<PAGE>

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

                                  FORM 10-KSB/A

(MARK ONE)
/X/  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
     ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

/ /  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________.

COMMISSION FILE NUMBER  0-21523

                              VIRGINIA GAS COMPANY
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

         DELAWARE                                               87-0443823
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                               Identification No.)

              200 EAST MAIN STREET, ABINGDON, VIRGINIA 24210, (540)
     676-2380 (Address and telephone number of principal executive offices)

             Securities registered pursuant to Section 12(b) of the
              Exchange Act: None Securities registered pursuant to
                       Section 12(g) of the Exchange Act:
                     COMMON STOCK, PAR VALUE $.001 PER SHARE
                        WARRANTS TO PURCHASE COMMON STOCK

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 [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

Revenues for the fiscal year ended December 31, 1999 were $ 11,030,088.

The aggregate market value of the voting Common Stock, par value $.001 per
share, held by nonaffiliates of the Registrant as of March 15, 2000 was
approximately $ 15,011,000.

As of March 15, 2000, the Registrant had outstanding 5,504,906 shares of Common
Stock, par value $.001.


                                       1
<PAGE>

This Form 10KSB/A is filed in order to include information required by Part III
which was previously omitted pursuant to General Instruction E (3) to the Form.
This Form 10KSB/A also includes certain exhibits not previously filed. In all
other respects, the report is unchanged from the Form 10KSB filed on April 13,
2000.


                                       2
<PAGE>

                      VIRGINIA GAS COMPANY AND SUBSIDIARIES

                          ANNUAL REPORT ON FORM 10-KSB
                      FOR THE YEAR ENDED DECEMBER 31, 1999

<TABLE>

<CAPTION>

                                TABLE OF CONTENTS

 ITEM                                                                      PAGE
 NUMBER                           CAPTION                                NUMBER

          PART I
<S>       <C>                                                             <C>
  1       Business                                                            3
  2       Properties                                                          9
  3       Legal Proceedings                                                   9
  4       Submission of Matters to a Vote of Security Holders                 9
          PART II

  5       Market for Common Equity and Related Stockholder Matters            9
  6       Management's Discussion and Analysis                               10
  7       Financial Statements                                               17
  8       Changes in and Disagreements with Accountants
          on Accounting and Financial Disclosure                             33

          PART III

  9       Directors and Executive Officers of the Company                    33
  10      Executive Compensation                                             34
  11      Security Ownership of Certain Beneficial Owners and Management     36
  12      Certain Relationships and Related Transactions                     39
  13      Exhibits and Reports on Form 8-K                                   40
          Signatures                                                         44

</TABLE>


                                       3
<PAGE>

ITEM 1.  BUSINESS

GENERAL

     Virginia Gas Company (the "Company") was organized in 1987 under the laws
of the state of Delaware. The Company, directly or through its subsidiaries and
affiliated companies, is primarily engaged in the storage, marketing,
distribution, gathering, exploration and production of natural gas, and the
distribution of propane gas. The Company's principal assets are located in the
southwestern counties of the Commonwealth of Virginia.

     The Company's business has developed in response to the growing need for
natural gas storage, pipelines and distribution in its market area, resulting
principally from economic growth and the impact of deregulation. Deregulation
has given natural gas customers more flexibility in negotiating their natural
gas purchases and transportation contracts. The Company's pipeline connections
to the East Tennessee Natural Gas ("ETNG"), CNG Transmission Company ("CNG") and
Columbia Gas Transmission Company ("TCO") interstate pipeline systems, and to
the Company's adjacent storage facilities, are being combined to create a hub
which provides opportunities for more efficient gas distribution, including to
local, growing markets. At present, the Company's business primarily consists
of: (i) producing, gathering and marketing natural gas from wells in which the
Company has an ownership interest to municipal distributors, local distribution
companies and major oil and gas companies; (ii) storing natural gas for
municipal distributors and local distribution companies which have supplied
their own gas, or purchased it from third parties or the Company; (iii)
distributing propane and natural gas purchased from third parties or the Company
to local industrial, commercial and residential customers; and (iv) transporting
gas through its pipeline to a local distribution company.

     The Company's principal sources of revenue have varied depending on its
level of activity in any given segment of natural gas operations. From 1987 to
1992, substantially all of the Company's income was derived from exploration,
development and production of natural gas and from fees derived from managing
wells. From 1993 to 1996, the Company's income reflected the growth of its
storage operations. In 1996 and 1997, the Company initiated its propane
distribution and gas marketing operations, respectively. The Company's propane
distribution operations have grown steadily since then. In 1998, the Company
completed construction of 35 miles of pipeline and began serving a local
distribution company with transmission services at two delivery points.

     Management believes that current upward trends in the economy, a favorable
regulatory environment, the deregulation of the industry which has resulted in
end-users' ability to purchase gas on a competitive basis from a greater variety
of sources, and the increasing availability of natural gas as a form of energy
for residential, commercial and industrial markets present an opportunity for
the Company to expand into new markets and to better develop its current
markets.

SUBSIDIARIES AND AFFILIATES

     The Company has four consolidated wholly owned subsidiaries: Virginia Gas
Exploration Company (the "Exploration Company"), Virginia Gas Pipeline Company
(the "Pipeline Company"), Virginia Gas Propane Company (the "Propane Company")
and Virginia Gas Marketing Company (the "Marketing Company"). Affiliates of the
Company, Virginia Gas Distribution Company (the "Distribution Company") and
Virginia Gas Storage Company (the "Storage Company"), are each owned 50% by the
Company and 50% by one individual investor,


                                       4
<PAGE>

who has no material affiliation with either the Company, or any executive
officer, director or controlling shareholder of the Company.

     The Pipeline Company, the Distribution Company and the Storage Company are
the holders of Certificates of Public Convenience and Necessity ("CPCN") issued
by the Virginia State Corporation Commission ("VSCC") that are required for such
companies to conduct their business. The storage operations of the Pipeline
Company's and the Storage Company's operations are regulated by both the VSCC
and the Federal Energy Regulatory Commission ("FERC"). In connection with the
financing of the Distribution Company's distribution business, and the Storage
Company and Pipeline Company's storage and related pipeline businesses, the
Company participated in four tax-exempt bond issues in 1994, 1995 and 1997 that
provided financing for these various projects. Funds from such financings were
allocated, as needed, to the various subsidiaries and affiliates and each such
entity provided the Company with interest-bearing promissory notes evidencing
its obligation to repay the funds advanced by the Company. During 1998, the
company refinanced the tax-exempt bonds through a private debt placement and the
aforementioned promissory notes were replaced by ones reflecting the lower
interest rates.

STORAGE OPERATIONS

     The Company has the only two underground natural gas storage facilities in
the Commonwealth of Virginia. One of these facilities is located in Smyth and
Washington counties (the "Saltville Facility"), while the other facility is
located in Scott and Washington counties (the "Early Grove Field"). The Pipeline
Company owns and operates the Saltville Facility while the Storage Company owns
and operates the Early Grove Field.

     The Pipeline Company developed the Saltville Facility for use as a high
rate, peak usage storage facility. The Saltville Facility uses caverns created
in underground salt beds to store natural gas. The Company's engineering staff
believes the ultimate working gas capacity of the Saltville Facility could be up
to 10 Bcf. In June 1996 the Pipeline Company filed an application with the VSCC
for a CPCN for the operation of the Saltville Facility. In July 1996 the VSCC
issued an order authorizing the Pipeline Company to begin service on an interim
basis using the rates set forth in the application. The CPCN was issued to the
Pipeline Company in December 1997. In November 1996, the Pipeline Company
received a limited jurisdiction certificate from the FERC authorizing the
Pipeline Company to engage in the sale, transportation (including storage), or
assignment of natural gas that is subject to FERC's jurisdiction under the
Natural Gas Act, and to charge rates for its interstate service equal to the
intrastate rates approved by the VSCC. The Saltville Facility provides 10-day,
60-day and 90-day service and 20-day refill capacity. In August 1996 the
Pipeline Company injected the first working gas into the field. Peak daily
withdrawal rates of 49,000 MMBtu were achieved during 1999. In 1999, the Company
completed construction of an evaporation facility adjacent to its Saltville
Storage Facility. The facility will be used by the Company to create additional
storage space by eliminating brine from the salt caverns.

     The Early Grove Field is an underground natural gas storage facility owned
and operated by the Storage Company. The Storage Company has received a CPCN
from the VSCC, authorizing it to engage in the sale, transportation (including
storage), or assignment of natural gas and to charge rates approved by the VSCC.
The Early Grove Field includes 29 storage wells and a certificated area of 2,900
acres. Contracted storage volume for 60-day, 90-day and 150-day service has
increased from 520,000 MMBtu for the 1994/1995 heating season to 1,835,000 MMBtu
for the 1999/2000 heating season. The deliverability of the Early Grove Field
has been increased by reworking existing wells, drilling new wells, injecting
additional base gas, installing



                                       5
<PAGE>

larger diameter pipe, new compression equipment, and increasing the maximum
operating pressure of the field to 2,000 PSI from 1,400 PSI. Peak field
deliverability has been increased from 1,000 MMBtu to over 20,000 MMBtu per day
from 1992 to 1999.

PIPELINE OPERATIONS

     In 1998, the Company completed construction and began servicing 35 miles of
intrastate pipeline under authority granted in an application for a CPCN with
the VSCC filed in January 1997. The Company received the CPCN in December 1997.
The Company has purchased rights-of-way and obtained all necessary permits for
the construction of the remaining 37 miles of pipeline that will make up the
Company's P-25 pipeline. The pipeline will connect the Company's Saltville
Facility and transport natural gas to growing markets in Smyth, Wythe and
Pulaski Counties in southwestern Virginia. These areas currently are served only
by ETNG's #3300 interstate pipeline, which currently has insufficient capacity
to meet the area's needs.

     The P-25 pipeline has been and will be constructed and maintained
consistent with applicable federal, state and local laws and regulations and
accepted industry practice. The first phase of construction, completed in
October 1998, consisted of twinning the ETNG line to the town of Wytheville and
opening service to that town and Marion. The remaining phases will extend the
P-25 pipeline from Wytheville to Radford, Virginia. The Company has entered into
a 15-year contract with United Cities Gas Company ("UCG"), the local
distribution company which serves Smyth, Wythe and Pulaski Counties, to provide
pipeline capacity to supply 20,000 MMBtu per day. Completion of the P-25
pipeline is expected by late 2000. In early 1999, the Company filed an
application with the VSCC to extend its P-25 pipeline to Roanoke, VA, where it
will service a new contract with Roanoke Gas Company. The Company will provide
17,500 MMBtu per day to Roanoke through an additional 58 miles of pipeline. The
Company received a CPCN to extend its pipeline to Roanoke in December 1999.

     Substantially all of the operations conducted through the P-25 pipeline
will constitute common carrier pipeline activities. Such common carrier
activities are those under which transportation in the pipeline is available at
tariffs published with the VSCC to any shipper of natural gas who requests such
services, provided that each product for which transportation is requested
satisfies the conditions and specifications for transportation.

NATURAL GAS AND PROPANE DISTRIBUTION OPERATIONS

     The Company, through the Distribution Company, owns and operates 33 miles
of distribution pipelines and provides natural gas service to approximately 300
customers in Russell and Buchanan Counties in Virginia. Construction of a
10-mile pipeline providing service to the town of Lebanon in Russell County was
completed in June 1997. The Distribution Company has a CPCN authorizing it to
provide natural gas service in these counties. In January 1997, the Distribution
Company filed an application with the VSCC to extend its service territory to
include all of Dickenson and Tazewell Counties in Virginia, with the exception
of the service territory in Tazewell County currently certificated to
Commonwealth Public Service Corporation. This application was subsequently
amended to include the town of Saltville, Virginia as part of the proposed
service territory. In December 1997, the VSCC issued CPCNs to the Distribution
Company authorizing it to provide natural gas service to the western portion of
Tazewell County, excluding the service territory allotted to Commonwealth Public
Service Corporation, all of Dickenson County, and the town of Saltville. The
Distribution Company's tariff rates are approved by the VSCC.


