UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    Form 10-Q


     Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934

For the period ended    September 30, 1997


Commission File Number:  0-13775


                          KEYSTONE HERITAGE GROUP, INC.
                                  (Registrant)


     PENNSYLVANIA                                               23-2219740
(State of incorporation)                                     (I.R.S. Employer
                                                             Identification No.)

              555 WILLOW STREET, LEBANON, PENNSYLVANIA     17046
             (Address of principal executive offices)    (Zip Code)


                                  717-274-6800
              (Registrant's telephone number, including area code)


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

         Indicate  the  number of  shares  outstanding  of each of the  issuer's
classes of common stock, as of the latest practicable date.


          Class                               Outstanding at November 10, 1997

Common Stock ($5.00 par value)                         3,966,249 shares

<PAGE>

                          KEYSTONE HERITAGE GROUP, INC.

                                      Index

PART I - FINANCIAL INFORMATION                                         Page


Item 1 - Financial Statements

         Consolidated Balance Sheets as of
         September 30, 1997 and December 31, 1996 (Unaudited)             3

         Consolidated Statements of Income for the
         Three and Nine Months ended September 30, 1997 and
         1996 (Unaudited)                                                 4

         Consolidated Statements of Stockholders' Equity
         for the Nine Months ended September 30, 1997 and
         1996 (Unaudited)                                                 5

         Consolidated Statements of Cash Flows for the
         Nine Months ended September 30, 1997 and
         1996 (Unaudited)                                                 6

         Notes to Consolidated Financial Statements                       7


Item 2 - Management's Discussion and Analysis of
          Financial Condition and Results of Operations                   8


PART II - OTHER INFORMATION

Signature Page                                                           18

                                       -2-
<PAGE>
                          KEYSTONE HERITAGE GROUP, INC.
                           CONSOLIDATED BALANCE SHEETS

                             (Dollars In Thousands)
<TABLE>
<CAPTION>
                                                          September 30    December 31
                                                              1997           1996
                                                           ---------      ---------
ASSETS
<S>                                                          <C>            <C>    
      Cash and due from banks                                $21,274        $22,832
      Interest bearing deposits with banks                       437            181
      Term federal funds sold                                  8,000              0
      Investment securities available for sale                63,576         62,596
      Investment securities held to maturity
           (fair value of $80,624 and $92,079
           for 1997 and 1996, respectively)                   80,177         91,652
      Loans held for sale                                      1,418          6,019
      Loans, net of unearned income of
         $1,568 for 1997 and $1,812 for 1996                 461,925        422,534
      Allowance for loan losses                               (8,633)        (7,736)
                                                           ---------      ---------

           Loans, net                                        453,292        414,798

      Premises and equipment, net                              8,272          8,132
      Accrued interest receivable                              4,161          3,677
      Other real estate owned                                     80            695
      Deferred tax asset, net                                  2,481          2,604
      Other assets                                             3,168          3,121
                                                           ---------      ---------

           Total assets                                     $646,336       $616,307
                                                           =========      =========

LIABILITIES
      Non-interest bearing deposits                          $74,339        $72,683
      Interest bearing deposits                              473,695        454,150
                                                           ---------      ---------

           Total deposits                                    548,034        526,833

      Short-term borrowings                                   19,081         12,478
      Other borrowings                                         3,388          6,438
      Accrued interest payable                                 5,416          5,184
      Other liabilities                                        3,186          3,135
                                                           ---------      ---------

           Total liabilities                                 579,105        554,068

STOCKHOLDERS' EQUITY

      Common stock - $5 par value; 10,000,000
           shares authorized; 4,071,683 outstanding
           at September 30, 1997 and December 31, 1996        20,358         20,358
      Capital surplus                                         22,078         22,078
      Retained earnings                                       26,148         21,418
      Treasury stock - 113,434 shares at September 30,
           1997 and 93,700 at December 31, 1996               (2,669)        (2,123)
      Net unrealized gain on investment securities
           available for sale, net of taxes                    1,316            508
                                                           ---------      ---------

           Total stockholders' equity                         67,231         62,239

           Total liabilities and stockholders'
             equity                                         $646,336       $616,307
                                                           =========      =========
</TABLE>
See accompanying notes to financial statements.

