXPENSE
   Interest Expense ................................................            (55)            (41)           (112)            (82)
   Capitalized Interest ............................................              2               5               5              10
                                                                              -----           -----           -----           -----
       Total Interest Expense--Net .................................            (53)            (36)           (107)            (72)
                                                                              -----           -----           -----           -----
(LOSS) INCOME BEFORE INCOME TAXES, MINORITY INTERESTS,
   DISCONTINUED OPERATIONS EXTRAORDINARY ITEM AND
   CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE ...........           (491)             30            (487)             99
INCOME TAXES .......................................................            177              (5)            177             (18)
MINORITY INTERESTS .................................................              4              --               5              --
                                                                              -----           -----           -----           -----
(LOSS) INCOME BEFORE DISCONTINUED OPERATIONS,
   EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF A
   CHANGE IN ACCOUNTING PRINCIPLE ..................................           (310)             25            (305)             81
DISCONTINUED OPERATIONS (Note 3)
   Loss from Discontinued Operations (including loss
   on disposal of $(34), net of tax benefit--$18) ..................            (37)             (8)            (37)            (11)
                                                                              -----           -----           -----           -----
(LOSS) INCOME BEFORE EXTRAORDINARY ITEM
   AND CUMULATIVE EFFECT OF A CHANGE IN
   ACCOUNTING PRINCIPLE ............................................           (347)             17            (342)             70
Extraordinary Loss on Early Retirement of Debt
   (net of tax) ....................................................             --              --              --              (2)
Cumulative Effect of a Change in Accounting Principle
   (net of tax) ....................................................             --              --            (120)              9
NET (LOSS) INCOME ..................................................           (347)             17            (462)             77
                                                                              -----           -----           -----           -----
Preferred Stock Dividend Requirements ..............................             (5)             (5)            (11)            (11)
                                                                              -----           -----           -----           -----
(LOSS) EARNINGS AVAILABLE TO PUBLIC
   SERVICE ENTERPRISE GROUP INCORPORATED ...........................          $(352)          $  12           $(473)          $  66
                                                                              =====           =====           =====           =====
</TABLE>

See Notes to Consolidated Financial Statements.


                                       2
<PAGE>

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                            PSEG ENERGY HOLDINGS INC.
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                            PSEG ENERGY HOLDINGS INC.
                           CONSOLIDATED BALANCE SHEETS
                                     ASSETS
                              (Millions of Dollars)
                                   (Unaudited)

                                                          June 30,  December 31,
                                                            2002       2001
                                                          --------  ------------
CURRENT ASSETS
   Cash and Cash Equivalents .......................      $    38     $    54
   Accounts Receivable:
     Trade .........................................          101         104
     Other .........................................           19          19
     Affiliated Companies ..........................           31          --
   Notes Receivable ................................          164          --
   Interest Receivable .............................           14           2
   Assets Held for Sale ............................           23         422
   Inventory .......................................            6          11
   Prepayments .....................................            5           3
   Current Assets of Discontinued Operations .......          422         543
                                                          -------     -------
        Total Current Assets .......................          823       1,158
                                                          -------     -------

PROPERTY, PLANT AND EQUIPMENT
   Electric Generation and Distribution Assets .....          677         669
   Construction in Progress ........................          248         345
   Real Estate .....................................          115         115
   Property and Equipment ..........................           17          43
                                                          -------     -------
        Total ......................................        1,057       1,172
   Accumulated Depreciation and Amortization .......         (114)       (155)
                                                          -------     -------
        Net Property, Plant and Equipment ..........          943       1,017
                                                          -------     -------

INVESTMENTS
   Capital Leases - Net ............................        2,899       2,784
   Corporate Joint Ventures ........................        1,161       1,111
   Partnerships Interests - Net ....................          571         659
   Other Investments ...............................            9           9
                                                          -------     -------
        Total Investments ..........................        4,640       4,563
                                                          -------     -------

OTHER ASSETS
   Goodwill ........................................          447         548
   Deferred Costs ..................................           43          84
   Other ...........................................           47          69
                                                          -------     -------
        Total Other Assets .........................          537         701
                                                          -------     -------

TOTAL ASSETS .......................................      $ 6,943     $ 7,439
                                                          =======     =======

See Notes to Consolidated Financial Statements.


                                       3
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                            PSEG ENERGY HOLDINGS INC.
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                            PSEG ENERGY HOLDINGS INC.
                           CONSOLIDATED BALANCE SHEETS
                         LIABILITIES AND CAPITALIZATION
                              (Millions of Dollars)
                                   (Unaudited)

                                                         June 30,   December 31,
                                                           2002        2001
                                                         -------    ------------
CURRENT LIABILITIES
   Long-Term and Medium-Term Debt Due Within
     One Year ......................................      $   414       $   242
   Short-Term Borrowings Due to Public Service
     Enterprise Group Incorporated .................           --            38
   Payables:
     Trade Accounts ................................           33            46
     Taxes .........................................            5            21
     Interest ......................................           52            49
     Other .........................................           27            48
     Affiliated Companies ..........................           --            41
   Borrowings Under Lines of Credit ................          321           300
   Non-Recourse Notes Payable ......................          273           285
   Current Liabilities of Discontinued Operations ..          280           261
                                                          -------       -------
       Total Current Liabilities ...................        1,405         1,331
                                                          -------       -------

NONCURRENT LIABILITIES
   Deferred Income Taxes and Investment and
     Energy Tax Credits ............................        1,044         1,211
   Other Noncurrent Liabilities ....................          145            95
                                                          -------       -------
       Total Noncurrent Liabilities ................        1,189         1,306
                                                          -------       -------

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

MINORITY INTERESTS .................................           29            47
                                                          -------       -------

CAPITALIZATION
   Project Level, Non-Recourse Long-Term Debt ......          628           635
   Senior Notes ....................................        1,779         1,644
   Medium-Term Notes ...............................           --           252
                                                          -------       -------
       Total Long-Term Debt ........................        2,407         2,531
                                                          -------       -------

   STOCKHOLDER'S EQUITY
     Common Stock, Issued: 100 Shares ..............           --            --
     Preferred Stock ...............................          509           509
     Additional Paid-in Capital ....................        1,690         1,490
     Retained Earnings .............................           37           510
     Accumulated Other Comprehensive Loss ..........         (323)         (285)
                                                          -------       -------
       Total Stockholder's Equity ..................        1,913         2,224
                                                          -------       -------

TOTAL LIABILITIES AND CAPITALIZATION ...............      $ 6,943       $ 7,439
                                                          =======       =======

See Notes to Consolidated Financial Statements.


                                       4
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                            PSEG ENERGY HOLDINGS INC.
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                            PSEG ENERGY HOLDINGS INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (Millions of Dollars)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                      For the Six
                                                                      Months Ended
                                                                        June 30,
                                                                 ----------------------
                                                                    2002        2001
                                                                 ----------  ----------
<S>                                                                <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net (Loss) Income ........................................      $(462)      $  77
   Adjustments to Reconcile Net (Loss) Income to
      Net Cash Flows from Operating Activities:
     Depreciation and Amortization ..........................         20           5
     Deferred Income Taxes (Other than Leases) ..............       (177)         (6)
     Leveraged Lease Income, Adjusted for Rents
       Received .............................................         48          35
     Investment Distributions ...............................          4          41
     Undistributed Earnings from Affiliates .................        (17)        (46)
     Net Losses (Gains) on Investments/Partnership ..........         38         (36)
     Foreign Currency Transaction Loss ......................         69          --
     Proceeds from Withdrawal from Partnership Interests ....         --          50
     Write-down of Project Investments ......................        506          --
     Loss on Disposal of Discontinued Operations (net of tax)         34          --
     Cumulative Effect of a Change in Accounting
       Principle (net of tax) ...............................        120          (9)
     Net Changes in Certain Current Assets and Liabilities:
       Accounts Receivable ..................................       (105)        (47)
       Taxes Payable ........................................        (16)          9
       Accounts Payable .....................................        (38)         34
       Interest Payable .....................................          3          15
       Other Current Assets and Liabilities .................        (12)         13
     Other ..................................................          9           4
                                                                   -----       -----
     Net Cash Provided by Operating Activities ..............         24         139
                                                                   -----       -----

CASH FLOWS FROM INVESTING ACTIVITIES
   Investments in Partnerships and Joint Ventures ...........       (152)        (79)
   Investments in Capital Leases ............................        (31)       (392)
   Additions to Property, Plant and Equipment ...............       (183)        (62)
   Return of Capital from Partnerships ......................         90          --
   Acquisitions, Net of Cash Acquired .......................         --        (112)
   Other ....................................................        (83)        (87)
                                                                   -----       -----
     Net Cash Used in Investing Activities ..................       (359)       (732)
                                                                   -----       -----

CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from Additional Paid-in Capital .................        200         300
   Net Increase (Decrease) in Short-Term Debt ...............         21        (346)
   Net (Decrease) Increase in Short-Term Affiliate
     Borrowings .............................................        (38)        230
   Proceeds from Long-Term Debt .............................        245         622
   Repayment of Medium-Term and Long-Term Debt ..............        (98)       (195)
   Cash Dividends Paid ......................................        (11)        (15)
   Other ....................................................          2          (1)
                                                                   -----       -----
     Net Cash Provided by Financing Activities ..............        321         595
                                                                   -----       -----
   Effect of Exchange Rate Changes on Cash and
     Cash Equivalents .......................................         (2)         --
   Net Change in Cash and Cash Equivalents ..................        (16)          2
   Cash and Cash Equivalents at Beginning of Period .........         54          22
                                                                   -----       -----
   Cash and Cash Equivalents at End of Period ...............      $  38       $  24
                                                                   =====       =====

Supplemental Disclosure of Cash Flow Information:
     Cash Payments During the Period for:
       Income Taxes .........................................      $ (14)      $ (42)
       Interest .............................................      $  90       $  57
Non-Cash Financing Activities:
       Debt Assumed from Companies Acquired .................      $  --       $ 176
</TABLE>

See Notes to Consolidated Financial Statements.


                                       5
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                            PSEG ENERGY HOLDINGS INC.
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             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Basis of Presentation

Basis of Presentation

PSEG Energy Holdings Inc. (Energy Holdings),  incorporated under the laws of the
State of New Jersey  with its  principal  executive  offices  located at 80 Park
Plaza,  Newark, New Jersey 07102 is a direct  wholly-owned  subsidiary of Public
Service  Enterprise  Group  Incorporated  (PSEG).  Unless the context  otherwise
indicates, all references to "Energy Holdings",  "we", "us" or "our" herein mean
PSEG Energy  Holdings  Inc.  and its  consolidated  subsidiaries.  We have three
principal direct  wholly-owned  subsidiaries;  PSEG Global Inc.  (Global),  PSEG
Resources  Inc.   (Resources)  and  PSEG  Energy   Technologies   Inc.   (Energy
Technologies).  Effective  June 30, 2002, we announced our intention to exit the
businesses of Energy Technologies,  and one of Global's investments, Tanir Bavi.
For additional information, see Note 3. Discontinued Operations.

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 our
Notes  contained  in the 2001 Annual  Report on Form 10-K and the first  quarter
2002 Quarterly  Report on Form 10-Q.  These Notes update and supplement  matters
discussed  in the 2001  Annual  Report on Form 10-K and the first  quarter  2002
Quarterly Report on Form 10-Q.

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.  All such  adjustments  are of a  normal  recurring
nature.  The year-end  Consolidated  Balance  Sheet was derived from the audited
consolidated  financial  statements  included in the 2001 Annual  Report on Form
10-K. Certain  reclassifications  of prior period data have been made to conform
with the current period presentation.

Note 2. Recent Accounting Pronouncements

On January 1, 2002 we adopted the Financial  Accounting  Standards  Board (FASB)
Statement of Financial  Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible  Assets"  (SFAS 142).  Under SFAS 142,  goodwill is a  nonamortizable
asset, and is subject to an annual review for impairment,  and an interim review
when certain events or circumstances  occur that indicate the carrying value may
not be  recoverable.  Under SFAS 142 we had a transitional  period of six months
from the date of adoption to complete our goodwill impairment testing, which was
completed as of June 30,  2002.  We have  evaluated  the  recoverability  of the
recorded  amount of goodwill based on certain  operating and financial  factors.
Such impairment testing included cash flow tests which require broad assumptions
and significant judgement to be exercised by management.  We have completed this
impairment  analysis  and  have  recorded  after-tax  charges  of $120  million,
retroactive  to January  1,  2002,  and such  amount  has been  recognized  as a
Cumulative Effect of a Change in Accounting Principle in accordance with the new
standard.  For  further  analysis  of the  impairment  of  goodwill  see Note 3.
Discontinued Operations and Note 4. Asset Impairments.

On  January 1, 2002 we adopted  SFAS No.  144,  "Accounting  for  Impairment  or
Disposal of Long-Lived  Assets" (SFAS 144). Under SFAS 144 long-lived  assets to
be disposed of are  measured at the lower of carrying  amount or fair value less
costs to sell,  whether  reported in continuing  operations  or in  discontinued
operations. Discontinued operations will no longer be measured at net realizable
value or include  amounts for  operating  losses that have not yet  occurred.  A
long-lived  asset must be tested for  impairment  whenever  events or changes in
circumstances  indicate that its carrying amount may be impaired. For additional
information relating to asset impairments,  see Note 3. Discontinued  Operations
and Note 7. Commitments and Contingencies.

In July 2001,  the FASB issued SFAS No. 143,  "Accounting  for Asset  Retirement
Obligations"  (SFAS 143).  Under SFAS 143, the fair value of a liability  for an
asset  retirement  obligation  should be  recorded  in the period in which it is
incurred.  Upon  settlement  of the  liability,  an entity  either  settles  the
obligation  for its  recorded  amount  or  incurs a gain or loss if the  settled
amount  differs from the  liability  recorded.  SFAS 143 is effective for fiscal
years beginning


                                       6
<PAGE>

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                            PSEG ENERGY HOLDINGS INC.
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             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

after June 15,  2002.  We are  currently  evaluating  this  guidance  and cannot
determine the impact on our financial  position,  results of operations,  or net
cash flows, however, such impact could be material.

Note 3. Discontinued Operations

Energy Technologies' Investments

Energy Technologies is comprised of 11 heating, ventilating and air conditioning
(HVAC) operating  companies and an asset management group which includes various
Demand Side Management (DSM) investments. DSM investments in long-term contracts
represent expenditures made by Energy Technologies to share DSM customers' costs
associated with the installation of energy efficient equipment. DSM revenues are
earned  principally  from  monthly  payments  received  from  utilities,   which
represent  shared  electricity  savings  from  the  installation  of the  energy
efficient equipment.

During the second  quarter of 2002, we completed our  impairment  testing of all
recorded  goodwill in  accordance  with guidance set forth in SFAS 142 including
the goodwill  associated with the 11 HVAC operating companies acquired by Energy
Technologies.  Such analysis  indicated  that the entire $53 million of goodwill
associated with the HVAC companies was impaired, which resulted in a $32 million
(after-tax)  charge (net of $20 million in taxes).  In accordance with SFAS 142,
this  charge was  recorded  as of January  1, 2002 as a  Cumulative  Effect of a
Change in Accounting  Principle,  reflected in our results of operations for the
six months ended June 30, 2002.

In June 2002,  we  adopted a plan to sell our  interests  in the HVAC  operating
companies.  The sale of the HVAC operating companies is expected to be completed
by December 31,  2002.  We have  retained the services of an  investment-banking
firm which is marketing the HVAC operating  companies to interested  parties and
has completed an analysis of the fair market value of the  operating  companies.
The fair value was lower than our carrying value of these  companies,  resulting
in an impairment  loss  recognized for the quarter and six months ended June 30,
2002 (as noted below). Additionally, we have initiated a process for the sale of
Energy Technologies' asset management group, which we expect to sell by June 30,
2003. Based on our assessments, we believe the fair market value of these assets
approximates  their  carrying  value as of June  30,  2002.  The HVAC  operating
companies and the asset management group meet the criteria for classification as
components  of   discontinued   operations  and  all  prior  periods  have  been
reclassified to conform to the current year's presentation.

In addition to the goodwill  impairment,  we have  further  reduced the carrying
value of the investments in the 11 HVAC operating  companies to their fair value
less costs to sell,  and  recorded a loss on  disposal  for the  quarter and six
months  ended June 30, 2002 of $20  million,  net of $11  million in taxes.  Our
remaining  investment  position in Energy  Technologies  is  approximately  $135
million,  of which approximately $35 million relates to deferred tax assets, for
which no valuation  allowance is deemed  necessary.  Excluding  the deferred tax
assets,  approximately  70% of our remaining  investment  balance relates to the
asset  management  group and 30%  relates  to the HVAC  companies.  Although  we
believe that we will be able to sell the HVAC and asset  management  businesses,
we can give no assurances  that we will be able to realize their total  carrying
values.