                                       6
<PAGE>

     The Distribution Company has a firm transportation service contract for a
ten-year term with East Tennessee Natural Gas for the winter months of November
through March, and an interruptible transportation contract with ETNG for the
remainder of the year.

     In 1996, the Company commenced distribution of propane gas in southwestern
Virginia. Because of shared costs and similarities such as easily converted
appliances, many natural gas utilities provide both products to their customers.
Customers often do not distinguish between the two forms of gas when used in the
home. The Company intends, in part, to develop its propane distribution business
through selective acquisitions. In that regard, the Company acquired a portion
of Blue Grass Oils, Inc.'s existing propane distribution business in Buchanan,
Dickenson and Russell Counties and in the western part of Tazewell County,
Virginia in April 1997. At the end of 1999, the Company was providing propane
gas service to over 4,400 customers in southwestern Virginia.

EXPLORATION, PRODUCTION, GATHERING, AND MARKETING OPERATIONS

     DRILLING ACTIVITY. The Company did not drill or complete any natural gas
wells during 1998 or 1999.

     SERVICE OPERATIONS. The Company engages in the business of supervising
drilling operations and operating producing wells. As of December 31, 1999, the
Company operated 72 wells located in Virginia and West Virginia. As operator of
producing wells, the Company is responsible for the maintenance and verification
of all production records, distribution of production proceeds and information,
and compliance with various state and federal regulations. Generally, the
Company provides the routine day-to-day production operations for producing
wells and is paid for such services on a per well, monthly fee basis.

     GAS GATHERING OPERATIONS. The Company operates various unregulated natural
gas gathering systems located mainly in Dickenson and Buchanan Counties in
Virginia which connect the Company's operated wells to interstate pipelines. The
gathering systems consist of approximately 67 miles of pipeline. The gathering
systems connect the Company's natural gas production to the ETNG, CNG and TCO
interstate pipeline systems and gathering systems as well as to the Distribution
Company's distribution system.

     For such natural gas gathering services, the Company collects certain
transportation allowances from producers (owners of natural gas). Transportation
allowances vary depending upon contractual arrangements and currently range from
$.05 to $.50 per MMBtu.

     MARKETING. In 1997 the Company began marketing natural gas. The Company
currently markets and sells natural gas provided from Company-operated wells and
facilities. The Company anticipates that future expansion of its marketing
operations will include purchases of natural gas supplies from third party
sources, storing these supplies in its Saltville Facility and marketing these
supplies to its customers.

COMPETITION AND CUSTOMER BASE

     The Company competes with major utility companies and pipeline companies in
the areas of utility services and pipeline operations. The deregulation of the
natural gas industry has provided the Company with marketing and transportation
opportunities; however, other pipeline companies, marketers and brokers with
resources far greater than the Company likewise are the


                                       7
<PAGE>

beneficiaries of such deregulation. While the Company and the Storage Company
currently own and operate the only underground natural gas storage facilities in
Virginia, it is possible that other companies could develop other underground
natural gas storage facilities, and companies could rely on other methods of
storage such as above-ground stored liquefied natural gas. The Company competes
in the areas of exploration, production, transportation and marketing of natural
gas and distribution of propane with major oil companies, other independent oil
and gas concerns and individual producers and operators. Many of the Company's
competitors have substantially greater financial and other resources than the
Company.

     The Company has a limited number of customers for its wholesale pipeline
and storage services as the Company's facilities are limited by their pipeline
interconnects. Consequently, access to customers is restricted to those with
interconnects on the pipelines with which the Company's facilities are
connected. As a result, a majority of the Company's revenues are earned from a
small group of customers.

REGULATION

     VSCC REGULATION. The Company's and the Storage Company's natural gas
storage operations are regulated primarily by the VSCC and the FERC, which has
jurisdiction over interstate sales of storage services. Storage rates are
subject to VSCC approval and are based on the cost of service of the facility,
which provide for an approved rate of return. A facility can apply for revised
rates based on actual costs if they are higher than previously anticipated and
conversely the VSCC may require a reduction in rates if returns are higher than
anticipated.

     The Company's transmission pipeline operations are regulated by the VSCC.
Substantially all of the operations conducted through these pipelines constitute
common carrier pipeline activities. Such common carrier activities are those
under which transportation in the pipeline is available at tariff rates
published with the VSCC to any shipper of natural gas who requests such
services, provided that each product for which transportation is requested
satisfies the conditions and specifications for transportation.

     The natural gas distribution operations of the Distribution Company are
also regulated by the VSCC, which regulates the rates which may be charged to
end-users, setting them at levels sufficient to recover the cost of service to
its customers including an approved rate of return. The Distribution Company
filed for a rate increase late in 1999. The increase was put in place subject to
refund during January 2000. During March 2000, the VSCC approved the Company's
new rate structure.

     The Company's gathering facilities, propane distribution operations and
natural gas marketing operations are not subject to service or rate regulation
from the VSCC.

     FERC REGULATION. The Company's operations either are not governed by, or by
virtue of limited jurisdiction certificates having been issued by FERC, are
exempt from, further regulation by FERC under the Natural Gas Act.

     ENVIRONMENTAL AND SAFETY REGULATION. The operations of the Company are
subject to various federal, state and local environmental laws. In particular,
operations in Virginia are subject to the Virginia Clean Air Act as administered
by the Virginia Department of Environmental Quality ("VDEQ"). The Virginia Clean
Air Act restricts emissions from wells, pipelines and processing plants, and the
VDEQ may curtail operations not meeting minimum standards. The design,
construction, operation and maintenance of the Company's VSCC


                                       8
<PAGE>

jurisdictional facilities are subject to the safety regulations established by
the United States Department of Transportation pursuant to the Natural Gas
Pipeline Safety Act of 1968, as amended, or by state agency regulations meeting
the requirements thereunder. The Company is also subject to other federal, state
and local laws covering the handling or discharge into the environment of
materials used by the Company, or otherwise relating to protection of the
environment, safety and health.

     Expenditures for environmental control facilities and for remediation have
not been material in relation to the results of operations of the Company. The
Company believes, however, that it is reasonably likely that the trend in
environmental legislation and regulations will continue to be toward stricter
standards. The Company is unaware of future environmental standards that are
reasonably likely to be adopted that will have a material effect on the
Company's results of operations, but there can be no assurance such standards
will not be adopted in the future.

TITLE TO PROPERTIES

     Substantially all of the properties comprising the Saltville Facility and
the Early Grove Field are situated on land not owned by the Company or the
Storage Company.

     The Company's rights to develop and operate the Saltville Facility are
derived from a deed from the Industrial Development Authority of the town of
Saltville. The deed provides the Company with rights to store gas, rights to use
any facilities and surface area for natural gas storage use and rights to remove
salts to create cavities for natural gas storage. The deed encompasses
approximately 11,000 acres of storage rights in Washington and Smyth Counties,
Virginia.

     The Storage Company's rights to develop and operate the Early Grove Field
are derived from its ownership of mineral leasehold rights and from surface
easements.

     The Company's existing pipelines, gathering systems and distribution
systems are situated on land not owned by the Company but as to which the
Company and its affiliates have easements from the landowners permitting the use
of such land for the construction and operation of pipeline facilities. The
Company has received or intends to receive franchises, easements, licenses,
permits and other authorizations to construct and operate proposed or future
pipelines, gathering systems and distribution systems within the jurisdiction of
various cities, counties and other government agencies and jurisdictions, as
well as along and across waterways and rights-of-way for federal, state, county
and city highways, streets and roads.

     Substantially all of the Company's producing property interests are held
pursuant to leases from third parties. The Company has obtained title opinions
on substantially all of its producing properties and believes that it has
satisfactory title to such properties in accordance with standards generally
accepted in the natural gas industry. The Company's producing properties are
subject to customary royalty interests, liens for current taxes and other
burdens which the Company believes do not materially interfere with the use of
or affect the value of such producing properties.

EMPLOYEES


                                       9
<PAGE>

     As of December 31, 1999, the Company, its subsidiaries and affiliated
companies employed 55 persons on a full time basis, none of whom is covered by a
collective bargaining agreement.


                                       10
<PAGE>

ITEM 2. PROPERTIES

     See Item 1 for a discussion of properties and locations and Note 8 of Notes
to the Consolidated Financial Statements contained in Part II, Item 7 for a
discussion of any liens or encumbrances.

ITEM 3. LEGAL PROCEEDINGS

     There is no pending nor, to the knowledge of the Company, any threatened
litigation against the Company or its Subsidiaries or Affiliates which could
have a material adverse effect on their financial position.

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

     No matters were submitted to a vote of security holders during the fourth
quarter of 1999.

                                                      PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

                                        APPROXIMATE NUMBER OF STOCKHOLDERS

                                                               Number of
                                                        Stockholders of Record
                    Title of Class                         as of December 31,
                                                                 1999

Common stock, par value $.001                                   1,727
Warrants to purchase common stock                                  56

     The Common Stock of the Company is traded on the Nasdaq National Market
under the symbol "VGCO." The following table sets forth, for the periods
indicated, the high and low sales prices of the common stock, compiled from
quotations supplied by the Nasdaq Monthly Statistical Report, in addition to
dividends per share declared for the periods indicated:


                                       11
<PAGE>

                                 PRICE RANGE OF

                                  COMMON STOCK

<TABLE>

<CAPTION>

                                                                       DIVIDENDS
                                            HIGH        LOW            PER SHARE

<S>                                       <C>        <C> <C>            <C>
   1998
         First Quarter                    9          7 5/16             0.0175
         Second Quarter                   7 3/4      6                  0.0175
         Third Quarter                    6 7/32     4                  0.0175
         Fourth Quarter                   4 1/2      3                  0.0175
   1999

         First Quarter                    3 5/8      2 5/32             0.0175
         Second Quarter                   4 3/4      2 1/2              0.0175
         Third Quarter                    4 3/8      3 3/8                   -
         Fourth Quarter                   4          2 7/8                   -
   2000

         First Quarter (through March 15) 3 3/4      2 17/32                 -

</TABLE>

     The Company paid cash dividends on its Common Stock for each of the years
1992 through 1998. During 1999, the Company's Board of Directors reexamined the
Company's dividend policy and determined that the funds would be better used in
support of capital expansion. Accordingly, at this time, the Company does not
pay cash dividends on its Common Stock. There is no assurance that the Company
will resume dividend payments in the future.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS

     The following discussion of the financial condition, changes in financial
condition, and results of operations of the Company for 1998 and 1999 should be
read in conjunction with the consolidated financial statements and related notes
contained in Part II, Item 7.

GENERAL

     The Company derives revenues from its storage, exploration, production,
gathering, marketing and propane distribution operations. From its 50%
investments in the Storage Company and the Distribution Company, the Company
derives earnings from the storage, and distribution operations of these
companies. The Company accounts for its investments in these companies using the
equity method.

     In its storage business, the Company receives fees for use of its storage
space in addition to injection and withdrawal fees for the use of compression
facilities, collectively referred to as storage revenues. Storage charges to
customers are in accordance with storage rates included in tariffs approved by
the VSCC.

     In its pipeline business, the Company receives fees for use of its pipeline
space, referred to as pipeline revenues. Pipeline charges to customers are in
accordance with pipeline rates included in tariffs approved by the VSCC.

     In its exploration and production business, the Company receives revenues
from the sale of its natural gas production. The Company also receives revenues
from managing the construction, drilling, development and operation of natural
gas facilities, including management


                                       12
<PAGE>

and operations fees. In its natural gas gathering business, revenues are
generated from its ownership interest in gathering pipelines for natural gas
traveling through its gathering systems. In its gas marketing operations, the
Company generates revenues from the sale of natural gas. In its propane
distribution business, the Company generates revenues from the sale of propane
to industrial, commercial and residential customers. The Storage Company also
provides unregulated winter gas supply services.

     In its distribution operations, the Distribution Company's gross profits
are realized by the difference between the prices at which it purchases and the
prices at which it sells natural gas to its industrial, commercial and
residential customers. The prices at which the Distribution Company sells
natural gas to its customers are in accordance with the rate schedules in its
tariff filed with the VSCC. The Distribution Company purchases natural gas under
short-term contracts, which reflect the market price of natural gas.