                                       -3-
<PAGE>
                          KEYSTONE HERITAGE GROUP, INC.
                        CONSOLIDATED STATEMENTS OF INCOME

                  (Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
                                                           Three Months Ended      Nine Months Ended
                                                              September 30            September 30
                                                            1997        1996        1997       1996
                                                          -------     -------     -------     -------
INTEREST INCOME
<S>                                                        <C>         <C>        <C>         <C>    
              Interest and fees on loans                   $9,902      $9,366     $29,136     $27,096
              Interest and dividends on investment
                securities available for sale:
                  Taxable investment securities               899         722       2,650       2,155
                  Equity investments                           66          55         196         159
              Interest and dividends on investment
                securities held to maturity:
                  Taxable investment securities             1,025       1,055       3,207       3,274
                  Non-taxable investment securities           210         131         569         382
                                                          -------     -------     -------     -------
                    Total interest and dividends on
                     investment securities                  2,200       1,963       6,622       5,970
              Interest on money market investments            192          89         374         156
                                                          -------     -------     -------     -------
                  Total interest income                    12,294      11,418      36,132      33,222

INTEREST EXPENSE
              Interest on deposits                          5,296       4,672      15,286      13,626
              Interest on short-term borrowings               152         135         401         369
              Interest on other borrowings                     86          98         278         420
                                                          -------     -------     -------     -------
                  Total interest expense                    5,534       4,905      15,965      14,415

                  Net interest income                       6,760       6,513      20,167      18,807

              Provision for loan losses                         0           0           0           0
                                                          -------     -------     -------     -------
                  Net interest income after provision
                   for loan losses                          6,760       6,513      20,167      18,807

OTHER OPERATING INCOME
              Trust income                                    356         352       1,004         961
              Service charges on deposits                     377         341       1,078         978
              Net realized gain on investment
                  securities available for sale               310          35         512          58
              Net gain on sale of mortgage loans              239         321         664         644
              Net gain on sale of credit card loans
                  and merchant processing activity              0           0         618           0
              Other income                                    513         559       1,767       1,624
                                                          -------     -------     -------     -------
                  Total other operating income              1,795       1,608       5,643       4,265

OTHER OPERATING EXPENSE
              Salaries and employee benefits                2,770       2,672       8,211       7,522
              Occupancy expense, net                          412         340       1,147         967
              Equipment expense                               481         448       1,419       1,500
              Deposit insurance expense                        16           1          48           2
              Other expense                                 1,647       1,360       3,892       3,986
                                                          -------     -------     -------     -------
                  Total other operating expense             5,326       4,821      14,717      13,977

                  Income before income taxes                3,229       3,300      11,093       9,095
              Income taxes                                    973       1,001       3,393       2,795
                                                          -------     -------     -------     -------

                  Net income                               $2,256      $2,299      $7,700      $6,300
                                                          =======     =======     =======     =======

PER COMMON SHARE
                  Net income                                 $.57        $.57       $1.94       $1.55
                                                          =======     =======     =======     =======

                  Cash dividends paid                        $.25        $.22        $.75        $.62
</TABLE>
                                       -4-
<PAGE>
                          KEYSTONE HERITAGE GROUP, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                         Nine Months Ended September 30