Operating  results of Energy  Technologies,  less certain  allocated  costs from
Energy Holdings,  have been  reclassified  into  discontinued  operations in our
Consolidated  Statements  of  Operations.  The  results of  operations  of these
discontinued  operations  for the  quarter and six months  ended June 30,  2002,
yielded additional losses of $5 million (after-tax) and $8 million  (after-tax),
respectively, and are disclosed below:


                                       7
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                            PSEG ENERGY HOLDINGS INC.
================================================================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

                                    Quarter Ended          Six Months Ended
                                       June 30,                June 30,
                                   ----------------        ----------------
                                   2002        2001        2002        2001
                                   ----        ----        ----        ----
                                  (Millions of Dollars)  (Millions of Dollars)
Operating Revenues .........       $ 97        $111        $198        $213
Pre-Tax Operating Loss .....         (6)        (13)        (10)        (17)
Loss Before Income Taxes ...         (7)        (13)        (11)        (18)

The  carrying  amounts  of the assets and  liabilities  of Energy  Technologies'
investments,  as of June 30, 2002 and December 31, 2001, have been  reclassified
into  Current  Assets of  Discontinued  Operations  and Current  Liabilities  of
Discontinued Operations,  respectively,  on our Consolidated Balance Sheets. The
carrying  amounts  of the major  classes  of assets  and  liabilities  of Energy
Technologies'  investments,  as of June 30,  2002 and  December  31,  2001,  are
summarized in the following table:

                                                         June 30,   December 31,
                                                           2002        2001
                                                         --------   ------------
                                                          (Millions of Dollars)
CURRENT ASSETS
   Accounts Receivable:
     Trade (net of allowance for
       doubtful accounts) ........................         $  79          $ 114
   Notes Receivable ..............................            21             21
   Costs and Estimated Earnings
     in Excess of Billings
     on Uncompleted Contracts ....................            14             19
   Other .........................................             4              4
                                                           -----          -----
       Total Current Assets ......................           118            158
                                                           -----          -----

PROPERTY, PLANT AND EQUIPMENT
   Property, Plant and Equipment .................            50             45
   Accumulated Depreciation
     and Amortization ............................           (33)           (31)
                                                           -----          -----
       Net Property, Plant and Equipment .........            17             14
                                                           -----          -----

INVESTMENTS ......................................            47             54
                                                           -----          -----

OTHER ASSETS
   Goodwill ......................................            --             53
   Other .........................................            10             11
                                                           -----          -----
       Total Other Assets ........................            10             64
                                                           -----          -----

TOTAL ASSETS .....................................         $ 192          $ 290
                                                           =====          =====


                                       8
<PAGE>

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                            PSEG ENERGY HOLDINGS INC.
================================================================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

                                                      June 30,     December 31,
                                                        2002          2001
                                                      --------    -----------
                                                        (Millions of Dollars)
CURRENT LIABILITIES
   Accounts Payable:
     Trade .....................................         $33          $38
     Other .....................................          16           17
     Affiliated Companies ......................           3            8
   Non-Recourse Notes Payable ..................           6           --
   Billing in Excess of Costs and
     Estimated Earnings on
     Uncompleted Contracts .....................          25           19
                                                         ---          ---
       Total Current Liabilities ...............          83           82

NONCURRENT LIABILITIES .........................           3            6

LONG-TERM DEBT .................................           6            1
                                                         ---          ---

TOTAL LIABILITIES ..............................         $92          $89
                                                         ===          ===

Tanir Bavi

Global  owns a 74%  interest in Tanir Bavi Power  Company  Private  Ltd.  (Tanir
Bavi), which owns and operates a 220 MW barge mounted, combined-cycle generating
facility in India. The plant commenced  combined-cycle  commercial  operation in
2001.  Power from the plant is being sold under a  seven-year  fixed price Power
Purchase Agreement (PPA) with the Karnataka Power  Transmission  Company Limited
(KPTCL),  a state  affiliated  entity,  formerly known as Karnataka  Electricity
Board.

Our impairment testing of the goodwill  associated with Global's  acquisition of
Tanir Bavi  indicated  that the  entire $27  million  of  goodwill  recorded  in
connection with our investment in Tanir Bavi was impaired and resulted in an $18
million  charge,  net of $9 million in taxes.  In accordance with SFAS 142, this
charge  was  recorded  as of January 1, 2002 as a  component  of the  cumulative
effect  of a  change  in  accounting  principle,  reflected  in our  results  of
operations for the six months ended June 30, 2002.  For  additional  information
see Note 2. Recent Accounting Pronouncements and Note 4. Asset Impairments.

Tanir  Bavi has been in  dispute  with  KPTCL  regarding  the  terms of  payment
specified  in the PPA  relating  to the fixed  portion of the  tariff,  which is
approximately  US  $0.04  per  kilowatt-hour.  The  amount  of  the  dispute  is
approximately half of this fixed amount. During the first quarter of 2002, KPTCL
referred the dispute to the  government of Karnataka,  which  directed  KPTCL to
accept Tanir Bavi's  position.  Prior to KPTCL's  acceptance of such  direction,
however,  the  Karnataka  Electricity  Regulatory  Commission  (KERC)  exercised
jurisdiction  over the matter  and  requested  that  KPTCL not  comply  with the
requests of the  government of Karnataka  until KERC had reviewed the matter.  A
hearing was held in May 2002, at which KERC determined that the disputed amounts
could not be paid until the parties complied with the dispute resolution process
called for in the PPA. The dispute  resolution  process and certain  other legal
remedies could take an extended  period of time before a result is known.  While
pursuing legal  recourse,  it is likely we will need to make  additional  equity
contributions in the plant to maintain  liquidity.  We believe the delays in the
process have greatly  diminished our  expectations of a satisfactory  resolution
and in June 2002, we adopted a plan to exit Tanir Bavi.

Global  and its  partner  in this  venture,  GMR Vasavi  Group,  a local  Indian
company, are in negotiations for the sale of Global's majority interest in Tanir
Bavi to the GMR Vasavi Group. The final  negotiations and completion of sale are
expected  to  occur  in the  third  quarter  of 2002.  Should  this  sale not be
consummated,  we will seek another buyer for


                                       9
<PAGE>

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                            PSEG ENERGY HOLDINGS INC.
================================================================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

this facility.  In such an event, we can give no assurances that we will be able
to  realize  the amount of our  adjusted  carrying  value.  Tanir Bavi meets the
criteria for  classification  as a component of discontinued  operations and all
prior  periods  have  been   reclassified  to  conform  to  the  current  year's
presentation. We have reduced the carrying value of Tanir Bavi to its fair value
less  costs to sell and  recorded a loss on  disposal  for the  quarter  and six
months ended June 30, 2002 of $14 million (after-tax).  The operating results of
Tanir Bavi for the quarter and six months ended June 30, 2002 yielded  income of
$2 million (after-tax) and $5 million (after-tax),  respectively. The respective
income from discontinued operations partially offsets the loss on disposal.

Our share of operating results of this discontinued  operation are summarized in
the following table:

                                       Quarter Ended          Six Months Ended
                                         June 30,                 June 30,
                                       -------------          ----------------
                                       2002       2001*       2002        2001*
                                       ----       -----       ----        -----
                                                (Millions of Dollars)
Operating Revenues .............       $32         $ 1         $61         $ 1
Operating Income ...............        11           1          23           1
Income Before Income Taxes .....         3           1           9           1

*     Operating  results  for Tanir Bavi were  recorded in  accordance  with the
      equity method of accounting  for the quarter and six months ended June 30,
      2001.


                                       10
<PAGE>

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                            PSEG ENERGY HOLDINGS INC.
================================================================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The carrying amounts of the assets and liabilities of Tanir Bavi, as of June 30,
2002 and December  31,  2001,  have been  reclassified  into  Current  Assets of
Discontinued  Operations  And Current  Liabilities of  Discontinued  Operations,
respectively,  in our Consolidated  Balance Sheets.  The carrying amounts of the
major classes of assets and  liabilities  of Tanir Bavi, as of June 30, 2002 and
December 31, 2001, are summarized in the following tables:

                                                         June 30,   December 31,
                                                           2002        2001
                                                         --------   -----------
ASSETS                                                   (Millions of Dollars)
   Cash ........................................          $   3         $   2
   Accounts Receivable:
     Trade (net of allowance for
       doubtful accounts) ......................             17            26
   Notes Receivable ............................              9             5
   Inventory ...................................              3             3
                                                          -----         -----
     Total Current Assets ......................             32            36
                                                          -----         -----

PROPERTY, PLANT AND EQUIPMENT
   Electric Generation and
     Distribution Assets .......................            197           194
   Accumulated Depreciation ....................            (14)           (4)
                                                          -----         -----
     Net Property, Plant and Equipment .........            183           190
                                                          -----         -----

OTHER ASSETS
   Goodwill ....................................             --            27
   Other .......................................             15            --
                                                          -----         -----
     Total Other Assets ........................             15            27
                                                          -----         -----
OTHER ASSETS

       TOTAL ASSETS ............................          $ 230         $ 253
                                                          =====         =====

LIABILITIES
   Long-Term Debt Due Within One Year ..........          $  28         $  28
   Accounts Payable--Trade .....................             21            16
   Accounts Payable--Other .....................              3             1
                                                          -----         -----
     Total Current Liabilities .................             52            45

LONG-TERM DEBT .................................            117           108
MINORITY INTEREST ..............................             19            19
                                                          -----         -----

TOTAL LIABILITIES ..............................          $ 188         $ 172
                                                          =====         =====

Note 4. Asset Impairments

As of December 31, 2001, our aggregate investment exposure in Argentina was $632
million, including certain loss contingencies.  These investments included a 90%
owned distribution company,  Empresa Distribuidora de Electricidad de Entre Rios
S.A. (EDEERSA); and minority interests in three distribution companies,  Empresa
Distribuidora de Energia Norte S.A. (EDEN), Empresa Distribuidora de Energia Sur
S.A. (EDES), and Empresa Distribuidora La Plata S.A. (EDELAP) and two generating
companies,  Central  Termica  San  Nicolas  (CTSN),  and Parana  which are under
contract for sale to certain  subsidiaries of The AES  Corporation  (AES). As of
June 30,


                                       11
<PAGE>

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                            PSEG ENERGY HOLDINGS INC.
================================================================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

2002, we have  determined  that the carrying value of our Argentine  investments
was impaired.  The combination of the year-to-date  operating  losses,  goodwill
impairment at EDEERSA,  write-down of $506 million for all Argentine assets, and
certain  loss  contingencies  resulted  in a pre-tax  charge to earnings of $632
million  ($410  million  after-tax)  for the six months ended June 30, 2002.  In
connection with the write-down of our Argentine  assets,  we recorded a deferred
tax  asset of $220  million.  We  believe  that we will have  sufficient  future
capital  gains to realize this  deferred tax asset.  For a discussion of certain
contingencies related to our Argentine investments,  see Note 7. Commitments and
Contingencies.

The tables below provide pre-tax and after-tax impacts of the various impairment
charges, results of operations, and accruals of loss contingencies recorded with
respect to our  investments  in  Argentina  for the quarter and six months ended
June 30, 2002 and June 30, 2001.

<TABLE>
<CAPTION>
                                                                              Quarter Ended                    Six Months Ended
                                                                                 June 30,                           June 30,
                                                                          -----------------------            -----------------------
                                                                          2002              2001             2002              2001
                                                                          -----             -----            -----             -----
                                                                                           (Millions of Dollars)
                                                                                                 (pre-tax)
<S>                                                                       <C>               <C>              <C>               <C>
(Losses) Earnings Before Local Taxes-EDEERSA .................            $ (14)            $   2            $ (59)            $   5
Write-down of EDEERSA ........................................              (94)               --              (94)               --
Write-down of Assets Held for Sale to AES ....................             (412)               --             (412)               --
Loss Contingencies and Other .................................               (8)               --              (11)               --
Goodwill Impairment-EDEERSA ..................................               --                --              (56)               --
                                                                          -----             -----            -----             -----
    Total ....................................................            $(528)            $   2            $(632)            $   5
                                                                          -----             -----            -----             -----

<CAPTION>
                                                                              Quarter Ended                    Six Months Ended
                                                                                 June 30,                           June 30,
                                                                          -----------------------            -----------------------
                                                                          2002              2001             2002              2001
                                                                          -----             -----            -----             -----
                                                                                           (Millions of Dollars)
                                                                                                (after-tax)
<S>                                                                       <C>               <C>              <C>               <C>
(Losses) Earnings-EDEERSA ....................................            $  (9)            $   1            $ (40)            $   3
Write-down of EDEERSA ........................................              (61)               --              (61)               --
Write-down of Assets Held for Sale to AES ....................             (268)               --             (268)               --
Loss Contingencies and Other .................................               (5)               --               (5)               --
Goodwill Impairment-EDEERSA ..................................               --                --              (36)               --
                                                                          -----             -----            -----             -----
    Total ....................................................            $(343)            $   1            $(410)            $   3
                                                                          -----             -----            -----             -----
</TABLE>

EDEERSA

Given  the  year-to-date  and  projected  operating  losses at  EDEERSA  and the
continued economic uncertainty in Argentina, we determined that it was necessary
to test these assets for impairment. As a result of this analysis, we determined
that these  assets are  completely  impaired  under SFAS 144. We recorded  total
charges and losses of $213 million,  pre-tax, related to this investment for the
six months  ended June 30, 2002.  These  pre-tax  charges  consisted of goodwill
impairment charges of $56 million, six month operating losses of $59 million, of
which $45 million was recorded in the first  quarter,  writing off the remaining
$94 million net asset balance  pursuant to our SFAS 144 impairment  analysis and
loss  contingencies  and other items of $4 million.  The total after-tax charges
and losses  related to this  investment  were $139  million,  for the six months
ended June 30, 2002.

In  addition,  we have  developed  an exit  strategy  to  dispose  of our equity
interest in EDEERSA.  This exit is expected to be complete by June 30, 2003, and
we intend to operate EDEERSA while carrying out our exit plans.  However, due to
uncertainties  related to the timing and method of disposal of our investment in
EDEERSA,  the impairment charges and results of EDEERSA's operations will not be
reported as a  discontinued  operation  until  EDEERSA has


                                       12
<PAGE>

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                            PSEG ENERGY HOLDINGS INC.
================================================================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

been  disposed  of or a sale is  probable.  During the  second  quarter of 2002,
EDEERSA defaulted on its debt, which is nonrecourse to Global and us.

As of  January 1,  2002,  goodwill  related  to our  investment  in EDEERSA  was
approximately  $56  million  and  was  included  in  our  previously   disclosed
investment  exposure.  As part of the  adoption of SFAS 142, we have  determined
that this goodwill was impaired and all of the goodwill has been written-down as
a cumulative  effect of a change in  accounting  principle as of January 1, 2002
and is reflected in our Consolidated  Statement of Operations for the six months
ended June 30, 2002.  See below,  Goodwill  Impairment  Analysis,  for a further
discussion of our goodwill analysis.

Our share of the (Losses) Earnings for EDEERSA were included in our Consolidated
Statement of Operations as indicated in the following table:

                                          Quarter Ended       Six Months Ended
                                            June 30,              June 30,
                                        ----------------      ----------------
                                        2002       2001*      2002       2001*
                                        ----       -----      ----       -----
Operating Revenues .................    $  5       $  2       $ 19       $  5
Operating Expenses .................       4         --         14         --
                                        ----       ----       ----       ----
Operating Income ...................       1          2          5          5
Other Losses - Foreign Currency
  Transaction Loss .................     (15)        --        (68)        --
                                                                         ----
Minority Interest and Other ........      --         --          4         --
                                        ----       ----       ----       ----
(Loss) Earnings before Taxes .......    $(14)      $  2       $(59)      $  5
                                        ====       ====       ====       ====

*     Operating  results for EDEERSA were recorded in accordance with the equity
      method of accounting for the quarter and six months ended June 30, 2001.

Stock Purchase Agreement

On August 24, 2001,  Global entered into a Stock Purchase  Agreement with AES to
sell its minority interests in EDEN, EDES,  EDELAP,  CTSN and Parana, to certain
subsidiaries  of AES.  On  February  6, 2002,  AES  notified  Global that it was
terminating  the Stock Purchase  Agreement.  In the Notice of  Termination,  AES
alleged that a Political  Risk Event,  within the meaning of the Stock  Purchase
Agreement,  had  occurred,  by virtue of certain  decrees of the  Government  of
Argentina,  thereby  giving  AES the  right  to  terminate  the  Stock  Purchase
Agreement.  Global disagreed that a Political Risk Event as defined in the Stock
Purchase  Agreement,  which is limited to expropriation of assets,  had occurred
and has so  notified  AES.  Global's  position  is that the risk of a change  to
currency  policy and the related  events in Argentina were  acknowledged  by the
parties  and  reflected  in  the  purchase  price.  Global  maintains  that  the
"Political  Risk Event"  contemplated  as a basis for  termination  was narrowly
defined and limited to expropriation or similar circumstances. There has been no
expropriation  to date. In April 2002,  Global filed a lawsuit in New York State
Supreme  Court for New York County  against AES to enforce its rights  under the
Stock Purchase Agreement, which it is pursuing.

A motion is pending  before the court  seeking an  expedited  trial of  Global's
claim for specific  performance.  We cannot predict the ultimate outcome of this
matter.