RESULTS OF OPERATIONS

     Virginia Gas Company recorded revenues of $11.0 million in 1999 compared to
$9.8 in 1998 representing a 13% increase. Revenue growth was primarily derived
from the Company's P-25 pipeline that began service late in 1998, and growth in
the Company's propane distribution operations. Lower gas sales negatively
impacted revenues as sales volumes declined 5% due to lower production from
Company wells and lower amounts of third party gas sales. The trend of lower
production will continue due to the maturity of the wells.

<TABLE>

<CAPTION>

     ---------------------------- ------------- -------------- ----------------
                                                                PERCENTAGE
                  REVENUE             1999              1998      CHANGE
     ---------------------------- ------------- -------------- ----------------
     ---------------------------- ------------- -------------- ----------------
    <S>                           <C>            <C>           <C>
     Natural Gas Sales              $2,865,000     $3,256,000       (12)%
     ---------------------------- ------------- -------------- ----------------
     Storage Revenues                2,898,000      2,600,000        11
     ---------------------------- ------------- -------------- ----------------
     Pipeline Revenues               1,140,000        447,000       155
     ---------------------------- ------------- -------------- ----------------
     Propane Gas Sales               1,845,000      1,261,000        46
     ---------------------------- ------------- -------------- ----------------
     Explor. & Prod. Revenues          351,000        342,000         3
     ---------------------------- ------------- -------------- ----------------
     Management Revenues               304,000        260,000        17
     ---------------------------- ------------- -------------- ----------------
     Interest and Other Income       1,627,000      1,634,000         0
     ---------------------------- ------------- -------------- ----------------
        Total  Revenue             $11,030,000    $ 9,800,000        13%
     ---------------------------- ------------- -------------- ----------------

</TABLE>

     The Company operated 35 miles of its newly constructed pipeline for all of
1999 compared to limited operation in 1998. The pipeline generated $1.1 million
in demand charges in 1999 compared to $447,000 in 1998. The pipeline extends
from the Company's Saltville storage facility to Wytheville, Virginia. The
Company has a 15-year contract with Atmos Energy's subsidiary, United Cities Gas
Company, that provides 6,000 MMBtu/day to Marion, Virginia and 4,000 MMBtu/day
to Wytheville, Virginia.

     The Company's propane operation continued to experience significant growth
during 1999, as its customer base increased to 4,470 from 3,060 in December
1998. Propane gas revenues increased to $1.8 million from $1.3 million as
gallons sold increased to 2.0 million from 1.4 million. During 1999, the Company
opened a new customer service center in a county adjacent to its existing
territory and doubled its storage capacity to 186,000 gallons from 90,000
gallons in response to customer growth.

     Cost of natural gas sold declined from $3.0 million in 1998 to $2.5 million
in 1999 due to the aforementioned reduction in gas sale volumes. The Company
sold 1,345,000 MMBtu of gas


                                       13
<PAGE>

in 1999 compared to 1,418,000 MMBtu in 1998. Gross margins during 1999 improved
to 12% from 7% in 1998. The 12% is comparable to the pre-1998 margins. Propane
gas expense increased to $848,000 from $574,000 due to higher volumes, as
margins remained steady.

     The Company's general and administrative expense increased to $2.3 million
in 1999 from $1.6 million in 1998. There are two main reasons for the increase:
more resources were devoted toward administrative efforts and the Company's
ongoing strategic evaluation. The Company constructed 35 miles of pipeline in
1998. The project required that the Company devote much of its resources to the
capital project. During 1999, the Company's capital projects did not require the
same level of administrative resources. Consequently, with the same level of
infrastructure, the Company capitalized less of its employee time, which
resulted in an additional $560,000 in net overhead. In addition to less
capitalization, the Company's ongoing strategic evaluation required
approximately $200,000 in additional legal costs and investment banking fees.
These increases in costs mitigated the impact of the Company's early 1999
restructuring (see Note 13).

     The Company was successful in curbing growth in operations and maintenance
(O&M) expense during 1999. Despite customer growth in its propane subsidiary of
46%, the Company's O&M expense decreased to $887,000 from $899,000. A
contributing factor to the lower O&M was the purchase of compressors at the
Company's Saltville Storage Facility in February 1999. The compressors, before
the purchase, had been leased for an annual rental of $252,000.

     Depreciation, depletion, and amortization increased to $1.5 million from
$1.0 million due in large part to the Company's addition of the P-25 pipeline
that was placed in service late in 1998. Additional depreciation on propane
assets was also a factor as the Company's propane operations continued to
expand. Production expenses decreased to $88,000 from $106,000 reflecting the
continued maturity and decline of the Company's exploration and production
operations.

     Interest expense was $1.6 million in 1999 compared to $1.5 million in 1998.
The Company increased its outstanding balance on its line of credit from $2.5
million at the beginning of 1999 to $6.0 million at the end of the year to fund
construction of its evaporation facility. Other taxes increased during the
current year to $444,000 from $175,000 in 1998. The main contributor to this
increase was the additional franchise taxes paid by the Company in 1999. Due to
increase in authorized equity that was approved during 1998, the Company's
Delaware franchise taxes increased $130,000 annually. In addition to franchise
taxes, the Company's property taxes increased demonstrating the effect of 1998's
pipeline construction. Revenue earned from the pipeline also contributed to
higher gross receipts taxes paid to the Commonwealth of Virginia.

     The Company's earnings from affiliated companies were $413,000 in 1999.
That amount includes the $403,000 (portion attributable to VGC) gain recorded by
Virginia Gas Storage Company related to the sale of its interest in the Haysi
Gathering System during the first quarter of 1999. Factoring out that gain,
earnings from affiliates was $10,000 compared to a loss of $58,000 in 1998.
Improvements occurred at the affiliate level in the form of both lower general
and administrative expenses and lower operations and maintenance expenses.

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS


                                       14
<PAGE>

AND HEDGING ACTIVITIES (SFAS 133). The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. In February 2000, the FASB issued
a proposed statement that would amend SFAS 133 such that contracts to purchase
or sell commodities in volumes deemed to be in a Company's normal course of
business would not be considered derivatives as defined by SFAS 133. Therefore,
management does not believe SFAS 133 will have a material impact on the
consolidated financial statements when adopted. Statement No. 133 is effective
for fiscal years beginning after June 15, 2000 and may not be applied
retroactively.

FINANCIAL CONDITION

     Capital expenditures during 1999 were $ 7.5 million compared to $16.7
million in 1998 and were funded by the Company's line of credit with Wachovia
Bank and cash flow from operations. Cash flow from operations improved
dramatically to $3.8 million in 1999 from approximately $19,000 in 1998 as the
Company's affiliates repaid working capital loans.

     The Company has classified $24 million of long-term debt as current due to
a technical non-compliance with the Company's debt covenants. The Company's
covenants require it to maintain certain financial ratios (see Note 8). As of
December 31, 1999, one covenant requires the Company to maintain historical
EBITDA of one and one-half times current debt service. The Company's Line of
Credit (the "Line") with Wachovia Bank N.A. (the "Bank") is currently due on
July 1, 2000, and as of December 31, 1999, had a balance outstanding of $6.0
million. The $6.0 million, in its entirety by definition, must be included in
the Company's current debt service and, as a consequence, causes the technical
non-compliance. The Company's senior lenders, John Hancock and Wachovia, have
both provided the Company with a waiver through March 31, 2000. Furthermore, as
of the quarter ending March 31, 2000, the covenant becomes more stringent,
requiring the Company then to maintain EBITDA of one and three-quarters times
current debt service. Due to construction delays, the Company's revenue has not
grown at the expected pace. Consequently, the Company, with its current debt
structure, will have difficulty in meeting this covenant.

     The Company is exploring options to refinance its Line in a manner that
will avoid non-compliance with the covenant. One of those options is a partial
liquidation of assets and a complete repayment of the Line. There can be no
assurance that the Company will be successful in refinancing the Line. If it is
unsuccessful, the Company plans to seek additional waivers or renegotiate the
debt covenants, which will be at the discretion of the Company's lenders.

     The Company projects its capital budget for 2000 to be $20.0 million if the
pipeline and storage assets are expanded in the manner the Company believes is
appropriate and for which it has been securing the necessary regulatory
approvals and future contractual commitments. The Company does not have internal
resources currently to support this budget and has, as explained below, been
seeking financing from outside sources and considering other strategic
alternatives, such as potential asset liquidations, to obtain it. If resources
do not become available in the context of the transactions described below
currently under consideration by the Board of Directors, the Company will
postpone construction.


                                       15
<PAGE>

OUTLOOK

     The Company believes the best prospects for its future require the
continued expansion of the pipeline and storage assets. However, the Company's
internal resources are insufficient to support this expansion and, to date, the
Company's external efforts to attract the necessary capital have been
unsuccessful. The Company believes that resources could ultimately be found but
they are likely to be on less favorable terms than those historically available
and than those needed to best realize the benefits of expansion. The Company
could continue to operate in a status quo mode, which would not require
additional financing. However, the Company projects that flat to declining
results would be associated with the adoption of a status quo approach.

     In consideration of the above factors, and as previously disclosed, the
Company has for some time been exploring both sources of additional external
capital and strategic alternatives, which would promote the expansion strategies
that the Board and management believe are in the long term interest of those
invested in the Company's businesses. The efforts relating to strategic
alternatives have intensified in recent months as it has become clearer that the
level of additional financing and/or investment required is unlikely to be
available directly. Given the projected outcome of a status quo approach, it
appears that completion of an appropriate strategic transaction, if available,
would be in the Company's and its stockholders' best long term interests.

     As disclosed, in December 1999, a group of management employees made an
offer to acquire the Company, which was subject to a number of conditions,
including financing. The offer is no longer under active consideration. Through
its financial advisor, CIBC Oppenheimer, the Board has recently received other
indications of interest in a purchase of the Company's stock or significant
portions of its consolidated assets from several third parties who appear to
have the financial resources to complete the transactions in which they have
indicated an interest. These indications of interest, which have been
communicated subject to due diligence, negotiation of definitive agreements,
regulatory approvals, shareholder approval and other conditions, generally
appear to represent premiums to market value from the standpoint of the
Company's recent share price and are being actively considered by the Board.
However, at the present time, there can be no assurance that any of these
transactions will take place or that if they do take place, they will do so at
the prices initially proposed. It is the intention of the Board in pursuing
these matters to seek the transaction or transactions which will maximize
available value for the Company's shareholders. When and if sufficient progress
can be made with regard to a transaction that appears appropriate for the Board
to recommend to stockholders, further disclosure will be made.

FORWARD LOOKING STATEMENTS

     Certain of the statements contained in this section of the report,
including those under "Outlook" and "Financial Condition" are forward-looking.
While Virginia Gas Company believes that these statements are accurate, the
Company's business is dependent upon general economic conditions and various
conditions specific to its industry, and future trends and these factors could
cause actual results to differ materially from the forward looking statements
that have been made. In particular:

o    The Company's growth plans are contingent on its ability to affordably
     finance future capital expenditures. If the Company is unable to finance
     capital expenditures, revenue growth will be impacted.


                                       16
<PAGE>

o    Virginia Gas Company's revenue growth depends on future demand for pipeline
     and storage services. Many factors impact that demand. A continued trend of
     warmer than normal winters in the Company's service area could
     substantially curb the demand for natural gas storage and/or pipeline
     service. "Unbundling" or deregulation in the natural gas industry could
     introduce additional competitors and make the viability of long-term
     contracts suspect.

o    Virginia Gas Company derives 52% of its revenues from 4 customers.
     Accordingly, the future of the Company is inexorably linked to these
     significant customers. If any of these customers experience liquidity
     problems or undergo consolidations, it could negatively impact the Company.

YEAR 2000 ISSUE

     Over the past several years, the Company has developed and implemented a
plan to address the impacts of the Year 2000 ("Y2K") problem on our information
and operations systems. We also surveyed third parties to determine the status
of their Y2K compliance programs. In addition, we developed contingency plans
specifying what the Company would do if we or important third parties
experienced disruptions critical to business activities as a result of the Y2K
problem.

