RGCO



                  [Graphic:  Roanoke Gas Company Logo Flame]



                              Roanoke Gas Company
                              1997 Annual Report


[GRAPHIC:  Depicted are illustrations of Roanoke Gas Company's liquified
natural gas facility in Botetourt County, Virginia, one of Highland Propane
Company's bulk storage facilities, and Bluefield Gas Company's office in
Bluefield, West Virginia.]

<PAGE>


                                   Contents


                              1     Letter To Stockholders
                              2     A Message From John Williamson -President
                                    Elect
                              3     Review Of Operations
                              7     Management's Discussion & Analysis
                              12    1997 Financial Highlights
                              13    Independent Auditors' Report
                              14    Consolidated Balance Sheets
                              16    Consolidated Statements Of Earnings
                              17    Consolidated Statements Of Stockholders'
                                    Equity
                              18    Consolidated Statements Of Cash Flows
                              20    Notes To Consolidated Financial
                                    Statements
                              32    Summary Of Gas Sales & Statistics
                              33    Summary Of Capitalization Statistics
                              35    A Tribute To Frank Farmer
                              36    Corporate Mission Statement

                                    Notice Of Annual Meeting - Back Cover




Depicted on the front of the report are illustrations by Karen Kessler of
Roanoke Gas Company's liquified natural gas facility in Botetourt County,
Virginia, one of Highland Propane Company's bulk storage facilities, and
Bluefield Gas Company's office in Bluefield, West Virginia.
<PAGE>
Letter To Stockholders



Dear Stockholder: 

      I am pleased to say that the year ended September 30, 1997 was one of
new records for Roanoke Gas Company.  We set records for earnings, customer
growth and gallons of propane sold.  Earnings were $2.3 million, 5 percent
higher than last year despite 8 percent warmer weather.  Earnings per share
increased to $1.54 from $1.51, while the number of shares outstanding
increased by 3 percent.
      Our number of customers increased over 4,000, a 7 percent growth rate
overall, with natural gas customers increasing 3 percent and the number of
propane customers increasing by an exciting 38 percent.  Despite the warmer
weather, propane volumes increased by 10 percent, associated with customer
growth occurring throughout the year.  Natural gas volumes were down by 3
percent, associated with fewer space heating sales during the milder winter,
particularly January and February.
      Our dividend reinvestment and stock purchase plan remains attractive
for investors, and over 50,000 shares were sold to existing stockholders
during the year.  Approximately 20 percent of dividends paid in 1997 were
reinvested through the plan.  Our dividend record remains strong, with 53
years of consecutive quarterly dividends, and 1997 marked our second
consecutive yearly dividend increase.
      We are particularly pleased with our marketing efforts and the
resulting customer growth.  Our 3 percent annual growth rate in natural gas
customers is well above the national average of 1.9 percent published by the
American Gas Association.  Our 38 percent propane customer growth rate is
outstanding and reflects our commitment to growth through service territory
expansion, market saturation and acquisition of available propane
distributorships.  Propane is clearly becoming the fuel of choice for home
space and hot water heating in areas where extending natural gas lines is not
economically practical.
      We are very active in the regulatory arena, as we have rate cases
pending for Roanoke Gas Company, Bluefield Gas Company and Commonwealth
Public Service Corporation.  The rate cases are necessary to both keep
returns on the capital invested in the public utility systems up-to-date with
current interest rate costs and ensure timely recovery of the added capital
and depreciation costs for replacement of the older portions of the
distribution plant.  We remain committed to our long-term plan to replace all
bare steel and cast iron piping in the natural gas distribution systems, and
we replaced 8.1 miles of bare steel and cast iron mains in 1997.
      We continued our efforts at streamlining operations to control costs
through increased investment in technology, increased employee training and
continued use of outsourcing where economies of scale indicated savings were
available.  Our customer-to-employee ratio at September 30, 1997 was over 397
compared to 285 in 1991 when I became President of Roanoke Gas Company.
      I plan to retire at the end of January 1998, but I will be leaving the
Company in good hands with a strong management team in place and ready to
take over.  John B. Williamson, III will become President and Chief Executive
Officer, and I have every confidence in his leadership abilities and
knowledge.  Arthur L. Pendleton will become Executive Vice President and
Chief Operating Officer, and he has worked closely with me for the last 20
years as we have grown and improved our operations.  I plan to stay active in
the Company and the industry.  I will remain as Chairman of the Board of
Roanoke Gas Company, and I will continue to be Chairman of the Coordinating
Council for Smaller Company Programs of the American Gas Association (AGA)
and will continue on the Board of Directors of the AGA.
<PAGE>
      On behalf of the Board of Directors of Roanoke Gas Company and our
management, I once again invite you to join us for a stockholders breakfast
and social hour prior to our Annual Meeting on January 26, 1998.  Also on
behalf of the Board and Management, I extend our continuing appreciation to
you for your investment as a stockholder of Roanoke Gas Company.

Sincerely,


s/F. A. Farmer
Frank A. Farmer, Jr.
Chairman of the Board, President & CEO

Graphic:    Photograph of           Photo Caption:    Frank A. Farmer, Jr.
            Frank Farmer                              Chairman, President &
                                                      CEO Roanoke Gas Company
<PAGE>
A Message From John Williamson -
President Elect

      I am very pleased to have the opportunity to lead Roanoke Gas Company
following Mr. Farmer's retirement, and I am most appreciative of the Board of
Directors' vote of confidence.  I will strive to continue earning that
confidence year after year.
      I come to the position with a strong management team in place.  Art
Pendleton as Chief Operating Officer will ensure that the skill and knowledge
built by Mr. Farmer over the years in Company operations will continue. 
Roger Baumgardner has been Vice President, Secretary and Treasurer for 15
years and will continue to provide his talents and stable influence in
Company activities.
      We also have a staff of managers with industry experience ranging from
5 to 20 years.  Jane O'Keeffe, our Assistant Vice President for Human
Resources, has 6 years with Roanoke Gas Company and 20 years of human
resource management experience.  John D'Orazio runs our Marketing and New
Construction Department and is the engine behind our outstanding customer
growth.  He has been with the Company for 5 years and has 15 years of
industry experience.  Robert Wells, our Director of Information Systems, has
14 years with the Company and is the guiding force in our expanding
utilization of state-of-the-art technology.
      David Anderson, our Assistant Secretary and Assistant Treasurer, who
has been with the Company 18 years, will continue his work in regulatory and
rate case affairs.  Our Controller, Howard Lyon, has been with the Company 10
years.  He has prior experience with a national accounting firm and gives
unparalleled commitment in his role with the Company.  Richard Pevarski, our
Director of Distribution Service, has 12 years with the Company and 13 years
of industry experience.  He is the steady hand on the natural gas
distribution system in Roanoke.  James Devens, who directs our propane
operations, has been with us 6 years and has great enthusiasm for the growth
opportunity that the propane market holds.
      Jim Shockley has been with us 13 years and has risen up through the
ranks, starting as an entry-level employee in distribution, to become Manager
of Bluefield Gas Company.  Ed Painter, with 10 years of  experience, oversees
our Customer Service Department.  Ann Miller has 7 years with the Company and
oversees our materials purchasing and warehousing.  Mike Gagnet, who manages
the acquisition and shipment of over 12 million MCFs of natural gas and 6
million gallons of propane, has 13 years with the Company.  In addition,
there are several employees in our management development program with great
promise, and we have a number of experienced supervisors in all major areas
of the Company to help guide the efforts of a dedicated and well-trained
workforce. (We also have a very strong Board of Directors, many of whom are
CEOs of regional businesses in areas ranging from health care to public
utilities.)
      I am excited about leading this committed and talented team.  I believe
we have the right combination of creativity, experience and drive to carry
Roanoke Gas Company into the next millennium and to respond aggressively to
the changing energy market and the opportunities that these changes will
bring. We look forward to growing and diversifying Roanoke Gas Company to
help ensure that we remain an attractive and rewarding investment for our
stockholders.  We plan to make Roanoke Gas into the premier locally owned and
operated Company in our region, known as an exciting place to work and as an
outstanding investment for its owners.
<PAGE>
      I thank you for being a stockholder of Roanoke Gas Company.  I hope you
not only will continue, but increase, your level of interest and ownership in
this growing Company, which I believe is located in one of the best regions
in the country in which to live and work.



s/John B. Williamson, III
John B. Williamson, III
President Elect

Graphic:    Photograph of           Photo Caption:    John B. Williamson, III
            John Williamson                           President Elect 
                                                      Roanoke Gas Company
<PAGE>
Review Of Operations

Financial

      The Company established a new benchmark as it surpassed the record
earnings of fiscal 1996 to post net income for fiscal 1997 of $2,309,880 or
$1.54 per share.  The previous record was $2,196,672 or $1.51 per share.  The
stockholders' investment in the Company grew by $1,621,950 to $20,596,951,
which amounts to $13.48 per share.  At September 30, 1997, the market value
of the Company's stock was $18.00 per share, or 134% of book value.
      In November 1996, the directors voted to increase the regular quarterly
dividend to $.26 per share from $.255 per share effective February 1997.  The
current annual dividend of $1.04 per share is a 5.8% yield on the current
market value of the Company's stock and represents a payout of 67.5% based on
earnings for fiscal 1997.
      In December 1996, the Company issued $8,000,000 unsecured senior notes
payable by Roanoke Gas Company and $1,300,000 unsecured notes payable by
Bluefield Gas Company.  The Company increased its equity capitalization by
issuing $882,719 in stock through its Dividend Reinvestment and Stock
Purchase Plan and its Restricted Stock Plan For Outside Directors.
      The Company has unsecured lines of credit through its cash management
system totaling $20,000,000 at interest rates of prime or less.  These lines
are subject to annual renewal and do not require compensating balances.  The
average month-end balance of short-term debt in 1997 was approximately
$8,098,000, at an average interest rate of approximately 5.97%.  The month-
end balance at September 30, 1997 was $7,129,000, at an average interest rate
of 6.14%. 
      Please refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for additional information on the
Company's capital resources and for an analysis of changes in revenues and
expenses.

Gas Supply

      Weather patterns brought unseasonably cool weather in late fall and
early winter to the Company's service areas. Roanoke recorded 712 heating
degree days for the month of November, which was 33% more heating degree days
than the long-term norm for the month. In late January the pattern shifted,
bringing warmer than normal weather to the service area. Roanoke recorded 611
heating degree days for the month of February, which was 17.5% fewer heating
degree days than the long-term norm for the month.  
      One consequence of the early cold weather was an unusually early and
sharp increase in natural gas supply acquisition costs. However, the
unseasonably warm weather in February resulted in a dramatic decline in
natural gas commodity prices. Tempered by the warm weather in late winter,
commodity indexes relevant to Roanoke Gas Company purchases averaged only
around 6% higher than the previous fiscal year. 
      Roanoke Gas Company continues to use a mixture of long-term (multi-
year), mid-term (seasonal) and short-term (spot) gas purchase contracts. Our
objective is to create a reliable and economical mixture of 
gas supply contracts with terms that will not prohibit our ability to adapt
to changing market conditions or further unbundling. We were extremely
pleased with the performance of our natural gas suppliers. Long-term
suppliers currently include Amoco Energy Trading, Cabot Oil and Gas, Engage
Energy, Columbia Energy Services, LG&E Natural Gas and Duke Energy Company.
<PAGE>
      [This pulled quote appears in a box:  "The Company established a new
benchmark as it surpassed the record earnings of fiscal 1996 to post net
income for fiscal 1997 of $2,309,880 or $1.54 per share."]

      Roanoke Gas Company continues to regard storage supplies as an integral
component of our gas supply portfolio. The Roanoke and Bluefield operations
combined hold the rights to about 2.9 billion cubic feet (BCF) of natural gas
storage space, up about 0.1 BCF from last year. This storage includes
pipeline and third party underground facilities in both the Gulf Coast and
Appalachian areas, as well as our own liquefied natural gas (LNG) storage in
Botetourt County, Virginia.  
      Having storage space allows Roanoke Gas Company to minimize gas costs
by purchasing and injecting natural gas in the summer when the commodity
prices are traditionally lower. When withdrawn in the winter, storage
supplies are generally relatively economical, as well as highly reliable. The
Company participates in pipeline capacity release programs to further
minimize the cost of firm service to our customers.

Nonutility Operations

      Total sales by Diversified Energy Company, trading as Highland Propane
Company, for fiscal year 1997 were 6,568,066 gallons, an increase of 10% from
1996 levels on 8% warmer weather.  The increased volume is attributed to
customer growth resulting from service territory expansion, increased sales
efforts in existing territories and the leasing of certain of the assets of
U.S. Gas, Inc.
      On September 5, 1997, the Company executed an agreement with U.S. Gas,
Inc. located in Moneta, Virginia to acquire certain of the propane assets of
U.S. Gas, Inc., which Highland Propane is currently leasing, in exchange for
approximately 35,000 shares of Roanoke Gas common stock.  The Company is
currently serving the customers of U.S. Gas, Inc., and expects to complete
the final purchase in November 1997.  The pending acquisition accounted for
approximately 500 of the 2,419 customer increase by Highland in 1997 and
established a service 

1997 Annual Report

<PAGE>
Review Of Operations

presence for the Company around Smith Mountain Lake.
      The Company continued its geographic expansions into Bedford,
Rockbridge and Alleghany counties in Virginia and Fayette, Summers and
Raleigh counties in West Virginia and established four new bulk storage
plants, including a pending acquisition in Bedford with the purchase of
certain of the assets of U.S. Gas, Inc.  Propane operations are organized
into geographic divisions based on market concentrations and location of bulk
propane storage facilities.  Current divisions include Roanoke, Southwest
Virginia, Bluefield, Beckley, Rainelle, Bedford and Rockbridge.  The Company
continuously evaluates potential areas for expansion or acquisition and
believes that new propane territories and customer additions offer
significant growth opportunities.
      Diversified Energy Company, trading as Highland Gas Marketing, sold
1,154,834 decatherms of natural gas in 1997, an increase of 14% over 1996. 
Highland Gas Marketing buys interruptible supplies of spot gas and temporary
interstate pipeline transportation services, and resells them to large
industrial customers that contract with the local utility for delivery from
the interstate pipeline to the customer's meter.  The natural gas marketing
business is highly competitive with relatively low margins; however, it also
has a low cost of operation with minimal facility and personnel requirements.

[This pulled quote appears in a box:  "Roanoke Gas Company, Bluefield Gas
Company and Highland Propane Company experienced record customer growth in
1997.  The Company's total combined customer base increased from
approximately 57,000 customers to over 61,000."]
 