Since AES is disputing its obligation to close and we cannot predict the outcome
of the  litigation,  we  determined  it was  necessary  to test these assets for
impairment.  As a result of this analysis,  it was determined  that these assets
are fully  impaired and we recorded a  write-down  in the amount of $412 million
(pre-tax) and $268 million (after-tax) for the quarter and six months ended June
30, 2002 and loss  contingencies  and other items of $7 million (pre-tax) and $3
million  (after-tax)  for the  quarter  and six  months  ended  June  30,  2002,
respectively.  In  connection  with the terms of the Stock  Purchase  Agreement,
Global  has  accrued  interest  and other  receivables  of $17  million  through
February 6, 2002,  which are direct  obligations  of AES and represent the total
remaining exposure associated with these investments on our Consolidated Balance
Sheets.


                                       13
<PAGE>

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                            PSEG ENERGY HOLDINGS INC.
================================================================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Goodwill Impairment Analysis

We have  finalized  our  evaluation  of the effect of  adopting  SFAS 142 on the
recorded  amount of goodwill.  The total amount of goodwill  impairments is $120
million,  net of tax of $66 million and is comprised of $36 million  (after-tax)
at EDEERSA,  $34 million  (after-tax) at Rio Grande  Energia (RGE),  $32 million
(after-tax) at Energy  Technologies  and $18 million  (after-tax) at Tanir Bavi.
All of the goodwill on these  companies,  other than RGE, is fully impaired.  As
noted above, this impairment charge has been recorded as of January 1, 2002 as a
component of the  Cumulative  Effect of a Change in Accounting  Principle and is
reflected in Consolidated  Statement of Operations for the six months ended June
30, 2002. The $53 million of goodwill at Energy Technologies and the $27 million
of  goodwill at Tanir Bavi as of December  31, 2001 has been  reclassified  into
Current Assets of Discontinued  Operations on our  Consolidated  Balance Sheets.
For further detail regarding the goodwill impairments at Energy Technologies and
Tanir Bavi, see Note 3. Discontinued Operations.

As of June 30, 2002, the remaining  carrying value of goodwill was $447 million,
of which $441 million was recorded in connection  with Global's  acquisitions of
Sociedad Austral de Electricidad S.A. (SAESA) and Empresa de Electricidad de los
Andes  S.A.  (Electroandes)  in Chile and Peru in August and  December  of 2001,
respectively.  For the year ended  December 31, 2001, the  amortization  expense
related to goodwill was $3 million.

As of June 30, 2002,  our pro-rata share of the remaining  goodwill  included in
equity method  investees  totaled $300 million.  In  accordance  with  generally
accepted accounting principles, such goodwill is not consolidated on our balance
sheet.  Our share of the  amortization  expense  related to such goodwill was $8
million for the year-ended December 31, 2001.


                                       14
<PAGE>

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                            PSEG ENERGY HOLDINGS INC.
================================================================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of June 30, 2002 and December 31,  2001,  our goodwill and pro-rata  share of
goodwill in equity method investees was as follows:

                                                           As of
                                              June 30, 2002    December 31, 2001
                                              -------------    -----------------
Global                                              (Millions of Dollars)
   SAESA .................................        $315               $315
   EDEERSA(1) ............................          --                 63
   Electroandes (2) ......................         126                164
   ELCHO .................................           6                  6
                                                  -----------------------
         Total Consolidated Goodwill .....         447                548
Global
   RGE (3) ...............................          75                142
   Chilquinta (4) ........................         166                174
   Luz del Sur ...........................          34                 34
   Kalaeloa ..............................          25                 25
                                                  -----------------------
     Pro-Rata Share of Equity
       Investment Goodwill ...............         300                375
                                                  -----------------------
         Total Goodwill ..................        $747               $923
                                                  =======================

(1)   The decrease at EDEERSA relates to an impairment of $56 million under SFAS
      142 and to purchase  price  adjustments  of $7 million made  subsequent to
      December 31, 2001 that  resulted in  reduction  in the  carrying  value of
      goodwill from $63 million to $56 million.

(2)   The decrease at Electroandes  relates to purchase price  adjustments  made
      subsequent to December 31, 2001 which  resulted in higher value  allocated
      to Property, Plant and Equipment.

(3)   The decrease at RGE relates to an impairment of $50 million under SFAS 142
      and $17 million for the devaluation of the Brazilian Real.

(4)   The decrease at Chilquinta relates to the devaluation of the Chilean Peso.


                                       15
<PAGE>

================================================================================
                            PSEG ENERGY HOLDINGS INC.
================================================================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 5. Income Taxes

We file a consolidated Federal income tax return with PSEG. We have entered into
tax  allocation  agreements  with PSEG which provide that we will record our tax
liabilities  as though we were  filing  separate  returns  and will  record  tax
benefits to the extent  that PSEG is able to receive  those  benefits.  Deferred
income taxes are provided for the temporary differences between book and taxable
income, resulting primarily from the use of revenue recognition under the equity
method  of  accounting  for  book  purposes,  as well as the use of  accelerated
depreciation  for tax purposes and the recognition of fair value  accounting for
book purposes.  We defer and amortize investment and energy tax credits over the
lives  of the  related  properties.  Our  effective  tax rate  differs  from the
statutory  Federal  income tax rate of 35%  primarily  due to the  imposition of
state  taxes  and  the  fact  that  Global  accounts  for  many  of its  foreign
investments using the equity method of accounting. Under such accounting method,
Global  reflects in revenues its pro-rata share of the  investment's  net income
and the foreign  income taxes are a component  of our equity in earnings  rather
than included as a component of our income tax provision.

A tax  (benefit)  expense  has  been  recorded  for the  results  of  continuing
operations. An analysis of that (benefit) expense is as follows:

<TABLE>
<CAPTION>
                                                                              Quarter Ended                    Six Months Ended
                                                                                 June 30,                           June 30,
                                                                          ----------------------            ----------------------
                                                                          2002             2001             2002             2001
                                                                          --------------------------------------------------------
                                                                                          (Millions of Dollars)
<S>                                                                       <C>              <C>              <C>              <C>
Pre-Tax (Loss) Income ..........................................          $(491)           $  30            $(487)           $  99

Tax Computed at the Federal Statutory Rate @ 35% ...............           (172)              11             (170)              35

Increases (decreases) from Federal statutory
rate attributable to:
    State Income Taxes after Federal Benefit ...................             --                2                1                4
    Rate Differential of Foreign Operations ....................             (6)              (5)              (8)             (17)
    Other ......................................................              1               (3)              --               (4)
                                                                          --------------------------------------------------------
Total Income Tax (Benefit) Expense .............................          $(177)           $   5            $(177)           $  18
                                                                          --------------------------------------------------------

      Effective Income Tax Rate ................................          (36.0)%           15.0%           (36.4)%           17.8%
</TABLE>

In connection  with the  write-down of our Argentine  assets,  certain  goodwill
impairments,  and impairment  charges associated with our decision to exit Tanir
Bavi and the businesses of Energy Technologies, we recorded a deferred tax asset
of $269 million.  The deferred tax asset is reflected as a reduction of deferred
tax liability on our Consolidated  Balance Sheets.  We reviewed the deferred tax
asset for recoverability, and determined a valuation allowance was not required.

Note 6. Financial Instruments and Risk Management

Our  operations  are exposed to market risks from  changes in commodity  prices,
foreign  currency  exchange  rates,  interest rates and equity prices that could
affect our results of operations and financial condition. We manage our exposure
to these market risks through our regular  operating  and  financing  activities
and,  when deemed  appropriate,  hedge these risks through the use of derivative
financial  instruments.  We use the term "hedge" to mean a strategy  designed to
manage  risks of  volatility  in prices or rate  movements  on  certain  assets,
liabilities or anticipated  transactions and by creating a relationship in which
gains or losses on derivative  instruments  are expected to  counterbalance  the
losses or gains on the assets,  liabilities or anticipated  transactions exposed
to such market risks.


                                       16
<PAGE>

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                            PSEG ENERGY HOLDINGS INC.
================================================================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

We use  derivative  financial  instruments  as risk  management  tools which are
consistent  with our business plans and prudent  business  practices and not for
speculative purposes.

The notional  amounts of derivatives do not represent  amounts  exchanged by the
parties  and,  thus,  are  not a  measure  of our  exposure  through  our use of
derivatives.

Equity Securities

Resources  has  investments  in  equity  securities  and  limited  partnerships.
Resources  carries its partnership  investments in certain capital and leveraged
buyout funds  investing in securities at fair value where market  quotations and
an  established  liquid  market of  underlying  securities  in the portfolio are
available.  Consequently, the carrying value of these investments is affected by
changes in the fair value of the underlying securities. Fair value is determined
by  adjusting  the  market  value of the  securities  for  liquidity  and market
volatility  factors,  where  appropriate.  For investments  where there is not a
liquid market,  Resources  relies on the investment fund manager to determine if
the fund has  experienced  an other than  temporary  impairment for which a loss
would need to be  recorded.  During the three month  period ended June 30, 2002,
Resources  recognized such a loss of approximately  $26 million pre-tax which is
included  in Net  Losses on  Investments.  As of June 30,  2002,  Resources  had
investments in leveraged buyout funds of approximately $90 million, of which $21
million was comprised of public  securities with available market prices and $69
million were private investments. Comparably, as of December 31, 2001, Resources
had  investments in leveraged  buyout funds of  approximately  $130 million,  of
which $35 million was  comprised  of public  securities  with  available  market
prices and $95 million were private investments.

Foreign Currencies

We conduct our  business on a  multinational  basis in a wide variety of foreign
currencies.  Our objective for foreign  currency  risk  management  policy is to
preserve  the  economic  value of cash  flows in  currencies  other  than the US
Dollar. Our policy is to hedge significant probable future cash flows identified
as  subject  to  significant  foreign  currency  variability.  In  addition,  we
typically hedge a portion of our exposure resulting from identified  anticipated
cash  flows,   providing  the  flexibility  to  deal  with  the  variability  of
longer-term  forecasts as well as changing market conditions,  in which the cost
of hedging may be excessive relative to the level of risk involved.  Our foreign
currency   hedging   activities  to  date  include  hedges  of  US  Dollar  debt
arrangements in operating  companies that conduct  business in currencies  other
than the US Dollar  and  purchase  of  options  to limit  downside  on  earnings
translation.


                                       17
<PAGE>

================================================================================
                            PSEG ENERGY HOLDINGS INC.
================================================================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As  of  June  30,  2002,  Global  and  Resources  had  international  assets  of
approximately  $2.870  billion  and $1.425  billion,  respectively.  For further
analysis of our  international  assets,  see Note 8.  Financial  Information  by
Business Segments.

Resources'  international  investments are primarily  leveraged leases of assets
located in Austria,  Australia,  Belgium,  China, Germany, the Netherlands,  New
Zealand  and the United  Kingdom  with  associated  revenues  denominated  in US
Dollars and therefore, not subject to foreign currency risk.

Global's international  investments are primarily in projects that presently, or
are expected to, generate or distribute  electricity in, Brazil,  Chile,  China,
India, Italy, Oman, Peru, Poland,  Taiwan,  Tunisia and Venezuela.  Investing in
foreign countries  involves certain additional risks.  Economic  conditions that
result in higher  comparative rates of inflation in foreign countries are likely
to result in  declining  values in such  countries'  currencies.  As  currencies
fluctuate  against the US Dollar,  there is a  corresponding  change in Global's
investment  value in terms of the US  Dollar.  Such  change is  reflected  as an
increase or  decrease in the  investment  value and Other  Comprehensive  (Loss)
Income  (OCI),  as part of the  cumulative  translation  adjustment,  a separate
component of  Stockholder's  Equity.  As of June 30, 2002, net foreign  currency
devaluations have reduced the reported amount of our total Stockholder's  Equity
by $276  million,  of which $184  million  and $84  million  were  caused by the
devaluation  of the Brazilian Real and the Chilean Peso,  respectively.  For the
net foreign currency  devaluations for the quarter and six months ended June 30,
2002 and 2001, see Note 9. Comprehensive Income.

In May 2002, Energy Holdings purchased foreign currency call options in order to
hedge its average 2002 earnings  denominated in Brazilian  Reais and in Peruvian
Nuevo Sols for the remainder of 2002.  As of June 30, 2002,  there were six call
options  outstanding  on the Brazilian  Real, one expiring in each month through
December 2002. The aggregate notional value of these contracts was approximately
$17 million as of June 30, 2002.  The fair value of those options as of June 30,
2002 was $1 million. In addition, there were six call options outstanding on the
Peruvian  Nuevo Sol,  one  expiring in each month  through  December  2002.  The
aggregate  notional value of these contracts was approximately $48 million as of
June  30,  2002.  The  fair  value of  those  options  as of June  30,  2002 was
negligible. These options are not considered hedges for accounting purposes and,
as a result, changes in their fair value are recorded directly to earnings.

The fair value of foreign currency derivatives, designated and effective as cash
flow hedges, are initially recorded in OCI. Reclassification of unrealized gains
or losses on cash flow hedges of  variable-rate  debt  instruments from OCI into
earnings occurs as payments are made on the derivative instruments and generally
offsets the change in the value of the hedged item. We estimate reclassifying $1
million of  foreign  exchange  gains from  foreign  currency  cash flow  hedges,
including our pro-rata share from our equity method  investees,  from OCI to our
Consolidated  Statements of Operations over the next 12 months.  For the quarter
and six  months  ended  June 30,  2002,  losses  of less  than $1  million  were
transferred from OCI to our Consolidated Statements of Operations.

Interest Rates

We are subject to the risk of fluctuating interest rates in the normal course of
business.  Our policy is to manage  interest  rate risk through the use of fixed
rate debt,  floating rate debt and interest  rate swaps.  As of June 30, 2002, a
hypothetical  10% change in market  interest  rates would result in a $4 million
change in annual  interest  costs  related to our  short-term  and floating rate
debt.


                                       18
<PAGE>

================================================================================
                            PSEG ENERGY HOLDINGS INC.
================================================================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

We  construct  a  hypothetical  swap to  mirror  all the  critical  terms of the
underlying debt and utilize  regression  analysis to assess the effectiveness of
the actual swap at inception and on an ongoing  basis.  The  assessment  will be
done periodically to ensure the swaps continue to be effective.  PSEG determines
the fair value of interest rate swaps through counterparty valuations,  internal
valuations  and the  Bloomberg  swap  valuation  function.  There  have  been no
material  changes in the  techniques or models used in the valuation of interest
rate swaps during the periods presented. There is minimal impact of counterparty
credit risk the fair value of the hedges  since our  policies  require  that our
counterparties have investment grade credit ratings.

We have  entered into  interest  rate swaps to lock in fixed  interest  rates on
certain of our construction  loans to hedge forecasted future interest payments.
We  have  elected  to  use  the  Hypothetical   Derivative   Method  to  measure
ineffectiveness of the hedges as described under Derivative Implementation Group
(DIG) Issue No. G7.

Ineffectiveness  may occur if the actual draw down of the debt and the  notional
amount of the swap during the  construction  phase are different.  The amount of
ineffectiveness,  if any, is  recorded  in earnings at the end of the  reporting
period.  The impact of  ineffectiveness  on net income should be minimal because
the  interest  rate  swaps  and the  underlying  debt  are  indexed  to the same
benchmark interest rate. Therefore, interest rate fluctuations should be offset.

Global is  constructing  electric  generation  facilities  in Oman,  Poland  and
Tunisia.  The operating companies of these facilities have entered into interest
rate  swaps  to lock in  fixed  interest  rates  on up to  $650  million  of its
construction  loans.  Such interest rate swaps hedge the value of the cash flows
of future interest  payments.  The gross notional amounts,  interest rates, fair
values and  impacts to  Accumulated  OCI as of June 30,  2002 are listed  below.
Global  currently  owns 81%,  55%,  and 60% of the Oman,  Polish,  and  Tunisian
investments, respectively:

<TABLE>
<CAPTION>
                                                      Oman                       Poland                           Tunisia
                                                    --------          ---------------------------         -----------------------
                                                      US $              US $         Polish Zloty           US $           Euro
                                                    Tranche           Tranche           Tranche           Tranche         Tranche
                                                    --------          -------        ------------         -------         -------
                                                                     (Millions of Dollars, where applicable)
<S>                                                  <C>               <C>               <C>               <C>             <C>
Notional Amount ..........................           $  70             $ 127             $  57             $  57           $  72
Pay Rate .................................             6.3%              8.4%             13.2%              7.0%            5.2%
Receive Rate .............................           LIBOR             LIBOR             WIBOR*            LIBOR          EURIBOR**
Fair Value ...............................           $ (11)            $ (38)            $ (30)            $  (5)          $  (2)
Balance in Accumulated OCI ...............           $   6             $  13             $  10             $   2           $   1
Percent Ownership ........................              81%               55%               55%               60%             60%
Maturity .................................            2018              2010              2010              2009            2009
</TABLE>

 *    WIBOR- Warsaw Inter-Bank Offered Rate

**    EURIBOR-Euro Area Inter-Bank Offered Rate

The  ineffective  portion  of  these  interest  rate  swaps is  recorded  in our
Consolidated  Statements of Operations.  During the quarter and six months ended
June  30,  2002,  Global  recorded  a loss and a gain of less  than $1  million,
respectively,  after taxes and minority interest,  due to the ineffectiveness of
such interest rate swaps.