     The Company's Y2K plan was completed in all material respects prior to
December 31, 1999. As of March 15, 2000, the Company has not experienced any
material business disruptions or system failures as a result of Y2K issues, nor
is it aware of any Y2K issues that have impacted our customers, suppliers, or
other important third parties to an extent that would be significant to the
Company.


                                       17
<PAGE>

ITEM 7.  FINANCIAL STATEMENTS

                      VIRGINIA GAS COMPANY AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>

<CAPTION>

                                                                                         PAGE
<S>                                                                                       <C>
Report of Independent Public Accountants                                                  17
Consolidated Balance Sheets as of December 31, 1999 and 1998                              18
Consolidated Statements of Operations for the years ended December 31, 1999 and 1998      19
Consolidated Statements of Changes in Stockholders' Equity for the years ended
    December 31, 1999 and 1998                                                            20
Consolidated Statements of Cash Flows for the years ended December 31, 1999 and 1998      21
Notes to Consolidated Financial Statements                                                22

</TABLE>


                                       18
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
Virginia Gas Company:

We have audited the accompanying consolidated balance sheets of Virginia Gas
Company (a Delaware Corporation) and Subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Virginia Gas Company
and Subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 2 and 8 to the
financial statements, the Company was not in compliance with certain debt
covenants related to $30,000,000 of its debt obligations as of December 31,
1999, which raises substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.



ARTHUR ANDERSEN LLP

Richmond, Virginia
March 3, 2000


                                       19
<PAGE>


<TABLE>

<CAPTION>

                      VIRGINIA GAS COMPANY AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 1999 AND 1998

                                     ASSETS

                                                                    1999              1998
                                                             -----------      ------------
<S>                                                          <C>              <C>
CURRENT ASSETS:
    Cash and cash equivalents                                $  1,444,731     $  1,763,753
    Accounts receivable                                         1,212,685        3,469,757
    Notes receivable                                               40,100           38,800
    Other current assets                                          899,168          498,707
                                                             ------------     ------------
                  Total current assets                          3,596,684        5,771,017

PROPERTY AND EQUIPMENT, net                                    43,145,750       37,139,538

INVESTMENT IN AFFILIATED COMPANIES                              4,343,460        3,930,554

NOTES RECEIVABLE - AFFILIATED COMPANIES                        13,000,912       13,000,912

OTHER ASSETS                                                      639,714          619,533
                                                             ------------     ------------
                  Total assets                                $64,726,520      $60,461,554
                                                             ============     ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
    Current portion of long-term debt                         $24,045,144     $     46,734
    Line of credit                                              6,000,000        2,500,000
    Accounts payable                                              316,666          542,626
    Funds held for future distribution                            248,136          266,806
    Other current liabilities                                     242,011          261,624
                                                             ------------     ------------
                  Total current liabilities                    30,851,957        3,617,790

LONG-TERM DEBT                                                    209,709       24,254,444

DEFERRED INCOME TAXES                                             907,821          645,674
                                                             ------------     ------------
                  Total liabilities                            31,969,487       28,517,908
                                                             ------------     ------------
STOCKHOLDERS' EQUITY:

    Common stock - par value $.001, 100,000,000 shares
        authorized, 5,504,906 shares issued and outstanding         5,505            5,505
    Additional paid-in capital                                 31,375,267       31,375,267
    Retained earnings                                           1,376,261          562,874
                                                              -----------      -----------
                  Total stockholders' equity                   32,757,033       31,943,646
                                                              -----------      -----------
                  Total liabilities and stockholders' equity  $64,726,520      $60,461,554
                                                              ===========      ===========
</TABLE>

                 The accompanying notes are an integral part of these
consolidated balance sheets.

                                       20
<PAGE>

                      VIRGINIA GAS COMPANY AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

<TABLE>

<CAPTION>

                                                                                                1999                1998
                                                                                           ------------           ---------
OPERATING REVENUES:
<S>                                                                                        <C>                  <C>
     Operating revenues                                                                    $  9,402,851         $ 8,165,771
     Interest and other income                                                                1,627,237           1,634,206
                                                                                           ------------           ---------
                                                                                             11,030,088           9,799,977
                                                                                           ------------           ---------
EXPENSES:

    Cost of natural gas sold                                                                  2,510,885           3,042,541
    Propane gas expense                                                                         848,217             574,002
    General and administrative                                                                2,300,777           1,646,448
    Depreciation, depletion, and amortization                                                 1,483,001             972,891
    Operation and maintenance expense                                                           887,412             899,030
    Production expenses                                                                          87,933             106,146
    Restructuring and impairment charges                                                              -           1,262,110
                                                                                           ------------           ---------
                                                                                              8,118,225           8,503,168
                                                                                           ============           =========

OTHER EXPENSES:
    Interest expense                                                                          1,645,589           1,452,677
    Other taxes                                                                                 444,342             174,978
                                                                                           ------------           ---------
                                                                                              2,089,931           1,627,655
                                                                                           ============           =========

INCOME (LOSS) BEFORE EARNINGS OF AFFILIATED COMPANIES, INCOME TAXES, AND
    EXTRAORDINARY LOSS                                                                          821,932           (330,846)

     Provision for (benefit from) income taxes                                                  228,793           (101,763)
                                                                                           ------------           ---------

INCOME (LOSS) BEFORE EARNINGS OF AFFILIATED COMPANIES AND
EXTRAORDINARY LOSS                                                                              593,139           (229,083)
     Equity in earnings (losses) of affiliated companies before
        extraordinary items                                                                     412,920            (58,102)
                                                                                           ------------           ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM                                                       1,006,059           (287,185)
     Extraordinary loss on extinguishment of debt net of taxes of
        $444,000                                                                                      -           (832,493)
                                                                                           ------------           ---------
NET INCOME (LOSS)                                                                         $   1,006,059       $ (1,119,678)
                                                                                           ============           =========
WEIGHTED AVERAGE, SHARES ISSUED AND OUTSTANDING                                               5,504,906           5,504,906
                                                                                           ============           =========
NET INCOME (LOSS) PER COMMON SHARE, BASIC AND DILUTED:

     Net income (loss) before extraordinary item                                          $        0.18       $       (0.05)

     Extraordinary loss on extinguishment of debt (net of tax)                                        -               (0.15)
                                                                                           ------------           ---------
     Net income (loss) per common share                                                   $        0.18       $       (0.20)
                                                                                           ============           =========

</TABLE>

                 The accompanying notes are an integral part of these
consolidated financial statements.

                                       21
<PAGE>

                      VIRGINIA GAS COMPANY AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

<TABLE>

<CAPTION>

                                                    COMMON      ADDITIONAL        RETAINED
                                                    STOCK    PAID-IN CAPITAL      EARNINGS
                                               ------------  ---------------  ------------
<S>                                            <C>            <C>             <C>
BALANCE, December 31, 1997                     $      5,505   $ 31,241,082    $  2,067,916
    Repurchase of employee warrants                      --         (5,015)             --
    Payment of employee notes receivable for
       Stock                                             --        139,200              --
    Common stock dividends                               --             --        (385,364)
    Net loss                                             --             --      (1,119,678)
                                               ------------  ---------------  ------------
BALANCE, December 31, 1998                            5,505     31,375,267         562,874
    Common stock dividends                               --             --        (192,672)
  Net income                                             --             --       1,006,059
                                               ------------  ---------------  ------------
BALANCE, December 31, 1999                     $      5,505   $ 31,375,267    $  1,376,261
                                               ============  ===============  ============
</TABLE>

                 The accompanying notes are an integral part of these
consolidated financial statements.
                                        22



<PAGE>

                      VIRGINIA GAS COMPANY AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                        1999            1998
                                                                   ------------    ------------
<S>                                                                <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income (loss)                                              $  1,006,059    $ (1,119,678)
    Adjustments to reconcile net income to net cash provided by
       operating activities:
         Depreciation, depletion, and amortization                    1,483,001         972,891
         Gain on sale of fixed assets                                   (15,607)           --
         Undistributed losses (earnings) of affiliated companies       (412,920)         58,102
         Extraordinary loss on extinguishment of debt                      --         1,013,394
         Deferred income taxes                                          262,147        (280,234)
         Impairment charge                                                 --         1,021,498
         Decrease (increase) in accounts receivable                   2,249,460        (826,739)
         Increase in other current assets                              (400,461)       (193,484)
         Decrease in other assets                                      (140,480)        (47,334)
         Decrease in accounts payable                                  (225,960)       (550,220)
         Decrease in other current liabilities                          (38,283)        (28,780)
                                                                   ------------    ------------
                  Net cash provided by operating activities           3,766,956          19,416
                                                                   ------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Capital expenditures                                             (7,489,907)    (16,748,264)
    Proceeds from sale of assets                                        142,126          89,105
    Payments received on notes receivable                                   800         159,350
                                                                   ------------    ------------
                  Net cash used in investing activities              (7,346,981)    (16,499,809)
                                                                   ------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Payment of loan principal                                        (2,856,325)    (19,645,855)
    Proceeds from new loans                                           6,310,000      26,500,000
    Purchase of warrants and options                                       --            (5,015)
    Payment of debt issuance costs                                         --          (659,311)
    Refund of financing reserve funds                                      --           688,792
    Dividends paid                                                     (192,672)       (385,364)
                                                                   ------------    ------------
                  Net cash provided by financing activities           3,261,003       6,493,247
                                                                   ------------    ------------
NET DECREASE IN CASH                                                   (319,022)     (9,987,146)

CASH, beginning of year                                               1,763,753      11,750,899
                                                                   ------------    ------------
CASH, end of year                                                  $  1,444,731    $  1,763,753
                                                                   ------------    ------------
                                                                   ------------    ------------
SUPPLEMENTAL DISCLOSURE:

    Interest paid                                                  $  2,202,825    $  2,028,874
                                                                   ------------    ------------
                                                                   ------------    ------------
    Income taxes paid                                              $    300,000    $     12,075
                                                                   ------------    ------------
                                                                   ------------    ------------
</TABLE>

                 The accompanying notes are an integral part of these
consolidated financial statements.
                                       23
<PAGE>

                      VIRGINIA GAS COMPANY AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 1999 AND 1998

 1.  DESCRIPTION OF OPERATIONS:

Virginia Gas Company (the "Company") was organized in 1987 under the laws of the
state of Delaware. The Company, directly or through its subsidiaries and
affiliated companies, is primarily engaged in the storage, marketing,
distribution, gathering, exploration, and production of natural gas, and the
distribution of propane gas, principally in the southwestern counties of the
Commonwealth of Virginia.

 2.  MANAGEMENT'S PLANS:

The Company has classified $24 million of long-term debt as current due to a
technical non-compliance with the Company's debt covenants. The Company's
covenants require it to maintain certain financial ratios (see Note 8). As of
December 31, 1999, one covenant requires the Company to maintain historical
EBITDA of one and one-half times current debt service. The Company's Line of
Credit (the "Line") with Wachovia Bank N.A. (the "Bank") is currently due on
July 1, 2000, and as of December 31, 1999, had a balance outstanding of $6.0
million. The $6.0 million, in its entirety by definition, must be included in
the Company's current debt service and, as a consequence, causes the technical
non-compliance. The Company's senior lenders, John Hancock and Wachovia, have
both provided the Company with a waiver through March 31, 2000. Furthermore, as
of the quarter ending March 31, 2000, the covenant becomes more stringent,
requiring the Company then to maintain EBITDA of one and three-quarters times
current debt service. Due to construction delays, the Company's revenue has not
grown at the expected pace. Consequently, the Company, with its current debt
structure, will have difficulty in meeting this covenant.

The Company is exploring options to refinance its Line in a manner that will
avoid non-compliance with the covenant. One of those options is a partial
liquidation of assets and a complete repayment of the Line. There can be no
assurance that the Company will be successful in refinancing the Line. If it is
unsuccessful, the Company plans to seek additional waivers or renegotiate the
debt covenants, which will be at the discretion of the Company's lenders.