                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                                                                       Net Unrealized
                                                                                                        Gain (Loss) On
                                                Common        Capital       Retained        Treasury  Securities Available
                                                 Stock        Surplus       Earnings          Stock        for Sale         Total
Balance, December 31, 1995                      $20,358       $22,078        $16,107        $   -0-       $    336         $58,879
<S>                                               <C>           <C>         <C>               <C>            <C>          <C>  
     Net Income                                     -0-           -0-          6,300            -0-            -0-           6,300
     Cash dividends ($.62 per share)                -0-           -0-         (2,524)           -0-            -0-          (2,524)
     Acquisition of 43,300 shares of
     treasury stock at cost                         -0-           -0-            -0-           (974)           -0-            (974)
     Change in unrealized gain (loss)
      on investment securities
      available for sale, net of taxes              -0-           -0-            -0-            -0-           (124)           (124)
                                                -------       -------        -------       --------     ----------        --------
Balance, September 30, 1996                     $20,358       $22,078        $19,883        $  (974)      $    212         $61,557
                                                =======       =======        =======       ========     ==========        ========

Balance, December 31, 1996                      $20,358       $22,078        $21,418        ($2,123)      $    508         $62,239
     Net income                                     -0-           -0-          7,700            -0-            -0-           7,700
     Cash dividends ($.75 per share)                -0-           -0-         (2,968)           -0-            -0-          (2,968)
     Re-issuance of 6,666 shares of
     treasury stock                                 -0-           -0-             (2)           157            -0-             155
     Acquisition of 26,400 shares of
      treasury stock at cost                        -0-           -0-            -0-           (703)           -0-            (703)
     Change in unrealized gain
      (loss) on investment securities
      available for sale, net of taxes              -0-           -0-            -0-            -0-            808             808
                                                -------       -------        -------       --------      ---------         -------
Balance, September 30, 1997                     $20,358       $22,078        $26,148        ($2,669)      $  1,316         $67,231
                                                =======       =======        =======       ========      =========         =======
</TABLE>
                                       -5-
<PAGE>
                          KEYSTONE HERITAGE GROUP, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                                   Nine Months Ended
                                                                     September 30
                                                                   1997         1996
CASH FLOW FROM OPERATING ACTIVITIES:
<S>                                                              <C>           <C>   
    Net income                                                   $7,700        $6,300
    Adjustments to reconcile net income to cash:
        Depreciation and amortization                               951         1,108
        (Increase) decrease in deferred income taxes               (325)          220
        (Increase) decrease in accrued interest receivable         (484)          106
        Increase (decrease) in accrued interest payable             232          (976)
        Net gain on sale or credit card loans
         and merchant card processing                              (618)            0
        Net gain on sale of other real estate owned                (112)            0
        Net gain on sale of loans                                  (664)         (644)
        Originations of residential mortgage loans sold         (25,175)      (28,135)
        Proceeds from sale of residential mortgage loans         26,263        27,175
        Net realized gain on investment securities
         available for sale                                        (512)          (58)
        Other, net                                                 (585)         (401)
                                                               --------      --------
            Net cash provided by operating activities             6,671         4,695

CASH FLOWS FROM INVESTING ACTIVITIES:
    Net increase in money market investments                     (8,256)       (3,377)
    Maturities of investment securities
      held to maturity                                           28,976        27,492
    Maturities of investment securities
      available for sale                                         19,523        20,980
    Sale of investment securities available for sale              3,037           156
    Funds invested in investment securities
      held to maturity                                          (17,406)      (15,801)
    Funds invested in investment securities
      available for sale                                        (21,409)       (9,289)
    Proceeds from sale of credit card loans and
      merchant processing activity                                3,051             0
    Net increase in loans made to customers                     (36,665)      (30,458)
    Net expenditures for premises and equipment                  (1,091)         (835)
    Proceeds from sale of other real estate owned                   773           206
                                                               --------      --------
        Net cash used in investing activities                   (29,467)      (10,926)

CASH FLOWS FROM FINANCING ACTIVITIES:
    Net increase in deposits                                     21,201        12,642
    Net increase in short-term borrowings                         6,603         4,054
    Net decrease in other borrowings                             (3,050)       (9,592)
    Acquisition of treasury stock                                  (703)         (974)
  Re-issuance of treasury stock                                     155             0
    Cash dividends paid                                          (2,968)       (2,524)
                                                               --------      --------
        Net cash provided by financing activities                21,238         3,606