Global holds investments in various  generation  facilities in the United States
that are accounted for under the equity method of accounting and, therefore, are
not consolidated in Global's financial  statements.  Global holds a 50% indirect
ownership in two investments  located in Texas and a 50% direct ownership in one
investment  in  Hawaii  (collectively  the  investees),  which  hold  US  Dollar
denominated debt with variable  interest  payments tied to LIBOR rates. In order
to lock in fixed  interest  rates on such debt,  the investees each entered into
interest  rate  swaps to hedge  the  value  of the  cash  flows of their  future
interest payments.  As of June 30, 2002, the aggregate notional balance of these
swaps was $312 million  (Global's share was $156 million),  the weighted average
fixed interest rate paid was 6.9% and Global's share of the aggregate fair value
of these swaps was a liability of $12 million.  These swaps were  designated  as
hedges for  accounting  purposes and, as a result,  changes in the fair value of
the hedge were recorded in OCI.

The fair value of interest  rate swaps,  designated  and  effective as cash flow
hedges, are initially recorded in OCI.  Reclassification  of unrealized gains or
losses  on cash flow  hedges of  variable-rate  debt  instruments  from OCI into
earnings  occurs as interest  payments  are accrued on the debt  instrument  and
generally offsets the change in the interest accrued on the underlying  variable
rate debt. We estimate reclassifying $7 million of losses from cash flow hedges,
including our pro-rata share from our equity method  investees,  from OCI to our
Consolidated  Statements of Operations over the next 12 months.  For the quarter
and six months  ended June 30,  2002,  losses of $1 million and $3 million  were
reclassified from OCI to our Consolidated Statements of Operations.


                                       19
<PAGE>

================================================================================
                            PSEG ENERGY HOLDINGS INC.
================================================================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Valuation of Senior Notes

Based on the  borrowing  rates  currently  available to us for debt with similar
terms and  remaining  maturities,  the fair value of our  long-term  debt was as
follows:

                                                      June 30, 2002
                                              ------------------------------
                                              Carrying Amount     Fair Value
                                              ---------------     ----------
                                                    (Millions of Dollars)
Senior Notes -- Energy Holdings.........          $1,779            $1,670

As of July 22, 2002,  the fair value of the Senior Notes of Energy  Holdings had
further declined in value to an estimated fair value of $1.247 billion. The fair
value of the Senior Notes is based on information obtained from market sources.

Energy Technologies

In April 2002, Energy  Technologies  entered into two interest rate caps with an
aggregate notional of approximately $5 million to hedge project related floating
rate  financings  entered  into in the second  quarter of 2002.  These caps were
entered  into  to  protect  against  benchmark  interest  rate  fluctuations  in
accordance with its risk management policy guidelines.  As of June 30, 2002, the
fair value of the caps was immaterial.

Credit Risk

Credit  risk  relates  to the risk of loss  that we would  incur as a result  of
nonperformance  by  counterparties,  pursuant to the terms of their  contractual
obligations.  We have established credit policies that we believe  significantly
minimize our exposure to credit risk.  These  policies  include an evaluation of
potential counterparties' financial condition, including credit ratings.

Note 7. Commitments and Contingencies

Argentine Economic Crisis

Global has certain  contingent  obligations  that are likely to occur if certain
projects  in  Argentina  continue  to  default  on their  debt  and  performance
obligations.  The estimated  amount to cover this exposure is $7 million and has
been recorded as a component of general and administrative  operating  expenses.
For  EDELAP,  Global has a standby  equity  agreement  to  contribute  equity in
support of unpaid  interest and US tax  liabilities to its borrower  subsidiary.
Global's  obligation  and  reimbursement  of payments  made on its behalf  could
amount to $2 million related to this project loan. Global's Chilean distribution
company,  SAESA, has guaranteed performance  obligations of its subsidiary which
operates  in  Argentina  in the amount of  approximately  $4  million.  Finally,
Global's  contingency  includes $1 million of likely costs related to defense of
anticipated legal actions which may be taken against PSEG companies or directors
and officers of its Argentine operations.

Under  certain  circumstances,  Global  could be  obligated  to settle its share
(approximately  $26  million)  of a  project  loan for  EDELAP  should it or the
majority  owner of the  project,  take  certain  actions  including  forcing  or
permitting  certain  loan  parties  to  declare  bankruptcy.  In  addition,  the
guarantee  can be triggered by  transferring  the shares of certain loan parties
without  lender  consent.  Breach  of this  transfer  covenant  can be  cured by
delivering  certain pledge agreements  relating to the ownership of loan parties
to the lenders.  Global could also be liable for any incremental  direct damages
arising from the breach of these covenants.  Given the likely cure of any breach
by the project sponsors,  such a contingent  obligation has a low probability of
being  triggered,  and therefore no provision has been made in our  Consolidated
Financial Statements.


                                       20
<PAGE>

================================================================================
                            PSEG ENERGY HOLDINGS INC.
================================================================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SAESA has guaranteed its share of a $35 million debt  obligation for a 50% owned
affiliate in Argentina, Edersa. This obligation was recorded on our Consolidated
Balance  Sheets as it was  considered  in the  valuation of SAESA at the date of
purchase in August 2001. SAESA needs a waiver from lenders in existing financing
agreements to invest the funds to repay the obligation.  We believe such waivers
are likely to be secured.  In the event SAESA is not able to obtain the required
waiver and could not raise the necessary funds, Global may be required to make a
$35 million equity  contribution  to SAESA to repay the  obligation.  Since this
obligation  has  been  previously  recorded,  there  will  be no  impact  to our
Consolidated Statement of Operations if the transaction is funded.

Default in  non-recourse  project  finance does not  cross-default  to any other
credit  agreements of Energy Holdings.  In cases where Energy Holdings or Global
has guaranteed obligations,  default under the project finance agreements may be
accelerated if the project is in default. In June 2002 the Administrative  Agent
for the EDELAP  project  loan  notified  Global that the loan was in default and
Global  paid $2 million  in Sponsor  guarantees  that were due.  This  amount is
included in the $632 million of Argentine  investment exposure that was impaired
and recorded in the Consolidated Statement of Operations.

      Global

As of June 30, 2002,  Energy  Holdings had $50 million,  or less than 1%, of our
assets  invested in the Turboven  generation  facilities,  located in Venezuela.
Recently,  Venezuela has been subject to a loss of capital as the country's debt
has been subject to a credit rating downgrade.  In February 2002, the government
of  Venezuela  abandoned  its crawling  currency peg and allowed the  Venezuelan
Bolivar to float freely with the US Dollar.  The Bolivar devalued  approximately
45% since  year-end 2001 from 758 Bolivars to 1 US Dollar to 1,386 Bolivars to 1
US Dollar as of June 30, 2002. The Turboven power purchase contracts are indexed
to the US Dollar as are the fuel supply costs.  This implies that,  with respect
to power  purchase  contracts,  a  devaluation  will not  impact the level of US
Dollar revenues realized. Our near term income statement exposure relates to our
net monetary  position in  Bolivars.  Since  Turboven is a US Dollar  functional
entity,  any receivables and payables that are not indexed to the US Dollar must
be re-measured to the US Dollar. The impact of the re-measurement is recorded as
a loss  or  gain  to our  Consolidated  Statements  of  Operations.  The  recent
devaluation  of the  Bolivar  did not  have a  material  adverse  impact  on our
financial position, results of operations or net cash flows.

In May 2001, GWF Energy LLC (GWF Energy),  a 50/50 joint venture  between Global
and Harbinger GWF LLC,  entered into a ten year power purchase  agreement  (PPA)
with the California  Department of Water  Resources  (CDWR) to provide 340 MW of
electric capacity to California from three new natural gas-fired peaking plants,
the Hanford, Henrietta and Tracy Peaking Plants. Total project cost is estimated
at approximately $335 million. The Hanford Peaking Plant, a 95 MW facility,  was
completed and began operation in August 2001. The Henrietta  Peaking Plant, also
a 95 MW facility,  was completed and began operation in June 2002, and the Tracy
Peaking  Plant, a 160 MW facility,  received the permits  necessary to allow the
start of  construction  on July 17,  2002  following  significant  delays in the
permitting process.  This late receipt of the Tracy Peaking Plant's permits does
not  allow  sufficient  time to  complete  construction  before  the  commercial
operations  date  deadline of October  31,  2002 under the PPA. On February  28,
2002, GWF Energy  asserted a force majeure claim under the provisions of the PPA
for an appropriate extension of the deadline.

On April 24,  2002,  GWF Energy  received  notice  from the CDWR  rejecting  GWF
Energy's force majeure claim. GWF Energy is in substantive negotiations with the
CDWR over this matter.  We and Global are evaluating the  appropriate  course of
action to protect GWF  Energy's  rights under the CDWR PPA.  Global's  permanent
equity investment in these plants, including  contingencies,  is not expected to
exceed $100 million after  completion of project  financing,  which is currently
expected  to occur in late  2002 or in 2003.  In the  event  financing  does not
occur,  our investment in this facility could increase to the full amount of the
project  costs,  noted above.  For a  description  of turbine  loans and working
capital loans from Global to GWF Energy pending completion of project financing,
see Note 10. Related-Party Transactions.

On February 25, 2002, the Public Utilities Commission of the State of California
(CPUC) and the State of California  Electricity Oversight Board filed complaints
with FERC under Section 206 of the Federal Power Act against  certain


                                       21
<PAGE>

================================================================================
                            PSEG ENERGY HOLDINGS INC.
================================================================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

sellers of electricity,  which, pursuant to long-term FERC authorized contracts,
provide  power  to  the  CDWR.  GWF  Energy  is  a  named  respondent  in  these
proceedings.  The complaints allege that, collectively,  the specified long-term
wholesale  power  contracts  are  priced at unjust and  unreasonable  levels and
request FERC to abrogate  the  contracts  to enable the State of  California  to
obtain replacement  contracts as necessary or in the alternative,  to reform the
contracts to provide for just and reasonable  pricing,  reduce the length of the
contracts and strike from the contracts the specific non-price  conditions found
to be unjust and unreasonable.  On April 25, 2002, FERC consolidated the matters
and set the contracts of GWF Energy and certain other respondents, including the
ten-year PPA, for hearing. FERC determined that the GWF contract,  among others,
was  entitled to  presumption  of validity,  requiring  the CPUC to prove it was
"against the public  interest."  FERC also  strongly  encouraged  the parties to
negotiate settlements and directed a settlement judge to be appointed to oversee
such  negotiations.  GWF Energy has entered  into,  and  continues to engage in,
substantive negotiations with representatives of the State of California,  under
oversight of the FERC  settlement  judge,  in an attempt to resolve  differences
between the parties.  We cannot predict the outcome of this matter or its impact
on our financial position, results of operations and net cash flows.

In January 2002, Global completed  negotiations to buy a 35% interest in the 590
MW  (electric)  and 618 MW  (thermal)  coal-fired  Skawina CHP Plant  (Skawina),
located  in Poland  and in June 2002  completed  negotiations  to  increase  its
ownership interest to approximately 50%. The transaction includes the obligation
to  purchase  additional  shares  in 2003  that will  bring  Global's  aggregate
interest in Skawina to approximately 75%. Skawina supplies  electricity to three
local distribution companies and heat mainly to the city of Krakow, under annual
one-year  contracts.  The  sale  is  part  of  the  Polish  Government's  energy
privatization  program.  Global has  expended  $31  million  during 2002 for its
approximately 50% ownership interest and the total equity investment is expected
to be approximately $44 million.

Global owns a 60% interest in Carthage  Power Company  (CPC), a 471 MW gas-fired
combined-cycle  electric generation facility located in Rades,  Tunisia. CPC has
entered  into a  20-year  power  purchase  contract  for the sale of 100% of the
output to Societe  Tunisienne de l' Electricite  et du Gaz (STEG).  The contract
called for the plant to be  operational  by November 24, 2001,  however,  due to
delays in construction,  this deadline was not met. STEG has declared that it is
entitled to liquidated  damages at the rate of $67 thousand a day since November
24, 2001 in accordance  with the terms of the power  purchase  contract.  CPC is
contesting  STEG's claim and the two parties are currently under  negotiation to
settle this dispute. The facility was built by Alstom Centrales Energetiques SA,
(Alstom)  an  independent  contractor,   who  was  also  obligated  to  complete
construction by November 24, 2001. CPC believes it is entitled to  reimbursement
from  Alstom  for  damages  owed to STEG  resulting  from  construction  delays,
however, no assurances can be given.

We, and/or Global have guaranteed  certain  obligations of Global's  affiliates,
including the successful completion, performance or other obligations related to
certain of the projects in an aggregate amount of approximately  $190 million as
of June 30, 2002. The guarantees  consist of a $61 million equity commitment for
Elektrocieplownia  Chorzow Sp. Z o.o. (ELCHO) in Poland,  $56 million of various
guarantees for Dhofar Power Company in Oman, a $25 million  guarantee related to
bond payment  obligations  of Chilquinta  Energia  Finance Co. LLC in connection
with  electric  distribution  companies  in Chile and Peru,  and  various  other
guarantees  comprising the remaining $48 million. A substantial  portion of such
guarantees  is  cancelled  upon  successful   completion,   performance   and/or
refinancing of construction debt with non-recourse project debt.

We and our equity method investees are involved in various legal actions arising
in the normal course of business. We do not expect that there will be a material
adverse  effect on our financial  condition,  results of operations and net cash
flows as a result of these proceedings, although no assurances can be given.

      Energy Technologies

In the normal  course of  business,  Energy  Technologies  secures  construction
obligations with performance bonds issued by insurance  companies.  In the event
that Energy Technologies'  tangible equity falls below $100 million, we would be
required to provide  additional  support  for the  performance  bonds.  Tangible
equity is defined as net  equity  less  goodwill.  As of June 30,  2002,  Energy
Technologies'  tangible  equity  was $106  million.  Energy  Holdings  is in


                                       22
<PAGE>

================================================================================
                            PSEG ENERGY HOLDINGS INC.
================================================================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

the process of negotiating  alternate  support  arrangements  with bond issuers,
including an  indemnification  agreement,  which is likely to be executed in the
near future. As of June 30, 2002,  Energy  Technologies had $206 million of such
bonds  outstanding,  of which $71  million  was at risk in ongoing  construction
projects. Energy Holdings expects to reduce this amount over time as part of its
exit from this  business.  The  performance  bonds are not  included in the $190
million of guaranteed  obligations,  discussed above. No assurances can be given
that Energy Holdings will be successful in extinguishing these obligations.


                                       23
<PAGE>

================================================================================
                            PSEG ENERGY HOLDINGS INC.
================================================================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 8. Financial Information by Business Segments

Information  related to the  segments of Energy  Holdings'  business is detailed
below:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                           Energy                       Consolidated
                                                         Global          Resources      Technologies      Other (A)         Total
                                                         ------          ---------      ------------      ---------     ------------
                                                                                     (Millions of Dollars)
<S>                                                     <C>              <C>              <C>              <C>              <C>
For the Quarter Ended
June 30, 2002:
Total Operating Revenues ......................         $   134          $    26          $    --          $    --          $   160
Loss from Discontinued Operations
  (including loss on disposal) ................         $   (12)         $    --          $   (25)         $    --          $   (37)
Segment (Loss) Earnings Available
  to PSEG .....................................         $  (321)         $    (5)         $   (26)         $    --          $  (352)

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

For the Quarter Ended
June 30, 2001:
Total Operating Revenues ......................         $    37          $    51          $    --          $    --          $    88
Loss from Discontinued Operations
  (including loss on disposal) ................         $     1          $    --          $    (9)         $    --          $    (8)
Segment Earnings (Loss) Available
  to PSEG .....................................         $     4          $    14          $    (9)         $     3          $    12

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

For the Six Months Ended
June 30, 2002:
Total Operating Revenues ......................         $   241          $    78          $    --          $     1          $   320
Loss from Discontinued Operations
  (including loss on disposal) ................         $    (9)         $    --          $   (28)         $    --          $   (37)
Cumulative Effect of a Change in
  Accounting Principle ........................         $   (88)         $    --          $   (32)         $    --          $  (120)
Segment (Loss) Earnings Available
  to PSEG .....................................         $  (419)         $     9          $   (61)         $    (2)         $  (473)

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

For the Six Months Ended
June 30, 2001:
Total Operating Revenues ......................         $   126          $    84          $    --          $    --          $   210
Loss from Discontinued Operations
  (including loss on disposal) ................         $    --          $    --          $   (11)         $    --          $   (11)
Extraordinary Loss on
  Early Retirement of Debt ....................         $    (2)         $    --          $    --          $    --          $    (2)
Cumulative Effect of a Change in
  Accounting Principle ........................         $     9          $    --          $    --          $    --          $     9
Segment Earnings (Loss) Available
  to PSEG .....................................         $    59          $    17          $   (12)         $     2          $    66

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

As of June 30, 2002:
Total Assets ..................................         $ 3,567          $ 3,144          $   227          $     5          $ 6,943

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

As of December 31, 2001:
Total Assets ..................................         $ 4,074          $ 3,026          $   290          $    49          $ 7,439

------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(A)   Other  activities  include amounts  applicable to Energy Holdings  (parent
      corporation),  Enterprise  Group  Development  Corporation,  PSEG  Capital
      Corporation and intercompany eliminations.