 3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements for 1999 and 1998 include the accounts of
four wholly owned subsidiaries. These subsidiaries are Virginia Gas Exploration
Company, Virginia Gas Marketing Company, Virginia Gas Pipeline Company, and
Virginia Gas Propane Company. All significant intercompany balances and
transactions have been eliminated in consolidation.

CASH AND CASH EQUIVALENTS



                                       24
<PAGE>

Cash and cash equivalents consist of all cash balances and highly liquid
investments which have an original maturity at purchase of three months or less.

INVESTMENT IN AFFILIATED COMPANIES

The Company's investments in affiliated companies are accounted for using the
equity method. Investments carried at equity consist of Virginia Gas Storage
Company ("VGSC") and Virginia Gas Distribution Company ("VGDC") (the
"Affiliates"). The Company has a 50 percent interest in each of these
Affiliates.

Combined financial information as of December 31, 1999 and 1998, and for the
years then ended, for investments in affiliated companies accounted for by the
equity method is as follows.

<TABLE>
<CAPTION>
                                                                  1999            1998
                                                              -----------     -----------
<S>                                                          <C>             <C>
        Current assets                                       $  1,462,597    $  1,313,989
        Property and equipment, net                            20,444,918      22,206,543
        Other assets                                            1,967,623       3,637,419
                                                              -----------     -----------
                                                              $23,875,138     $27,157,951
                                                              -----------     -----------
                                                              -----------     -----------



        Current liabilities                                 $     576,769    $  2,754,017
        Long-term debt                                         13,916,719      15,916,719
        Other liabilities                                         694,731         626,136
        Stockholders' equity                                    8,686,919       7,861,079
                                                              -----------     -----------
                                                              $23,875,138     $27,157,951
                                                              -----------     -----------
                                                              -----------     -----------
</TABLE>

<TABLE>
<CAPTION>
                                                                 FOR THE YEARS ENDED
                                                                    DECEMBER 31
                                                                 1999            1998
                                                              -----------     -----------
<S>                                                          <C>            <C>
        Revenues                                             $  5,814,707   $  4,851,762
        Income (loss) before income taxes and
              extraordinary loss                                1,251,273        (176,084)
        Net income (loss)                                         825,840      (1,058,795)
</TABLE>

The Company provides certain general and administrative services for the
Affiliates. These services include professional services, insurance coverage and
administrative services. Other transactions include purchases and sales of
natural gas, natural gas storage, and technical services provided to the
Affiliates.

VGSC, a 50% owned affiliate of VGC, sold its 60% interest in the Haysi gathering
System in February 1999 for $2.7 million resulting n a $1.2 million before-tax
gain. The Company recorded 50% of that gain through earnings of affiliates.

USE OF ESTIMATES

                                       25
<PAGE>

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities (if any) at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

REVENUE RECOGNITION

The Company recognizes natural gas sales and gathering revenues upon delivery of
natural gas to the common pipeline carrier. Storage revenues are recognized
evenly throughout the contract terms with injection and withdrawal revenues
recognized as natural gas is injected or withdrawn from the storage facility.
Propane gas sales are recognized upon delivery of gas to the customer.

INCOME PER COMMON SHARE

Income per common share is computed using the weighted-average shares of common
stock and dilutive common stock equivalents (options and warrants) outstanding
during the respective periods. The number of weighted-average shares used in
calculating income per common share was 5,504,906 for the years ended December
31, 1999 and 1998.

PROPERTY AND EQUIPMENT

The Company follows the successful efforts method of accounting for its natural
gas exploration activities. Under this method, geological and geophysical costs
and costs of carrying and retaining undeveloped properties are expensed when
incurred. All direct and certain indirect costs relating to property
acquisition, successful exploratory wells, development costs, and support
equipment and facilities are capitalized as the properties are obtained or the
facilities are placed into service. Costs of exploratory wells are charged to
expense if it is determined that proven reserves are not found.

Unproved gas properties that are individually significant are periodically
assessed for impairment of value, with losses recognized at the time of
impairment. The Company recognized an impairment loss of approximately
$1,020,000 in 1998 related to its oil and gas properties. Property and equipment
is depreciated using the straight-line method over estimated useful lives,
ranging from 5 to 40 years. Maintenance and repairs are charged to expense as
incurred. Improvements and betterments are capitalized.

LONG-LIVED ASSETS

Long-lived assets and certain identifiable intangible assets (including
goodwill) are reviewed for impairment when circumstances indicate that the
carrying amount of an asset may not be recoverable. VGC periodically evaluates
whether events and circumstances have occurred that indicate whether the
remaining estimated useful lives of long-lived assets should be revised or
whether the remaining balance may not be recoverable. When factors indicate that
a long-lived asset should be evaluated for possible impairment, VGC uses an
estimate of its undiscounted net cash flow over the remaining life of the
long-lived assets in measuring whether the long-lived asset is recoverable.



                                       26
<PAGE>

CAPITALIZED INTEREST

The Company capitalizes interest on expenditures for significant projects while
activities are in progress to bring the assets to their intended use. Interest
capitalized totaled $583,632 and $578,662 for the years ended December 31, 1999
and 1998, respectively.

OTHER ASSETS

Costs incurred in conjunction with financing transactions are amortized on a
straight-line basis, which is not materially different than the effective
interest method, over the terms of the financing transactions.

FUNDS HELD FOR FUTURE DISTRIBUTION

Revenues are collected by the Company as operator and marketer of the gas sold
on behalf of the working interest parties and held for final distribution to
them and to landowners. Until these funds are distributed, they are recorded as
funds held for future distribution.

INCOME TAXES

Income taxes are accounted for using the asset-and-liability method. Under the
asset-and-liability method, deferred income taxes reflect the temporary
differences between assets and liabilities recognized for financial reporting
purposes and amounts recognized for tax purposes.

RECLASSIFICATIONS

Certain reclassifications have been made in the 1998 balances to conform to the
1999 presentation.

 4.  ACCOUNTS RECEIVABLE:

<TABLE>
<CAPTION>
                                                                          1999            1998
                                                                    ------------    ------------
<S>                                                                <C>             <C>
Trade receivables                                                  $     864,199   $     841,256
Due from affiliated companies                                            209,382       2,490,642
Lease operating expenses receivable                                      129,199         120,704
Joint-interest receivables                                                 9,905          17,155
                                                                    ------------    ------------
                                                                    $  1,212,685    $  3,469,757
                                                                    ------------    ------------
                                                                    ------------    ------------
</TABLE>

The majority of the Company's accounts receivable are due from companies
predominately involved in the marketing and distribution of oil and gas
products.

 5. NOTES RECEIVABLE - AFFILIATED COMPANIES:

<TABLE>
<CAPTION>
                                                                                              1999            1998
                                                                                           ------------    ------------
<S>                                                                                        <C>             <C>
Note receivable from Virginia Gas Distribution Company; interest receivable at
   8.5%; principal payable in maturities of
   $845,000 to $1,056,000 from 2003 to 2012                                                $  8,661,172    $  8,661,172
</TABLE>



                                       27
<PAGE>

<TABLE>
<S>                                                                                        <C>             <C>
Note receivable from Virginia Gas Storage Company;
   interest receivable at 8.5%; principal payable in maturities of
   $423,000 to $529,000 from 2003 to 2012                                                     4,339,740       4,339,740
                                                                                            -----------     -----------
                                                                                            $13,000,912     $13,000,912
                                                                                            -----------     -----------
                                                                                            -----------     -----------
</TABLE>


 6.  PROPERTY AND EQUIPMENT:

<TABLE>
<CAPTION>
                                                                            1999            1998
                                                                          -----------     -----------
<S>                                                                       <C>             <C>
Storage properties                                                        $15,628,751     $15,025,229
Pipelines                                                                  12,114,571      11,540,536
Work in progress                                                           11,984,847       7,332,997
Propane facilities                                                          3,877,907       2,635,165
Wells                                                                       1,455,086       1,525,247
Building and improvements                                                   1,077,037         860,861
Vehicles                                                                      498,926         430,079
Office equipment                                                              490,437         405,692
Equipment                                                                      74,269          96,229
                                                                          -----------     -----------
                                                                           47,201,831      39,852,035

Less- Accumulated depreciation, depletion, and amortization                (4,056,081)     (2,712,497)
                                                                          -----------     -----------
                                                                          $43,145,750     $37,139,538
                                                                          -----------     -----------
                                                                          -----------     -----------
</TABLE>

 7.  OTHER ASSETS:

<TABLE>
<CAPTION>
                                                                                1999            1998
                                                                          -----------     -----------
<S>                                                                     <C>             <C>
Deferred financing costs                                                $     243,678   $     572,313
Interest receivable                                                           222,433               -
Insurance proceeds receivable                                                 119,516               -
Other                                                                          48,575          47,220
Note receivable - trade                                                         5,512               -
                                                                          -----------     -----------
                                                                        $     639,714   $     619,533
                                                                          -----------     -----------
                                                                          -----------     -----------
</TABLE>

 8.  DEBT:

<TABLE>
<CAPTION>
                                                                                              1999             1998
                                                                                           -----------      ------------
<S>                                                                                        <C>              <C>
Notes payable to John Hancock Mutual Life Insurance Company; interest payable
    quarterly at 8.5%, principal payable in maturities of $1,659,000 to
    $2,073,000 from 2003 to 2012                                                           $ 17,000,000     $ 17,000,000

Notepayable to Mellon Bank, NA; interest payable quarterly at 8.5%, principal
    payable in maturities of $390,000 to $488,000 from 2003 to 2012                           4,000,000        4,000,000



Notepayable to John Hancock Variable Life Insurance Company; interest payable
    quarterly at 8.5%, principal payable in maturities of $293,000 to
    $366,000 from 2003 to 2012                                                                3,000,000        3,000,000
</TABLE>



                                       28
<PAGE>

<TABLE>
<S>                                                                                     <C>                  <C>
Notepayable with interest at 8%; payable in monthly installments of principal
    and interest of $1,802 through November 2007; secured by an asset with a
    book value of $172,335 as of December 31, 1999                                              125,539          136,630

Notepayable with interest at 7.5%; payable in monthly installments of principal
    and interest of $1,119; maturing in February 2009, secured by an asset with
    a book value of $237,400 as of December 31, 1999
                                                                                                 88,802           95,324
Notes payable through 2001 with interest from 8% to 9.3%; secured by assets
    with a book value of $47,648 as of December 31, 1999                                         40,512           69,224
                                                                                         --------------      -----------
                                                                                             24,254,853       24,301,178

Less- Current portion                                                                           (45,144)         (46,734)

        Amounts classified as current                                                       (24,000,000)               -
                                                                                         --------------      -----------
Long-term debt                                                                           $      209,709      $24,254,444
                                                                                         --------------      -----------
                                                                                         --------------      -----------
</TABLE>

In March 1998, the Company sold $24 million in senior notes to John Hancock
Mutual Life Insurance Company ("John Hancock") in the form of four promissory
notes. Subsequently, John Hancock assigned $4.0 million of these notes to Mellon
Bank. With $19.5 million of the proceeds, the Company called and retired the
Series 1997 Russell County, Virginia Subordinated Natural Gas Facilities Revenue
Bonds, the Series 1995 Buchanan County, Virginia Senior Subordinated Natural Gas
Facilities Revenue Bonds, and the Series A 1994 Buchanan County, Virginia
Natural Gas Revenue Bonds. The Company also defeased the Series A and B 1994
Russell County, Virginia Subordinated Natural Gas Facilities Revenue Bonds. The
remaining proceeds were used to develop the Company's pipeline projects. As a
result of the refinancing, the Company recognized an extraordinary loss on
extinguishment of debt for approximately $832,000. This amount is net of taxes
and includes the Company's 50% share of the extraordinary loss recorded by its
affiliates. The note agreement requires the Company to maintain certain debt
service coverage ratios, a prescribed consolidated tangible net worth, and it
limits the Company's total liabilities. As of December 31, 1999, the Company was
not in compliance with these covenants. The Company has obtained waivers of
these covenant violations through March 31, 2000. The notes are guaranteed by
the Company's wholly-owned subsidiaries and the company has pledged the stock of
50 percent owned affiliates as collateral for the notes.