Plant Additions

      Capital additions for fiscal 1997 totaled $8,052,801 for the
consolidated companies, substantially greater than the $5,522,977 total for
last year. The increase was driven by record setting growth, primarily for
Highland Propane Company.  Bluefield Gas accounted for 7.6% of the total
capital spending or $608,106, Highland Propane additions were 28.9% of the
total or $2,326,222 and Roanoke Gas added $5,118,473 in capital or 63.5% of
total capital additions.  New business expenditures, including mains, meters,
new service lines and new propane installations, totaled $5,072,000, compared
to last year's $2,773,000.  The natural gas companies installed 1,667 new
service lines and 19.9 miles of new mains compared to 1,563 new service lines
and 18.1 miles of new mains last year.  Highland Propane Company installed
2,280 new tank sets compared to 1,075 last year, a 112% increase.
      Main replacement and service renewal expenditures totaled $1,384,000,
just under the $1,508,000 spent last year.  During the year the Company
replaced 598 service lines and 8.14 miles of main compared to previous year
totals of 800 service lines and 8.7 miles of main. The Company continues to
maintain the 25-year program schedule to replace, by the year 2017,
approximately 12,000 bare steel services and 210 miles of cast iron and bare
steel distribution mains.  This program is designed to reduce maintenance
costs and improve system integrity by reducing unaccounted for gas volumes
caused by leakage.
      Other major increases in plant additions included:  $151,000 for
facility relocations due to road construction projects, $536,000 for new
equipment, including replacement vehicles, and $486,000 to add new support
services equipment, including a new local area computer network in Roanoke
and a wide area network in our Bluefield and Rainelle, West Virginia offices.
<PAGE>
      For fiscal year 1998, the Company has budgeted $7,667,000 for capital
expenditures.  Major items will include $2.1 million to support Highland
Propane customer growth, $3.1 million in new natural gas customer additions,
$1.3 million to replace existing mains and services, $175,000 for relocations
due to road construction projects, $400,000 for new equipment, including
automotive replacements, and $460,000 for support services, including
computer software and an upgrade of our central processing system.

Marketing & Sales

      Roanoke Gas Company, Bluefield Gas Company and Highland Propane Company
experienced record customer growth in 1997.  Customer growth was
approximately 3% at Roanoke Gas Company,  3% at Bluefield Gas Company and 38%
at Highland Propane Company.  Combined, over 4,000 new customers were added
in 1997, with an overall growth rate of 7%, more than three times the
national average.  The Company's total combined customer base increased from
approximately 57,000 customers to over 61,000.  On the natural gas side,
conversions represented approximately 50% of the new customer growth for
Roanoke Gas Company and 64% for Bluefield Gas Company.
      Highland Propane surpassed 2,000 tank installations in a single year
for the first time in the Company's history. This represented a 112% increase
over last year's tank installations.  Tank installations were up in all
divisions of Highland Propane with Southwest Virginia up 190% from fiscal
1996, followed by Rainelle, West Virginia up 135%, Roanoke, Virginia up 84%
and Bluefield, West Virginia up 63%.     Highland has expanded its marketing
efforts over the past year to include Beckley, West Virginia and Rockbridge
County, Alleghany County, and Bedford County, Virginia.
      The marketing strategy for both propane and natural gas is centered
around strong trade ally relationships, one-on-one contacts with members of
the sales team and providing superior, real-time 

Roanoke Gas Company
<PAGE>
customer service. This program has been extremely successful, and the number
of trade allies has grown and expanded into Beckley, West Virginia and
Alleghany County, Rockbridge County and Bedford County, Virginia.  The
Company has been proactive in its efforts to seek feedback from the trade
allies and has made improvements to operations based on their suggestions.
      Commission sales representatives, whose primary goal is the addition of
new gas customers along existing gas mains or the addition of new propane
customers, have proven to be highly successful.  Natural gas conversion
customers exceeded the 650 customer mark for the second year in a row, and
the number of new propane tank sets more than doubled compared to the number
of new tank sets last year. Highland Propane Company has added commissioned
sales personnel to cover Bedford County and Montgomery County, Virginia,
which are two of the fastest growing areas in our propane service territory.
      The Company has been working closely with prospective industrial and
commercial (I/C) customers and regional economic development groups.  In
1997, we added several new I/C customers to our system, including R.R.
Donnelley, Towers Automotive, Dynax Corporation and Virginia Forging.  
      The Company remains actively involved in various leadership positions
within the community, including, but not limited to, the Roanoke Regional
Chamber of Commerce, The Arts Council of the Blue Ridge, Junior Achievement,
The New Century Council, United Way, The Salvation Army, Community School and
the Roanoke Regional and New River Valley Homebuilders Associations.  The
Company takes its community responsibilities seriously and encourages
employees to become involved in community affairs. 

[Pulled quote appears in a box:  "Roanoke Gas Company is responding to its
growth by improving employee efficiency through enhancing the end user's day-
to-day work environment with better user interfaces, desktop functionality,
system integration, and user training."]

Customer Service

      Roanoke Gas Company is committed to providing quality customer service
for all of its customers via its Customer Service Department, a blend of
human resources and technology. The Company utilizes an automated attendant
answering system to direct callers to their appropriate area of interest. 
      During the winter of 1996, as customers responded to rising gas costs
brought on by the natural gas market reaction to an unusually cold November,
the telephone call volumes exceeded the capacity of the Department to respond
in a timely fashion and, accordingly, an answering service was employed to
assist with the problem.  Customer calls are automatically forwarded by the
automated attendant to the answering service after the caller has been on
hold one minute and thirty seconds.  The answering service takes messages
from customers, and Company personnel then return calls in non-peak calling
times. This method functioned well and is anticipated to provide relief
during the busy fall furnace light-up season. 
      Roanoke Gas Company is exploring other technological advances, such as
integrated voice response units which will allow customers to call the
Company and obtain account balances, date of last payments and other
information without having to speak directly with a Customer Service
Representative.  As the customer base continues to grow, the Company will
diligently search for new technology to better serve its customers, while
always offering a human contact for those needing it. 
      The Company again conducted its annual HeatShare Program, designed to
provide monetary assistance to low income customers having difficulty paying
their winter bills.  Now in its sixteenth season, the program has helped more
than 6,000 families with nearly $850,000 donated by the Company, employees,
customers and concerned individuals.  The program is administered each year
by The Salvation Army.  In addition, customer service employees provide
information to the needy families on additional sources of financial
assistance.<PAGE>

Information Systems

      Customer growth, while controlling costs, requires improved employee
efficiency and reliable systems that can be scaled to meet the increasing
needs of the business.  Roanoke Gas Company is responding to its growth by
improving employee efficiency through enhancing the end user's day-to-day
work environment with better user interfaces, desktop functionality, system
integration, and user training. To help assure system reliability and
stability, considerable progress has been made on the Year 2000 situation.
      With the installation of a new Local Area Network (LAN) and Wide Area
Network (WAN), employees use a graphical user interface (GUI) that provides a
seamless environment between IBM AS/400 applications and PC applications. 
The environment utilizes a standardized PC application suite on the network
that provides consistency for both the end user and technical support. 
Structured training for our PC applications has been outsourced to a vendor
that is focused on user training.  This provides uniform training for end
users and allows technical human resources to be committed to technology. 
The functionality and integration built into the PC applications and the IBM
AS/400 reduces the efforts required by the end user.
      The implementation of our Purchase Requisition and Electronic
Authorization Systems continued our progress toward the goal of complete
system integration.  The Purchase Requisition System assists the 



1997 Annual Report
<PAGE>
Review Of Operations

authorized end user to request the purchase of materials, equipment and other
supplies electronically.  The Electronic Authorization System receives end
user requisitions and routes them for proper approval.  Once a requisition
has been completely approved, a purchase order is automatically created for
the items to be ordered.  These systems have reduced paperwork and the time
required to process a requisition and have increased control through system
authority.  On-line inquiry and reports can be executed to provide current
and historical information on requisitions.
      New technology and efficiencies gained through the use of new systems
is no more important than the reliability and stability of existing systems. 
With this commitment, significant progress is being made on the Year 2000
Project.  Critical financial applications, such as General Ledger, Payroll
and Budgeting, have all been converted to handle the turn of the century. 
All new systems such as LAN, WAN, and Purchase Requisitions, were required to
be Year 2000 compliant prior to installation.  All remaining IBM AS/400
systems, such as Customer Information, Work Orders, and Inventory, are to be
Year 2000 compliant by December 31, 1997.
      To help ensure adequate system performance, to enable the continued
application system growth, and to facilitate the maintenance of existing
systems, the IBM AS/400 was upgraded subsequent to fiscal year end.

Market Price & Dividend Information

      The Company's common stock is listed on the Nasdaq National Market
under the trading symbol RGCO.  This provides stockholders, brokers and
others with immediate access to the latest bid and ask prices and creates
greater liquidity in the Company's stock.  The table below sets forth the
range of bid prices for shares of the Company's common stock, as reported in
the Nasdaq National Market.
      Although the Company has paid continuous quarterly dividends to its
stockholders since August 1, 1944, and has increased dividends for the past
two years, the Company has not established a formal policy with respect to
dividends.  Payment of dividends is within the discretion of the Company's
Board of Directors and will depend upon, among other factors, earnings,
capital requirements and the operating and financial condition of the
Company.  There can be no assurance that these or other conditions will not
in the future negatively affect the Company's ability to pay dividends.  In
addition, the Company's long-term indebtedness contains restrictions on
cumulative net earnings of the Company and dividends previously paid.  At
September 30, 1997 and 1996, respectively, the Company had 1,853 and 1,713
common shareholders of record in conjunction with 1,527,486 and 1,475,843
common shares outstanding.
<PAGE>
<TABLE>
<CAPTION>
                                       Range of             Cash
                                      Bid Prices         Dividends
                                                          Declared
Fiscal Year Ended                   High        Low
September 30,
<S>                             <C>         <C>           <C>
1997
   First Quarter                   $18.000     $16.750      $.26
   Second Quarter                   18.250      17.000       .26
   Third Quarter                    17.750      15.750       .26
   Fourth Quarter                   18.125      16.000       .26

1996
   First Quarter                   $16.250     $14.250      $.255
   Second Quarter                   18.500      15.000       .255
   Third Quarter                    18.250      16.500       .255
   Fourth Quarter                   17.250      14.750       .255
</TABLE>

Roanoke Gas Company
<PAGE>
Management's Discussion & Analysis 
Of Financial Condition And Results Of Operations

<TABLE>
<CAPTION>
                                           Roanoke Gas Company and Subsidiaries
                                                  SELECTED FINANCIAL DATA
                                                 Years Ended September 30,

                                              1997           1996            1995           1994            1993
------------------------------------------------------------------------------------------------------------------
<S>                                     <C>            <C>            <C>             <C>            <C>
Operating Revenues                        $ 65,047,826   $ 65,770,873   $ 48,611,147    $ 58,195,857   $ 57,715,679
Operating Margin                            22,464,921     22,030,795     19,435,864      19,902,497     18,297,030
Operating Earnings                           4,403,423      4,035,304      3,522,258       3,537,267      3,235,269
Earnings Before Interest Charges             4,550,333      4,113,044      3,701,907       3,592,351      3,264,713
Net Earnings                                 2,309,880      2,196,672      1,777,240       1,677,098      1,441,336
Net Earnings Per Share                            1.54           1.51           1.26            1.25           1.13
Cash Dividends Declared
  Per Share                                       1.04           1.02           1.00            1.00           1.00
Book Value Per Share                             13.48          12.86          12.25           11.88          11.36
Average Shares Outstanding                   1,503,388      1,455,999      1,408,659       1,339,402      1,280,176
Total Assets                                62,593,258     58,921,099     51,614,667      49,579,447     48,758,728
Long-Term Debt
  (Less Current Installments)               17,079,000     20,222,124     17,504,047      16,414,900     16,530,499
Stockholders' Equity                        20,596,951     18,975,001     17,555,172      16,424,919     14,652,663
Shares Outstanding At September 30,          1,527,486      1,475,843      1,432,512       1,382,343      1,289,302
</TABLE>

General

      The core business of Roanoke Gas Company and its public utility
affiliates, collectively, the Company, is the distribution of natural gas to
approximately 53,000 active customers in the cities of Roanoke, Salem and
Bluefield, Virginia and Bluefield, West Virginia, and the surrounding areas,
at rates and charges regulated by the State Corporation Commission in
Virginia (the Virginia Commission) and the Public Service Commission in West
Virginia (the West Virginia Commission).  The Company is required, as a
public utility, to help ensure that it has the capacity to adequately serve
the ongoing needs of its customers.  The Company also continues to expand its
facilities to keep pace with the industrial and commercial development and
residential growth in its service areas.  The Company continues to experience
steady customer growth, and anticipates continuing this trend by attracting
adequate investment capital, along with adequate and timely increases in
rates when needed from the state commissions.  The Company also serves
approximately 8,800 active propane accounts in southwestern Virginia and
southern West Virginia and serves natural gas industrial transportation
customers by brokerage of natural gas supplies through its subsidiary,
Diversified Energy Company, which trades as Highland Propane Company and
Highland Gas Marketing.  Propane sales are becoming an increasingly important
aspect of the Company's operations, with the annual growth in propane
customers now exceeding the annual growth in natural gas customers.
      Continued public acceptance and a growing preference for natural gas
and propane as a competitively priced, clean and efficient fuel for space
heating and other residential, commercial and industrial applications have
prompted the steady increase in the number of customers served and in the
cost of constructing facilities required to serve them.  Energy 
conservation and the availability of modern, highly efficient furnaces and
other appliances for replacement and new services in better-insulated homes
<PAGE>
continue to result in a slight decline in annual weather normalized per
capita residential usage.  The effect of such per capita declines, unless
offset by new customer growth, abnormally cold weather, or requested rate
relief, could result in a decline or attrition in the Company's net operating
earnings as a percentage of the equity component of the rate base. 
Competition from alternative fuels and/or suppliers could also impact the
Company's profitability levels.
Forward-Looking Statements
      From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and development
activities and similar matters.  The Private Securities Litigation Reform Act
of 1995 provides a safe harbor for forward-looking statements.  In order to
comply with the terms of the safe harbor, the Company notes that a variety of
factors could cause the Company's actual results and experience to differ
materially from the anticipated results or other expectations expressed in
the Company's forward-looking statements.  The risks and uncertainties that
may affect the operations, performance, development and results of the
Company's business include the following: (i) obtaining adequate rate relief
from regulatory authorities on a timely basis; (ii) earning on a consistent
basis an adequate return on invested capital; (iii) increasing expenses and
labor costs and availability; (iv) price competition from alternative fuels;
(v) volatility in the price of natural gas and propane; (vi) some uncertainty
in the projected rate of growth of natural gas and propane requirements in
the Company's service area; and (vii) general economic conditions both
locally and nationally.  In addition, the Company's business is seasonal in
character and strongly influenced by weather conditions.  Extreme changes in
winter heating 



1997 Annual Report
<PAGE>
Management's Discussion & Analysis 
Of Financial Condition And Results Of Operations

[Graph Appears here:    NATURAL GAS CUSTOMERS]
<TABLE>
<CAPTION>
                                  NATURAL GAS
                                   CUSTOMERS
    <S>               <C>      <C>      <C>      <C>      <C>
      Year               1993     1994     1995     1996     1997
      Customers         46,788   48,544   49,813   51,094   52,763
</TABLE>

degree days from the normal or mean can have significant short-term impacts
on revenues and gross margin.

