Industry Restructuring

    The natural gas industry has been undergoing continuous and dramatic change
since the mid-1980's when large customers were given the option to purchase
their requirements directly from marketers.  Since that time the industry
has transitioned to the point that today even residential customers have the
option of choosing their gas supplier.  However, acceptance of the new
competitive environment by small customers, and by marketers to serve the
small customers, has been slow to catch on.  The electric industry has
is also undergoing a transition to the competitive environment with many
similar issues to be resolved. While the company is keeping abreast of the
electric proceedings, efforts are  directed towards the natural gas
proceedings.

    On November 3, 1998 the New York State Public Service Commission (PSC)
issued a Policy Statement indicating its view as to how to best ensure a
competitive market for natural gas in New York State.  The Statement's
intended purpose was to facilitate development of a competitive market,
eliminate barriers to competition, provide guidance to LDC's and marketers
and address customer inertia.  It concluded that the most effective way to
establish a competitive market is for local distribution companies, such as
Corning, to cease selling gas with the theory that separating the monopoly
distribution function from the competitive merchant function would maximize
competition and customer benefits. The statement did not set a specific date
for cessation of sales activities.  Rather, a transitional period of three to
seven years was suggested as appropriate for individual LDC's to exit the
merchant function.  There are many issues such as capacity contracts, system
reliability, rate design and provider of last resort to be resolved during
this transition.  The Policy Statement suggests that these issues will be
best be resolved both at the individual LDC level and callaboratively with
all stakeholders involved. Staff of the PSC plans to initiate a process to
address these issues in the near future.  As it has been throughout this
process, this company will be active in the proceeding.

    By retaining the distribution function,  but no longer selling gas, little
will change regarding the operating functions of the company.  The company
will continue to own and maintain the distribution system, regulate the flow
of gas, measure and meter gas, bill customers, be the provider of last resort
and handle all emergency calls.  Since the company has never made a profit
on the actual sale of gas, the profit margin should also remain unchanged.
Acceptance by customers in the company's service territory with regards to the
option of supplier choice reflects that of customers around the state.
Mailings were sent to each individual customer explaining the availability
and procedures to be followed and the response was very limited.  Presently
there are only four marketers that have shown an interest in serving the
small volume customers and they are currently serving approximately 125
customers, or less than one percent of the small customer base.  Within
New York State there are 95 marketers certified to serve small volume
customers. These marketers are serving approximately 50,000 customers or less
than nine percent of the total available customer base.  Less than one percent
of the residential customers are currently being served directly by marketers.

   The ability of the company to comply with the PSC timetable will rely
directly upon the acceptance by the market and the marketers, and the
initiatives directed by the PSC.  As the Company's capacity contracts come
up for renewal, starting in 2001, a careful analysis will need to be made with
respect to future requirements.  The contract requirements and the related
company costs which are currently passed on to customers through the gas adj-
ustment clause mechanism should decrease significantly, relieving the company
of fixed financial obligations as the captive customber base is declining.

  Industry restructuring has forced managment to take a critical look at
traditional revenue sources and make certain strategic planning decisions
if the company is to move forward.  As was mentioned in the letter to
shareholders, the decision was made to look for non-traditional revenue
sources to mitigate the uncertainty of the current natural gas market.  The
natural gas business will continue to be the company's core business and rate
stability for our customers will continue to be the highest priority.
However, it is very apparent that if the company is to grow, it must
diversify its earnings base.  That process has begun and will continue into
the future.  In the end, management is confident that the company will be
successful in the new deregulated environment.

MANAGMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Earnings

Consolidated net income amounted to $640,000 or $1.39 per share in 1998
compared to $756,000 or $1.64 per share in 1997.  The primary reason for the
decline was the extremely mild winter.  Other significant items affecting
the Company's operating results are discussed below.

Operating Revenue

Operating revenue of $16,673,000 declined seven percent in 1998 due
primarily to a reduction in gas delivered as a result of mild weather.
Total gas delivered to customers amounted to 7,334,858 Mcf in 1998 compared
to 7,897,614 Mcf in 1997.  However, the Company's weather normalization
billing mechanism (discussed briefly in not 1 to the financial statements)
retores some of the margin lost in times of warm weather.  Accordingly, the
Company billed $226,000 more than the previous year through this mechanism.

The Company also experienced a decline in capacity assignment revenue in
1998.  This revenue is obtained from marketing the Company's unused pipeline
capacity and a regulatory incentive that allows the Company to retain fifteen
percent of such revenue.  Capacity assignment revenue of $160,000 in 1998 was
down from $242,000 the previous year, a reduction of $82,000 that was
expected due to a mild winter and an increasingly competitive market.

Operating Expense

Purchased gas expense of $9,409,000 in 1998 decreased 10% due to decreased
deliveries noted above.  The decline was further driven by a benefit from
the Company's lost and unaccounted for gas incentive mechanism.  The Company
realized a benefit of $276,000 in 1998, up substantially from the $120,000
benefit the preceding year.  Other operating and maintenance expense remained
stable at $3,557,000, an increase of less than one percent from the previous
year.

Taxes other than federal income taxes decreased slightly due to lower gross
receipts taxes as the result of decreased revenue.  The Company is subject
to the New York public utilities gross receipts tax which is levied on all
revenues.

Utility depreciation expense increased five percent to $574,000 due to
increased investment in plant.  Interest expense increased eight percent in
1998 as the result of higher outstanding debt levels.  