As of December 31, 1999, scheduled principal payments on long-term debt for the
next five years and thereafter are as follows:

<TABLE>
        <S>                                                <C>
        2000                                               $     45,144
        2001                                                     33,178
        2002                                                     23,763
        2003                                                  2,365,925
        2004                                                  2,367,863
        Thereafter                                           19,418,980
</TABLE>

Based upon the borrowing rates currently available to the Company for loans with
similar terms and remaining maturities, the approximate fair value of long-term
debt at December 31, 1999 and 1998, was approximately $23,661,000 and
$27,259,000 respectively.



                                       29
<PAGE>

The Company entered into an $8 million line of credit agreement (the "Line")
with Wachovia Bank, N.A. in July 1998. The Line carries an interest rate based
on the monthly LIBOR rate plus a factor, which is contingent on the company's
debt service coverage ratio. At December 31, 1999 the interest rate was 8.98%.
The Line's financial covenant requirements are similar to the covenants in the
John Hancock Note Agreement discussed above. As of December 31, 1999, the
Company was not in compliance with these financial covenants. The Company has
received waivers of these covenant violations through March 31, 2000. The
Company had $6.0 million and $2.5 million outstanding as of December 31, 1999
and 1998. The total amount is due on July 1, 2000.

 9.  STOCK OPTIONS:

The Company has granted certain management and directors stock options that
allow the individuals to purchase previously unissued common shares at a set
price. The exercise prices of options granted approximate the estimated fair
market value, as determined by the Board of Directors of the Company's common
stock as of the grant date.

On October 1, 1998, the Company granted to certain of its officers and directors
options to purchase 290,000 shares of the Company's common stock at an exercise
price of $4.125 in accordance with the 1998 Stock Option Plan. The options are
subject to a three-year vesting period from October 1, 1998 until October 1,
2001. The options expire on October 1, 2008.

On July 1, 1997, the Company granted options to purchase 120,000 shares of the
Company's common stock at an exercise price of $10 per share. The options are
subject to a three-year vesting period from July 1, 1997 until June 30, 2000.

These options expire on June 30, 2002.

Changes in the options outstanding during the years ended December 31, 1999 and
1998, were as follows:

<TABLE>
<CAPTION>
                                                                     WEIGHTED-AVERAGE
                                                                       EXERCISE PRICE
                                                            SHARES       PER SHARE
                                                            -------- ----------------
<S>                                                          <C>        <C>
Outstanding, December 31, 1997                               110,000    $10.00
   Granted                                                   290,000    $4.125
   Canceled                                                 (100,000)   $10.00
Outstanding, December 31, 1998                               300,000     $4.32
   Canceled                                                  (30,000)   $4.125
Outstanding, December 31, 1999                               270,000     $4.34
</TABLE>

At December 31, 1999, options for 103,333 shares are currently exercisable.

In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company has elected to account for its stock options under APB Opinion No. 25,
under which no compensation cost has been recognized. Had compensation cost for
these stock options been determined in accordance with



                                       30
<PAGE>

SFAS No. 123, the Company's net income and income per share would have decreased
by approximately $230,000 ($.04 per share) in 1999. Net loss and loss per share
would have been increased by $75,000 ($.02 per share) in 1998. The weighted
average fair value of options granted during 1998 was approximately $2.52.

The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model. The following weighted average
assumptions were used for grants in 1998: risk-free rate of return of 4.16%;
expected dividend yield of .71%; expected life of ten years; expected volatility
of 50%.

10.  COMMITMENTS AND CONTINGENT LIABILITIES:

The Company leases vehicles, equipment, land, and office space. Certain of these
leases require the Company to pay minimum royalties or rentals. The aggregate
minimum royalty and rental payments on leases for the next five years and
thereafter are as follows.

<TABLE>
        <S>                                                <C>
        2000                                               $ 198,619
        2001                                                 177,270
        2002                                                 117,700
        2003                                                  68,777
        2004                                                  51,857
        Thereafter                                           509,328
</TABLE>

The Company is subject to various Federal, state, and local laws and regulations
relating to the protection of the environment. The Company believes that it is
in compliance with these laws and regulations and does not expect to incur
significant capital expenditures in future years to maintain compliance.

11.  SALES TO MAJOR CUSTOMERS:

The Company has four significant customers that accounted for 31%, 9%, 8%, and
4% of 1999 operating revenues and 27%, 18%, 11%, and 11% in 1998 operating
revenues respectively.

12.  INCOME TAXES:

The components of the provision (benefit) for income taxes before extraordinary
items are as follows:

<TABLE>
<CAPTION>
                                                      1999           1998
                                                 -----------   -----------
<S>                                              <C>           <C>
        Current:
            Federal                              $  (30,317)   $   173,834
            State                                    (3,037)         4,637
                                                 -----------   -----------
                                                    (33,354)       178,471

        Deferred:
            Federal                                 238,279       (272,953)
            State                                    23,868         (7,281)
                                                 -----------   -----------
                                                    262,147       (280,234)
                                                 -----------   -----------
                                                $   228,793      $(101,763)
                                                 -----------   -----------
                                                 -----------   -----------
</TABLE>



                                       31
<PAGE>

The components of deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                                                           1999           1998
                                                                       -----------    -----------
<S>                                                                    <C>            <C>
        Deferred tax assets:
            Minimum tax credit carryforwards                           $   111,615    $   111,615
            Net operating loss carryforward                              1,264,898        887,461
                                                                       -----------    -----------
                          Total                                          1,376,513        999,076
                                                                       -----------    -----------
        Deferred tax liabilities:
            Capital assets                                               2,284,334      1,644,750
                                                                       -----------    -----------
                                                                         ---------        -------
                          Net deferred tax liabilities                 $   907,821    $   645,674
                                                                       -----------    -----------
                                                                       -----------    -----------
</TABLE>

The Company has no valuation allowances as of December 31, 1999 and 1998.

A reconciliation of the tax provision at the statutory Federal income tax rate
and the Company's actual provision for income tax before extraordinary items is
as follows:

<TABLE>
<CAPTION>
                                                                                         1999           1998
                                                                                      -----------      ---------
<S>                                                                                   <C>              <C>
        Tax (benefit) at statutory rate of 34%                                        $   419,850      $(132,242)
        Equity in (earnings) losses of affiliated companies                              (152,780)        19,755
        State income taxes, less Federal benefit                                          (36,144)        (7,281)
        Statutory depletion in excess of cost depletion                                    (6,937)       (13,874)
        Other, net                                                                          4,804         31,879
                                                                                      -----------      ---------
                                                                                      $   228,793      $(101,763)
                                                                                      -----------      ---------
                                                                                      -----------      ---------
</TABLE>

In addition, the Company has minimum tax credits that can be carried forward
indefinitely to offset future regular tax. The aggregate amount of minimum tax
credits available at December 31, 1999, is approximately $112,000.

13.  EMPLOYMENT COMMITMENTS:

On May 23, 1996, the Company entered into a ten-year employment contract with
its President and CEO (the "President"), which provides for an annual salary of
$155,000. The contract provides for a bonus to be paid based upon 10 percent of
the Company's pretax earnings on all amounts from $1,000,000 to $1,999,999 and
15 percent of the Company's pretax earnings on all amounts in excess of
$2,000,000. The President did not receive a bonus in 1999, however, $28,000 was
accrued for 1999 performance as of December 31, 1999. If the President is
terminated by the Company for any reason other than for cause during the term of
the employment contract, at the President's election, the Company would be
obligated to purchase all or a portion of the shares held by him and his family
(404,813 shares as of December 31, 1999) at a price equal to 150 percent of the
market value of the Company's shares on the date of termination. In addition,
the Company would be obligated to pay the President in a lump sum all salary
amounts owed through the term of the employment agreement plus an additional
$2,000,000.

14.  RESTRUCTURING AND IMPAIRMENT CHARGES:



                                       32
<PAGE>

In December 1998, the Company's Board of Directors approved a cost reduction
plan. Consistent with the plan, the Company recorded a $241,000 reserve related
to severance payments for former employees and employees that were laid-off in
January 1999. This reserve had been utilized by December 31, 1999. A total of
eight employees were laid-off. These employees were given payments totaling
$241,000. As discussed in Note 3, the Company also recorded an impairment charge
of approximately $1,020,000 related to its well property. The charge was in
response to lower wellhead prices for natural gas and the continued decline in
significance of the Company's exploration and production operation.
Approximately $833,000 of the impairment related to properties that had been
developed but require additional capital to be fully developed or are
undeveloped properties. At the end of 1998, it was not economically feasible to
develop these properties. Additionally, the Company recognized the impact of
declining prices on its producing properties by estimating the general decline
using 1996 as the base year. The Company determined that the prices had declined
21% since 1996 and recorded an impairment reserve of $187,000 in response to
this decline.

15. SEGMENT INFORMATION:

The Company classifies its business into five fundamental areas: natural gas
storage, production, transportation, propane distribution and parent company
activities. Storage activities include revenues derived from and expenses
incurred in the operation of the Saltville Storage Facility. The production
segment includes gas sales from Company operated wells through its Virginia Gas
Marketing Company and the related expenses. Transportation activities include
revenue derived from the Company's P-25 pipeline system and the expenses
incurred to operate that system. The propane distribution segment includes all
revenues obtained through the retail distribution of propane and the related
expenses. The parent company activities relate solely to activities of Virginia
Gas Company as a holding company. Information as to the operations of the
Company in different business segments is set forth below based on the nature of
the products and services offered.

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31
                                                             1999               1998
                                                         ------------    ------------
<S>                                                      <C>             <C>
STORAGE:

     Total assets                                        $ 23,264,477    $ 18,453,478
     Capital expenditures                                $  5,331,379    $  3,971,187

     Operating revenues                                  $  2,924,552    $  2,938,544
     Interest income                                             --           276,041
     Other income                                               2,729             725
     Operation and maintenance                               (466,657)       (505,099)
     Depreciation, depletion, and amortization               (564,987)       (374,080)
                                                         ------------    ------------
STORAGE OPERATING AND INTEREST INCOME                    $  1,895,637    $  2,336,131
                                                         ------------    ------------
                                                         ------------    ------------

PRODUCTION:

     Total assets                                        $  4,032,109    $  3,849,877
     Capital expenditures                                $     39,453    $     46,259
</TABLE>



                                       33
<PAGE>

<TABLE>
<S>                                                      <C>             <C>
     Operating revenues                                  $  3,528,617    $  3,646,654
     Interest income                                           43,545          42,157
     Other income                                              20,666           7,038
     Cost of natural gas sold                              (2,510,885)     (3,042,541)
     Production expense                                       (87,933)       (106,146)
     Operations and maintenance                               (28,453)        (77,506)
     Depreciation, depletion, and amortization               (178,086)       (244,063)
                                                         ------------    ------------
PRODUCTION OPERATING AND INTEREST INCOME                 $    787,471    $    225,593
                                                         ------------    ------------
                                                         ------------    ------------
TRANSPORTATION:

     Total assets                                        $ 14,751,201    $ 13,693,638
     Capital expenditures                                $    654,904    $ 11,442,048

     Operating revenues                                  $  1,150,349    $    507,246
     Interest income                                             --            48,713
     Other income                                               1,099            --
     Operation and maintenance                                (17,916)        (64,103)
     Depreciation, depletion, and amortization               (267,793)       (135,610)
                                                         ------------    ------------
TRANSPORTATION OPERATING AND INTEREST INCOME             $    865,739    $    356,246
                                                         ------------    ------------
                                                         ------------    ------------
PROPANE DISTRIBUTION:

     Total assets                                        $  4,787,296    $  3,607,146
     Capital expenditures                                $  1,322,672    $  1,226,069

     Operating revenue                                   $  1,909,391    $  1,321,698
     Interest income                                             --            11,081
     Other income                                             244,748         165,791
     Propane gas expense                                     (848,217)       (574,002)
     Operation and maintenance                               (374,386)       (252,322)
     Depreciation, depletion, and amortization               (237,183)       (152,938)
                                                         ------------    ------------
PROPANE DISTRIBUTION OPERATING AND INTEREST INCOME       $    694,353    $    519,308
                                                         ------------    ------------
                                                         ------------    ------------
PARENT COMPANY:

     Investments in subsidiaries and affiliates          $ 29,093,460    $ 28,680,554
     Notes receivable from subsidiaries and affiliates   $ 23,460,004    $ 21,469,845
     Total assets                                        $ 58,022,637    $ 54,776,897
      Capital expenditures                               $    141,499    $     62,701


     Operating revenue                                   $    712,036    $        202
     Interest income                                        2,258,695       2,066,314
     Other income                                                 256           2,420
     Depreciation, depletion, and amortization               (234,952)        (66,200)
                                                         ------------    ------------
</TABLE>


                                       34
<PAGE>

<TABLE>
<S>                                                      <C>             <C>
PARENT COMPANY OPERATING AND INTEREST INCOME             $  2,736,035    $  2,002,736
                                                         ------------    ------------
                                                         ------------    ------------
ELIMINATION OF INTERCOMPANY/INTERSEGMENT ACTIVITY:

    Total assets                                         $(40,131,200)   $(33,919,482)
    Operating revenues                                   $   (822,094)   $   (248,573)
    Interest income                                      $   (944,501)   $   (986,074)

VIRGINIA GAS COMPANY CONSOLIDATED:

     Total assets                                        $ 64,726,520    $ 60,461,554
     Capital expenditures                                $  7,489,907    $ 16,748,264
     Operating revenues                                  $  9,402,851    $  8,165,771
     Interest income                                        1,357,739       1,458,232
     Other income                                             269,498         175,974
     Cost of gas sold                                      (2,510,885)     (3,042,541)
     Propane gas expense                                     (848,217)       (574,002)
     Production expense                                       (87,933)       (106,146)
     Operations and maintenance                              (887,412)       (899,030)
     Depreciation, depletion, and amortization             (1,483,001)       (972,891)
VIRGINIA GAS COMPANY CONSOLIDATED OPERATING AND
                                                         ------------    ------------
   INTEREST INCOME                                       $  5,212,640    $  4,205,367
                                                         ------------    ------------
                                                         ------------    ------------
</TABLE>



                                       35
<PAGE>

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         None.

                                    PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

DIRECTORS

                  Set forth below is information regarding the Company's
Directors, their ages, the period during which they have served as a Director,
their business experience during at least the past five years and other
directorships currently held by them.

         Glenn B. Rogers, age 61, served as Senior Vice President of Marketing
and Gas Supply for United Cities Gas Company from 1970 until his retirement in
October 1997. In this position, he was responsible for the propane operations of
United Cities Gas Company. From 1979 to 1987, Mr. Rogers served United Cities
Gas Company as Group Vice President of Gas Supply, Marketing and Rates and from
1976 to 1979 he served as Vice President of Gas Supply. Mr. Rogers is a past
president of the Southeastern Gas Association. He also serves as a director of
Vietti Food Corporation. Mr. Rogers holds a B.S. degree in mathematics from
Peabody College and a Master's degree in mathematics from Southeast Oklahoma
State College. Mr. Rogers' term as a Director expires in 2001. Mr. Rogers was
elected Chairman of the Board in April 1999.

         Michael L. Edwards, age 47, has served as President and Director of the
Company since its formation in 1987 and as Chairman from 1987 to April 1999. He
also serves as President of Virginia Gas Exploration Company, Virginia Gas
Pipeline Company, Virginia Gas Marketing Company, Virginia Gas Propane Company,
Virginia Gas Storage Company and Virginia Gas Distribution Company. From 1983 to
1986 Mr. Edwards served as Executive Vice President and Director of Petroleum
Development Corporation. Mr. Edwards is a Phi Beta Kappa graduate of the
University of California, Berkeley and he received an MBA from the Stanford
University School of Business. Mr. Edwards' term as a Director expires in 2002.
He is the husband of Karen K. Edwards.

         Karen K. Edwards, age 42, has served as Vice President and Director of
the Company since its formation in 1987. She served as Treasurer until September
1995 and as Secretary until March 1998. Ms. Edwards received an MBA from the
Colgate Darden Graduate School of Business at the University of Virginia and a
Bachelor's degree in Business Administration from the University of Colorado.
Ms. Edwards' term as a Director expires in 2001. She is the wife of Michael L.
Edwards.

         Everette G. Allen, Jr., age 59, has served as a Director of the Company
since January 1998. He has served as Chairman of Hirschler, Fleischer, Weinberg,
Cox & Allen, a law firm located in Richmond, Virginia since 1986, and has been
employed by that firm since 1970. Mr. Allen is a director of Hersha Hospitality
Trust, a publicly traded real estate investment trust registered on the American
Stock Exchange. Mr. Allen has served as a member of the Board of Trustees for
Randolph-Macon College and is a Fellow with the American College of Trial
Lawyers. He is a Phi Beta Kappa graduate of Randolph-



                                       36
<PAGE>

Macon College and a graduate of the University of Virginia Law School. Mr.
Allen's term as Director expires in 2000.

         G. Lee Crenshaw, II, age 41, has served as a Director of the Company
since January 1998. He has served as a Director and Senior Vice President of
Anderson & Strudwick, Inc., an investment/brokerage firm, since 1994. From 1991
to 1994 he was employed at Scott & Stringfellow, an investment/brokerage firm,
as Vice President. Mr. Crenshaw was employed as a stockbroker at Wheat, First
Securities, Inc. from 1982 to 1991. He is a graduate of Virginia Commonwealth
University. Mr. Crenshaw's term as a Director expires in 2000.

EXECUTIVE OFFICERS

         The executive officers are elected to serve annual terms at the first
Board of Directors meeting following the annual meeting of the stockholders.
Certain information concerning the Company's executive officers as of March 31,
2000 is set forth below, except that information concerning Mr. and Mrs. Edwards
is presented above.

         James E. Talkington, III, age 40, has served as Vice President, Land
and Legal Affairs of the Company since April 1998. Mr. Talkington has also
served as the Company's Secretary since June 1999. He has been employed by the
Company since 1994 as land manager. Prior to his affiliation with the Company,
Mr. Talkington was an independent land manager for Ashland Exploration Company
in 1994. From 1989 to 1993 Mr. Talkington was employed by Continental Reserves
Oil Company as land manager.

         Bradley L. Swanson, age 53, has served as Vice President, Marketing and
Government Affairs of the Company since April 1998. He has been employed by the
Company since 1987 with responsibility for land leasing, right of way purchases,
legal matters, marketing, and government relations. From 1983 to 1987 Mr.
Swanson was the owner and operator of Home Town Properties, a residential and
commercial real estate firm.

         G. Scott Hill, age 43, has served as Vice President, Operations of the
Company since April 1998. He has been employed by the Company since March 1997
with responsibility for gas storage and pipeline operations. From 1985 to 1996
Mr. Hill was employed by Columbia Natural Resources as a drilling engineer.

         Robert C. Withrow, Jr., age 52, has served as Treasurer of the Company
since April 1998. He has been employed by the Company since February 1998 as
director of accounting. From 1981 to 1997 Mr. Withrow was employed as Vice
President of Finance of The Dosco Corporation. From 1979 to 1980 he was employed
by American Electric Power Company as internal audit manager. Mr. Withrow was
employed by Deloitte & Touche from 1972 to 1979 as senior auditor. He is a
certified public accountant.

         William L. Clear, age 29, has served as Chief Financial Officer of the
Company beginning in December 1998 and Assistant Secretary of the Company since
April 1998. He has been employed by the Company since March 1998 as Controller.
From 1993 to February 1998 Mr. Clear was employed by Coopers and Lybrand L.L.P.
as a business assurance senior associate specializing in audits of utility


                                       37
<PAGE>

companies. He received a B.S. in accounting from Emory & Henry College and an
M.A. in accounting from the University of Tennessee, Knoxville. Mr. Clear is a
certified public accountant.

         Timothy L. Ferguson, age 35, has served as Senior Vice President of the
Company since November 1998. He has been employed by the Company since March
1998 with responsibility primarily for pipeline and storage operations. Mr.
Ferguson also serves as Senior Vice President of Operations for Virginia Gas
Pipeline Company, Virginia Gas Storage Company, Virginia Gas Distribution
Company, Virginia Gas Exploration Company and Virginia Gas Propane Company.
Prior to his affiliation with the Company, Mr. Ferguson was employed by Palmer
Engineering Company, as an engineering project manager between 1994 and 1998,
and by Tenneco Gas, as a project engineer from 1989 to 1994.

ITEM 10. EXECUTIVE COMPENSATION

COMPENSATION OF DIRECTORS

Directors of the Company receive $2,500 for attending each Board of Directors
meeting. Directors also receive an additional $2,500 annually for serving on the
Audit Committee. Allen, Crenshaw, and Ms. Edwards serve on the Audit Committee.
Directors are eligible to participate in the Company's 1998 Stock Option Plan.
No stock options were granted during fiscal year 1999 to any directors

EXECUTIVE COMPENSATION

         The following table presents information concerning the annual
compensation of the Chief Executive Officer and each executive officer of the
Company whose salary and bonus were greater than $100,000 in 1999. No
officer, except Michael Edwards, received salary and bonus in excess of
$100,000 in 1999. This table presents compensation for services rendered in
all capacities to the Company in 1999, 1998 and 1997.

                                            SUMMARY COMPENSATION TABLE
                                            --------------------------
<TABLE>
<CAPTION>
                                                                                       Stock
                                                                                      Options
Name and Principal                                                                        and        All Other
      Position                            Year       Salary(1)         Bonus          Warrants       Comp.
                                          ----       ---------         -----         ---------       -----------
<S>                                       <C>         <C>              <C>           <C>             <C>
Michael L. Edwards                        1999        $155,000         $   -         $     -         $20,864 (2)
  President and Chief                     1998        $155,000         $31,802       $     -         $32,441
  Executive Officer                       1997        $157,917         $50,000       $     -         $32,837
</TABLE>

(1)      Amounts include cash compensation earned and received by the named
         officer as well as amounts deferred under a 401(k) Savings Plan.

(2)      Amounts shown include Company contributions to a 401(k) Savings Plan of
         $10,000, life insurance premiums of      , board fees of $10,000, and
         vehicle compensation of $864. vehicle allowances and directors' fees.



                                       38
<PAGE>

EMPLOYMENT AGREEMENT

         On May 23, 1996, the Company entered into a ten-year employment
agreement with Michael L. Edwards which provides for an annual salary of
$155,000. Mr. Edwards will also receive annual bonuses computed on the basis of
10% of the Company's pre-tax earnings on all amounts from $1,000,000 to
$1,999,999 and 15% of the Company's pre-tax earnings on all amounts in excess of
$2,000,000. The bonus for 1996 was $50,000 and was paid in 1997. The bonus for
1997 was $31,802 and was paid in 1998. In the event Mr. Edwards' employment is
terminated by the Company for any reason other than for cause during the term of
the employment agreement, at the election of Mr. Edwards the Company will be
obligated to purchase all or a portion of the shares held by him and/or his wife
at a price equal to 150% of the market value of the Company's shares on the date
of termination. In addition, the Company will be obligated to pay Mr. Edwards in
a lump sum all salary amounts payable to Mr. Edwards through the term of the
employment agreement plus an additional $2,000,000.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the beneficial ownership of common stock by the
Company's directors and executive officers as of March 31, 2000, as well as
additional information about beneficial owners of 5% or more of the Company's
common stock based upon filings with the Securities and Exchange Commission and
to the Company's knowledge.