Capital Resources & Liquidity

      Roanoke Gas Company's primary capital needs are the funding of its
continuing construction program and the seasonal funding of its stored gas
inventories.  The Company's capital expenditures for the year were a
combination of replacements and expansions, reflecting the need to replace
older cast iron and bare steel pipe with plastic pipe, while continuing to
meet the demands of customer growth.  Total capital expenditures for the
period were approximately $8.05 million, allocated as follows: $5.12 million
for Roanoke Gas Company, $.61 million for Bluefield Gas Company and $2.32
million for Highland Propane Company.  Depreciation cash flow provided
approximately $3.2 million in support of capital expenditures, or
approximately 40% of total investment.  Historically, consolidated capital
expenditures were $5.5 million in 1996 and $5.6 million in 1995.  It is
anticipated that future capital expenditures will be funded with the
combination of depreciation cash flow, retained earnings, sale of Company
equity securities and issuance of debt. 
      At September 30, 1997, the Company had available lines of credit
totaling $20 million for its short-term borrowing needs, of which $7,129,000
was outstanding.  Short-term borrowing, in addition to providing limited
capital project bridge financing, is used to finance summer and fall gas
purchases, which are stored in the underground facilities of Columbia Gas
Transmission Corporation, Tennessee Gas Pipeline Company and Virginia Gas
Storage Company, as well as in the Company's above-ground LNG storage
facility, to help ensure adequate winter supplies to meet customer demand. 
At September 30, 1997, the Company had $6,485,028 in inventoried natural gas
supplies.
      Short-term borrowings, together with internally-generated funds, long-
term debt and the sale of common stock through the Company's Dividend
Reinvestment and Stock Purchase Plan (the Plan), have been adequate to cover
construction costs, debt service and dividend payments to stockholders.  The
terms of short-term borrowings are negotiable, with average rates of 5.97% in
1997, 5.84% in 1996 and 6.07% in 1995.  The lines do not require compensating
balances.  The Company utilizes a cash management program, which provides for
daily balancing of the Company's temporary investment and short-term
borrowing needs with interest rates indexed to the 30-day LIBOR interest rate
plus a premium.  The program allows the Company to maximize returns on
temporary investments and minimize the cost of short-term borrowings.
      Stockholders' equity increased by $1,621,950, reflecting an increase of
$739,231 in retained earnings and proceeds of $882,719 of new common stock
purchases through the Plan and the Restricted Stock Plan For Outside
Directors for the period. The purchase price of Company common stock under
these plans is based upon the fair market value of such common stock,
<PAGE>
determined by the Board of Directors based on the closing sales price of the
Company's common stock on the Nasdaq National Market on the investment date,
if the investment date is a trading day, or if not, the first trading day
prior to such day. 
      At September 30, 1997, the Company's consolidated capitalization was
50% equity and 50% debt, compared to 48% equity and 52% debt at September 30,
1996.

Regulatory & Rate Case Proceedings

      The Company has three rate case applications pending before regulatory
bodies.  A Bluefield Gas Company rate case application was filed with the
West Virginia Commission in April 1997 with a decision expected in February
1998.
      Roanoke Gas Company filed an application with the Virginia Commission
in December 1996 with rates placed into effect, subject to refund, on January
1, 1997.  A hearing was held on the application in June 1997, and an order in
the case is not expected until sometime early in 1998.  The Company has
established reserves for an estimated level of refund in the case, and
management believes the reserves are adequate to cover any refunds ordered by
the Virginia Commission.
      Commonwealth Public Service Corporation, the Virginia portion of
Bluefield Gas Company, filed a rate case with the Virginia Commission in June
1997, and expects to put the rates into effect, subject to refund, in
December 1997.  The hearing and final order are not expected until sometime
in 1998.
      The Company filed a stipulated settlement with Virginia Gas Company and
the Virginia Commission in the contested certificated territory applications
for Tazewell County, Virginia.  The settlement provides for Commonwealth
Public Service Corporation to expand its certificated service territory for
several miles around Bluefield, Virginia in eastern Tazewell County and
provides for Virginia Gas Company to serve the other areas of Tazewell
County.  The Company believes this is a reasonable settlement which allows
Commonwealth Public Service Corporation adequate opportunity for future
growth.  Management expects the Virginia Commission to approve the
settlement.


Roanoke Gas Company
<PAGE>
Results Of Operations

Fiscal Year 1997 Compared With Fiscal Year 1996

OPERATING REVENUES - Operating revenues for the natural gas utilities
decreased $2,225,226 to $57,842,181 in 1997 from $60,067,407 in 1996.  The
decrease in revenues is attributed to weather that was approximately 8%
warmer in 1997 than in 1996.  Operating revenues for propane increased
$1,502,179 to $7,205,645 in 1997 from $5,703,466 in 1996 due to the
tremendous growth in the number of customer additions and higher billing
rates impacted by propane cost.

ENERGY VOLUMES - The volume of natural gas delivered to customers was down
365,903 MCF to 10,804,045 MCF in 1997 from 11,169,948 MCF in 1996, primarily
attributable to weather that was approximately 8% warmer than the weather in
1996.  While customer growth was on par for the period, sales were down in
all categories, with the exception of transportation volumes, due to warmer
weather.  Propane sales volumes for 1997 were 6,568,066 gallons compared to
5,997,912 gallons in 1996, an increase of 570,154 gallons; again, indicative
of the increase in customer growth.

COST OF ENERGY - The cost of natural gas was $38,675,337 in 1997 compared to
$40,763,104 in 1996.  The $2,087,767 decrease was due to a 3% decline in
volume and a 2% decrease in unit cost, both of which were impacted by weather
that was approximately 8% warmer in 1997 than in 1996.  The cost of propane
was up $930,594 due to an increase in sales volume of 570,154 gallons
associated with customer growth and a 20% increase in unit cost.

OTHER OPERATING EXPENSES - Other operations and maintenance expenses
decreased $411,894, or 4.15%, to $9,512,597 in 1997 from $9,924,491 in 1996. 
Although the Company had modest increases in expenses associated with health
insurance and bad debt accruals, legal expenses and the write-off of
regulatory assets, these were more than offset by reductions in FAS 106
accruals and maintenance expenses.
      General taxes increased $54,631 to $2,456,399 in 1997 from $2,401,768
in 1996.  While there were decreases in the revenue-sensitive taxes (gross
receipts and occupation taxes), the business license and merchants taxes,
franchise taxes and property taxes increased. 
      Income taxes were down $105,931 to $857,964 in 1997 from $963,895 in
1996.  See note 5 of the notes to consolidated financial statements for
information on income taxes.
      Depreciation and amortization expenses increased $239,465 to $2,533,912
in 1997 from $2,294,447 in 1996 due to depreciation on normal additions to
plant in service.
      Other operating expenses - propane operations includes the operating
and maintenance expenses, taxes and depreciation of Highland Propane Company. 
These costs increased $289,736 to $2,700,626 in 1997 from $2,410,890 in 1996. 
The increase was mainly due to depreciation on increased plant associated
with customer growth and increased income taxes associated with higher
taxable income.

OTHER INCOME - Other income, net of other deductions, increased $69,170 to
$146,910 in 1997 from $77,740 in 1996.  The increase was primarily due to
jobbing revenues and interest income and the elimination of a write-down of
nonutility property which occurred in 1996.

[Graph appears here:  COMPARISON  MCF to HDD (Heating Degree Days)]
<PAGE>
<TABLE>
<CAPTION>
                                        COMPARISON
                             MCF to HDD (Heating Degree Days)

      Year                    1993         1994         1995         1996          1997
    <S>                  <C>         <C>           <C>         <C>           <C>
      MCFs Delivered       9,820,345   10,267,038    9,961,877   11,169,948    10,804,045
      HDD                      4,356        4,416        3,791        4,696         4,298
</TABLE>

[Graph appears here:  COMPARISON Gallons Delivered to HDD (Heating Degree
Days)]
<TABLE>
<CAPTION>
                                        COMPARISON
                      Gallons Delivered to HDD (Heating Degree Days)

      Year                    1993         1994         1995         1996          1997
    <S>                  <C>         <C>           <C>         <C>           <C>
      Gallons Propane      4,586,334    5,012,830    4,822,277    5,997,912     6,568,066
      HDD                      4,356        4,416        3,791        4,696         4,298
</TABLE>

INTEREST CHARGES - Total interest charges increased $324,081 to $2,240,453 in
1997 from $1,916,372 in 1996.  The increase was associated with higher
borrowings under lines of credit due to under-collections of gas costs in the
early winter months, higher receivable balances, higher inventories,
increases in capital additions and interest on rate refund reserve.

NET EARNINGS AND DIVIDENDS - Net earnings for 1997 were $2,309,880 as
compared to $2,196,672 for 1996.  Earnings per share of common stock were
$1.54 in 1997 compared to $1.51 in 1996.  Dividends per share of common stock
were $1.04 in 1997 compared to $1.02 in 1996.  The $113,208 increase in net
earnings can be attributed to cost containment and customer growth.




1997 Annual Report
<PAGE>
Management's Discussion & Analysis 
Of Financial Condition And Results Of Operations 

[Graph appears here:  COMPARISON  Net Income to HDD (Heating Degree Days)]
<TABLE>
<CAPTION>
                                        COMPARISON
                          Net Income to HDD (Heating Degree Days)

      Year                    1993         1994         1995         1996          1997
    <S>                  <C>         <C>           <C>         <C>           <C>
      Net Income          $1,441,336   $1,677,098   $1,777,240   $2,196,672    $2,309,880
      HDD                      4,356        4,416        3,791        4,696         4,298
</TABLE>

Fiscal Year 1996 Compared With Fiscal Year 1995

OPERATING REVENUES - Operating revenues for the natural gas utilities
increased $16,005,670 to $60,067,407 in 1996 from $44,061,737 in 1995.  The
increase in revenues is attributed to weather that was approximately 24%
colder in 1996 than in 1995 and a 34% increase in the unit cost of gas. 
Operating revenues for propane increased $1,154,056 to $5,703,466 in 1996
from $4,549,410 in 1995.  The increase in revenues is also attributed to the
colder weather and customer growth. 

ENERGY VOLUMES - The volume of natural gas delivered to customers was up
1,208,071 MCF or approximately 12% in 1996.  The interruptible and
transportation volumes were down due to curtailments but the firm volumes
were up 21% due to the colder weather.  Propane sales volumes in 1996 were up
1,175,635 gallons, or 24%, due to the colder weather and an increase in
customer growth. 

COST OF ENERGY - The cost of natural gas was $40,763,104 in 1996 compared to
$27,027,507 in 1995.  The $13,735,597 increase was due to a 12% increase in
the volume of gas delivered to customers and a 34% increase in the unit cost
of gas.  Both the volume and price increases in 1996 were impacted by the
weather that was 11% colder than normal.  Likewise, the cost of propane in
1996 was up $829,198 due to a 24% increase in sales volume associated with
the colder weather and customer growth, and an 11% increase in the unit cost
of propane.

OTHER OPERATING EXPENSES - Other operations and maintenance expenses
increased 11% to $9,924,491 in 1996 from $8,959,677 in 1995.  The largest
increases were in bad debt accruals (associated with higher billings),
collection and billing expenses, legal expenses, general office renovations
and maintenance of distribution system.
      General taxes increased 15% to $2,401,768 in 1996 from $2,082,896 in
1995, due primarily to revenue-sensitive taxes (gross receipts and business
and occupation taxes).
      Income taxes on the natural gas utilities increased $252,458 to
$963,895 in 1996 from $711,437 in 1995, primarily due to increased taxable
income.  See note 5 of the notes to consolidated financial statements for
additional information on income taxes.
      Depreciation and amortization expenses increased $160,959 to $2,294,447
in 1996 from $2,133,488 in 1995 due to depreciation on normal additions to
plant in service.
<PAGE>
      Other operating expenses - propane operations consist of the operating
and maintenance expenses, taxes and depreciation of Highland Propane.  These
costs increased to $2,410,890 in 1996 from $2,026,108 in 1995.  The $384,782
increase was mainly attributable to (1) tank sets in regard to customer
growth, (2) additional delivery costs associated with 
increased volumes and foul weather, (3) additional sales expense associated
with market area expansion and the resulting customer growth and sales
commissions, (4) tank maintenance, and (5) greater depreciation on additional
customer tanks and delivery vehicles.

OTHER INCOME - Other income, net of other deductions, decreased significantly
in 1996 to $77,740 from $179,649 in 1995.  The decrease was primarily due to
Roanoke Gas Company being in a borrowing mode instead of an investment mode
on the cash management system, a reduction in net jobbing revenues, and the
elimination of interest income and a capital gain on the sale of investment
property of Highland Propane.

INTEREST CHARGES - Total interest charges were down $8,295 for 1996 versus
1995 due to the liquidity of Highland Propane Company.  
NET EARNINGS AND DIVIDENDS - Net earnings for fiscal 1996 were $2,196,672 as
compared to $1,777,240 for fiscal 1995.  The $419,432 increase in net
earnings can be attributed to weather that was 11% colder than normal and 24%
colder than fiscal 1995 and increased sales from

[Graph appears here:  GROSS UTILITY PLANT]
<TABLE>
<CAPTION>
                                                       GROSS UTILITY PLANT
                                            (Including Construction Work-In-Progress)
                                             Millions Of Dollars: 1997 - $66,678,107

Year    1988         1989        1990        1991        1992         1993        1994        1995        1996         1997
<S> <C>          <C>         <C>         <C>         <C>          <C>         <C>         <C>         <C>          <C>
     $33,034,999  $36,013,885 $39,346,347 $41,586,792 $45,100,044  $48,258,419 $52,729,927 $57,369,281 $61,732,904  $66,678,107

</TABLE>

Roanoke Gas Company
<PAGE>
customer growth.  Earnings per share of common stock were $1.51 in 1996
compared to $1.26 in 1995.  Dividends per share of common stock were $1.02 in
1996 and $1.00 in 1995.