                                       24
<PAGE>

================================================================================
                            PSEG ENERGY HOLDINGS INC.
================================================================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Geographic information for Energy Holdings is disclosed below:

<TABLE>
<CAPTION>
                                                                Revenues (1)                               Identifiable Assets (2)
                                         ---------------------------------------------------------       --------------------------
                                              Quarter Ended                  Six Months Ended
                                                 June 30,                          June 30,
                                         -----------------------           -----------------------        June 30,      December 31,
                                          2002             2001             2002             2001           2002            2001
                                         ------           ------           ------           ------        --------      -----------
                                                                           (Millions of Dollars)
<S>                                      <C>              <C>              <C>              <C>            <C>             <C>
United States ................           $   48           $   40           $   82           $  111         $2,648          $2,675
Foreign Countries ............              112               48              238               99          4,295           4,764
                                         ------           ------           ------           ------         ------          ------
     Total ...................           $  160           $   88           $  320           $  210         $6,943          $7,439
                                         ------           ------           ------           ------         ------          ------

Assets in foreign countries include:
   Chile .....................................................................................             $  996          $  880
   Netherlands ...............................................................................                954             911
   Argentina .................................................................................                 --             737
   Peru ......................................................................................                445             520
   Tunisia ...................................................................................                277             245
   India(3) ..................................................................................                271             288
   Poland ....................................................................................                252             166
   Brazil ....................................................................................                228             282
   Other .....................................................................................                872             735
                                                                                                           ------          ------
      Total ..................................................................................             $4,295          $4,764
                                                                                                           ======          ======
</TABLE>

(1)   Revenues  are  attributed  to  countries  based  on the  locations  of the
      investments.

(2)   Assets are  comprised  of  investment  in  corporate  joint  ventures  and
      partnerships  that are accounted for under the equity method and companies
      in  which  we  have a  controlling  interest  for  which  the  assets  are
      consolidated on our financial statements. Amount is net of pre-tax foreign
      currency  translation  adjustment  of $306  million and $283 million as of
      June 30, 2002, and December 31, 2001, respectively.

(3)   $230 million and $253 million relates to our Tanir Bavi operations,  as of
      June 30, 2002 and December 31, 2001, respectively.  For description of the
      discontinued   operations  of  Tanir  Bavi,   see  Note  3.   Discontinued
      Operations.

The table below  reflects our investment  exposure in Latin American  countries,
through Global:

<TABLE>
<CAPTION>
                                                                                                             Investment Exposure
                                                                                                          -------------------------
                                                                                                          June 30,      December 31,
                                                                                                            2002            2001
                                                                                                          --------      -----------
                                                                                                             (Millions of Dollars)
<S>                                                                                                          <C>             <C>
   Argentina .................................................................................               $ --            $632
   Brazil ....................................................................................                430             467
   Chile .....................................................................................                536             542
   Peru ......................................................................................                431             387
   Venezuela .................................................................................                 51              53
</TABLE>

The  investment  exposure  consists  of invested  equity plus equity  commitment
guarantees.


                                       25
<PAGE>

================================================================================
                            PSEG ENERGY HOLDINGS INC.
================================================================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 9. Comprehensive (Loss) Income

<TABLE>
<CAPTION>
                                                                             Quarter Ended                     Six Months Ended
                                                                                June 30,                            June 30,
                                                                        -----------------------             -----------------------
                                                                         2002              2001              2002              2001
                                                                        -----             -----             -----             -----
                                                                                          (Millions of Dollars)
<S>                                                                     <C>               <C>               <C>               <C>
Net (Loss) Income ..........................................            $(347)            $  17             $(462)            $  77
Foreign currency translation adjustments (A) ...............              (19)              (36)              (86)              (38)
  Reclassification adjustment for losses
    included in net income .................................               63                --                69                --
Cumulative effect of a change in accounting
   principle (net of tax of $14 and minority
   interest of $12) ........................................               --                --                --               (15)
Current period declines in fair value of
  derivative instruments-net (B) ...........................              (12)               --               (25)               (1)
  Reclassification adjustment for losses
    included in net income .................................                2                --                 4                --
                                                                        -----             -----             -----             -----
Comprehensive (Loss) Income ................................            $(313)            $ (19)            $(500)            $  23
                                                                        =====             =====             =====             =====
</TABLE>

(A)   Net of tax of $29 million and $4 million for the  quarters  ended June 30,
      2002 and 2001,  respectively,  and $39  million and $4 million for the six
      months ended June 30, 2002 and 2001, respectively.

(B)   Net of tax and  minority  interest  of $20 million and $26 million for the
      quarter and six months ended June 30, 2002, respectively.

Note 10. Related-Party Transactions

Administrative Costs

PSEG Services Corporation (Services) provides and bills administrative  services
to us on a monthly  basis.  Our costs related to such  services  amounted to $10
million for the six months ended June 30, 2002.

Additional Paid-in Capital

For the six months ended June 30, 2002, PSEG invested $200 million of additional
equity in us, the proceeds of which were used to repay  short-term debt and fund
additional investments at Global.

Loans to TIE

In April  1999,  Global  and its  partner,  Panda  Energy  International,  Inc.,
established  Texas  Independent  Energy,  L.P. (TIE), a 50/50 joint venture,  to
develop, construct, own, and operate electric generation facilities in Texas. As
of June  30,  2002  and  December  31,  2001,  Global's  investments  in the TIE
partnership  include $75 million and $165 million,  respectively,  of loans that
earn  interest at an annual rate of 12% that are  expected to be repaid over the
next 10 years.

Loans to GWF Energy

In May 2001, GWF Energy,  a 50/50 joint venture between Global and Harbinger GWF
LLC,  entered  into a 10-year  PPA with the DWR to  provide  340 MW of  electric
capacity to California from three new natural  gas-fired peaking plants that GWF
Energy  expects  to build and  operate  in  California.  Total  project  cost is
estimated at approximately $335 million. Global's permanent equity investment in
these plants,  including  contingencies,  is not expected to exceed $100 million
after completion of project  financing,  which is currently expected to occur in
late 2002 or early 2003.  Pending  completion of project  financing,  Global has
provided GWF Energy  approximately  $98 million of


                                       26
<PAGE>

================================================================================
                            PSEG ENERGY HOLDINGS INC.
================================================================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

secured  loans to finance the  purchase  of  turbines.  The  turbine  loans bear
interest  at  rates  ranging  from  12% to 15%  per  annum  and are  payable  in
installments  beginning May 31, 2002, with final maturity no later than December
31, 2002.  Global has also  provided  GWF Energy $52 million of working  capital
loans as of June 30, 2002,  to fund  construction  costs  pending  completion of
project financing. Such loans earn interest at 20% per annum and are convertible
into equity at Global's  option.  For a discussion  of the  commercial  dates of
operation  and issues of the  permitting  process  with  respect to these  three
plants, see Note 7. Commitments and Contingencies.


                                       27
<PAGE>

================================================================================
                            PSEG ENERGY HOLDINGS INC.
================================================================================

                 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
our 2001 Annual  Report on Form 10-K and  Quarterly  Report on Form 10-Q for the
quarter ended March 31, 2002 affecting our consolidated  financial condition and
the results of operations of us and those of our  subsidiaries.  This discussion
refers to our Consolidated  Financial Statements  (Statements) and related Notes
to Consolidated  Financial  Statements (Notes) and should be read in conjunction
with such  Statements and Notes.  Unless the context  otherwise  indicates,  all
references  to "Energy  Holdings",  "we",  "us" or "our" herein mean PSEG Energy
Holdings Inc. and its consolidated subsidiaries.

Overview of the Quarter and Six Months Ended June 30, 2002

Losses to Public Service  Enterprise Group  Incorporated  (PSEG) for the quarter
and six  months  ended  June 30,  2002  were  $352  million  and  $473  million,
respectively.  These results include  after-tax charges of $380 million and $531
million  for the  quarter  and six  months  ended June 30,  2002,  respectively,
related to the asset  impairment  of  investments  in Argentina  and losses from
operations  of  those  impaired  assets,   discontinued   operations  of  Energy
Technologies and a generating facility in India and goodwill impairment charges.
For the six months  ended June 30,  2002,  as a result of  adopting  SFAS 142 on
January 1, 2002, an after-tax  impairment  loss of $120 million was  recognized.
This was recorded as the Cumulative  Effect of a Change in Accounting  Principle
as of the date of adoption. The after-tax charges discussed above are summarized
in the following table:

<TABLE>
<CAPTION>
                                                             Quarter Ended    Six Months Ended
                                                             June 30, 2002     June 30, 2002
                                                             -------------    ----------------
                                                             (Millions of      (Millions of
                                                                Dollars)          Dollars)
                                                             -------------    ----------------
<S>                                                               <C>                <C>
Global
Argentina - EDEERSA and Assets Held for Sale to AES
               Write-down of Investment ...........               $343               $374
               Goodwill impairment ................                 --                 36
                                                                  ----               ----
      Total Argentina .............................                343                410
                                                                  ----               ----
India - Tanir Bavi
               Discontinued Operations ............                 12                  9
               Goodwill impairment ................                 --                 18
                                                                  ----               ----
      Total Tanir Bavi ............................                 12                 27
                                                                  ----               ----
Brazil - RGE
               Goodwill impairment ................                 --                 34
                                                                  ----               ----
SubTotal for Global ...............................                355                471
                                                                  ----               ----
Energy Technologies
               Discontinued Operations ............                 25                 28
               Goodwill impairment ................                 --                 32
                                                                  ----               ----
SubTotal Energy Technologies ......................                 25                 60
                                                                  ----               ----
      Total .......................................               $380               $531
                                                                  ====               ====
</TABLE>

For the quarter and six months ended June 30,  2002,  excluding  these  charges,
Earnings  Available  to PSEG were $28  million  and $58  million,  respectively.
Comparable  earnings for the quarter and six months ended June 30, 2001 were $20
million and $70 million,  respectively. The increase in earnings for the quarter
ended June 30, 2002,  excluding these charges, as compared to the same period in
2001  resulted  primarily  from a gain on withdrawal  from Global's  interest in
Eagle  Point  Cogeneration  Partnership.  This  gain  was  partially  offset  by
unexpected  losses in Resources'  leveraged  buyout  portfolio.  The decrease in
earnings for the six months ended June 30, 2002,  excluding  these  charges,  as
compared to the same period in 2001 resulted primarily from unexpected losses in
Resources' leveraged buyout portfolio.


                                       28
<PAGE>

================================================================================
                            PSEG ENERGY HOLDINGS INC.
================================================================================

See Results of Operations for further analysis.

Future Outlook

We are a part of Public Service  Enterprise Group  Incorporated  (PSEG's) growth
strategy.  In order to achieve this  strategy,  PSEG Global Inc.  (Global)  will
selectively  focus on generation and  distribution  investments  within targeted
high-growth  regions.  PSEG Resources Inc.  (Resources)  will utilize its market
access,  industry knowledge and transaction  structuring  capabilities to expand
its energy-related  financial investment  portfolio.  Resources' assets generate
cash flow and earnings in the near term,  while  investments at Global generally
have a longer time horizon  before  achieving  expected  cash flow and earnings.
Also,  Resources'  passive  lower-risk  assets  serve to balance the higher risk
associated with operating assets at Global.

While  Global  realized  substantial  growth  in  2001,  significant  challenges
developed during the fourth quarter of 2001, and have continued into 2002. These
challenges include the Argentine economic, political and social crisis, the soft
power  market  in  Texas  and  California  (see  Business  Environment),  recent
developments  in India  (see  Note 3.  Discontinued  Operations  of the Notes to
Consolidated  Financial  Statements) and the worldwide economic  downturn.  As a
result,  Global has refocused its strategy from one of accelerated growth to one
that places  emphasis on increasing  the  efficiency and returns of its existing
assets.

In August  2001,  Global  entered  into a stock  purchase  agreement to sell its
minority  interests  in  certain  Argentine  assets  to  its  partner,  the  AES
Corporation  (AES).  As a result of the  continuing  difficulties  in Argentina,
Global has initiated a plan to exit all of its  operations  located in Argentina
and has recorded a combined  $632 million  (pre-tax)  charge to earnings for the
six months  ended June 30, 2002 for the  operating  losses,  asset  impairments,
goodwill  impairment  and certain loss  contingencies  related to the  Argentine
investments.  We completed  our analysis as part of the  implementation  of SFAS
142,  and in  addition  to the $56  million  (pre-tax)  of  goodwill  impairment
recorded  in  connection  with  our  investment  in  Empresa   Distribuidora  de
Electricidad  de Entre Rios S.A  (EDEERSA),  we recorded an additional  goodwill
impairment of $130 million  (pre-tax)  associated  with Rio Grande  Energia S.A.
(RGE),  Energy  Technologies  and Tanir Bavi Power Company  Private Ltd.  (Tanir
Bavi). For further  discussion of the Argentine  economic crisis and the related
losses,   goodwill  impairments,   discontinued  operations  and  certain  other
contingencies,  see Note 3. Discontinued  Operations,  Note 4. Asset Impairments
and Note 7. Commitments and Contingencies of the Notes to Consolidated Financial
Statements.

In  early  2002,  we began to  evaluate  the  future  prospects  of PSEG  Energy
Technologies' (Energy Technologies)  business model and its fit in our portfolio
given the slower pace of retail energy  deregulation  in the markets in which we
are active, as well as, the substandard performance of Energy Technologies since
its  inception.  In June 2002,  we adopted a plan to sell our  interests  in the
businesses in which Energy  Technologies had acquired or developed.  For further
discussion of the discontinued  operations of Energy  Technologies,  see Note 3.
Discontinued Operations of the Notes to Consolidated Financial Statements.

In 2002, we are  expecting to earn $145 million to $155  million,  excluding the
previously  discussed  charges.  For 2003,  we expect  increases  in earnings as
Global,  with its major  risks in  Argentina  and India  behind it,  significant
cost-cutting  measures in place and limited spending planned over the next 18 to
24 months,  expects improvements in earnings through its focus on increasing the
return  on  its  existing  assets;  and  Resources,   with  recent  and  planned
investments  and less exposure to its  investment  in the KKR  leveraged  buyout
funds,  expects to continue  to be a steady  contributor  to  earnings  and cash
flows.

Access to sufficient  capital from external sources and from PSEG as well as the
availability  of cash  flow and  earnings  from  Global  and  Resources  will be
essential to fund future  investments.  We  continuously  evaluate our plans and
capital  structure in light of available  investment  opportunities  and seek to
maintain the flexibility to pursue strategic growth investments.  Depending upon
the level of investment  activity,  we anticipate  obtaining  additional  equity
contributions  from PSEG as  necessary  to maintain  our growth  objectives  and
targeted capital structure.  The availability of equity capital from PSEG cannot
be assured since it is dependent upon our  performance and the needs of PSEG and
PSEG's other subsidiaries.


                                       29
<PAGE>

================================================================================
                            PSEG ENERGY HOLDINGS INC.
================================================================================

Factors Affecting Future Outlook

Our  success  will be  dependent,  in part,  on our  ability to  mitigate  risks
presented by our international  strategy.  The economic and political conditions
in certain  countries  where Global has  investments  present  risks that may be
different  than those found in the United  States  including:  renegotiation  or
nullification of existing contracts,  changes in law or tax policy, interruption
of business,  risks of nationalization,  expropriation,  war, and other factors.
Operations  in foreign  countries  also present risks  associated  with currency
exchange and  convertibility,  inflation and  repatriation of earnings.  In some
countries in which Global has  interests,  economic and monetary  conditions and
other factors could affect Global's ability to convert its cash distributions to
US Dollars or other freely  convertible  currencies,  or to move funds  offshore
from such countries.  Furthermore, the central bank of any such country may have
the  authority to suspend,  restrict or otherwise  impose  conditions on foreign
exchange transactions or to approve distributions to foreign investors. Although
Global  generally seeks to structure power purchase  contracts and other project
revenue  agreements  to provide  for  payments  to be made in, or indexed to, US
Dollars or a currency freely  convertible into US Dollars,  its ability to do so
in all cases may be limited.

The international  risks discussed above can potentially be magnified due to the
volatility of foreign  currencies.  The foreign  exchange rates of the Brazilian
Real,  Chilean Peso and Peruvian Nuevo Sol have recently weakened due to various
political  and  economic  factors.  This  could  result in  comparatively  lower
contributions  from our  distribution  investments in US Dollar terms.  While we
still expect Latin  America to contribute  significantly  to our earnings in the
future,  the political and economic risks associated with this region could have
a material adverse impact on our remaining investments in the region.

Certain of Global's  projects  are also  subject to the risk of changing  future
energy  prices,  including  its  investment  in two 1,000 MW facilities in Texas
which have performed below  expectations  due to lower energy prices than we had
anticipated,  primarily  resulting  from the  over-supply of energy in the Texas
power market.  Global  expects this trend to continue  until the 2004-2005  time
frame when market  prices are  expected  to  increase,  as older less  efficient
plants in the Texas power  market are  expected to be retired and the demand for
electricity  is expected to increase and has included these  assumptions  within
its business  plans.  However,  no assurances can be given as to the accuracy of
these  estimates and changes in these  estimates could have a material impact on
its forecasted results of operations, financial position, or net cash flows.