    Net decrease in cash and due from banks                      (1,558)       (2,625)

    Cash and due from banks at beginning of period               22,832        23,766
    Cash and due from banks at end of period                    $21,274       $21,141

SUPPLEMENTAL DISCLOSURES:
    Interest paid                                                $8,416        $8,148
    Income taxes paid                                             3,850         2,183

NON-CASH INVESTING AND FINANCING ACTIVITIES:
    Loans charged-off                                               466           673
</TABLE>

                                       -6-
<PAGE>

                          KEYSTONE HERITAGE GROUP, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   The accompanying  consolidated  financial  statements of Keystone  Heritage
     Group,  Inc.  have  not  been  reviewed  by  independent  certified  public
     accountants.  However, in management's  opinion, the statements reflect all
     adjustments  and  disclosures  necessary  for a  fair  presentation  of the
     consolidated  balance  sheet of the  Company as of  September  30, 1997 and
     December 31, 1996, the consolidated  statements of income for the three and
     nine month periods  ended  September  30, 1997 and 1996,  the  consolidated
     statements of stockholders'  equity for the nine months ended September 30,
     1997 and 1996 and the  consolidated  statements  of cash flows for the nine
     months ended September 30, 1997 and 1996. The accounting  policies followed
     in the  presentation  of interim  financial  results  are the same as those
     followed on an annual basis or those adopted  during the first two quarters
     of 1997. The consolidated  financial statements of Keystone Heritage Group,
     Inc.  and  subsidiaries  include the accounts of the Company and its wholly
     owned subsidiaries, Lebanon Valley National Bank and Keystone Heritage Life
     Insurance Company. All significant  intercompany  balances and transactions
     have been eliminated in the consolidated financial statements. For purposes
     of comparability, certain prior year amounts have been reclassified.

2.   Earnings  per common share are based upon the  weighted  average  number of
     shares  outstanding.  The weighted average number of shares outstanding was
     3,954,184 and  4,053,287  for the three month  periods ended  September 30,
     1997 and 1996,  respectively,  and  3,959,748  and  4,065,506  for the nine
     months ended September 30, 1997 and 1996, respectively.

3.   On August 15, 1997, an  announcement  was made of Keystone  Heritage Group,
     Inc's. agreement to merge with Fulton Financial  Corporation.  According to
     the terms of this agreement, each share of Keystone Heritage's common stock
     outstanding  at the time of the merger will be exchanged for 1.83 shares of
     Fulton  Financial  common stock.  Under the  agreement,  Keystone  Heritage
     Group, Inc. and its banking  subsidiary  Lebanon Valley National Bank would
     be merged into Fulton Financial. Fulton Financial is the fifth largest bank
     holding company in Pennsylvania, with assets of $4.2 billion. The merger is
     subject to approval by regulatory  authorities and stockholders of Keystone
     Heritage  Group.  The merger is expected to be  finalized  during the first
     quarter of 1998.

                                       -7-
<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

      Keystone  Heritage  Group,  Inc. (the "Company") is a bank holding company
organized under the laws of Pennsylvania  and registered  under the Federal Bank
Holding  Company Act of 1956.  The  Company's  principal  subsidiary  is Lebanon
Valley National Bank (the "Bank").

Results of Operations
      Net income for the Company for the three months ended  September  30, 1997
was $2.256  million or $.57 per share,  compared  to $2.299  million or $.57 per
share  for the  three  months  ended  September  30,  1996.  Return  on  average
stockholders' equity and return on average assets for the 1997 period were 13.60
percent and 1.40 percent,  respectively.  Return on average stockholders' equity
and return on average  assets for the 1996  period  were 14.91  percent and 1.56
percent, respectively.