Accounting Changes

      The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of (Statement 121), on October 1, 1996. 
Statement 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.  The adoption of Statement 121 in 1997 did not have a material
impact on the Company's consolidated financial position, results of
operations or liquidity.
      Prior to October 1, 1996, the Company accounted for its stock options
in accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations.  As such, compensation expense was recorded on the date of
grant only if the current market price of the underlying stock exceeded the
option price.  On October 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation
(Statement 123), which permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of grant. 
Alternatively, Statement 123 allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net earnings and pro
forma net earnings per share disclosures for stock option grants made in 1996
and future years as if the fair-value-based method defined in Statement 123
had been applied.  The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of Statement 123.

Recent Accounting Developments

      In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
(Statement 128).  Statement 128 supersedes APB Opinion No. 15, Earnings Per
Share, and specifies the computation, presentation and disclosure
requirements for earnings per share (EPS) for entities with publicly-held
common stock or potential common stock.  The Company is required to adopt the
provisions of Statement 128 on October 1, 1997.  The Company believes the
adoption of Statement 128 will not have a material impact on its EPS
calculations.
      The Financial Accounting Standards Board has also issued Statement of
Financial Accounting Standards (SFAS) No. 129, Disclosure of Information
about Capital Structure, SFAS No. 130, Reporting Comprehensive Income, and
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information.  These Statements are effective for fiscal years beginning after
December 15, 1997.  The Company does not anticipate the adoption of these
Statements will have a material impact on its consolidated financial
position, results of operations or liquidity. 

[Graph appears here:  GAS SALES]
<PAGE>
<TABLE>
<CAPTION>
                                                            GAS SALES
                                                        Volume (Millions)
                                                      1997 - 10,804,045 MCF

Year         1988       1989       1990       1991       1992        1993        1994       1995        1996         1997
<S>     <C>         <C>        <C>        <C>        <C>         <C>        <C>         <C>        <C>         <C>
Volume     9,212,194  9,316,868  9,066,558  8,335,292  9,339,521   9,820,345  10,267,038  9,961,877  11,169,948   10,804,045

</TABLE>
Impact Of Inflation

      The cost of natural gas represented approximately 72% for fiscals 1997
and 1996 and 66% for fiscal 1995 of the total operating expenses of the
Company's gas utilities' operations.  However, under the present regulatory
Purchased Gas Adjustment mechanisms, the increases and decreases in the cost
of gas are passed through to the Company's customers.
      Inflation impacts the Company through increases in non-gas costs such
as insurance, labor costs, supplies and services used in operations and
maintenance and on the replacement cost of plant and equipment.  The margin
charged to natural gas customers to cover these costs can only be increased
through the regulatory process via a rate increase application.  In addition
to stressing performance improvements and higher gas sales volumes to offset
inflation, management must continually review operations and economic
conditions to assess the need for filing and receiving adequate and timely
rate relief from the state commissions.

Franchises

      Roanoke Gas Company and Commonwealth Public Service Corporation, a
subsidiary of Bluefield Gas Company, currently hold the only franchises
and/or certificates of public convenience and necessity to distribute natural
gas in their respective Virginia service areas.  The franchises generally
extend for multi-year periods and are renewable by the municipalities. 
Certificates of public convenience and necessity, which are issued by the
Virginia Commission, are exclusive and of perpetual duration, subject to
compliance with regulatory standards.



1997 Annual Report
<PAGE>
Management's Discussion & Analysis 
Of Financial Condition And Results Of Operations 

      In July 1996, Roanoke Gas signed new 20-year franchise agreements with
the cities of Roanoke and Salem and the Town of Vinton effective as of
January 1, 1996. Bluefield Gas Company holds the only franchise to distribute
natural gas in its West Virginia service area.  Its franchise extends for a
period of 30 years from August 23, 1979.
      Management anticipates that the Company will be able to renew all of
its franchises when they expire.  There can be no assurance, however, that a
given jurisdiction will not refuse to renew a franchise or will not, in
connection with the renewal of a franchise, attempt to impose certain
restrictions or conditions that could adversely affect the Company's business
operations or financial condition.

Environmental Issues

      Both Roanoke Gas Company and Bluefield Gas Company operated
manufactured gas plants (MGPs) as a source of fuel for lighting and heating
until the early 1950s.  The process involved heating coal in a low-oxygen
environment to produce a manufactured gas that could be distributed through
the Company's pipeline system to customers.  A by-product of the process was
coal tar, and the potential exists for on-site tar waste contaminants at both
former plant sites.  The extent of contaminants at these sites is unknown at
this time, and the Company has not performed formal analysis at the Roanoke
Gas Company MGP site.  An analysis at the Bluefield Gas Company site
indicates some soil contamination.  The Company, with concurrence of legal
counsel, does not believe any events have occurred requiring regulatory
reporting.  Further, the Company has not received any notices of violation or
liabilities associated with environmental regulations related to the MGP
sites and is not aware of any off-site contamination or pollution as a result
of these prior sites.  Therefore, the Company has no plans for subsurface
remediation at either of the MGP sites.  Should the Company eventually be
required to remediate either of the MGP sites, the Company will pursue all
prudent and reasonable means to recover any related costs, including
insurance claims and regulatory approval for rate case recognition of
expenses associated with any work required.  Based upon prior orders of the
Commission related to environmental matters at other companies, the Company
believes it would be able to recover prudently incurred costs.  Additionally,
a stipulated rate case agreement between the Company and the West Virginia
Commission recognizes the Company's right to defer MGP clean-up costs, should
any be incurred, and to seek rate relief for such costs.  If the Company
eventually incurs costs associated with a required clean-up of either MGP
site, the Company anticipates recording a regulatory asset for such clean-up
costs which are anticipated to be recoverable in future rates.  Based on
anticipated regulatory actions and current practices, management believes
that any costs incurred related to the previously-mentioned environmental
matters will not have a material effect on the Company's consolidated
financial position.

[Graph appears here:  Roanoke Gas Company & Subsidiaries - HOW 1997 REVENUE
DOLLARS WERE SPENT]
<PAGE>
<TABLE>
<CAPTION>
                      Roanoke Gas Company & Subsidiaries
                      HOW 1997 REVENUE DOLLARS WERE SPENT

                         Year Ended September 30, 1997
                         Gross Revenues - $68,494,365

                                              Amount
    <S>                                  <C>
      Cost Of Gas & Propane                $42,582,905
      Salaries & Wages                     $ 5,057,225
      All Other Expenses                   $ 9,290,285
      Taxes                                $ 3,766,602
      Interest Charges                     $ 2,240,453
      Depreciation & Amortization          $ 3,247,015
      Dividends Declared To Owners         $ 1,570,649
      Earnings Retained In Business        $   739,231
</TABLE>

[Graph appears here:  Roanoke Gas Company & Subsidiaries - 1997 FINANCIAL
HIGHLIGHTS]

<TABLE>
<CAPTION>
                      Roanoke Gas Company & Subsidiaries
                           1997 FINANCIAL HIGHLIGHTS

    <S>                                             <C>
      Operating Revenues - Gas                        $ 57,842,181
      Propane Revenues - Propane                      $  7,205,645
      Other Revenues - Gas Marketing                  $  2,869,514
      Merchandising And Jobbing                       $    567,128
      Interest Income                                 $      9,897
      Gross Revenues                                  $ 68,494,365
      Net Earnings                                    $  2,309,880
      Net Earnings Per Share                          $       1.54
      Dividends Per Share - Cash                      $       1.04
      Total Customers - Natural Gas                         52,763
      Total Customers - Propane                              8,829
      Total Natural Gas Deliveries - MCF                10,804,045
      Total Propane Sales - Gallons                      6,568,066
      Number Of Full-Time Employees                            155
      Total Payroll Chargeable To 
      Operations & Construction                       $  5,820,863
      Total Additions To Plant                        $  8,052,801
</TABLE>

Roanoke Gas Company
<PAGE>
Independent Auditors' Report






The Board of Directors and Stockholders
Roanoke Gas Company:


      We have audited the accompanying consolidated balance sheets of Roanoke
Gas Company and subsidiaries as of September 30, 1997 and 1996, and the
related consolidated statements of earnings, stockholders' equity and cash
flows for each of the years in the three-year period ended September 30,
1997.  These consolidated 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 generally accepted auditing
standards.  Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated 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 Roanoke
Gas Company and subsidiaries as of September 30, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1997, in conformity with generally
accepted accounting principles.

						    s/KPMG Peat Marwick LLP
                                                    KPMG PEAT MARWICK LLP


Roanoke, Virginia
October 17, 1997





1997 Annual Report
<PAGE>
<TABLE>
<CAPTION>
Roanoke Gas Company and Subsidiaries
Consolidated Balance Sheets
September 30, 1997 and 1996

Assets                                                    1997               1996
------------------------------------------------------============-------===========-
<S>                                                 <C>               <C>
Utility Plant:
   In service                                        $ 65,590,024        60,454,905 
   Accumulated depreciation and amortization          (22,612,963)      (20,822,398)
--------------------------------------------------------------------------------------
      In service, net                                  42,977,061        39,632,507 
   Construction work-in-progress                        1,088,083         1,277,999 
--------------------------------------------------------------------------------------
      Utility plant, net                               44,065,144        40,910,506 
--------------------------------------------------------------------------------------
Nonutility Property:
   Propane                                              6,634,369         4,403,630 
   Accumulated depreciation and amortization           (2,540,274)       (2,070,405)
--------------------------------------------------------------------------------------
      Nonutility property, net                          4,094,095         2,333,225 
--------------------------------------------------------------------------------------
Current Assets:
   Cash and cash equivalents                              116,045           633,322 
   Accounts receivable, less allowance for 
      doubtful accounts of $368,345 in
      1997 and $279,316 in 1996                         4,188,984         3,857,407 
   Inventories                                          7,427,581         7,402,586 
   Prepaid income taxes                                     7,368           297,521 
   Deferred income taxes                                1,206,995           379,356 
   Purchased gas adjustments                              587,457         1,782,590 
   Other                                                  420,674           479,926 
--------------------------------------------------------------------------------------
      Total current assets                             13,955,104        14,832,708 
--------------------------------------------------------------------------------------
Other Assets                                              478,915           844,660 


--------------------------------------------------------------------------------------
                                                     $ 62,593,258        58,921,099 
======================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>




Roanoke Gas Company
<PAGE>
<TABLE>
<CAPTION>

Liabilities And Stockholders' Equity                      1997               1996
------------------------------------------------------============------============--
<S>                                                 <C>               <C>
Capitalization:
   Stockholders' equity:
      Common stock, $5 par value.  Authorized
         3,000,000 shares; issued and outstanding
         1,527,486 and 1,475,843 shares in 1997
         and 1996, respectively                      $  7,637,430         7,379,215 
      Capital in excess of par value                    5,271,667         4,647,163 
      Retained earnings                                 7,687,854         6,948,623 
--------------------------------------------------------------------------------------
      Total stockholders' equity                       20,596,951        18,975,001 
   Long-term debt, excluding current installments      17,079,000        20,222,124 
--------------------------------------------------------------------------------------
      Total capitalization                             37,675,951        39,197,125 
--------------------------------------------------------------------------------------
Current Liabilities:
   Current installments of long-term debt               3,143,124           669,423 
   Borrowings under lines of credit                     7,129,000         6,652,500 
   Dividends payable                                      397,530           376,795 
   Accounts payable                                     5,512,348         4,931,467 
   Customer deposits                                      427,895           362,384 
   Accrued expenses                                     4,233,860         3,214,953 
   Refunds from suppliers - due customers                 425,860            23,865 
--------------------------------------------------------------------------------------
      Total current liabilities                        21,269,617        16,231,387 
--------------------------------------------------------------------------------------
Deferred Credits And Other Liabilities:
   Deferred income taxes                                3,145,932         2,960,795 
   Deferred investment tax credits                        492,357           531,792 
   Other deferred credits                                   9,401                 - 
--------------------------------------------------------------------------------------
      Total deferred credits and other liabilities      3,647,690         3,492,587 
--------------------------------------------------------------------------------------
                                                     $ 62,593,258        58,921,099 
======================================================================================
</TABLE>


1997 Annual Report
<PAGE>
<TABLE>
<CAPTION>
Roanoke Gas Company and Subsidiaries
Consolidated Statements Of Earnings
Years Ended September 30, 1997, 1996 and 1995

                                                          1997              1996              1995
------------------------------------------------------============------============-----============-
<S>                                                <C>                 <C>              <C>
Operating Revenues:
   Gas utilities                                     $ 57,842,181        60,067,407         44,061,737 
   Propane operations                                   7,205,645         5,703,466          4,549,410 
------------------------------------------------------------------------------------------------------
      Total operating revenues                         65,047,826        65,770,873         48,611,147 
------------------------------------------------------------------------------------------------------
Cost Of Gas:
   Gas utilities                                       38,675,337        40,763,104         27,027,507 
   Propane operations                                   3,907,568         2,976,974          2,147,776 
------------------------------------------------------------------------------------------------------
      Total cost of gas                                42,582,905        43,740,078         29,175,283 
------------------------------------------------------------------------------------------------------
Operating Margin                                       22,464,921        22,030,795         19,435,864 
------------------------------------------------------------------------------------------------------
Other Operating Expenses:
   Gas utilities:
      Other operations                                  8,049,833         8,056,211          7,726,611 
      Maintenance                                       1,462,764         1,868,280          1,233,066 
      Taxes - general                                   2,456,399         2,401,768          2,082,896 
      Taxes - income                                      857,964           963,895            711,437 
      Depreciation and amortization                     2,533,912         2,294,447          2,133,488 
   Propane operations (including taxes - income 
      of $309,137, $177,059 and $224,017 
      in 1997, 1996 and 1995, respectively)             2,700,626         2,410,890          2,026,108 
------------------------------------------------------------------------------------------------------
      Total other operating expenses                   18,061,498        17,995,491         15,913,606 
------------------------------------------------------------------------------------------------------
Operating Earnings                                      4,403,423         4,035,304          3,522,258 
------------------------------------------------------------------------------------------------------
Other Income (Deductions):
   Gas utilities:
      Interest income                                       8,204               274             26,652 
      Merchandising and jobbing, net                      147,522            99,334            120,475 
      Other deductions                                    (87,486)         (120,539)          (142,389)
      Taxes - income                                      (37,552)          (22,486)           (14,547)
   Propane operations, net                                116,222           121,157            189,458 
------------------------------------------------------------------------------------------------------
      Total other income (deductions)                     146,910            77,740            179,649 
------------------------------------------------------------------------------------------------------
Earnings Before Interest Charges                        4,550,333         4,113,044          3,701,907 
------------------------------------------------------------------------------------------------------
<PAGE>
Interest Charges:
   Gas utilities:
      Long-term debt                                    1,740,998         1,621,661          1,680,078 
      Other                                               441,444           292,301            231,142 
   Propane operations                                      58,011             2,410             13,447 
------------------------------------------------------------------------------------------------------
      Total interest charges                            2,240,453         1,916,372          1,924,667 
------------------------------------------------------------------------------------------------------
Net Earnings                                         $  2,309,880         2,196,672          1,777,240 
------------------------------------------------------------------------------------------------------
Net Earnings Per Share                               $       1.54              1.51               1.26 
======================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.