Resources faces risks with regard to the creditworthiness of its counterparties,
as well as the risk of a change in the current tax treatment of its  investments
in leveraged  leases.  The  manifestation of either of these risks could cause a
materially  adverse  effect  on its  strategy  and  its  forecasted  results  of
operations, financial position, or net cash flows.

In  addition,  we have  exposure  to the equity  and debt  markets  through  our
substantial  use of  short-term  financing,  the effect of lower assumed rate of
returns and lower fund balances on our pension and other postretirement  benefit
plan (OPEB) expenses,  the potential impact to Resources'  investment in the KKR
leveraged  buyout funds, and other equity and debt investments held by us. Also,
increases  in the cost of  capital,  which  could  result from market and lender
concerns  regarding us, our industry,  Unites States and international  economic
conditions and other factors,  could make it more difficult for us to enter into
profitable investments. We are also subject to credit risk.

See Business Environment and Credit Risk for further discussion.

Results of Operations

Energy Holdings -- Revenues

Revenues  increased  $72 million or 82% and $110  million or 52% for the quarter
and six months ended June 30, 2002, respectively, from the comparable periods in
2001.

Revenues  for the  quarter  ended  June 30,  2002  were  favorably  impacted  by
increased  revenues of $97 million at Global of which $54 million was related to
the  acquisitions in the second half of 2001 of Sociedad Austral de Electricidad
S.A., (SAESA), a Chilean distribution company and Empresa de Electricidad de los
Andes S.A. (Electroandes), a Peruvian generation company. An additional increase
in revenues of $39 million was realized from the gain on  withdrawal  from Eagle
Point  Cogeneration  Partnership  (Eagle  Point).  In the first quarter of 2001,
Global  withdrew  from its  interest in Eagle Point in exchange  for a series of
payments through 2005, expected to total up to


                                       30
<PAGE>

================================================================================
                            PSEG ENERGY HOLDINGS INC.
================================================================================

$290  million.  Such  payments  will be made in each year until 2005,  providing
certain  operating  contingencies  are met.  Partially  offsetting the increased
revenues at Global was a decrease of $26 million of revenues at  Resources.  The
reduction in revenues at Resources was primarily  related to a net change of $32
million in the carrying  value of publicly  traded and private  securities  held
within the KKR leveraged  buyout  funds.  Partially  offsetting  the decrease in
revenues at Resources  was an increase of $6 million in higher  leveraged  lease
income from continued investment in such financing transactions.

Revenues  for the six months  ended June 30,  2002 were  favorably  impacted  by
increased  revenues of $116  million at Global of which $101 million was related
to the acquisitions of SAESA and Electroandes. Revenues further increased by $13
million due to improved earnings from RGE as new regulatory changes allow RGE to
recover from  customers  prior tariff  charges  previously  expensed.  Partially
offsetting  the  increased  revenues  at Global was a decrease  of $6 million in
revenues at  Resources.  The  reduction in revenues at Resources  was  primarily
related to a net change of $23 million in the carrying value of publicly  traded
and private  securities  held within the KKR leveraged  buyout funds.  Partially
offsetting  the decrease in revenues at Resources was an increase of $17 million
in higher  leveraged  lease income from  continued  investment in such financing
transactions.

Energy Holdings -- Operating Expenses

Operating  expenses  increased $552 million and $593 million for the quarter and
six months ended June 30, 2002,  respectively,  from the  comparable  periods in
2001. The operating  expenses for the quarter and six months ended June 30, 2002
include a $515 million  charge  associated  with the write-down of all Argentine
investments  and certain loss  contingencies.  Our  investments in the Argentine
operations  were  deemed to be fully  impaired  and we  recorded a $506  million
write-down of project  investments.  In connection  with our plans to exit these
businesses in Argentina, we recorded loss contingencies of $7 million associated
with certain  potential  interest  payment  defaults at the project level and an
additional  $2 million of legal fees for the quarter  and six months  ended June
30, 2002. The loss  contingencies and legal fees were recorded as a component of
administrative and general expenses.

Operating expenses, less expenses associated with the $515 million impairment of
our Argentine investments, increased $37 million or 176% and $78 million or 195%
for the  quarter  and six months  ended June 30,  2002,  respectively,  from the
comparable  periods in 2001.  The increases for the quarter and six months ended
June 30, 2002 were  primarily  due to operating  expenses  incurred at SAESA and
Electroandes,  which were not  included in the 2001  results for the  comparable
periods.

Energy Holdings -- Interest Expense - Net and Preferred Stock Dividend
Requirements

Interest Expense - Net and Preferred Stock Dividend  Requirements  increased $17
million, or 41% and $35 million or 42% for the quarter and six months ended June
30, 2002, respectively,  from the  comparable  periods in 2001. The increase was
primarily due to interest  expense  associated with the $550 million 8.5% Senior
Notes issued in June 2001 and the $400 million of 8.625%  Senior Notes issued in
February  2001. The proceeds from the sale of Senior Notes were used for general
corporate purposes, including the funding of the aforementioned acquisitions. In
addition, interest expense increased from non-recourse financings at Tanir Bavi,
SAESA,  EDEERSA and  Electroandes.  Partially  offsetting  these  increases  was
reduced  interest  expense  associated  with the  repayments of $35 million PSEG
Capital  Corporation  (PSEG Capital) 6.73%  Medium-Term Notes in June 2001, $135
million 6.74%  Medium-Term  Notes in October 2001 and $98 million  variable rate
Medium-Term Notes in June 2002.

At June 30, 2002 and December 31, 2001, we had total debt  outstanding of $3.415
billion  and  $3.396  billion,  respectively,  of which  $933  million  and $934
million, respectively, is non-recourse to us. At June 30, 2002, and December 31,
2001, we had non-recourse  debt related to our  discontinued  operations of $157
million  and  $137  million,  respectively  and  is  excluded  from  total  debt
outstanding.  Such amounts are classified as a component of Current  Liabilities
of Discontinued  Operations and no longer  classified as debt outstanding on our
Consolidated Balance Sheets.

Energy Holdings -- (Losses) Earnings Before Interest and Taxes (EBIT)
Contribution

EBIT includes operating income, other income and minority interest.  The results
of operations for each of Energy Holdings' business segments are explained below
with reference to the EBIT contribution. Energy Holdings borrows on the basis of
a combined credit profile to finance the activities of its


                                       31
<PAGE>

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                            PSEG ENERGY HOLDINGS INC.
================================================================================

subsidiaries.  As such,  the  capital  structure  of each of the  businesses  is
managed by Energy Holdings. Debt at each subsidiary is evidenced by demand notes
with Energy Holdings and PSEG Capital.

Information concerning EBIT is presented here as a measure of financial results,
including a measure of our ability to service debt. In addition, EBIT may not be
comparable to similarly titled measures by other  companies.  EBIT should not be
construed  as an  alternative  to operating  income or cash flow from  operating
activities,  each as  determined  according  to  generally  accepted  accounting
principles.  Although  we are not  required  to meet  minimum  EBIT to  interest
charges  tests as part of our  debt  covenants,  we use  these  measures  in our
financial and business planning process to provide reasonable assurance that our
forecasts  will provide  adequate  interest  coverage to maintain or improve our
target credit ratings.

<TABLE>
<CAPTION>
                                                                     (Losses) Earnings Before Interest and Taxes Contribution
                                                               --------------------------------------------------------------------
                                                                      Quarter Ended                           Six Months Ended
                                                                        June 30,                                   June 30,
                                                               --------------------------                --------------------------
                                                                2002                 2001                 2002                 2001
                                                               -----                -----                -----                -----
                                                                                         (Millions of Dollars)
<S>                                                            <C>                  <C>                  <C>                  <C>
EBIT:
     Global ....................................               $(452)               $  22                $(440)               $  99
     Resources .................................                  21                   48                   70                   77
     Energy Technologies .......................                  (1)                  (1)                  (1)                  (2)
     Other .....................................                  (2)                  (3)                  (4)                  (4)
                                                               -----                -----                -----                -----
Total EBIT .....................................               $(434)               $  66                $(375)               $ 170
                                                               =====                =====                =====                =====
</TABLE>

      Global

Global  develops,   acquires,   owns  and  operates   electric   generation  and
distribution  facilities  and  engages  in power  production  and  distribution,
including  wholesale and retail sales of electricity,  in selected  domestic and
international markets.

Until the fourth quarter of 2000,  Global's  investments  consisted primarily of
minority  ownership  positions in projects and joint  ventures.  Other than fees
collected for providing operations and maintenance  services,  Global's revenues
represented  its  pro-rata  ownership  share of net income  generated by project
affiliates  which are  accounted  for by the equity  method of  accounting.  The
expenses in the table below were those required to develop  projects and general
and administrative expenses required to operate the business as a whole.

In the fourth quarter of 2000,  Global  increased its interest in Carthage Power
Company, an electric  generation  facility under construction in Rades,  Tunisia
from 35% to 60% and completed  project  financing for a 55% economic interest in
Elektrocieplownia  Chorzow Sp. Z0.0.  (ELCHO),  a power plant in Poland with the
expectation of an increase to a 90% economic interest by 2003.

In the first  quarter of 2001,  Global  increased its interest in Tanir Bavi, an
electric  generation facility in India from 49% to 74%. (For a discussion of our
plan to exit Tanir Bavi,  see Note 3.  Discontinued  Operations  of the Notes to
Consolidated  Financial  Statements.)  In the  second  quarter  of 2001,  Global
increased  its  interest  in  EDEERSA,  an  electric  distribution  facility  in
Argentina from 41% to 90%. In the third quarter of 2001,  Global purchased a 94%
interest and an additional 6% interest in the fourth quarter of 2001 in SAESA, a
group  of  companies   consisting  of  four   distribution   companies  and  one
transmission  company that provide  electric service in Chile and a distribution
company  in  Argentina.   In  the  fourth  quarter  of  2001,   Global  acquired
Electroandes,  a hydroelectric  generation and transmission company in Peru. The
accounts of Global  include the assets,  liabilities,  revenues  and expenses of
majority-owned  subsidiaries  over which Global exercises  control and for which
control is other than temporary.


                                       32
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                            PSEG ENERGY HOLDINGS INC.
================================================================================

Summary Results - Global

<TABLE>
<CAPTION>
                                                                              Quarter Ended                     Six Months Ended
                                                                                 June 30,                            June 30,
                                                                         -----------------------             -----------------------
                                                                          2002              2001              2002              2001
                                                                         -----             -----             -----             -----
                                                                                           (Millions of Dollars)
<S>                                                                      <C>               <C>               <C>               <C>
EBIT:
Revenues ....................................................            $ 134             $  37             $ 241             $ 125
Expenses ....................................................              565                14               619                27
                                                                         -----             -----             -----             -----
Operating Income ............................................             (431)               23              (378)               98
Other (Loss) Income and Minority Interests ..................              (21)               (1)              (62)                1
                                                                         -----             -----             -----             -----
EBIT ........................................................            $(452)            $  22             $(440)            $  99
                                                                         =====             =====             =====             =====
</TABLE>

Global's  EBIT  contribution  decreased  $474  million and $539  million for the
quarter and six months ended June 30, 2002,  respectively,  from the  comparable
periods in 2001. The Global EBIT  contribution  decrease for the quarter and six
months  ended June 30, 2002 was due  primarily  to the $515 million of operating
expenses   associated  with  the  write-down  and  certain  loss   contingencies
associated  with our Argentine  investments.  Our  investments  in the Argentine
operations  were  deemed to be fully  impaired  and we  recorded a $506  million
write-down of project  investments.  In connection  with our plans to exit these
businesses, we recorded loss contingencies of $7 million associated with certain
potential  interest  payment  defaults at the project level and an additional $2
million of legal fees for the quarter and six months  ended June 30,  2002.  The
loss contingencies and legal fees were recorded as a component of administrative
and general expenses.

The  Global  EBIT  contribution,  less the $515  million of  operating  expenses
associated  with the asset  impairments  and loss  contingencies  in  Argentina,
increased  $41 million or 186% and  decreased $24 million or 24% for the quarter
and six months  ended  June 30,  2002,  respectively,  as  compared  to the same
periods in 2001.

The Global EBIT contribution,  adjusted for certain Argentine impacts, increased
$41  million for the quarter  ended June 30, 2002  primarily  related to the $39
million  gain  on  withdrawal   from  Eagle  Point.   Earnings  from  SAESA  and
Electroandes   were  largely  offset  by  losses  from  marking  the  US  Dollar
denominated  debt at EDEERSA to a  devaluing  Argentine  Peso and the  decreased
earnings from our investments in the Texas and California generation facilities.

The Global EBIT contribution,  adjusted for certain Argentine  impacts,  for the
six months ended June 30, 2002  decreased  $24 million  primarily  due to losses
from marking the US Dollar denominated debt at EDEERSA to a devaluing  Argentine
Peso and  reduced  earnings  from our  investments  in the Texas and  California
generation facilities. This decrease was partially offset by earnings from SAESA
and Electroandes and increased earnings from RGE.

Global investments include partnership  interests in seven qualifying facilities
(QFs) in  California  that  sell  power  under  long-term  energy  and  capacity
contracts to Pacific Gas & Electric Company (PG&E).  These  facilities  realized
decreased  operating earnings for the quarter and six months ended June 30, 2002
as compared to the same periods in 2001 due to lower energy  prices in 2002.  In
2001, certain of these generation facilities had benefited from the historically
high  wholesale  power prices in the  California  power market,  as the contract
terms allowed for certain  variable energy  pricing.  The energy output of these
facilities is currently under a fixed energy contract  amendment for a period of
five  years  ending in July,  2006 to PG&E and  earnings  are  likely to be less
volatile in future periods.

In May 2001, GWF Energy LLC (GWF Energy),  a 50/50 joint venture  between Global
and Harbinger GWF LLC,  entered into a ten-year Power Purchase  Agreement  (PPA)
with the California  Department of Water  Resources  (CDWR) to provide 340 MW of
electric capacity to California from three new natural gas-fired peaking plants,
the Hanford, Henrietta and Tracy Peaking Plants. The Hanford Peaking Plant, a 90
MW facility,  was completed  and began  operation in August 2001. In early 2002,
the Hanford  Peaking  Plant was taken  off-line  for a  scheduled  environmental
upgrade for a period of three  months.  During the quarter and six months  ended
June 30, 2002, the facility realized operating losses as no revenues were earned
during the outage.  In May 2002, the plant completed the  environmental  upgrade
and it is anticipated to become profitable in the second half of 2002.

For a discussion of the Texas Power Market, see Business Environment.


                                       33
<PAGE>

================================================================================
                            PSEG ENERGY HOLDINGS INC.
================================================================================

      Resources

Resources  earns its leveraged  lease revenues  (recorded as Income from Capital
and Operating Leases) primarily from rental payments and tax benefits associated
with such  transactions.  As a passive investor in limited  partnership  project
financing transactions,  Resources recognizes revenue from its pro-rata share of
the income generated by these investments.  As an owner of beneficial  interests
in two leveraged buyout funds,  Resources recognizes revenue as the share prices
of public  companies  in the  leveraged  buyout  funds  fluctuate.  In addition,
revenue is  recognized  as  companies  in the fund  distribute  dividend  income
through the fund to the investors and as the fund liquidates its holdings.

Summary Results - Resources

                                       Quarter Ended         Six Months Ended
                                          June 30,               June 30,
                                    ------------------      -----------------
                                    2002          2001      2002         2001
                                    ----          ----      ----         ----
                                               (Millions of Dollars)
Revenues ......................      $26           $51       $78          $84
Expenses ......................        5             3         8            7
                                     ---           ---       ---          ---
Operating Income and EBIT .....      $21           $48       $70          $77
                                     ===           ===       ===          ===

Resources' EBIT  contribution  decreased $27 million or 56% and $7 million or 9%
for the  quarter  and six months  ended June 30,  2002,  respectively,  from the
comparable periods in 2001.

The Resources'  EBIT  contribution  decrease for the quarter ended June 30, 2002
was primarily due to $34 million of lower Net Investment Gains (Losses) of which
$6 million resulted from a net decrease in the carrying value of publicly traded
and $26 million from  private  securities  within its  leveraged  buyout  funds.
Partially  offsetting  this  decrease  was an increase in revenues of $7 million
from higher  leveraged  lease income from  continued  investment by Resources in
such financing transactions.

The Resources' EBIT contribution decrease for the six months ended June 30, 2002
was  primarily due to lower Net  Investment  Gains  (Losses) of $23 million,  of
which $26 million  resulted from a net decrease in the carrying value of private
equity  securities  within  certain  leveraged  buyout funds.  This decrease was
partially  offset by an  increase of $17 million  from  higher  leveraged  lease
income from continued investment by Resources in such financing transactions.

      Energy Technologies

Energy Technologies is comprised of 11 heating, ventilating and air conditioning
(HVAC)  operating  companies and an asset management group which include various
Demand Side Management (DSM) investments. DSM investments in long-term contracts
represent  expenditures  made by the  Company  to  share  DSM  customers'  costs
associated with the installation of energy efficient equipment.

During the second  quarter of 2002, we completed our  impairment  testing of all
recorded goodwill as required by SFAS 142 including the goodwill associated with
the 11 HVAC operating companies acquired by Energy  Technologies.  Such analysis
indicated  that the entire $53 million of goodwill  recorded in connection  with
the  acquisitions  of these HVAC  companies  was  impaired and resulted in a $32
million (after-tax) charge to our Consolidated Statements of Operations. The $32
million  (after-tax)  goodwill  impairment  was  recorded as a component  of the
Cumulative Effect of a Change in Accounting Principle.