      During the third quarter,  an announcement  was made of Keystone  Heritage
Group, Inc's. agreement to merge with Fulton Financial Corporation. According to
the terms of this  agreement,  each share of Keystone  Heritage's  common  stock
outstanding  at the time of the  merger  will be  exchanged  for 1.83  shares of
Fulton Financial  common stock.  Under the agreement,  Keystone  Heritage Group,
Inc. and its banking  subsidiary  Lebanon  Valley  National Bank would be merged
into Fulton  Financial.  Fulton  Financial  is the fifth  largest  bank  holding
company in Pennsylvania,  with assets of $4.2 billion.  The merger is subject to
approval by regulatory  authorities and stockholders of Keystone Heritage Group.
The merger is expected to be finalized during the first quarter of 1998.

      Net income for the nine months ended September 30, 1997 was $7.700 million
or $1.94 per share,  compared to net income of $6.300 million or $1.55 per share
for 1996.  Return on average  stockholders'  equity and return on average assets
for the 1997 period were 16.09 percent and 1.65 percent, respectively. Return on
average  stockholders'  equity and return on average  assets for the 1996 period
were 13.95 percent and 1.46 percent, respectively.


Net Interest Income
      Net interest  income is the primary source of income for the Company.  Net
interest  income  is  the  difference  between  interest  earned  on  loans  and
investments  and interest paid on deposits and other funding  sources.  Deposits
are the primary source of funds for the Company. The factors which influence net
interest  income  include  changes in  interest  rates and  changes in asset and
liability balances.

      For purposes of this  discussion,  interest  income and the average  yield
earned on loans and  investments  are presented on a taxable  equivalent  basis.
This provides a basis for  comparison of tax exempt loans and  investments  with
taxable loans and  investments by giving effect to interest earned on tax exempt
loans and  investments  by an amount  equivalent  to federal  income taxes which
would have been paid on the assumption  that the interest earned on those assets
was taxable at the Company's statutory tax rate of 35 percent.

      The tables  presented  on pages 15 and 16 are  comparative  statements  of
average balances of interest  earning assets and interest  bearing  liabilities,
interest  income and interest  expense,  and interest rates for the three months
ended  September 30, 1997 and 1996, and for the nine months ended  September 30,
1997 and 1996.

      Net interest income for the three months ended September 30, 1997 was $7.0
million,  a $287 thousand or 4.3 percent  increase from the same period of 1996.
The net interest margin for the third quarter of 1997 was 4.54 percent  compared
to 4.77  percent for the same  period of 1996.  Average  earning  assets for the
three month period ended September 30, 1997 were $607.2 million, a $51.4 million
or a 9.2  percent  increase  from the same  period of 1996.  For the three month
comparative periods, net interest income increased in 1997 primarily as a result
of an increase in average loans  outstanding of $30.5 million or 7.3 percent and
increases  in the  investment  and money  market  investment  balances  of $20.9
million or 14.9  percent.  This  growth was  primarily  funded by  increases  in
average interest  bearing deposit balances of $42.9 million,  or 9.9 percent and
an

                                       -8-
<PAGE>
increase in average  non-interest bearing demand deposits of $5.6 million or 8.8
percent.  The net interest margin  decreased to 4.54 percent in 1997. This was a
result of the growth in earning  assets being funded by the growth in the higher
costing  time  deposits  and also due to a lower yield  earned on loan  balances
attributable to a more competitive loan market environment.

      Net interest income for the nine months ended September 30, 1997 was $20.7
million,  a $1.5 million or 7.6 percent  increase  from the same period of 1996.
The net interest  margin for the nine months ended  September  30, 1997 was 4.67
percent  compared to 4.71 percent for the same period of 1996.  Average  earning
assets for the nine month period ended September 30, 1997 were $592.8 million, a
$46.8 million or a 8.6 percent increase from the same period of 1996.