Roanoke Gas Company
<PAGE>
<TABLE>
<CAPTION>
Roanoke Gas Company and Subsidiaries
Consolidated Statements Of Stockholders' Equity
Years Ended September 30, 1997, 1996 and 1995

                                                                   Capital In                             Total
                                                   Common           Excess Of        Retained          Stockholders'
                                                    Stock           Par Value         Earnings           Equity
-------------------------------------------------===========-------===========-----============------=============--
<S>                                           <C>                 <C>             <C>               <C>
Balances, September 30, 1994                    $ 6,911,715          3,631,335         5,881,869        16,424,919 
Net earnings                                              -                  -         1,777,240         1,777,240 
Cash dividends ($1.00 per share)                          -                  -        (1,416,081)       (1,416,081)
Issuance of common stock (50,169 shares)            250,845            522,699                 -           773,544 
Common stock issuance costs                               -             (4,450)                -            (4,450)
--------------------------------------------------------------------------------------------------------------------
Balances, September 30, 1995                      7,162,560          4,149,584         6,243,028        17,555,172 
Net earnings                                              -                  -         2,196,672         2,196,672 
Cash dividends ($1.02 per share)                          -                  -        (1,491,077)       (1,491,077)
Issuance of common stock (43,331 shares)            216,655            497,579                 -           714,234 
--------------------------------------------------------------------------------------------------------------------
Balances, September 30, 1996                      7,379,215          4,647,163         6,948,623        18,975,001 
Net earnings                                              -                  -         2,309,880         2,309,880 
Cash dividends ($1.04 per share)                          -                  -        (1,570,649)       (1,570,649)
Issuance of common stock (51,643 shares)            258,215            624,504                 -           882,719 
--------------------------------------------------------------------------------------------------------------------
Balances, September 30, 1997                    $ 7,637,430          5,271,667         7,687,854        20,596,951 
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.





1997 Annual Report
<PAGE>
<TABLE>
<CAPTION>
Roanoke Gas Company and Subsidiaries
Consolidated Statements Of Cash Flows
Years Ended September 30, 1997, 1996 and 1995

                                                                1997               1996             1995
------------------------------------------------------------=============------============-----============--
<S>                                                       <C>                  <C>              <C>
Cash Flows From Operating Activities:
  Net earnings                                              $ 2,309,880          2,196,672         1,777,240 
  Adjustments to reconcile net earnings to net cash 
    provided by (used in) operating activities:
    Depreciation and amortization                             3,247,015          2,810,314         2,563,128 
    Loss (gain) on disposal of utility plant and 
      nonutility property                                          (961)            (4,202)            4,823 
    Loss (gain) on sale of other asset                            3,293                  -           (67,556)
    Write-down of other asset                                     4,230                  -                 - 
    Write-off of regulatory assets                              132,523                  -                 - 
    Decrease (increase) in purchased gas adjustments          1,195,133         (2,019,589)          931,422 
    Changes in assets and liabilities which provided 
      (used) cash, exclusive of changes and noncash
      transactions shown separately                           1,471,321         (3,608,875)        3,139,960 
--------------------------------------------------------------------------------------------------------------
    Net cash provided by (used in) operating activities       8,362,434           (625,680)        8,349,017 
--------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
  Additions to utility plant in service and under 
    construction and nonutility property                     (8,052,801)        (5,522,977)       (5,609,292)
  Proceeds from disposal of property                             50,094             42,511            70,403 
  Cost of removal of utility plant, net                        (158,855)          (423,221)         (122,523)
  Proceeds from sale of other asset                             141,969                  -                 - 
  Proceeds from collection of note receivable                         -                  -           490,000 
--------------------------------------------------------------------------------------------------------------
      Net cash used in investing activities                  (8,019,593)        (5,903,687)       (5,171,412)
--------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
  Proceeds from issuance of long-term debt                            -                  -         2,700,000 
  Retirement of long-term debt and payments on 
    obligations under capital leases                           (669,423)        (1,179,415)       (1,124,703)
  Net borrowings (repayments) under lines of credit             476,500          8,598,000        (3,793,000)
  Proceeds from issuance of common stock                        882,719            714,234           773,544 
  Common stock issuance costs                                         -                  -            (4,450)
  Cash dividends paid                                        (1,549,914)        (1,473,025)       (1,403,370)
--------------------------------------------------------------------------------------------------------------
      Net cash provided by (used in) financing activities      (860,118)         6,659,794        (2,851,979)
--------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents           (517,277)           130,427           325,626 
Cash and Cash Equivalents, Beginning of Year                    633,322            502,895           177,269 
--------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year                      $   116,045            633,322           502,895 
==============================================================================================================

                                                                                                    continued
</TABLE>


Roanoke Gas Company
<PAGE>
<TABLE>
<CAPTION>
                                                                1997               1996             1995
------------------------------------------------------------=============------============-----============--
<S>                                                       <C>                  <C>              <C>
Changes in Assets and Liabilities Which Provided (Used) 
Cash, Exclusive of Changes and Noncash Transactions 
Shown Separately:
  Accounts receivable and customer deposits, net            $  (266,066)          (346,566)         (304,927)
  Inventories                                                   (24,995)        (2,054,592)        1,028,359 
  Prepaid income taxes                                          290,153           (297,521)          260,609 
  Other noncurrent assets                                        83,730            160,936          (277,339)
  Accounts payable                                              580,881           (613,180)          224,166 
  Income taxes payable                                                -           (476,410)          476,410 
  Accrued expenses and other current assets, net              1,078,159           (111,608)        2,011,166 
  Refunds from suppliers - due customers                        401,995           (658,986)          183,953 
  Deferred taxes, including amortization of deferred
    investment tax credits                                     (681,937)           789,052          (350,121)
  Other deferred credits                                          9,401                  -          (112,316)
--------------------------------------------------------------------------------------------------------------
                                                            $ 1,471,321         (3,608,875)        3,139,960 
==============================================================================================================
Supplemental Disclosures Of Cash Flows Information:
  Cash paid during the year for:
    Interest                                                $ 2,065,893          1,493,801         1,867,816 
==============================================================================================================
    Income taxes, net of refunds                            $ 1,575,952          1,148,319           675,418 
==============================================================================================================
  Noncash Transactions:
    The Company refinanced $9,300,000 of current 
      installments of long-term debt and borrowings 
      under lines of credit as long-term debt in 1996.
    A capital lease obligation of $21,119 was incurred in 
      1995 when the Company entered into an equipment lease.
-------------------------------------------------------------------------------------------------------------- 
See accompanying notes to consolidated financial statements.
</TABLE>


1997 Annual Report
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 1997 and 1996 and Years Ended September 30, 1997, 1996 and 1995

(1)   Summary of Significant Accounting Policies

General

      The consolidated financial statements include the accounts of Roanoke
Gas Company and its wholly-owned subsidiaries (the Company), Bluefield Gas
Company and Diversified Energy Company, trading as Highland Propane Company
and Highland Gas Marketing.  Roanoke Gas Company and Bluefield Gas Company
are gas utilities, which distribute and sell natural gas to residential,
commercial and industrial customers within their service areas.  The gas
utilities are subject to regulation by the Federal Energy Regulatory
Commission and their applicable state regulatory commissions.  Highland
Propane Company, which is not a public utility, distributes and sells propane
in southwestern Virginia and southern West Virginia.  Highland Gas Marketing
brokers natural gas to several industrial transportation customers of Roanoke
Gas Company and Bluefield Gas Company.
      The Company maintains its financial records in accordance with the
accounting policies as prescribed by its regulatory commissions and generally
accepted accounting principles.  The Company's regulated operations meet the
criteria, and accordingly, follow the reporting and accounting requirements
of Statement of Financial Accounting Standards No. 71, Accounting for the
Effects of Certain Types of Regulation (Statement 71). Statement 71 sets
forth the application of generally accepted accounting principles to those
companies whose rates are determined by an independent third-party regulator. 
The economic effects of regulation can result in regulated companies
recording costs that have been or are expected to be allowed in the rate-
setting process in a period different from the period in which the costs
would be charged to expense by an unregulated enterprise.  When this results,
costs are deferred as assets in the consolidated balance sheet (regulatory
assets) and recorded as expenses as those same amounts are reflected in
rates.  Additionally, regulators can impose liabilities upon a regulated
company for amounts previously collected from customers and for recovery of
costs that are expected to be incurred in the future (regulatory
liabilities).
      The amounts recorded by the Company as regulatory assets and regulatory
liabilities follow:
<PAGE>
<TABLE>
<CAPTION>

                                                        September 30,
--------------------------------------------------------------------------
                                                       1997       1996
--------------------------------------------------------------------------
<S>                                              <C>          <C>
Regulatory Assets:
      Early retirement incentive plan costs        $  33,481     246,768
      Statement 106 implementation cost                    -      18,884
      Rate case costs                                  6,598      20,879
      Franchise negotiation costs                          -      41,846
      LNG tank painting costs                              -      25,720
      Union organization costs                             -      29,325
      Purchased gas adjustments                      587,457   1,782,590
      Statement 109 implementation                         -      20,484
      Other                                                -      12,938
--------------------------------------------------------------------------
                                                   $ 627,536   2,199,434
==========================================================================
Regulatory Liabilities:
      Refunds from suppliers - due customers         425,860      23,865
--------------------------------------------------------------------------
                                                   $ 425,860      23,865
==========================================================================
</TABLE>

      During 1997, the Company wrote off regulatory assets totaling $132,523
upon management's determination that, for rate-making purposes, recovery of
these costs in future revenues was no longer probable.
      All significant intercompany transactions have been eliminated in
consolidation.

Utility Plant

      Utility plant is stated at original cost.  The cost of additions to
utility plant includes direct labor and overhead.  The cost of depreciable
property retired, plus cost of dismantling, less salvage, is charged to
accumulated depreciation.  Maintenance, repairs, and minor renewals and
betterments of property are charged to operations.
Depreciation and Amortization
      Provisions for depreciation and amortization are computed principally
on composite straight-line rates for financial statement purposes and on
accelerated rates for income tax purposes.  Depreciation and amortization for
financial statement purposes are provided on annual composite rates ranging
from 2 percent to 20 percent, except for propane plant and certain other
utility plant which are depreciated on a straight-line basis over the assets'
estimated useful lives.  The annual composite rates are determined by
depreciation studies performed for rate-making purposes; however, these
studies provide estimated useful lives which are materially consistent with
generally accepted accounting principles, and accordingly, no significant
differences in annual depreciation and amortization expense amounts occur as
a result of regulation.


Roanoke Gas Company
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 1997 and 1996 and Years Ended September 30, 1997, 1996 and 1995

(1)   Summary of Significant Accounting Policies (continued)

Cash and Cash Equivalents

      For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents.
Inventories
      Inventories, which consist primarily of propane gas and natural gas
firm and winter storage, are valued at the lower of cost (average cost) or
market.

Unbilled Revenues

      The Company bills most of its customers on a monthly cycle basis,
although certain large industrial customers are billed at or near the end of
each month. The Company records revenue based on service rendered to the end
of the accounting period.  The amounts of unbilled revenues receivable
included in accounts receivable on the consolidated balance sheets in 1997
and 1996 were $915,192 and $863,480, respectively.
Income Taxes
      Income taxes are accounted for using the asset and liability method. 
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss and
tax credit carryforwards.  Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the years in which those temporary
differences are expected to be recovered or settled.  The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in earnings
in the period that includes the enactment date.

Bond Expenses

      Bond expenses are being amortized over the lives of the bonds using the
bonds outstanding method.

Purchased Gas Adjustments

      Pursuant to the provisions of the Company's purchased gas adjustment
(PGA) clause, increases or decreases in gas costs are passed on to its
customers. Accordingly, the difference between actual costs incurred and
costs recovered through the application of the PGA is reflected as a net
deferred charge or credit.  At the end of the deferral period, the balance of
the net deferred charge or credit is amortized over the next 12-month period
and amounts are reflected in customer billings.
Pension and Other Postretirement Benefit Plans
      The Company has a defined benefit pension plan covering substantially
all of its employees.  Generally, the Company's funding policy is to
contribute annually an amount equal to that which can be deducted for federal
income tax purposes.  Pension costs are computed based upon the provisions of
Statement of Financial Accounting Standards No. 87.
      The Company also provides certain health care, supplemental retirement
and life insurance benefits to active and retired employees.  Postretirement
benefit costs are computed based upon the provisions of Statement of
Financial Accounting Standards No. 106.
<PAGE>
Net Earnings Per Share

      Net earnings per share are based on the weighted average number of
shares outstanding during the year (1,503,388 shares in 1997, 1,455,999
shares in 1996 and 1,408,659 shares in 1995).  The calculations of weighted
average shares outstanding for 1997 and 1996 do not include the effect of
common stock equivalents (CSEs), since the impact of including CSEs in the
weighted average shares outstanding is less than three percent.

Use of Estimates

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

Stock Options

      Prior to October 1, 1996, the Company accounted for its stock options
in accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations.  As such, compensation expense was recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price.  On October 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (Statement 123), which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the date
of grant.  Alternatively, Statement 123 allows entities to continue to apply
the provisions of APB Opinion No. 25 and provide pro forma net earnings and
pro forma net earnings per share disclosures for stock option grants made in
1996 and future years as if the fair-value-based method defined in Statement
123 had been applied.  The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of Statement 123.

1997 Annual Report
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 1997 and 1996 and Years Ended September 30, 1997, 1996 and 1995

(1)   Summary of Significant Accounting Policies (continued)

Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

      The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of (Statement 121), on October 1, 1996. 
Statement 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.  Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset.  If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets. 
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.  Adoption of Statement 121 in 1997 did not
have a material impact on the Company's consolidated financial position,
results of operations or liquidity.