In June 2002,  we  formally  executed a plan to sell our  interests  in the HVAC
operating companies. We have retained the services of an investment-banking firm
to market the HVAC  operating  companies  to  interested  parties  and they have
completed an analysis of the fair market value of the operating  companies.  The
sale of the HVAC operating companies is expected to be completed by December 31,
2002.  Additionally,  we have initiated a two-phase  process for the sale of our
Asset Management Group,  which includes the DSM investments.  The first phase is
to finance the DSM assets through  non-recourse  financing and then sell off the
remaining equity. The HVAC operating  companies and the DSM investments meet the
criteria for  classification  as components of  discontinued  operations and all
prior  periods  have  been   reclassified  to  conform  to  the  current  year's
presentation.


                                       34
<PAGE>

================================================================================
                            PSEG ENERGY HOLDINGS INC.
================================================================================

We have further reduced the carrying value of these related investments to their
estimated net realizable  value, and incurred a loss on disposal for the quarter
and six months  ended June 30, 2002 of $20 million  (after-tax).  The  operating
results of these  discontinued  operations  for the quarter and six months ended
June 30,  2002,  yielded an  additional  loss of $5 million  (after-tax)  and $8
million (after-tax), respectively.

Liquidity and Capital Resources

The  following  discussion  of  our  liquidity  and  capital  resources  is on a
consolidated  basis,  noting  the uses and  contributions  of our  three  direct
operating subsidiaries, Global, Resources and Energy Technologies.

Financing Methodology

Our capital  requirements  and those of our  subsidiaries  are met and liquidity
provided by  internally  generated  cash flow,  external  financings  and equity
contributions  from PSEG. We make equity  contributions from time to time to our
subsidiaries  to  provide  for part of  their  capital  and  cash  requirements,
generally relating to long-term investments.  At times, we utilize inter-company
dividends  and  inter-company  loans to  satisfy  various  subsidiary  needs and
efficiently  manage our and our subsidiaries'  short-term cash needs. Any excess
funds  are  invested  in  accordance  with  guidelines  adopted  by our Board of
Directors.

External   funding  to  meet  our  needs  is  comprised  of  corporate   finance
transactions  and bank  credit  agreements.  The  debt  incurred  is our  direct
obligation.  We use some of the proceeds of this debt to make equity investments
in our subsidiaries.

Depending on the particular  company,  external  financing may consist of public
and private capital market debt and equity  transactions,  bank revolving credit
and term loan facilities,  commercial paper and/or project  financings.  Some of
these transactions involve special purpose entities (SPEs), formed in accordance
with  applicable  tax,  accounting  and legal  requirements  in order to achieve
specified  beneficial  financial  advantages,   such  as  favorable  tax,  legal
liability or accounting treatment. All special purpose entities are consolidated
in our Consolidated  Financial Statements,  except for certain subsidiaries that
are  less  than  majority  owned by us and  therefore  are not  permitted  to be
consolidated in our financial  statements  under generally  accepted  accounting
principles.

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

Financing  for  Global's  projects  and  investments  is  generally  provided by
non-recourse project financing  transactions.  These consist of loans from banks
and other  lenders  that are  typically  secured by project and special  purpose
subsidiary assets and/or cash flows.  Non-recourse transactions generally impose
no material  obligation on the parent-level  investor to repay any debt incurred
by the project borrower. However, in some cases, certain obligations relating to
the investment being financed,  including  additional  equity  commitments,  are
guaranteed  by Global,  and/or us.  Further,  the  consequences  of permitting a
project-level default include loss of any invested equity by the parent.

Over the  next  several  years,  we and our  subsidiaries  will be  required  to
refinance  maturing debt, and expect to incur additional debt and provide equity
to fund  investment  activity.  Any  inability  to  obtain  required  additional
external  capital  or  to  extend  or  replace  maturing  debt  and/or  existing
agreements at current levels and reasonable  interest rates may adversely affect
our financial condition, results of operations and net cash flows.

Debt Covenants, Cross Default Provisions, Material Adverse Changes, and Ratings
Triggers

Our debt  indenture  and  credit  agreements  and the credit  agreements  of our
subsidiaries and PSEG contain cross-default  provisions under which a default by
us or by  specified  subsidiaries  or by  PSEG  involving  specified  levels  of
indebtedness  in other  agreements  would result in a default and the  potential
acceleration  of  payment  under such  indentures  and  credit  agreements.  For
example, a default with respect to specified  indebtedness of us or Global of $5
million or more,  including our or Global's equity  contribution  obligations in
subsidiaries'  non-recourse  transactions,   as  set  forth  in  various  credit
agreements,  would  cause  a  cross-default  in one of our or our  subsidiaries'
credit agreements and potential acceleration  thereunder. A default with respect
to  specified  indebtedness  in an  aggregate  amount of $50 million for each of
PSEG, PSEG Power,  and Public Service  Electric and Gas Company,  and $5 million
for us,  including  relevant equity  contribution  obligations in  subsidiaries'
non-recourse   transactions   would  cause  a  cross-default  in  PSEG's  credit
agreements and potential acceleration thereunder.


                                       35
<PAGE>

================================================================================
                            PSEG ENERGY HOLDINGS INC.
================================================================================

If such a  default  were to  occur,  lenders,  or the  debt  holders  under  our
indenture or any of our or our  subsidiaries'  credit  agreements,  after giving
effect to any applicable  grace and/or cure periods,  could  determine that debt
payment  obligations  may be  accelerated  as a  result  of a  cross-default.  A
declaration of cross-default could severely limit our liquidity and restrict our
ability to meet our debt,  capital  and,  in  extreme  cases,  operational  cash
requirements.  Any  inability to satisfy  required  covenants  and/or  borrowing
conditions  could have a similar  impact.  In the event of any likely default or
failure to satisfy  covenants or  conditions,  we, or the  relevant  subsidiary,
would  seek  to  renegotiate  terms  of the  agreements  with  the  lenders.  No
assurances  can be given as to whether these efforts would be  successful.  This
would have a material  adverse  effect on our  financial  condition,  results of
operations and net cash flows, and those of our subsidiaries.

In  addition,  our  credit  agreements  and  those of PSEG and our  subsidiaries
generally  contain  provisions  under which the lenders  could refuse to advance
loans in the event of a material adverse change in the borrower's, and as may be
relevant,  our,  business or  financial  condition.  In the event that we or the
lenders in any of our or our subsidiaries'  credit  agreements  determine that a
material adverse change has occurred, advances of loan funds may be limited.

Some of these  credit  agreements  also contain  maximum debt to equity  ratios,
minimum  cash flow  tests and other  restrictive  covenants  and  conditions  to
borrowing.  Compliance with applicable  financial covenants will depend upon our
future  financial  position and the level of earnings and cash flow, as to which
no assurances  can be given.  As part of our  financial  planning  forecast,  we
perform  stress  tests  on  our  financial  covenants.  These  tests  include  a
consideration  of the impacts of potential asset  impairments,  foreign currency
fluctuations,  and other items.  Our current  analyses and projections  indicate
that we will still be able to meet our financial covenants.

Our debt indenture and credit  agreements and those of our  subsidiaries  do not
contain any material "ratings  triggers" that would cause an acceleration of the
required  interest and principal  payments in the event of a ratings  downgrade.
However,  in the event of a downgrade we and/or our  subsidiaries may be subject
to  increased  interest  costs on certain  bank debt.  We and Global may have to
provide  collateral  for  certain  of our and their  equity  commitments  if our
ratings  should fall below  investment  grade.  This would increase our costs of
doing business.

PSEG Capital has a $650 million  Medium-Term  Note (MTN) program which  provides
for the private  placement  of MTNs.  This MTN program is supported by a minimum
net worth  maintenance  agreement  between PSEG Capital and PSEG which provides,
among  other  things,  that  PSEG  (1)  maintain  its  ownership,   directly  or
indirectly,  of all  outstanding  common stock of PSEG  Capital,  (2) cause PSEG
Capital to have at all times a positive  tangible net worth of at least $100,000
and (3) make sufficient  contributions of liquid assets to PSEG Capital in order
to permit it to pay its debt  obligations.  At June 30,  2002 and  December  31,
2001,  total debt  outstanding  under the MTN program was $382  million and $480
million,  respectively,  maturing in 2002 and 2003. We expect to repay this debt
and eliminate this borrowing program by the second quarter of 2003.

Credit Ratings

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

The current  ratings of  securities  of us and PSEG  Capital are shown below and
reflect the respective views of the rating agencies, from whom an explanation of
the  significance  of their ratings may be obtained.  There is no assurance that
these  ratings will  continue for any given period of time or that they will not
be revised or withdrawn entirely by the rating agencies, if, in their respective
judgments,  circumstances  so warrant.  Any downward  revision or withdrawal may
adversely effect the market price of our securities or those of PSEG Capital and
serve to increase those companies' cost of capital.


                                       36
<PAGE>

================================================================================
                            PSEG ENERGY HOLDINGS INC.
================================================================================

                            Moody's (1)    Standard & Poor's(2)    Fitch(1)
                            -----------    --------------------    --------
Energy Holdings
---------------
Senior Notes                   Baa3               BBB-               BBB-

PSEG Capital
------------
Medium Term Notes              Baa2               BBB-            Not Rated

(1)   Recently  affirmed  in the second  quarter of 2002 and noted an outlook of
      Stable.

(2)   Standard and Poor's has established an overall  corporate credit rating of
      BBB for us.

Short-Term Liquidity

We have the following  credit  facilities  for various  funding  purposes and to
provide us liquidity. These agreements are with a group of banks and provide for
borrowings with maturities of up to one year. The following table summarizes our
various facilities as of June 30, 2002.

<TABLE>
<CAPTION>
                                        Expiration    Total      Primary     Amount
Energy Holdings                            Date      Facility    Purpose   Outstanding
                                        ----------   --------    -------   -----------
                                                    (Millions of Dollars)
<S>                                      <C>           <C>       <C>          <C>
364-day Revolving Credit Facility        May 2003      $200      Funding      $ --
Five-year Revolving Credit Facility      May 2004       495      Funding       245
Uncommitted Bilateral Agreement             N/A           *      Funding        76
                                                       ----                   ----
       Total                                           $695                   $321
                                                       ====                   ====
</TABLE>

*     Availability varies based on current market conditions

The  five-year  facility also permits up to $250 million of letters of credit to
be issued of which $12 million were outstanding as of June 30, 2002.

Financial covenants contained in these facilities include the ratio of cash flow
available for debt service (CFADS) to fixed charges. At the end of any quarterly
financial period such ratio shall not be less than 1.50x for the 12-month period
then ending.  As a condition of borrowing,  the pro-forma CFADS to fixed charges
ratio shall not be less than 1.75x as of the quarterly  financial  period ending
immediately  following  the first  anniversary  of each  borrowing  or letter of
credit  issuance.  CFADS includes,  but is not limited to, operating cash before
interest and taxes,  depreciation and amortization,  pre-tax cash  distributions
from all asset  liquidations and equity capital  contributions  from PSEG to the
extent not used to fund investing activity plus non-cash, non-recurring charges.
In  addition,  the  ratio of  consolidated  recourse  indebtedness  to  recourse
capitalization,  at the end of any  quarterly  financial  period,  shall  not be
greater  than 0.60 to 1.00.  This  ratio is  calculated  by  dividing  the total
recourse indebtedness by the total recourse capitalization.  This ratio excludes
the debt of PSEG Capital  which is supported by PSEG.  As of June 30, 2002,  the
latest  12  months  CFADS  coverage  ratio  was 4.8 and the  ratio  of  recourse
indebtedness to recourse capitalization was 0.50 to 1.00.

Compliance  with  applicable  financial  covenants  will  depend upon our future
financial  position  and the level of  earnings  and cash  flow,  as to which no
assurances  can be given.  In  addition,  our  ability to  continue  to grow our
business will depend to a significant degree on PSEG's ability to access capital
and our ability to obtain additional financing beyond current levels.


                                       37
<PAGE>

================================================================================
                            PSEG ENERGY HOLDINGS INC.
================================================================================

Capital Requirements

We plan to continue the growth of Resources.  Global has refocused its strategy,
from accelerated  growth to emphasis on increasing the efficiency and returns on
its existing  assets.  We are in the process of exiting the businesses of Energy
Technologies  and expect to have  liquidated all such assets by the end of 2002.
For the six months ended June 30, 2002, our  subsidiaries  made net  investments
totaling  approximately $359 million. These investments include an approximately
50% interest of a coal-fired  generation facility,  currently under construction
in Poland,  and additional  investments in existing  generation and distribution
facilities  and  projects  by Global  and an  investment  in a capital  lease by
Resources.  Also  included  was an $88 million  loan  repayment  from TIE. For a
discussion of the loans to TIE, see Note 10.  Related-Party  Transactions of the
Notes to Consolidated Financial Statements.

In January 2002, Global completed  negotiations to buy a 35% interest in the 590
MW  (electric)  and 618 MW  (thermal)  coal-fired  Skawina CHP Plant  (Skawina),
located  in Poland  and in June 2002  completed  negotiations  to  increase  its
ownership  interest to approximately 50%. Global has expended $31 million during
2002  for  its  approximately  50%  ownership  interest  and  the  total  equity
investment  is expected to be  approximately  $44  million.  The new facility is
expected to be  operational  in 2003.  Global  plans to increase  its  ownership
interest to 75% over the next few years.

As of June 30, 2002,  Energy  Holdings had $362 million  available for borrowing
under its $695 million of bank lines.  Additional  amounts of up to $100 million
from an uncommitted  bilateral agreement may be available dependent upon current
market conditions.  PSEG has announced its intention to contribute in the second
half of 2002 an  additional  $200  million of equity into  Energy  Holdings as a
result of this quarter's asset impairments. Energy Holdings is in the process of
reviewing  its  cost  structure  and  capital  investment  plans in light of the
increasingly  risky  environment  for  international  investment.  Current plans
anticipate a build out of Global  commitments  amounting to a net new investment
of  $150  million  over  the  next  two  years  and  additional   investment  of
approximately $300 million per year at Resources.  The majority of the Resources
investment is  discretionary  and is dependent  upon  availability  of potential
investments meeting certain profit thresholds. We have $414 million of long-term
debt due within one year,  including $130 million of MTNs maturing in the second
half of 2002, of which $100 million matured in July 2002.

Financing Activities

In May 2002,  Energy Holdings renewed its 364-day $200 million  Revolving Credit
Facility with a group of banks.  The new facility  matures May 7, 2003.  The new
facility has identical  terms and  conditions to the existing  facility with the
exception  of an  increase  in  the  pricing  spread  of  .125%  per  annum  for
borrowings.

In June 2002, $98 million of PSEG Capital Corp. Medium-Term Notes matured. These
Medium-Term  Notes were refunded with proceeds from a private  placement of $135
million which reopened the 8.625% Series of Senior Notes due February 2008.

In July 2002,  an  additional  $100 million of PSEG Capital MTNs with an average
borrowing  rate of 6.95%  matured.  These MTNs were  refunded with proceeds from
borrowings under Energy Holdings' bank facilities.

Remaining  maturities  under  the PSEG  Capital  Corp  program  are $30  million
maturing in October 2002 and $252 million maturing in May 2003. These issues are
expected to be refunded with proceeds of borrowings at Energy  Holdings and cash
from  operations.  We  have  no  other  material  debt  maturities  in  recourse
transactions through the end of 2003.

Discussion of Critical Accounting Policies

The accounting  policies  listed below are policies that involve the use of both
objectively and subjectively  derived  information to record financial statement
transactions in accordance with Generally Accepted Accounting  Principles (GAAP)
applied in the United  States.  The use of subjective  judgment and estimates by
management is a critical  element in the  application  of GAAP.  The  principles
below  were  determined  to be  most  significant  in the  determination  of our
financial  statements  for the years  presented,  and will impact our  financial
statements prospectively.


                                       38
<PAGE>

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                            PSEG ENERGY HOLDINGS INC.
================================================================================

Accounting for Leveraged Leases

A  leveraged  lease is  recorded  by  applying  cash  flows to lease  income and
amortization  on a  constant  return  basis  throughout  the lease  term.  A key
assumption  in our lease  transactions  is the residual  value at the end of the
lease term.  The residual  value is estimated at the beginning of the lease term
and is reviewed  annually for  adequacy.  If management  were to determine  that
there is a permanent  impairment  to the residual  value of an asset  subject to
lease,  the reduction  must be recorded  immediately.  Appreciation  in residual
value is not booked immediately,  but is deferred until termination of the lease
transaction normally through the purchase of the asset by the lessee.

Lease  accounting  also  includes  estimates of the  likelihood  of a borrower's
ability to pay the rent contractually derived in the transaction. If significant
uncertainty exists over the level of rent to be received, or rent is deferred to
future periods, the income accrual must be reduced to reflect lower estimates of
future lease income.  In the event of default by a lessee,  the leased asset may
be recorded on the balance sheet along with the related non-recourse debt.

Lease  accounting  also  includes  estimates  of future  tax  rates.  Changes in
statutory  rates could  affect the level of lease income  recorded,  as tax cash
flow is a key component of income in a lease transaction.