Provision and Allowance for Loan Losses
      There was no provision  for loan losses  charged to net income  during the
nine month period ended September 30, 1997 or 1996.

      Net  charge-offs  of $48 thousand were recorded for the three months ended
September  30, 1997  compared to net  recoveries  of $52  thousand  for the same
period of 1996. For the nine month  comparative  period the Company recorded net
recoveries  of $897  thousand  for 1997 and  recorded  net  charge-offs  of $319
thousand for 1996.  During the second quarter or 1997,  the Company  recovered a
total of $885  thousand on three  unrelated  commercial  loans.  A total of $500
thousand  which  was  previously  charged  off  in  1992  was  recovered  on one
commercial  loan though a  litigation  process.  In  addition  to the  recovered
principal  balance on this loan,  the Company also  recovered  $490  thousand in
interest income and legal expenses  associated  with this loan.  Commercial loan
charge-offs  for the nine month  period were $339  thousand  lower than the same
period of 1996  while  charge-offs  in loans to  individuals  increased  by $102
thousand for the same comparative periods.

      The  allowance  for loan losses was $8.6  million or 1.87 percent of total
loans  outstanding  at  September  30, 1997 and $7.7  million or 1.82 percent at
September  30, 1996.  The  allowance  for loan losses is a reserve for estimated
potential  loan losses in the loan  portfolio.  Losses occur  primarily from the
loan  portfolio,  but may also be derived from  commitments to extend credit and
standby letters of credit. Loan losses and recoveries of previously  charged-off
loans are charged or credited  directly to the  allowance  for loan losses.  The
allowance  for loan losses is an amount which,  in  management's  judgement,  is
considered  adequate to absorb  potential losses inherent in the loan portfolio.
Management  performs a  quarterly  assessment  of the Bank's loan  portfolio  to
determine the  appropriate  level of the allowance for loan losses.  The factors
considered  in this  evaluation  include,  but are not  necessarily  limited to,
estimated  loan losses  identified  through the review of loans by the Company's
personnel; general economic conditions;  deterioration in loan concentrations or
pledged  collateral;  historic loss experience;  and trends in portfolio volume,
composition,  delinquencies,  and non-accruals.  In addition, various regulatory
agencies, as an integral part of their examination process,  periodically review
the Bank's allowance for loan losses.

                                       -9-
<PAGE>

      The  following  is a summary of the  activity  in the  allowance  for loan
losses for the three and nine month periods ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
                                                 Three Months Ended         Nine Months Ended
                                                    September 30              September 30
                                                -------------------      --------------------
(Dollars in thousands)                            1997        1996         1997         1996
                                                -------     -------      -------      -------
<S>                                              <C>         <C>          <C>          <C>   
Allowance for loan losses
 at beginning of period                          $8,681      $7,654       $7,736       $8,025
Loans charged-off:
 Commercial                                           0           0           67          406
 Agriculture                                          0           0            0            0
 Real estate construction                             0           0            0            0
 Loans to individuals                               130          96          367          265
 Real estate - residential mortgage                  28           2           32            2
                                                -------     -------      -------      -------
Total loans charged-off                             158          98          466          673

Recoveries of loans previously charged-off:
 Commercial                                          97         128        1,307          299
 Agriculture                                          0           0            0            0
 Real estate construction                             0           7            0           19
 Loans to individuals                                13          15           55           36
 Real estate - residential mortgage                   0           0            1            0
                                                -------     -------      -------      -------
 Total recoveries of loans previously
                          charged-off               110         150        1,363          354

 Net loans charged-off (recovered)                   48         (52)        (897)         319
 Current period's provision for
 loan losses                                          0           0            0            0
                                                -------     -------      -------      -------

 Allowance for loan
 losses at end of period                         $8,633      $7,706       $8,633       $7,706
                                                =======     =======      =======      =======
</TABLE>