(2)   Allowance for Doubtful Accounts
      A summary of the changes in the allowance for doubtful accounts
follows:

<TABLE>
<CAPTION>
                                           Years Ended September 30,
--------------------------------------------------------------------------
                                         1997        1996        1995 
--------------------------------------------------------------------------
<S>                                 <C>           <C>         <C>
Balances, beginning of year           $ 279,316     171,947     318,834 
Provision for doubtful accounts         660,400     550,777     345,585 
Recoveries of accounts written off      125,035     131,499      91,941 
Accounts written off                   (696,406)   (574,907)   (584,413)
--------------------------------------------------------------------------
Balances, end of year                 $ 368,345     279,316     171,947 
==========================================================================
</TABLE>

(3)   Borrowings Under Lines of Credit

      The Company had total short-term lines of credit of $20,000,000 in
1997, $18,000,000 in 1996 and $13,000,000 in 1995.  The balances outstanding
under these lines of credit at September 30, 1997, 1996 and 1995 were
$7,129,000, $6,652,500 and $1,442,000, respectively.  The highest month-end
balances outstanding under these lines of credit were $15,896,000, $7,587,000
and $7,186,000 in 1997, 1996 and 1995, respectively.  The average  month-end
balances outstanding were approximately $8,098,000, $4,453,000 and $2,809,000
in 1997, 1996 and 1995, respectively.  The average interest rates on the
lines of credit were approximately 5.97 percent, 5.84 percent and 6.07
percent for 1997, 1996 and 1995, respectively.  The lines are subject to
annual renewal and do not require compensating balances.  The average
interest rates were 6.14 percent, 5.71 percent and 6.27 percent on balances
outstanding at September 30, 1997, 1996 and 1995, respectively.  
<PAGE>
(4)   Long-term Debt

      Long-term debt consists of the following:
<TABLE>
<CAPTION>
                                                                                              September 30,
----------------------------------------------------------------------------------------------------------------------
                                                                                          1997             1996
----------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>               <C>
Roanoke Gas Company:
      First mortgage bonds, collateralized by utility plant:
         Series K, 10%, due July 1, 2002, with provision for retirement of
            $265,000 each year through 2001, with a final payment 
            of $290,000                                                                $1,350,000         1,615,000
         Series L, 10.375%, due April 1, 2004, with provision for retirement
            of $334,000 each year through 2003, with a final payment 
            of $324,000                                                                 2,328,000         2,662,000
      Term debentures, collateralized by indenture dated October 1, 1991, 
         with provision for retirement in varying annual payments through
         October 1, 2016 and interest rates ranging from 6.75% to 9.625%                7,200,000         7,200,000
      Unsecured senior notes payable, with interest rate fixed at 7.66%,
         with provision for retirement of $1,600,000 for each year beginning
         December 1, 2014 through 2018                                                  8,000,000         8,000,000
      Obligations under capital leases, due in aggregate monthly payments
         of $3,076, including imputed interest, through August 1998                        31,624            64,547

</TABLE>
Roanoke Gas Company
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 1997 and 1996 and Years Ended September 30, 1997, 1996 and 1995

(4)   Long-term Debt (continued)

<TABLE>
<CAPTION>
                                                                                              September 30,
----------------------------------------------------------------------------------------------------------------------
                                                                                          1997             1996
----------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>               <C>
Bluefield Gas Company:
      Unsecured installment loan, with interest rate based on prime 
         (8.75% and 8.25% at September 30, 1997 and 1996, respectively), 
         with provision for retirement of $50,000 for each year through 
         1997 and a final payment of $12,500 on October 31, 1997                    $     12,500            50,000 
      Unsecured note payable, with interest rate fixed at 7.28%,
         with provision for retirement of $25,000 quarterly beginning January 1,
         2002 and a final payment of $1,000,000 on October 1, 2003                     1,300,000         1,300,000 
----------------------------------------------------------------------------------------------------------------------
Total long-term debt                                                                  20,222,124        20,891,547 
Less current installments of long-term debt                                           (3,143,124)         (669,423)
----------------------------------------------------------------------------------------------------------------------
Total long-term debt, excluding current installments                                $ 17,079,000        20,222,124 
======================================================================================================================
</TABLE>
      The above debt obligations contain various provisions including a
minimum interest charge coverage ratio, limitations on debt as a percentage
of total capitalization, and limitations on total liabilities as a percentage
of tangible net worth.  The obligations also contain a provision restricting
the payment of dividends, primarily based on the earnings of the Company and
dividends previously paid.  At September 30, 1997, approximately $4,400,000
of retained earnings was available for dividends.

      The aggregate annual maturities of long-term debt, including
obligations under capital leases, subsequent to September 30, 1997 are as
follows:

<TABLE>
<CAPTION>
      Years Ending September 30,
--------------------------------------------------------------
          <S>                                 <C>
            1998                                $  3,143,124
            1999                                     599,000
            2000                                     599,000
            2001                                     599,000
            2002                                   1,399,000
            Thereafter                            13,883,000
--------------------------------------------------------------
            Total                               $ 20,222,124
==============================================================

</TABLE>


1997 Annual Report
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 1997 and 1996 and Years Ended September 30, 1997, 1996 and 1995

(5)   Income Taxes

      The details of income tax expense (benefit) are as follows:

<TABLE>
<CAPTION>
                                                                         Years Ended September 30,
---------------------------------------------------------------------------------------------------------
                                                                      1997          1996       1995 
=========================================================================================================
<S>                                                             <C>             <C>        <C>
Charged to other operating expenses - gas utilities:
Current:
   Federal                                                        $ 1,561,779      206,399   1,104,505 
   State                                                              (15,946)     (40,248)     48,649 
---------------------------------------------------------------------------------------------------------
Total current                                                       1,545,833      166,151   1,153,154 
---------------------------------------------------------------------------------------------------------
Deferred:
   Federal                                                           (668,660)     777,772    (370,870)
   State                                                               20,226       58,621     (32,198)
---------------------------------------------------------------------------------------------------------
Total deferred                                                       (648,434)     836,393    (403,068)
---------------------------------------------------------------------------------------------------------
Investment tax credits, net                                           (39,435)     (38,649)    (38,649)
---------------------------------------------------------------------------------------------------------
Total charged to other operating expenses - gas utilities             857,964      963,895     711,437 
---------------------------------------------------------------------------------------------------------
Charged to other income and deductions - gas utilities:
Current:
   Federal                                                             37,787       22,195      14,587 
   State                                                                  105          665         (40)
---------------------------------------------------------------------------------------------------------
Total current                                                          37,892       22,860      14,547 
---------------------------------------------------------------------------------------------------------
Deferred:
   Federal                                                               (340)        (374)          - 
   State                                                                    -            -           - 
---------------------------------------------------------------------------------------------------------
Total deferred                                                           (340)        (374)          - 
---------------------------------------------------------------------------------------------------------
Total charged to other income and deductions - gas utilities           37,552       22,486      14,547 
---------------------------------------------------------------------------------------------------------
Charged to other operating expenses - propane operations:
Current:
   Federal                                                            233,323      153,044     200,022 
   State                                                               49,057       32,333      44,715 
---------------------------------------------------------------------------------------------------------
Total current                                                         282,380      185,377     244,737 
---------------------------------------------------------------------------------------------------------
<PAGE>
Deferred:
   Federal                                                             21,832       (6,052)    (15,528)
   State                                                                4,925       (2,266)     (5,192)
---------------------------------------------------------------------------------------------------------
Total deferred                                                         26,757       (8,318)    (20,720)
---------------------------------------------------------------------------------------------------------
Total charged to other operating expenses - propane operations        309,137      177,059     224,017 
---------------------------------------------------------------------------------------------------------
Total income tax expense                                          $ 1,204,653    1,163,440     950,001 
=========================================================================================================
</TABLE>


Roanoke Gas Company
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 1997 and 1996 and Years Ended September 30, 1997, 1996 and 1995

(5)   Income Taxes (continued) 

      Income tax expense for the years ended September 30, 1997, 1996 and
1995 differed from amounts computed by applying the U.S. Federal income tax
rate of 34 percent to earnings before income taxes as a result of the
following:

<TABLE>
<CAPTION>
                                                                         Years Ended September 30,
---------------------------------------------------------------------------------------------------------
                                                                      1997          1996       1995 
=========================================================================================================
<S>                                                             <C>             <C>        <C>
Net earnings                                                      $ 2,309,880    2,196,672   1,777,240 
Income tax expense                                                  1,204,653    1,163,440     950,001 
---------------------------------------------------------------------------------------------------------
Earnings before income taxes                                      $ 3,514,533    3,360,112   2,727,241 
=========================================================================================================
Computed "expected" income tax expense                              1,194,941    1,142,438     927,262 
Increase (reduction) in income tax expense resulting from:
   Amortization of deferred investment tax credits                    (39,435)     (38,649)    (38,649)
   Other, net                                                          49,147       59,651      61,388 
---------------------------------------------------------------------------------------------------------
Total income tax expense                                          $ 1,204,653    1,163,440     950,001 
=========================================================================================================
</TABLE>

   The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities are as follows:

<TABLE>
<CAPTION>

                                                                                     September 30,
---------------------------------------------------------------------------------------------------------
                                                                                    1997       1996
=========================================================================================================
<S>                                                                          <C>           <C>
Deferred tax assets:
   Accounts receivable, due to allowance for doubtful accounts                 $   132,818     105,602 
   Accrued pension and medical benefits, due to accrual for 
      financial reporting purposes in excess of actual contributions               803,852     682,471 
   Accrued vacation and bonuses, due to accrual for financial reporting 
      purposes                                                                     173,731     164,542 
   Purchased gas adjustments, due to accrual for financial reporting 
      purposes in excess of actual payments to customers                           176,972           - 
   Other                                                                           213,976      92,456 
---------------------------------------------------------------------------------------------------------
Total gross deferred tax assets                                                  1,501,349   1,045,071 
   Less valuation allowance                                                              -           - 
---------------------------------------------------------------------------------------------------------
Net deferred tax assets                                                          1,501,349   1,045,071 
---------------------------------------------------------------------------------------------------------
<PAGE>
Deferred tax liabilities:
   Utility plant, due to differences in depreciation                             3,154,190   2,912,432 
   Purchased gas adjustments, due to actual payments to 
      customers in excess of accrual for financial reporting purposes              225,309     620,788 
   Prepaid expenses and other assets, due to capitalization for financial 
      reporting purposes                                                            60,787      93,290 
---------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities                                             3,440,286   3,626,510 
---------------------------------------------------------------------------------------------------------
Net deferred tax liability                                                     $ 1,938,937   2,581,439 
=========================================================================================================
</TABLE>
      The Company has determined that a valuation allowance for the gross
deferred tax assets was not necessary at September 30, 1997 and 1996, since
realization of the entire gross deferred tax assets can be supported by the
amount of taxes paid during the carryback period available under current tax
laws, as well as the reversal of the temporary differences which gave rise to
the deferred tax liabilities.  
      In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized.  The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible. 
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this
assessment.




1997 Annual Report
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 1997 and 1996 and Years Ended September 30, 1997, 1996 and 1995

(6)   Employee Benefit Plans

      The Company has a defined benefit pension plan covering substantially
all of its employees.  The benefits are based on years of service and
employee compensation.  Plan assets are invested principally in cash
equivalents and corporate stocks and bonds.  Company contributions are
intended to provide not only for benefits attributed to date, but also for
those expected to be earned in the future.
      Pension expense includes the following components:
<TABLE>
<CAPTION>
                                                                         Years Ended September 30,
---------------------------------------------------------------------------------------------------------
                                                                      1997          1996       1995 
=========================================================================================================
<S>                                                             <C>             <C>        <C>
Service cost for the current year                                 $   142,467      148,465     127,908 
Interest cost on the projected benefit obligation                     419,474      397,458     376,147 
Actual return on assets held in the plan                           (1,030,919)    (717,703)   (988,813)
Net amortization and deferral of unrecognized gains and losses        647,436      372,234     727,706 
Special termination benefits cost related to the early retirement 
   incentive plan                                                           -            -     168,730 
---------------------------------------------------------------------------------------------------------
Net pension expense                                               $   178,458      200,454     411,678 
=========================================================================================================
</TABLE>

   The Plan's funded status is as follows: 

<TABLE>
<CAPTION>
                                                                                     September 30,
---------------------------------------------------------------------------------------------------------
                                                                                    1997       1996
=========================================================================================================
<S>                                                                          <C>           <C>
Actuarial present value of accumulated benefit obligation:
   Vested                                                                     $ (4,285,717) (4,241,528)
   Nonvested                                                                      (143,901)    (30,872)
---------------------------------------------------------------------------------------------------------
Accumulated benefit obligation                                                  (4,429,618) (4,272,400)
Effect of anticipated future compensation levels and other events               (1,510,433) (1,343,289)
---------------------------------------------------------------------------------------------------------
Projected benefit obligation                                                    (5,940,051) (5,615,689)
Fair value of assets held in the plan                                            6,324,249   5,498,868 
---------------------------------------------------------------------------------------------------------
Excess (deficiency) of plan assets over projected benefit obligation          $    384,198    (116,821)
=========================================================================================================
</TABLE>

   The excess (deficiency) of plan assets over the projected benefit 
obligation consists of the following:
<PAGE>
<TABLE>
<CAPTION>
                                                                                     September 30,
---------------------------------------------------------------------------------------------------------
                                                                                    1997       1996
=========================================================================================================
<S>                                                                          <C>           <C>
Net unrecognized gain from past experience different than assumed              $ 1,709,103   1,283,944 
Unamortized transition liability                                                  (329,977)   (435,421)
Unrecognized prior service cost                                                    (75,503)    (94,377)
Accrued pension cost included in the consolidated balance sheets                  (919,425)   (870,967)
---------------------------------------------------------------------------------------------------------
Total                                                                          $   384,198    (116,821)
=========================================================================================================
</TABLE>
      The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.75 percent for 1997,
1996 and 1995.  The rates of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation
were 5 percent in 1997 and 4 percent for compensation increases through
December 31, 1996 and 5 percent for compensation increases thereafter in 1996
and 1995.  The assumed long-term rate of return on assets was 8.5 percent for
1997, 1996 and 1995.
      In addition to pension benefits, the Company has a postretirement
benefits plan which provides certain health care, supplemental retirement and
life insurance benefits to active and retired employees who meet specific age
and service requirements.  The plan is contributory.  The Company has elected
to fund the plan over future years.  Approximately 67 percent of the
consolidated annual cost of the plan is recovered from the Company's
customers through rates.