<TABLE>
<CAPTION>
Name and Address (1)                                             Amount of                    Percent of
of Beneficial Owner                                              Ownership                       Class
--------------------                                             ---------                    -----------
<S>                                                                    <C>                      <C>
Dr. James T. Martin                                                    800,058                  14.53%
Eagle Top Long Road
Waitesville, Vermont  05673

Michael L. and Karen K. Edwards                                        752,576   (2)            13.67%

Michael L. Edwards                                                       6,000                   *

Karen K. Edwards                                                         9,900                   *

G. Lee Crenshaw, II                                                     30,639   (3)             *
707 East Main Street, 20th Floor
Richmond, Virginia  23219

Everette G. Allen, Jr.                                                  95,000   (4)             1.73%
Federal Reserve Bank Building
</TABLE>



                                       39
<PAGE>

<TABLE>
<CAPTION>
<S>                                                                    <C>                      <C>
701 East Byrd Street
Richmond, Virginia  23219

Glenn B. Rogers
605 Westover Drive
Nashville, Tennessee  37209                                             22,000   (5)             *
                                                                        ------


All executive officers and directors as                           1,738,977.83                   31.59%
a group
</TABLE>

*        Less than 1%.

(1)      Except as otherwise noted, the address of the holder is in care of the
         Company.

(2)      Includes 363,663 shares which may be issued to Mr. and Mrs. Edwards
         upon exercise of a presently exercisable warrant, the exercise price
         under which is $9.90 per share.

(3)      Includes 20,000 shares which may be issued to Mr. Crenshaw upon
         exercise of presently exercisable stock options. Mr. Crenshaw also
         holds options to acquire an additional 40,000 shares which may be
         issued to Mr. Crenshaw upon exercise as follows: 20,000 shares
         exercisable on each of October 1, 2000 and October 1, 2001.

(4)      Includes 20,000 shares which may be issued to Mr. Allen upon exercise
         of presently exercisable stock options. Mr. Allen also holds options to
         acquire an additional 40,000 shares which may be issued to Mr. Allen
         upon exercise as follows: 20,000 shares exercisable on each of October
         1, 2000 and October 1, 2001.

(5)      Includes 20,000 shares which may be issued to Mr. Rogers upon exercise
         of presently exercisable stock options. Mr. Rogers also holds options
         to acquire an additional 40,000 shares which may be issued to Mr.
         Rogers upon exercise as follows: 20,000 shares exercisable on each of
         October 1, 2000 and October 1, 2001.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Robert C. Bright, who served as Secretary of the Company from April
1998 through June 1999, is a stockholder in the Law Offices of Robert C. Bright,
a Professional Corporation, which provides certain legal services to the
Company. During 1998 and 1999, Mr. Bright's law firm received legal fees from
the Company of approximately $300,000 and $115,000, respectively. It is
anticipated that Mr. Bright will continue to provide limited legal services to
the Company.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

The following exhibits are included:



                                       40
<PAGE>

<TABLE>
<CAPTION>
    EXHIBIT                  DESCRIPTION OF EXHIBIT

<S>            <C>
*     3.1      Amended and Restated Certificate of Incorporation

*     3.2      Bylaws of Virginia Gas Company as Amended on June 10, 1998

*     4.1      John Hancock Note Purchase Agreement dated as of March 19, 1998

      9.1      Shareholders' Agreement and Voting Trust (incorporated by
               reference to Exhibit 9.1 to Virginia Gas Company's Registration
               Statement, Registration No. 333-5362-NY).

     10.1      Series A Preferred Stock Securities Purchase Agreement by and
               between Virginia Gas Company and Sirrom Capital Corporation
               (incorporated by reference to Exhibit 10.1 to Virginia Gas
               Company's Registration Statement, Registration No. 333-5362-NY).

     10.2      Stock Purchase Warrant issued by Virginia Gas Company to Sirrom
               Capital Corporation (incorporated by reference to Exhibit 10.2 to
               Virginia Gas Company's Registration Statement, Registration No.
               333-5362-NY).

     10.3      Placement Agreement between Virginia Gas Company and Anderson &
               Strudwick, Incorporated (incorporated by reference to Exhibit
               10.3 to Virginia Gas Company's Registration Statement,
               Registration No. 333-5362-NY).

     10.4      Warrant to Anderson & Strudwick Incorporated (incorporated by
               reference to Exhibit 4.2 to Virginia Gas Company's Form SB-2
               Registration No. 333-5362-NY)

     10.5      Employment Agreement between Virginia Gas Company and Michael L.
               Edwards (incorporated by reference to Exhibit 10.6 to Virginia
               Gas Company's Registration Statement, Registration No.
               333-5362-NY).

     10.6      Lease Agreement between J.D. Morefield, et.al. and Virginia Gas
               Company (incorporated by reference to Exhibit 10.7 to Virginia
               Gas Company's Registration Statement, Registration No.
               333-5362-NY).

     10.7      Firm Gas Storage Agreement between Virginia Gas Storage Company
               and Roanoke Gas Company (incorporated by reference to Exhibit
               10.8 to Virginia Gas Company's Form SB-2 Registration No.
               333-32009).

     10.8      Firm Storage Service Agreement between Virginia Gas Storage
               Company and Powell-Clinch Utility District (incorporated by
               reference to Exhibit 10.9 to Virginia Gas Company's Registration
               Statement, Registration No. 333-5362-NY).

     10.9      Firm Storage Service Agreement between Virginia Gas Storage
               Company and the Public Utility District of Jefferson and Cocke
               Counties, Tennessee (incorporated by reference to Exhibit 10.10
               to Virginia Gas Company's Registration Statement, Registration
               No. 333-5362-NY).

     10.10     Gas Storage Agreement between Virginia Gas Storage Company and
               United Cities Gas Company (incorporated by reference to Exhibit
               10.11 to Virginia Gas Company's Registration Statement,
               Registration No. 333-5362-NY).

     10.11     Firm Gas Storage Agreement between Virginia Gas Storage Company
               and Knoxville Utilities Board (incorporated by reference to
               Exhibit 10.12 to Virginia Gas Company's Registration Statement,
               Registration No. 333-5362-NY).

     10.12     Winter Service Firm Natural Gas Sales Agreement between Virginia
               Gas Storage Company and Knoxville Utilities Board (incorporated
               by reference to Exhibit
</TABLE>



                                       41
<PAGE>

<TABLE>
     <S>       <C>
               10.13 to Virginia Gas Company's Registration Statement,
               Registration No. 333-5362-NY).

     10.13     Interruptible Gathering Service Agreement between Columbia Gas
               Transmission Corporation and Virginia Gas Storage Company
               (incorporated by reference to Exhibit 10.15 to Virginia Gas
               Company's Registration Statement, Registration No. 333-5362-NY).

     10.14     Transfer Agreement between Virginia Gas Company and Tenneco
               Energy Resources Corporation (incorporated by reference to
               Exhibit 10.16 to Virginia Gas Company's Registration Statement,
               Registration No. 333-5362-NY).

     10.15     Amendment to Transfer Agreement between Virginia Gas Company and
               Tenneco Energy Marketing Company, successor-in-interest to
               Tenneco Energy Resources Corporation (incorporated by reference
               to Exhibit 10.17 to Virginia Gas Company's Form 10-KSB for the
               fiscal year ended December 31, 1996)

     10.16     Promissory Note in principal amount of $1,725,000 in favor of
               Tenneco Energy Resources Corporation (incorporated by reference
               to Exhibit 10.17 to Virginia Gas Company's Registration
               Statement, Registration No. 333-5362-NY).

     10.17     United Cities Contract (incorporated by reference to Exhibit
               10.18 to Virginia Gas Company's Registration Statement,
               Registration No. 333-5362-NY).

     10.18     Pipeline Balancing Agreement between East Tennessee Natural Gas
               Company and Virginia Gas Pipeline Company (incorporated by
               reference to Exhibit 10.19 to Virginia Gas Company's Registration
               Statement, Registration No. 333-5362-NY).

     10.19     Warrant to Shareholders (incorporated by reference to Exhibit
               10.20 to Virginia Gas Company's Registration Statement,
               Registration No. 333-5362-NY).

     10.20     Firm Storage Service Agreement between Virginia Gas Storage
               Company and Sevier County Utility District (incorporated by
               reference to Exhibit 10.22 to Virginia Gas Company's Form 10-KSB
               for the fiscal year ended December 31, 1996)

     10.21     Firm Storage Service Agreement between Virginia Gas Storage
               Company and Natural Gas Utility District of Hawkins County
               (incorporated by reference to Exhibit 10.23 to Virginia Gas
               Company's Form 10-KSB for the fiscal year ended December 31,
               1996)

     10.22     Firm Storage Service Agreement between Virginia Gas Pipeline
               Company and Citizens Gas Utility District (incorporated by
               reference to Exhibit 10.24 to Virginia Gas Company's Form 10-KSB
               for the fiscal year ended December 31, 1996)

     10.23     Firm Gas Storage Agreement between Virginia Gas Pipeline Company
               and Knoxville Utilities Board (incorporated by reference to
               Exhibit 10.25 to Virginia Gas Company's Form 10-KSB for the
               fiscal year ended December 31, 1996)

     10.24     Underwriting Agreement between Virginia Gas Company and Anderson
               & Strudwick, Incorporated (incorporated by reference to Exhibit
               1.1 to Virginia Gas Company's Form SB-2 Registration No.
               333-5362-NY)

     10.25     Description of Stock Options issued to named executive officers
               (incorporated by reference to Exhibit 10.27 to Virginia Gas
               Company's Form SB-2 Registration No. 333-32009)

     10.26     Amendment to the Firm Storage Service Agreement between Virginia
               Gas Storage Company and Powell-Clinch Utility District
               (incorporated by reference to
</TABLE>



                                       42
<PAGE>

<TABLE>
     <S>       <C>
               Exhibit 10.28 to Virginia Gas Company's Form SB-2 Registration
               No. 333-32009)

     10.27     Firm Storage Service Contract between Virginia Gas Pipeline
               Company and Hawkins County Utility District (incorporated by
               reference to Exhibit 10.29 to Virginia Gas Company's Form SB-2
               Registration No. 333-32009)

     10.30     Firm Storage Service Contract between Virginia Gas Pipeline
               Company and ALCOA (incorporated by reference to Exhibit 10.30 to
               Virginia Gas Company's Form SB-2 Registration No. 333-32009)

     10.31     Gas Transportation Agreement between Virginia Gas Distribution
               Company and East Tennessee Gas Company (incorporated by reference
               to Exhibit 10.31 to Virginia Gas Company's Form SB-2 Registration
               No. 333-32009)

     10.32     Underwriting Agreement between Virginia Gas Company and Ferris,
               Baker Watts, Incorporated (incorporated by reference to Exhibit
               1.1 to Virginia Gas Company's Form SB-2 Registration No.
               333-32009)

     21.1      Subsidiaries and Affiliates of Virginia Gas Company incorporated
               by reference to Exhibit 21.1 to Virginia Gas Company's 10KSB for
               fiscal 1999

     23.1      Consent of Arthur Andersen LLP incorporated by reference to
               Exhibit 23.1 to Virginia Gas Company's 10KSB for fiscal 1999

     27.1      Financial Data Schedule incorporated by reference to Exhibit 27.1
               to Virginia Gas Company's 10KSB for fiscal 1999

     99.1      Financial Statements of Virginia Gas Storage Company incorporated
               by reference to Exhibit 99.1 to Virginia Gas Company's 10KSB for
               fiscal 1999

     99.2      Financial Statements of Virginia Gas Distribution Company
               incorporated by reference to Exhibit 99.2 to Virginia Gas
               Company's 10KSB for fiscal 1999
</TABLE>

------------
*  Filed herewith

(b)      The Company filed the following Current Reports on Form 8-K during the
         quarter ended December 31, 1999:

         Current Report on Form 8-K as filed with the Securities and Exchange
         Commission on December 23, 1999


                                       43
<PAGE>

SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) 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, on March 15, 2000

VIRGINIA GAS COMPANY

(Registrant)

By  /s/  MICHAEL L. EDWARDS
  -------------------------
      Michael L. Edwards
      President, Chief Executive Officer, and Director

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 15, 2000.

/s/   GLENN B. ROGERS              Chairman of the Board of Directors
----------------------------------
          Glenn B. Rogers

/s/   KAREN K. EDWARDS             Vice President and Director
----------------------------------
         Karen K. Edwards

/s/  WILLIAM L. CLEAR              Vice President and Chief Financial Officer
----------------------------------
         William L. Clear



                                       44