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Observations with the EGRET gamma-ray telescope on the Compton Gamma Ray Observatory have been used to study the high-energy gamma rays produced in cosmic ray interactions in interstellar gas on the Galactic longitude range $l = 100-130\deg$. This range contains the Cepheus flare and the related Polaris flare of molecular gas, both within $\sim$250 pc of the Sun, as well as the largest complex of molecular clouds in the Perseus arm, that associated with NGC 7538, at a distance of $\sim$2.2 kpc. This longitude range is well suited for study of gradients of the properties of cosmic rays and interstellar gas with Galactocentric distance in the outer Galaxy, owing to the good kinematic separation and distinctive spatial distributions of the interstellar gas in the local and Perseus arms. A model for the diffuse emission for this region that treats separately the emission from the different distance ranges indicates that between the local and Perseus arms the gamma-ray emissivity per H atom decreases by a factor of $2.0 \pm 0.5$ for energies greater than 100 MeV and the proportionality $N({\rm H_2})/W_{\rm CO}$ increases by a factor of $4 \pm 1.5$. The molecular gas in the NGC 7538 complex is clearly detected. The constraints that these findings place on recent claims that cold molecular gas may be abundant in the outer Galaxy will be discussed. Other aspects of the study, including a search for an extremely soft gamma-ray point source discovered in the COS B data and limits on the dependence of $N({\rm H_2})/W_{\rm CO}$ on cloud mass will also be presented.