Roanoke Gas Company
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 1997 and 1996 and Years Ended September 30, 1997, 1996 and 1995

(6)   Employee Benefit Plans (continued)

      The following table presents the plan's funded status reconciled with
the amounts recognized in the Company's consolidated balance sheets:

<TABLE>
<CAPTION>
                                                                                     September 30,
---------------------------------------------------------------------------------------------------------
                                                                                    1997       1996
=========================================================================================================
<S>                                                                          <C>           <C>
Accumulated postretirement benefits obligation:
   Retirees                                                                    $ 2,846,193   2,448,483 
   Fully eligible active plan participants                                         712,308     646,587 
   Other active plan participants                                                1,262,063   1,202,667 
---------------------------------------------------------------------------------------------------------
Total accumulated postretirement benefits obligation                             4,820,564   4,297,737 
Plan assets at fair value, principally cash equivalents and mutual funds          (995,411)   (971,630)
---------------------------------------------------------------------------------------------------------
Accumulated postretirement benefits obligation in excess of plan assets          3,825,153   3,326,107 
Unrecognized net gain                                                              938,540   1,322,715 
Unrecognized transition obligation                                              (3,796,800) (4,034,100)
---------------------------------------------------------------------------------------------------------
Postretirement benefits cost included in accrued expenses                      $   966,893     614,722 
=========================================================================================================
</TABLE>

   Net periodic postretirement benefits cost includes the following components:

<TABLE>
<CAPTION>
                                                                         Years Ended September 30,
---------------------------------------------------------------------------------------------------------
                                                                      1997          1996       1995 
=========================================================================================================
<S>                                                             <C>             <C>        <C>
Service cost for the current year                                   $  96,255       89,000      86,613 
Interest cost on the accumulated postretirement 
   benefits obligation                                                325,036      363,000     320,992 
Return on assets held in the plan                                     (89,542)     (40,000)    (35,000)
Amortization of transition obligation                                 237,300      237,300     237,300 
Net total of other components                                         (25,201)     (16,000)     (7,583)
Special termination benefits cost related to the early 
   retirement incentive plan                                                -            -     242,319 
---------------------------------------------------------------------------------------------------------
Net periodic postretirement benefits cost                           $ 543,848      633,300     844,641 
=========================================================================================================
</TABLE>
<PAGE>
      For measurement purposes, 10 percent, 10.5 percent and 11 percent
annual rates of increase in the per capita cost of covered benefits (i.e.,
medical trend rate) were assumed for 1997, 1996 and 1995, respectively; the
rates were assumed to decrease gradually to 6.25 percent by the year 2005 and
remain at that level thereafter.  The medical trend rate assumption has a
significant effect on the amounts reported.  For example, increasing the
assumed medical cost trend rate by one percentage point each year would
increase the accumulated postretirement benefits obligation as of September
30, 1997 by approximately $577,834, or 12 percent, and the aggregate of the
service and interest cost components of net postretirement benefits cost by
approximately $68,513, or 16 percent.
      The weighted average discount rate used in determining the accumulated
postretirement benefits obligation was 7.75 percent at September 30, 1997,
1996 and 1995.
      During 1995, the Company offered a voluntary early retirement incentive
plan to all employees over age 55 who were vested in the Company's pension
plan.  Of the 25 eligible employees, 12 accepted the early retirement offer
by the April 26, 1995 deadline.  The total cost of the early retirement
incentive plan was $444,367, of which $125,904 was expensed directly in the
Company's third quarter of 1995 and $318,463 was established as a regulatory
asset, with amortization beginning in fiscal year 1996 when rates were placed
into effect to allow recovery of the capitalized costs.  The costs expensed
during the third quarter of 1995 related to the portion of the plan costs
that would be amortized during the period between the recognition of the plan
costs and the implementation of new rates, which provided for plan cost
recovery, in fiscal year 1996.  The Company recorded $139,482 and $71,695 of
amortization expense related to this regulatory asset during the years ended
September 30, 1997 and 1996.  The unamortized balance of the regulatory asset
of $73,805, excluding the balance relative to Bluefield Gas Company, was
written off in 1997 (see note 1).
      The Company also has a defined contribution plan covering all of its
employees who elect to participate.  The Company made annual matching
contributions to the plan based on 70 percent in 1997 and 50 percent in 1996
and 1995 of the net participants' basic contributions (from 1 percent to 6
percent of their total compensation).  The annual cost of the plan was
$217,466, $134,188 and $132,261 for 1997, 1996 and 1995, respectively.

1997 Annual Report
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 1997 and 1996 and Years Ended September 30, 1997, 1996 and 1995

(7)   Common Stock Options

      During 1996, the Company's stockholders approved the Roanoke Gas
Company Key Employee Stock Option Plan.  The plan provides for the issuance
of common stock options to officers and certain other full-time salaried
employees to acquire a maximum of 50,000 shares of the Company's common
stock.  The plan requires each option's exercise price per share to equal the
fair value of the Company's common stock as of the date of grant.

      The aggregate number of shares under option pursuant to the Roanoke Gas
Company Key Employee Stock Option Plan are as follows:
<TABLE>
<CAPTION>

                                               Number Of     Weighted Average      Option Price
                                                Shares        Exercise Price         Per Share
-------------------------------------------------------------------------------------------------
<S>                                          <C>                <C>            <C>
Options outstanding, September 30, 1996         13,000            15.500                15.500
Options granted                                 21,500            16.875                16.875
-------------------------------------------------------------------------------------------------
Options outstanding, September 30, 1997         34,500            16.357         15.500-16.875
=================================================================================================
</TABLE>

      Under the terms of the plan, the options become exercisable six months
from the grant date and expire ten years subsequent to the grant date.  All
options outstanding were fully vested and exercisable at September 30, 1997.
      The per share weighted-average fair values of stock options granted
during 1997 and 1996 were $1.08 and $1.63 on the dates of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:  1997-expected dividend yield of 5.78 percent, risk-free
interest rate of 6.29 percent, expected volatility of 10 percent and an
expected life of 10 years; 1996-expected dividend yield of 5.83 percent,
risk-free interest rate of 6.44 percent, expected volatility of 42 percent
and an expected life of 10 years.
      The Company uses the intrinsic value method of APB Opinion No. 25 for
recognizing stock-based compensation in the consolidated financial
statements.  Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under the provisions of
Statement 123, the Company's net earnings and net earnings per share would
have been decreased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
                                              Years Ended September 30,
---------------------------------------------------------------------------
                                               1997              1996
===========================================================================
<S>                                      <C>                 <C>
Net earnings:
   As reported                             $ 2,309,880         2,196,672
   Pro forma                                 2,278,093         2,182,681
Net earnings per share:
   As reported                             $      1.54              1.51
   Pro forma                               $      1.52              1.50
===========================================================================
/TABLE
<PAGE>

(8)   Related Party Transactions

      Certain of the Company's directors render business services or sell
products to the Company.  The significant services included legal fees of
approximately $182,000, $69,000 and $173,000 in 1997, 1996 and 1995,
respectively.  The products included natural gas purchases of approximately
$3,052,000, $1,950,000 and $1,250,000 in 1997, 1996 and 1995, respectively. 
It is anticipated that similar services and products will be provided to the
Company in 1998.




Roanoke Gas Company
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 1997 and 1996 and Years Ended September 30, 1997, 1996 and 1995

(9)   Quarterly Financial Information (Unaudited)

      Quarterly financial data as previously reported for the years ended
September 30, 1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>

                                        First         Second        Third        Fourth
1997                                   Quarter        Quarter      Quarter       Quarter
-------------------------------------------------------------------------------------------
<S>                               <C>             <C>            <C>
Operating revenues                  $ 22,412,424    24,580,783    9,894,442     8,160,177 
===========================================================================================
Operating earnings (loss)           $  1,840,530     2,394,999      261,537       (93,643)
===========================================================================================
Net earnings (loss)                 $  1,331,276     1,831,756     (247,734)     (605,418)
===========================================================================================
Net earnings (loss) per share       $       0.90          1.22         (.16)         (.42)
===========================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                        First         Second        Third        Fourth
1996                                   Quarter        Quarter      Quarter       Quarter
-------------------------------------------------------------------------------------------
<S>                               <C>             <C>            <C>
Operating revenues                  $ 17,993,759    29,625,390   10,435,031     7,716,693 
===========================================================================================
Operating earnings (loss)           $  1,865,501     2,412,749       38,336      (281,282)
===========================================================================================
Net earnings (loss)                 $  1,434,772     1,954,256     (407,940)     (784,416)
===========================================================================================
Net earnings (loss) per share       $       1.00          1.35         (.28)         (.56)
===========================================================================================
</TABLE>
      The pattern of quarterly earnings is the result of the highly seasonal
nature of the business, as variations in weather conditions generally result
in greater earnings during the winter months.

(10)  Business and Credit Concentrations

      The primary business of the Company is the distribution of natural gas
to residential, commercial and industrial customers in Roanoke, Virginia;
Bluefield, Virginia; Bluefield, West Virginia; and the surrounding areas. 
The Company distributes natural gas to its customers at rates and charges
regulated by the State Corporation Commission in Virginia and the Public
Service Commission in West Virginia.  The Company also serves propane
customers in southwestern Virginia and southern West Virginia through its
nonregulated subsidiary.
<PAGE>
      During 1997, 1996 and 1995, no single customer accounted for more than
5 percent of the Company's sales, and no account receivable from any customer
exceeded 5 percent of the Company's total stockholders' equity at September
30, 1997 and 1996.

(11)  Franchises

      Roanoke Gas Company (Roanoke Gas) and Commonwealth Public Service
Corporation, a subsidiary of Bluefield Gas Company, currently hold the only
franchises and/or certificates of public convenience and necessity to
distribute natural gas in their respective Virginia service areas.  The
franchises generally extend for multi-year periods and are renewable by the
municipalities.  Certificates of public convenience and necessity, which are
issued by the State Corporation Commission of Virginia, are of perpetual
duration, subject to compliance with regulatory standards.
      Management anticipates that the Company will be able to renew all of
its franchises when they expire.  There can be no assurance, however, that a
given jurisdiction will not refuse to renew a franchise or will not in
connection with the renewal of a franchise, impose certain restrictions or
conditions that could adversely affect the Company's business operations or
financial condition.

(12)  Environmental Matters

      Both Roanoke Gas Company and Bluefield Gas Company operated
manufactured gas plants (MGPs) as a source of fuel for lighting and heating
until the early 1950s.  The process involved heating coal in a low-oxygen
environment to produce a manufactured gas that could be distributed through
the Company's pipeline system to customers.  A by-product of the process was
coal tar, and the potential exists for on-site tar waste contaminants at both
former plant sites.  The extent of contaminants at these sites is unknown at
this time, and the Company has not performed a formal analysis at the Roanoke
Gas Company MGP site.  An analysis at the Bluefield Gas Company site
indicates some soil contamination.  The Company, with concurrence of legal
counsel, does not believe any events have occurred requiring regulatory
reporting.  Further, the Company has not received any notices of violation or
liabilities associated with environmental regulations related to the MGP
sites and is not aware of any off-site contamination or pollution as a result
of these prior operations.  Therefore, the Company has no plans for
subsurface remediation at either of the MGP sites.  Should the Company
eventually be required to remediate either of the MGP sites, the Company will
pursue all prudent and reasonable means to recover any related costs,
including insurance claims and regulatory approval for rate case recognition
of expenses associated with any work required.  Based upon prior orders of
the State Corporation Commission of Virginia related to environmental matters
at other companies, the Company believes it will be able to recover prudently
incurred costs.  Additionally, a  stipulated rate case agreement between the
Company and the West Virginia Public Service Commission recognizes the
Company's right to 



1997 Annual Report
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 1997 and 1996 and Years Ended September 30, 1997, 1996 and 1995

(12)  Environmental Matters (continued)

defer MGP clean-up costs, should any be incurred, and to seek rate relief for
such costs.  If the Company eventually incurs costs associated with a
required clean-up of either MGP site, the Company anticipates recording a
regulatory asset for such clean-up costs which are anticipated to be
recoverable in future rates.  Based on anticipated regulatory actions and
current practices, management believes that any costs incurred related to the
previously-mentioned environmental matters will not have a material effect on
the Company's consolidated financial position.

(13)  Commitments

      The Company has nine short-term contracts with seven natural gas
suppliers requiring the purchase of approximately 2,149,000 DTH of natural
gas at varying prices during the period October 1, 1997 through September 30,
1998.  The Company has also provided notice of bid awards to two natural gas
suppliers, and anticipates these notices to result in contracts to purchase
an additional 1,703,000 DTH of natural gas at varying prices during fiscal
year 1998.  In addition, the Company has short-term contracts with three
propane suppliers requiring the purchase of 2,952,500 gallons of propane
during the period October 1, 1997 through September 30, 1998.  Management
does not anticipate that these contracts will have a material impact on the
Company's fiscal year 1998 consolidated results of operations.
      During 1997, the Company entered into a purchase commitment to acquire
certain net assets of an area propane company.  The total purchase price
under this commitment will be satisfied through the issuance of 35,097 shares
of Company common stock.  The acquisition, which is expected to be
consummated in November 1997, will be accounted for under the purchase method
of accounting.

(14)  Fair Value of Financial Instruments

      Statement of Financial Accounting Standards No. 107, Disclosures About
Fair Value of Financial Instruments (Statement 107), requires the Company to
disclose estimated fair values of certain of its financial instruments. 
Statement 107 defines the fair value of a financial instrument as the amount
at which the instrument could be exchanged in a current transaction between
willing parties.

      The following methods and assumptions were used to estimate the fair
value of each class of financial instrument for which it is practicable to
estimate fair value.

Cash and Cash Equivalents

      The carrying amount is a reasonable estimate of fair value.

Long-term Debt

      The fair value of long-term debt is estimated by discounting the future
cash flows of each instrument at rates currently offered to the Company for
similar debt instruments of comparable maturities.
<PAGE>
Borrowings Under Lines of Credit

      The carrying amount is a reasonable estimate of fair value since the
rates of interest paid on borrowings under lines of credit approximate market
rates.