Measurement of Derivative Financial Instruments

We use derivative  financial  instruments  to hedge  floating  interest rate and
foreign currency exposure in many markets where we invest.  Derivative financial
instruments  must be  valued  and  recorded  as  assets  or  liabilities  in the
financial  statements.  The  derivation  of value  includes  estimates of future
interest  rates  and  exchange  rates  that  are  often  quite  volatile.  For a
discussion  of our  derivative  financial  instruments,  see  Note 6.  Financial
Instruments  and  Risk  Management  of  the  Notes  to  Consolidated   Financial
Statements.


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Use of Fair Value Accounting

Resources  applies fair value accounting for certain  securities held in Limited
Partnership interests that have quotable market prices on liquid exchanges.  For
other  securities  in the  portfolio  that do not  trade  on  liquid  exchanges,
securities  are carried at cost unless a valuation  report  prepared by the fund
manager indicates a permanent  impairment in value below cost. While objectively
derived, the volatility of securities markets over the past few years has caused
significant fluctuations in security prices. For example, we recorded net pretax
(losses)/gains  from fair value  adjustments  or security  sales  totaling $(16)
million,  $(4) million and $24 million for the three years  ended,  December 31,
2001, December 31, 2000 and December 31, 1999, respectively.

Accounting for the Effects of Goodwill

Our 2002 Consolidated  Statements of Operations have been materially impacted by
the  application  of SFAS 142.  This new  standard,  effective  January 1, 2002,
requires the  existence of any  goodwill  impairment  be disclosed in the second
quarter and recorded by the fourth quarter of 2002, applied retroactively to the
first quarter.  The basic difference  between previous  accounting  guidance and
this  new  standard  is that  the new  standard  allows  for  certain  valuation
methodologies  to test for impairment,  including a discounted cash flow method,
compared  to an  undiscounted  cash flow  method  which was  utilized  under the
previous  standard.  The new test must be completed  using data as of January 1,
2002.  Any  amounts  impaired  using data as of that date will be  recorded as a
"Cumulative Effect of an Accounting Change".  Any amounts impaired under the new
test using data after the initial  adoption  date will be recorded in  Operating
Expenses.   The  discounted  cash  flow  tests  require  broad  assumptions  and
significant judgment to be exercised by management. This includes projections of
future commodity prices, customer rates, customer demand,  operating costs, rate
relief from regulators,  customer growth and many other items.  While we believe
that our assumptions are reasonable,  actual results will likely differ from our
projections.

For an analysis of our existing  goodwill as of June 30, 2002, see Note 4. Asset
Impairments of the Notes to Consolidated Financial Statements.

Accounting for Long-Lived Assets

SFAS 144, a new standard  related to testing assets for impairment,  was adopted
on January 1, 2002.  Testing under SFAS 144 is essentially the same as the asset
impairment  tests we  performed  under  SFAS  121.  This  test  consisted  of an
undiscounted  cash flow test to determine if an impairment  existed,  and, if an
impairment  existed,  a discounted  cash flow test would be done to quantify it.
The new standard is broader in that it includes discontinued  operations as part
of its scope.  This test requires the same judgment to be employed by management
in building  assumptions  related to future earnings of individual  assets or an
investment as was required in determining  potential  impairments of goodwill as
discussed above.

These tests are required whenever events or circumstances indicate an impairment
may exist.  Examples of potential  events which could require an impairment test
are when power prices become depressed for a prolonged period in a market,  when
a foreign  currency  significantly  devalues,  or when an  investment  generates
negative  operating cash flows.  Any potential  impairment of investments  under
these circumstances is recorded as a component of operating expenses.


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Foreign Currency Accounting

Our  financial  statements  are  prepared  using the US Dollar as the  reporting
currency.  In accordance with SFAS 52 "Foreign  Currency  Translation",  foreign
operations  whose  functional  currency  is  deemed  to be the  local  (foreign)
currency, asset and liability accounts are translated into US Dollars at current
exchange  rates and revenues and expenses  are  translated  at average  exchange
rates  prevailing  during  the  period.  Translation  gains and  losses  (net of
applicable  deferred  taxes) are not included in determining  net income but are
reported  in OCI.  Gains and losses on  transactions  denominated  in a currency
other than the functional  currency are included in the results of operations as
incurred.

The  determination  of an entity's  functional  currency  requires  management's
judgment.  It is  based  on an  assessment  of the  primary  currency  in  which
transactions  in the local  environment  are  conducted,  and  whether the local
currency can be relied upon as a stable  currency in which to conduct  business.
As economic  and  business  conditions  change,  we are required to reassess the
economic  environment and determine the  appropriate  functional  currency.  The
impact of foreign  currency  accounting  could have a material adverse impact on
our financial condition, results of operation and net cash flows.

Environmental Matters

Global has ownership  interests in facilities,  including operating power plants
and   distribution   companies  and  power  plants  under   construction  or  in
development, in numerous countries. These include the United States (California,
Hawaii,  Maine, New Hampshire,  Pennsylvania and Texas),  Brazil,  Chile, China,
India,  Italy,  Oman,  Peru,  Poland,  Taiwan,  Tunisia  and  Venezuela.   These
operations are subject to compliance with  environmental laws and regulations by
relevant  authorities at each location,  which may include air and water quality
control, land use, disposal of wastes, aesthetics and other matters. In order to
achieve  compliance,  expenditures  may be needed  for  construction,  continued
operation or remediation of new and existing facilities and sites.

As  Global  pursues  new  opportunities,  it will be  required  to  comply  with
applicable  environmental  laws and  regulations.  Global  attempts to take such
expenditures into consideration when considering an investment;  however,  there
can be no assurance that  environmental laws and regulations will not change. If
environmental  laws  or  regulations  change  in  the  future,  there  can be no
assurance that our financial condition, results of operations and net cash flows
will not be materially and adversely affected. We are committed to operating our
businesses  cleanly,   safely  and  reliably  and  strive  to  comply  with  all
environmental laws,  regulations,  permits and licenses.  However,  despite such
efforts, there have been instances of non-compliance,  although no such instance
resulted in revocation  of any permit or license or caused a materially  adverse
effect on our financial condition, results of operations and net cash flows.

We do not anticipate any material capital expenditures for environmental control
facilities  or in  connection  with  compliance  with  federal,  state  or local
environmental  laws and regulations in 2002 or in connection with the generation
projects  currently in construction or advanced  development.  We do not believe
that compliance with federal, state and local environmental laws and regulations
will have a  material  adverse  effect on our  financial  condition,  results of
operations and net cash flows.


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                            PSEG ENERGY HOLDINGS INC.
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Business Environment

We continue to evaluate  the economic  consequences  of the  September  11, 2001
terrorist attacks on the United States and subsequent developments, particularly
their  impact on  accelerating  the  continued  economic  slowdown in the United
States and worldwide.  The consequences of a prolonged recession may include the
continued  weakening  of  certain  Latin  American  currencies,   including  the
Brazilian  Real,  the Chilean Peso,  the Peruvian  Nuevo Sol, and the Venezuelan
Bolivar,  lower energy prices in power  markets,  including  power markets where
Global  invests  in  merchant  generation  assets,  and  further  credit  rating
downgrades of energy companies,  sovereign  ratings and certain airlines.  As of
June 30,  2002,  $1.720  billion or 25% of our  assets  were  invested  in Latin
America,  specifically in Brazil,  Chile, Peru and Venezuela,  $1.219 billion of
leveraged  leases to domestic  energy  companies,  and $107 million or 1% of our
assets were  comprised  of  leveraged  leases of seven  aircraft  leased to five
separate lessees.

Global has $431 million  invested in the electric  generation  and  distribution
sector in Peru. Recent  privatizations in this sector have been cancelled due to
pressure from local residents. Such political pressure and disruption may have a
negative impact on Global's investments in Peru.

As of  December  31,  2001,  Global  had $281  million  invested  in two 1000 MW
gas-fired  combined-cycle  electric  generating  facilities in Texas,  including
approximately  $165 million of loans  earning an annual rate of 12%. Of the $165
million  outstanding  at December 31,  2001,  $88 million was repaid in February
2002.  TIE's  funding  for  these  payments  to Global  were  made  from  equity
contributions  of $44 million  from Global and $44  million  from Panda  Energy.
Earnings  and cash  distributions  from TIE during  2001 of $15  million and $25
million,  respectively,  were below  expectations  due to lower  energy  prices,
resulting  from the  over-supply  of energy in the Texas  power  market and mild
summer temperatures  suppressing demand in the region. Global expects this trend
to continue  until the  2004-2005  time frame when market prices are expected to
increase,  as older less efficient plants in the Texas power market are expected
to be retired and the demand for  electricity is expected to increase.  However,
no  assurances  can be given as to the  accuracy  of  these  estimates.  Current
projections  of future  cash  flows for each  plant,  using  independent  market
studies  for  estimating  gas and  electricity  prices,  market  heat  rates and
capacity prices, do not indicate the investment to be impaired.  We believe that
those  independent  market studies are the best available for estimating  future
prices.  This  impairment  test was  completed as of June 30, 2002 in accordance
with  SFAS 144 at the  project  level  and no  assurance  can be given as to the
accuracy of the projections used in the analysis.

Continued  weakness in the Texas power market will put pressure on the project's
ability to meet financial  covenants in their loan  documents.  Discussions  are
underway  with the  project  lenders to  improve  flexibility  in meeting  these
covenants.

We cannot  predict the impact of any further  currency  devaluations,  continued
economic  slowdown,  lower energy prices and potential lessee payment  defaults;
however,  such  impact  could have a material  adverse  effect on our  financial
condition, results of operations and net cash flows.

Credit Risk

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

Credit  risk  relates  to the risk of loss  that we would  incur as a result  of
non-performance  by  counterparties  pursuant to the terms of their  contractual
obligations.  We have established credit policies that we believe  significantly
minimize  credit  risk.  These  policies  include  an  evaluation  of  potential
counterparties'  financial  condition  (including  credit  rating),   collateral
requirements under certain circumstances and the use of standardized agreements,
which may allow for the netting of positive  and negative  exposures  associated
with a single counterparty.

Resources also has credit risk related to its  investments in leveraged  leases,
which totaled approximately $1.6 billion, net of deferred taxes of $1.3 billion,
as of June 30, 2002.  These  investments are  significantly  concentrated in the


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energy related industry and have some exposure to the airline industry. Although
86% of its investments are with investment grade  counterparties,  recent events
in the industry have  pressured the credit  ratings of several of the members of
the industry,  including certain of our  counterparties in these leveraged lease
investments.  The largest  non-investment grade lease in Resources' portfolio is
with  Dynegy  Inc.,  whose  credit  rating  was  recently  downgraded  to  below
investment  grade.  As of June 30, 2002,  the lease with Dynegy Inc. had a gross
investment balance of approximately $161 million.  In many of these investments,
Resources has protected its equity  investment by providing for the direct right
to assume  the debt  obligation  in the event of  default  by the  lessee.  Debt
assumption would be at Resources' sole discretion, and normally only would occur
if an appraisal of the leased property  yielded a value that exceeds the present
value of the debt  outstanding.  Should  Resources  ever directly  assume a debt
obligation, the fair value of the underlying asset and the associated debt would
be recorded on the balance  sheet  instead of the net equity  investment  in the
lease. As of June 30, 2002,  Resources determined that the collectibility of the
minimum lease payments under its leveraged lease investments is still reasonably
predictable  and  therefore  continues  to  account  for  these  investments  as
leveraged leases.

Accounting Matters

For a  discussion  of SFAS  142,  SFAS 143 and  SFAS  144,  see  Note 2.  Recent
Accounting Pronouncements of the Notes to Consolidated Financial Statements.

Forward-Looking Statements

Except for the historical  information contained herein,  certain of the matters
discussed  in this report  constitute  "forward-looking  statements"  within the
meaning  of  the  Private  Securities   Litigation  Reform  Act  of  1995.  Such
forward-looking  statements are subject to risks and  uncertainties  which could
cause  actual  results  to  differ  materially  from  those  anticipated.   Such
statements are based on management's  beliefs as well as assumptions made by and
information  currently  available to  management.  When used  herein,  the words
"will",  "anticipate",   "intend",  "estimate",   "believe",  "expect",  "plan",
"hypothetical",  "potential", "forecast", "projections" variations of such words
and similar expressions are intended to identify forward-looking  statements. We
undertake  no  obligation  to  publicly  update  or revise  any  forward-looking
statements, whether as a result of new information,  future events or otherwise.
The following  review of factors should not be construed as exhaustive or as any
admission  regarding the adequacy of our disclosures prior to the effective date
of the  Private  Securities  Litigation  Reform Act of 1995.  In addition to any
assumptions  and other factors  referred to specifically in connection with such
forward-looking  statements,  factors that could cause actual  results to differ
materially from those contemplated in any  forward-looking  statements  include,
among others, the following,  some of which relate to Energy Holdings indirectly
as a result of their potential  impact upon PSEG or Public Service  Electric and
Gas Company:

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

      o     managing  rapidly changing  wholesale  energy trading  operations in
            conjunction  with  electricity and gas production,  transmission and
            distribution systems;

      o     managing   foreign   investments   and   electric   generation   and
            distribution  operations  in  locations  outside of the  traditional
            utility service territory;

      o     political and foreign currency risks;

      o     sales  retention  and growth  potential  in a mature  PSE&G  service
            territory;

      o     ability to complete development or acquisition of current and future
            investments;

      o     partner and counterparty risk;

      o     exposure to market price  fluctuations  and  volatility  of fuel and
            power supply, power output and marketable securities, among others;

      o     ability to obtain  adequate and timely rate relief,  cost  recovery,
            and other necessary regulatory approvals;

      o     federal, state and foreign regulatory actions;

      o     regulatory   oversight  with  respect  to  utility  and  non-utility
            affiliate relations and activities;


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      o     operating  restrictions,  increased  costs and  construction  delays
            attributable to environmental regulations;

      o     nuclear  decommissioning  and the  availability of reprocessing  and
            storage facilities for spent nuclear fuel;

      o     licensing and regulatory  approvals  necessary for nuclear and other
            operating stations;

      o     the ability to economically and safely operate nuclear facilities in
            which  PSEG  has  an  interest   in   accordance   with   regulatory
            requirements;

      o     environmental concerns; and

      o     market  risk and debt and equity  market  concerns  associated  with
            these issues.

                           PART II. OTHER INFORMATION

                            ITEM 1. LEGAL PROCEEDINGS

New  Matter.  See Page 14.  AES  termination  of the Stock  Purchase  Agreement,
relating to the sale of certain Argentine  assets.  New York State Supreme Court
for New York  County  (Docket No.  60155/2002)  PSEG  Global,  et al vs. The AES
Corporation, et al.

In addition, see information on the following proceeding at the pages indicated:

      Form 10-K Page 25. See Page 23.  Complaint  filed with the FERC addressing
      contract terms of certain  Sellers of Energy and Capacity under  Long-Term
      Contracts  with  the  California  Department  of Water  Resources.  Public
      Utilities  Commission  of the State of  California v. Sellers of Long Term
      Contracts to the California  Department of Water Resources FERC Docket No.
      EL02-60-000.  California  Electricity Oversight Board v. Sellers of Energy
      and Capacity Under Long-Term  Contracts with the California  Department of
      Water Resources FERC Docket No. EL02-62-000.

                           ITEM 5. OTHER INFORMATION

Certain  information  reported under Energy Holdings' 2001 Annual Report on Form
10-K and  Quarterly  Report on Form 10-Q for the quarter ended March 31, 2002 is
updated below.

Form  10-K  Page 24.  On July 31,  2002 the  FERC  issued a Notice  of  Proposed
Rulemaking  (NOPR)  to  create  a  Standard  Market  Design  for  the  wholesale
electricity  markets  in the  United  States.  The  NOPR  seeks to  improve  the
consistency of market rules throughout the country,  including issues related to
reliability,   market  power  concerns,   transmission,   pricing,   congestion,
governance and other issues. We cannot predict the outcome of this matter or its
impact upon us if adopted,  which could  significantly  affect  transmission and
generation in the various markets in which we operate.

                    ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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

Exhibit Number              Document
--------------              --------
10                          Stock Purchase Agreement
                            12 Computation of Ratios of Earnings to Fixed
                            Charges
99                          Certification by E. James Ferland, Chief Executive
                            Officer of Energy Holdings Pursuant to Section 1350
                            of Chapter 63 of Title 18 of the United States Code
99.1                        Certification by Thomas M. O'Flynn, Chief Financial
                            Officer of Energy Holdings Pursuant to Section 1350
                            of Chapter 63 of Title 18 of the United States Code


(B) Reports on Form 8-K and 8-KA:

Date of Report           Form                    Items Reported
--------------           ----                    --------------
April 16, 2002           8-K                     5 and 7
July 17, 2002            8-K                     5 and 7
July 29, 2002            8-K/A                   5 and 7


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                                    SIGNATURE

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

                            PSEG ENERGY HOLDINGS INC.
                                  (Registrant)

                       By:       Derek DiRisio
                            -----------------------------
                                  Derek DiRisio
                          Vice President and Controller
                         (Principal Accounting Officer)

Date: August 2, 2002


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