Other Operating Income and Expense
     Other  operating  income was $1.8  million  and $1.6  million for the three
months ended September 30, 1997 and 1996,  respectively.  Other operating income
was $5.6 million and $4.3 million for the nine months ended  September  30, 1997
and 1996, respectively.  During the second quarter of 1997 the Company completed
the sale of its $3.1  million  portfolio  of credit card  receivables,  and in a
separate  transaction,  completed the sale of its merchant credit card processor
portfolio. The combined effect of these transactions resulted in a $618 thousand
pre-tax gain. The gain on the sale of the credit card portfolio along with gains
recognized on the sale of certain  equity  investments  recorded as  investments
available  for sale were the primary  reasons for the growth in other  operating
income during the nine month period of 1997 compared to the same period of 1996.

     Other  operating  expense for the three months ended September 30, 1997 was
$5.3 million,  a 10.5 percent  increase  from the $4.8 million  reported for the
same  period  of 1996.  For the nine  months  ended  September  30,  1997  other
operating  expense  was $14.7  million  compared  to $14.0  million for the same
period of 1996.

     Salaries and benefits expense  increased by $98 thousand or 3.7 percent and
by $689  thousand or 9.2 percent for the three and nine months  ended  September
30, 1997,  respectively,  compared to the same periods of 1996.  The increase in
salary and benefit  expense is primarily  attributable to the opening of five de
novo  branches  since  September  30, 1996 and the effects of the  staffing  for
Central  Mortgage  being  present  for the full year in 1997,  compared to being
present for seven  months in 1996.  In addition  merit  increases of 3.5 percent
were applied to base  salaries as of January 1, 1997.  The increase in occupancy
expense for the three and nine month comparative periods is also attributable to
the aforementioned addition of five de novo branches. Other expense increased by
$287  thousand for the three month period ended  September  30, 1997 compared to
the same  period  of 1996.  This was  attributable  to  certain  merger  related
expenses incurred during the third quarter of 1997.

                                      -10-
<PAGE>

Non-Performing Assets
     Loans,  other than consumer loans not secured by real estate, are typically
classified  as  non-accrual  at the  time  they  reach  90 days  past  due as to
principal or interest.  Loans may also be placed on non-accrual  status when, in
management's  opinion,  the collectability of principal or interest is doubtful,
or should management  believe that circumstances  warrant such action.  Consumer
loans not secured by residential  real estate are  charged-off  when they become
120 days past due.

     Non-performing  loans at September  30, 1997  totalled $801 thousand or .17
percent of total loans outstanding,  compared to $973 thousand or .23 percent of
loans at  December  31,  1996  and  $727  thousand  or .17  percent  of loans at
September  30,  1996.  Non-performing  assets at  September  30,  1997 were $881
thousand or .19 percent of loans plus other real estate  owned  compared to $1.7
million or .39  percent of loans plus other real estate  owned at  December  31,
1996 and $1.5  million or .35 percent of loans plus other real  estate  owned at
September 30, 1996. The  improvement in  non-performing  assets at September 30,
1997 as compared to December  31, 1996 was a result of a reduction in the levels
of  other  real  estate  owned  due to the  sale  of  other  real  estate  owned
properties.

     The following is a presentation  of  non-performing  assets as of September
30, 1997, December 31, 1996, and September 30, 1996:

                                        Sept. 30     Dec. 31     Sept. 30
(Dollars in thousands)                    1997        1996        1996
                                         ------      ------      ------
Non-performing loans                       $801        $973        $727
Other real estate owned, net                 80         695         749
                                         ------      ------      ------
Total non-performing assets                $881      $1,668      $1,476
                                         ======      ======      ======

Loans past due 90 days or more as to
  principal or interest                     762         624         455


Allowance for loan losses to
  non-performing loans                    10.78x       7.95x      10.60x
Non-performing loans as a
  percent of loans outstanding              .17%        .23%        .17%
Non-performing assets as a
  percent of loans outstanding
  plus other real estate owned              .19%        .39%        .35%

     Interest income of  approximately  $12 thousand and $36 thousand would have
been  recognized  during the three and nine month  periods  ended  September 30,
1997,  had these loans been current in accordance  with their original terms and
been  outstanding  through the period or since  origination.  Interest income on
these loans of $3 thousand and $5 thousand was  recognized  during the three and
nine months ended September 30, 1997.