      The carrying amounts and approximate fair values of the Company's
financial instruments requiring disclosure under Statement 107 at September
30, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                                       September 30,
--------------------------------------------------------------------------------------------------------------
                                                       1997                                 1996
--------------------------------------------------------------------------------------------------------------
                                             Carrying        Approximate           Carrying      Approximate
                                             Amounts         Fair Values           Amounts       Fair Values
--------------------------------------------------------------------------------------------------------------
<S>                                     <C>                 <C>                 <C>              <C>
Financial Assets:
   Cash and cash equivalents              $    116,045           116,045            633,322          633,322
--------------------------------------------------------------------------------------------------------------
Total financial assets                    $    116,045           116,045            633,322          633,322
==============================================================================================================
Financial Liabilities:
   Long-term debt                         $ 20,222,124        21,384,604         20,891,547       22,057,130
   Borrowings under lines of credit          7,129,000         7,129,000          6,652,500        6,652,500
--------------------------------------------------------------------------------------------------------------
Total financial liabilities               $ 27,351,124        28,513,604         27,544,047       28,709,630
==============================================================================================================
</TABLE>



Roanoke Gas Company
<PAGE>
Roanoke Gas Company and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 1997 and 1996 and Years Ended September 30, 1997, 1996 and 1995

(14)  Fair Value of Financial Instruments (continued)

      Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument. 
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument.  Because no market exists for a significant portion of
the Company's financial instruments, fair value estimates are based on
judgments regarding current economic conditions, risk characteristics of
various financial instruments and other factors.  These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment, and therefore, cannot be determined with precision.  Changes in
assumptions could significantly affect the estimates.
      Fair value estimates are based on existing financial instruments
without attempting to estimate the value of anticipated future business and
the value of assets and liabilities that are not considered financial
instruments.  Significant assets that are not considered financial assets
include utility plant, nonutility property, current deferred income taxes,
purchased gas adjustments and other assets; significant liabilities that are
not considered financial liabilities are refunds from suppliers - due
customers, noncurrent deferred income taxes and deferred investment tax
credits.  In addition, the tax ramifications related to the realization of
the unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates.








1997 Annual Report
<PAGE>
Roanoke Gas Company and Subsidiaries
Summary Of Gas Sales And Statistics
Years Ended September 30,

<TABLE>
<CAPTION>
<S>                               <C>              <C>               <C>                <C>                <C>
Revenues:                                1997             1996              1995               1994               1993
---------------------------------------------------------------------------------------------------------------------------
   Residential Sales                $ 32,595,261     $ 33,981,835      $ 25,078,211       $ 29,844,636       $ 27,841,933
   Commercial Sales                   19,879,180       20,219,289        14,313,723         16,979,230         16,005,765
   Interruptible Sales                 3,892,301        4,569,766         3,513,181          5,607,002          9,262,947
   Transportation Gas Sales            1,107,922          943,215           909,515            610,682             53,611
   Backup Services                       173,655          190,310           107,652            222,025                  -
   Late Payment Charges                  157,369          135,838           115,130            194,156            147,814
   Miscellaneous                          36,493           27,154            24,325             67,576            193,449
   Propane                             7,205,645        5,703,466         4,549,410          4,670,550          4,210,160
---------------------------------------------------------------------------------------------------------------------------
      Total                         $ 65,047,826     $ 65,770,873      $ 48,611,147       $ 58,195,857       $ 57,715,679
---------------------------------------------------------------------------------------------------------------------------
Net Income                          $  2,309,880     $  2,196,672      $  1,777,240       $  1,677,098       $  1,441,336
===========================================================================================================================
MCF's Delivered:
---------------------------------------------------------------------------------------------------------------------------
   Residential                         4,651,819        5,108,553         4,204,222          4,701,703          4,508,694
   Commercial                          3,230,714        3,385,962         2,834,884          2,981,888          2,853,079
   Interruptible                         959,146        1,088,921         1,240,658          1,521,663          2,377,236
   Transportation Gas                  1,933,236        1,549,854         1,660,504          1,022,892             81,336
   Backup Service                         29,130           36,658            21,609             38,892                  -
---------------------------------------------------------------------------------------------------------------------------
      Total                           10,804,045       11,169,948         9,961,877         10,267,038          9,820,345
===========================================================================================================================
Gallons Delivered (Propane)            6,568,066        5,997,912         4,822,277          5,012,830          4,586,334
===========================================================================================================================
Heating Degree Days                        4,298            4,696             3,791              4,416              4,356
===========================================================================================================================
Number Of Customers:
---------------------------------------------------------------------------------------------------------------------------
   Residential                            47,539           46,007            44,873             43,734             42,232
   Commercial                              5,181            5,043             4,896              4,767              4,512
   Interruptible And Interruptible
   Transportation Service                     43               44                44                 43                 44
---------------------------------------------------------------------------------------------------------------------------
      Total                               52,763           51,094            49,813             48,544             46,788
===========================================================================================================================
<PAGE>
Gas Account (MCF):

   Natural Gas Purchases And 
   Storage                            11,406,613       11,756,089        10,453,696         10,795,928         10,430,635
   Gas Made - Propane                          -                -                 -             14,008                  -
---------------------------------------------------------------------------------------------------------------------------
      Total Available                 11,406,613       11,756,089        10,453,696         10,809,936         10,430,635
===========================================================================================================================
   Natural Gas Deliveries             10,804,045       11,169,948         9,961,877         10,267,038          9,820,345
   Storage - LNG                         106,892          142,297           118,393            134,893            153,478
   Company Use And 
   Miscellaneous                          49,444           54,140            46,532             50,356             66,211
   System Loss                           446,232          389,704           326,894            357,649            390,601
---------------------------------------------------------------------------------------------------------------------------
      Total Gas Available             11,406,613       11,756,089        10,453,696         10,809,936         10,430,635
===========================================================================================================================
Total Assets                        $ 62,593,258     $ 58,921,099      $ 51,614,667       $ 49,579,447       $ 48,758,728
===========================================================================================================================
Long-Term Obligations               $ 17,079,000     $ 20,222,124      $ 17,504,047       $ 16,414,900       $ 16,530,499
===========================================================================================================================
</TABLE>



Roanoke Gas Company
<PAGE>
Roanoke Gas Company and Subsidiaries
Summary Of Capitalization Statistics
Years Ended September 30,

<TABLE>
<CAPTION>
<S>                               <C>              <C>               <C>                <C>                <C>
Common Stock:                            1997             1996              1995               1994               1993
---------------------------------------------------------------------------------------------------------------------------
   Shares Issued                      1,527,486         1,475,843         1,432,512          1,382,343         1,289,302 
   Net Earnings Per Share          $       1.54      $       1.51      $       1.26       $       1.25      $       1.13 
   Dividends Paid Per Share 
   (Cash)                          $       1.04      $       1.02      $       1.00       $       1.00      $       1.00 
   Dividends Paid Out Ratio                67.5%             67.5%             79.4%              80.0%             88.9%
   Number Of Shareholders                 1,853             1,713             1,699              1,625               901 
---------------------------------------------------------------------------------------------------------------------------
Capitalization Ratios:
---------------------------------------------------------------------------------------------------------------------------
   Long-Term Debt, Including 
      Current Installments                 49.5              52.4              51.6               51.0              54.5 
   Stockholders' Equity                    50.5              47.6              48.4               49.0              45.5 
---------------------------------------------------------------------------------------------------------------------------
      Total                               100.0             100.0             100.0              100.0             100.0 
---------------------------------------------------------------------------------------------------------------------------
   Long-Term Debt, Including 
      Current Installments         $ 20,222,124      $ 20,891,547      $ 18,683,462       $ 17,087,046      $ 17,549,817 
   Stockholders' Equity              20,596,951        18,975,001        17,555,172         16,424,919        14,652,663 
---------------------------------------------------------------------------------------------------------------------------
Total Capitalization 
   Plus Current Installments       $ 40,819,075      $ 39,866,548      $ 36,238,634       $ 33,511,965      $ 32,202,480 
===========================================================================================================================
</TABLE>





1997 Annual Report
<PAGE>
Roanoke Gas Company

Board Of Directors

Lynn D. Avis                        
Avis Construction Company           
President

Abney S. Boxley, III
W. W. Boxley Company
President

Frank T. Ellett
Virginia Truck Center, Inc.
President

Frank A. Farmer, Jr.
Chairman Of The Board, President & CEO

Wilbur L. Hazlegrove
Law Firm Of Woods, Rogers & Hazlegrove,
P.L.C. Member

J. Allen Layman   
R & B Communications, Inc.
President & CEO   

John H. Parrott   
John H. Parrott Associates
President

Thomas L. Robertson
Carilion Health System &
Carilion Medical Center
President

S. Frank Smith
Coastal Coal Sales Inc.
Executive Vice President


Officers

Frank A. Farmer, Jr.
Chairman Of The Board, President & CEO

Roger L. Baumgardner
Vice President, Secretary & Treasurer

Arthur L. Pendleton
Vice President - Operations

John B. Williamson, III
Vice President - Rates & Finance

Jane N. O'Keeffe
Assistant Vice President - Human Resources

J. David Anderson
Assistant Secretary & Assistant Treasurer
<PAGE>
Bluefield Gas Company

Board Of Directors

Roger L. Baumgardner
Roanoke Gas Company
Vice President, Secretary & Treasurer

Frank A. Farmer,  Jr.
Roanoke Gas Company
Chairman Of The Board, President & CEO

John H. Parrott
John H. Parrott Associates
President

Arthur L. Pendleton
Roanoke Gas Company
Vice President - Operations

John C. Shott     
Paper Supply Company
President   

Scott H. Shott 
Paper Supply Company
Secretary & Treasurer


Officers

Frank A. Farmer
President

Arthur L. Pendleton
Vice President - Operations

John B. Williamson, III
Vice President - Rates & Finance

Roger L. Baumgardner
Secretary & Treasurer


Diversified Energy Company
T/A Highland Propane Company & Highland Gas Marketing

Board Of Directors

Roger L. Baumgardner
Roanoke Gas Company
Vice President, Secretary & Treasurer

Frank T. Ellett
Virginia Truck Center, Inc.
President

Frank A. Farmer, Jr.
Roanoke Gas Company
Chairman Of The Board, President & CEO
<PAGE>
Arthur L. Pendleton
Roanoke Gas Company
Vice President - Operations

S. Frank Smith
Coastal Coal Sales, Inc.
Executive Vice President


Officers

Frank A. Farmer
President

Arthur L. Pendleton
Vice President - Operations

John B. Williamson, III
Vice President - Rates & Finance

Roger L. Baumgardner
Secretary & Treasurer 
<PAGE>
A Tribute To Frank Farmer


[Photograph of Frank Farmer appears here]


      When Frank Farmer joined Roanoke Gas as construction superintendent in
1964, the Company had 22,000 customers.  When he retires January 31, 1998,
the Company will have more than 60,000 customers.  However, that is only part
of a story of innovation and change that has characterized Frank's tenure at
Roanoke Gas Company.
      One of Frank's first jobs was overseeing the interconnection of
Roanoke's distribution facilities to the new interstate transmission pipeline
from East Tennessee Natural Gas Company.  That enabled Roanoke Gas to be one
of the first small companies to receive gas from two major national
suppliers, helping to ensure a steady and economical supply to its customers.
      As operations manager in the early 70s, he oversaw construction of the
liquefied natural gas (LNG) plant. Roanoke Gas Company was perhaps the
smallest gas company to install a complete LNG processing plant capable of
liquefying and storing natural gas in the summer for use during extreme cold
weather in the winter months.
      When the gas shortage occurred in the 1970s, the Company was frustrated
because it could not add new natural gas customers during a state-imposed
moratorium.  Even though earnings became stagnant, no employee was
furloughed.
      Roanoke Gas Company responded to the no-growth period of the moratorium
and developed a new market alternative by selling propane, a decision which
has proven to have significant consequences for the Company's growth. 
Propane sales growth accelerated after the purchase of Gas Services, Inc. of
West Virginia and the Company's decision to market propane as a rural and
suburban home and hot water heating alternative where natural gas lines did
not exist.
      Deregulation began in the 1980s, which would significantly impact the
entire industry.  Roanoke Gas went from a simple distribution utility with
the price of natural gas controlled by federal agencies to a company that had
to find natural gas suppliers and arrange for interstate pipeline delivery at
competitive prices.  The evolution of deregulation led to one of the most
significant events in the natural gas industry, passage of the National Gas
Policy Act, which continues to bring changes to the industry.
      As president in the 90s, Frank led innovations at Roanoke Gas which
characterized the Company's success in the new era including the installation
of automated meter reading in Bluefield, reading large volume gas meters via
telephone lines, upgrading all of the Company's computer and communications
systems, electronic monitoring and remote control of distribution system
operating pressure, implementing an early retirement program to reduce costs,
and outsourcing of repetitive functions to realize efficiencies through
economics of scale.
      For more than 33 years, Frank Farmer has seen and participated in
significant changes in the natural gas industry. He has helped steer the
Company's responses to those changes to the benefit of customers, employees
and stockholders.  He retires after the Company's best year of performance
with the directors and management's best wishes for a long, healthy and
prosperous retirement.



<PAGE>
                              Corporate Mission 
                                   Statement

            Roanoke Gas Company provides superior customer and
            stockholder value by being the preferred choice for
            safe, dependable, efficient, economical energy and
            services in the market it serves.




                                 Key Business
                                  Strategies

                             [ ]    Saturation Program
                             [ ]    Trade Ally Relations
                             [ ]    The Propane Alternative
                             [ ]    Acquisition and Geographic Expansion
                             [ ]    Positioning for Deregulation 
                             [ ]    Diversification










Access up-to-date information on Roanoke Gas Company and its subsidiaries at
http://www.roanokegas.com
<PAGE>
Southwest Virginia And Southern West Virginia's 
Choice For Comfort And Economy



Proudly Serving:
      Beckley                New Castle
      Bedford                Princeton
      Blacksburg             Pulaski
      Bluefield              Radford
      Bramwell               Rainelle
      Buchanan               Roanoke
      Christiansburg         Rocky Mount
      Clifton Forge          Rupert
      Covington              Salem
      Fincastle              Smith Mountain Lake
      Floyd                  Tazewell
      Fort Chiswell          Troutville
      Galax                  Vinton
      Hillsville             White Sulphur Springs
      Hinton                 Wytheville
      Lewisburg              and other area communities
      Lexington
      Marion
      Natural Bridge
      






      [Map of Roanoke Gas Company's Service Area appears here]





<PAGE>
[The following text appear in a box]


                           Notice Of Annual Meeting

                      The annual meeting of stockholders 
                     of Roanoke Gas Company will be held 
                   at the Executive Offices of the Company, 
                          519 Kimball Avenue, N. E.,
                        Roanoke, Virginia at 9:00 a.m.,
                           Monday, January 26, 1998.


             [Roanoke Gas Company Logo Mark (Flame) appears here] 

                                  Roanoke Gas
                     Your Choice for Comfort and Economy.


                 Transfer Agent and Dividend Disbursing Agent
                  First Union National Bank of North Carolina
                        Dividend Reinvestment Services
                                 P.O. Box 1154
                     Charlotte, North Carolina 28288-1154
                                1-800-829-8432

                 Roanoke Gas Company trades on Nasdaq as RGCO.
<PAGE>