Unregulated Operations

The Appliance Corporation subsidiary earnings increased twelve percent to
$249,000 in 1998.  The increase results primarily from three newly acquired
businesses.  In April 1998 the Company's appliance subsidiary completed the
purchase of three local existing businesses.  A shopping plaza in South
Corning was purchased which has multi-year leases with eight businesses
housed in 52,000 square feet of rentable space with a major grocery store as
the anchor.  Also purchased was a real estate management and brokerage organ-
azation and a tax and financial services company.  The shopping plaza was
purchased for $1,175,000 and finaced primarily through a $940,000 ten year
note secured by a mortgage on the shopping center real estate.  The real
estate and financial service companies were purchased for $349,000, funded
through a $180,000 eight year, 6.5 percent interest loan agreement with the
sellers and the balance through operating funds.  The real estate firm is a
franchise of The Prudential Marketplace Realty and has twenty three agents
operating out of offices in both the Corning and Elmira, New York market.  The
financial services business, Tax Center International, provides tax
preparation, accounting and payroll services and currently serves approx-
imately seven hundred clients .  These purchases are part of the Company's
plan to aggresively explore new opportunities in non-traditional areas.

Liquidity and Capital Resources

The Company financed its 1998 capital additions for regulated operations of
$1,105,000 through internally generated funds and short-term borrowing.
Capital additions for the Company's unregulated operations consisted
primarily of the three acquisitions discussed above.

The Company has $7,500,000 available through lines of credit at local banks,
the terms of which are discussed in note 6 to the financial statements.  It
is expected that the Company's current capital resources will be sufficient
for 1999 planned operations.  

Regulatory Matters

In 1998 the New York Public Service Commission issued an order concerning
the future of the natural gas industry.  A detailed discussion appears on
page 10 of this report.

Year 2000
    The year 2000 issue (Y2K") refers to the inability of certain computerized
systems and technologies to recognize and/or correctly process dates beyond
December 31, 1999.  Corning Natural Gas Corporation has identified those
areas within the Company where the potential exists for computer system
failure or miscalculations by computer programs could cause a disruption in
the Company's operations or services.  A Y2K Coordinator was assigned to
develop and implement a Y2K plan.  The Company has developed and put into
place solutions for the following areas:


1)  Computer Hardware and Software

The AS/400 Main Frame Computer Operating System and all software modules
including Customer Information Systems, Meter Reading, Billing for the Gas
and Appliance Company, Service Orders, Accounting and Financial Statements,
Inventory and Purchase Orders and Accounts Payable are now Y2K compliant
through upgrades received from our software provider and IBM.
    
    All personal computers identified as being non compliant have been replaced.
The review of software contained on these computers is currently being
conducted and the Company anticipates no problems with compliance in
this area.

2.  Telemetering System

The telemetering system is Y2K compliant and we anticipate no interruption
in the flow of gas to our customers due to our computer system.

3.  Phone System

The internal telephone system for the Company is now Y2K compliant.  We will
be able to receive emergency calls and generate the proper service orders
for all phases of our operations.  We do not require the use of PC's in
handling our customers' calls and creating orders.

Costs of Compliance

Because the Company is still in the process of identifying and replacing
non compliant systems or problems, it is not possible at this time to
quantify the total cost incurred with the Y2K program.  However, the
company expects that it will not be significant.

Risks of the Company's Y2K Issues

Since the Company has not completed all testing on some of the IT and non-IT
systems that may not be Y2K compliant, failure of these systems could have a
material impact on the Company's systems.  While the Company's Y2K program
is designed to identify and remedy these systems in order to avoid
interruption of its operations, there can be no assurance that it will be
able to identify all non compliant systems or successfully remedy all those
identified.

The Company is dependent upon third party products and services, such as
utilities and programming uplinks, for the operation of its businesses.   As
part of its Y2K program the Company will contact these third party product and
service providers to ascertain whether Y2K compliance issues may exist.  While
many of these companies may give us assurances that they are fully Y2K
complaint, the Company does not have the ability to verify such information.
If critical third party systems fail as a result of Y2K issues, the ability
of the Company to provide services to its customers may be interrupted.  While
the Company intends to consider contingency plans to address those risks,
although no such plans have been identified, there can be no assurance that
any such plan would resolve such problems in a satisfactory manner.  This
could result in lost revenues or the risk of actions against the Company if
the businesses of others are disrupted.

Cautionary Statement Regarding Forward Looking Statements

This report contains statements which, to the extent they are not recitations
of historical fact, constiture "forward-looking statements" within the
meaning of the Securities Litigation Reform Act of 1995 (Reform Act).  In this
respect, the words "estimate," "project," "anticipate," "expect," "intend,"
"believe" and similar expressions are intended to identify forward-looking
statements.   All such forward-looking statements are intended to be subject
to the safe harbor protection provided in the Reform Act.  A number of
important factors affecting the Company's business and finacial results could
cause actual results to differ materially from those stated in the forward-
looking statements.

Accounting Pronouncements

In 1999 the Company will be required to adopt the provisions of Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income, which
establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains, and losses) in a full set of
general purpose finacial statements.  Management expects that the significant
component of comprehensive income to be the net unrealized gain/loss on
marketable securities available for sale.

Management expects that other pronouncements to be adopted in 1999 will have
an immaterial impact on the financial statements.