     Concentrations   of  credit  are   considered  to  exist  if  a  number  of
counterparties  are  engaged in similar  activities  and have  similar  economic
characteristics  that would cause their ability to meet contractual  obligations
to  be  similarly   affected  by  changes  in  economic  or  other   conditions.
Agriculture-related  borrowings  at September  30, 1997 totalled $121 million or
26.3 percent of total loans outstanding.  These loans may be impacted by adverse
climate or economic  conditions  not common to other  industries.  The Company's
exposure to possible loss in the event of  nonperformance  by these borrowers is
represented by the contractual amount of those instruments. The Company's policy
is to require  supporting  collateral  for these loans which is generally in the
form of agriculture real estate, livestock, and farm equipment. At September 30,
1997  there  were no  significant  agriculture  related  borrowings  which  were
classified as non-performing assets and there were no charge-offs of agriculture
related loans during the three or nine months ended September 30, 1997.

                                      -11-
<PAGE>
Financial Position
     Total  assets at  September  30,  1997 were $646  million  compared to $616
million at December 31, 1996. Total loans outstanding at September 30, 1997 were
$462 million  compared to $423 million at December 31, 1996.  Total  deposits at
September  30, 1997 were $548  million  compared to $527 million at December 31,
1996.

Capital Adequacy
     The Company's  stockholders' equity was $67.2 million at September 30, 1997
and $62.2 million at December 31, 1996. Total stockholders'  equity increased by
8.0 percent from  December 31, 1996 which was the net effect of the  recognition
of $7.7 million in net income for the nine month period,  cash dividend payments
to stockholders of $2.97 million,  a favorable change in net unrealized gains or
losses  on  investment  securities  available  for  sale of $808  thousand,  the
acquisition  of 26,400  shares of treasury  stock at a cost of $703 thousand and
the  re-issuance  of 6,666 shares of treasury stock which provided $155 thousand
of additional capital.  Net unrealized gains on investment  securities available
for sale of $1.32  million and $508  thousand  were  included as a component  of
stockholders' equity at September 30, 1997 and December 31, 1996, respectively.

     The Company  announced  its  intentions  to  repurchase  up to 5 percent or
203,584 shares of its outstanding  common stock in June, 1996. These repurchased
shares are available for reissuance through the Company's Dividend  Reinvestment
or Stock  Option Plans or for other  general  corporate  purposes.  No shares of
common stock were re-acquired by the Company during the third quarter of 1997. A
total of 6,666  shares of  treasury  stock were  reissued  as as result of stock
options which were exercised  during the third quarter of 1997. At September 30,
1997, the Company's had 113,434 shares in treasury stock.

     The  maintenance  of an  appropriate  level of capital is a priority of the
Company's  management.  The Company's  capital  adequacy and dividend policy are
closely  monitored  by  management  and are  reviewed  regularly by the Board of
Directors of the Company.  The Company  intends to provide an adequate return to
its stockholders while retaining a sufficient capital base to provide for future
growth and to comply with regulatory standards.

     Banking  regulators'  risk-based  capital  guidelines  address  the capital
adequacy of banking  organizations.  These  guidelines  include a definition  of
capital and a framework for calculating risk-weighted assets by assigning assets
and off-balance sheet items to broad risk categories,  as well as minimum ratios
to be maintained by banking  organizations.  The  risk-based  capital ratios are
calculated by dividing qualifying capital by risk-weighted assets.

     Under the risk-based  capital  guidelines,  Total Capital is defined as the
sum of core or "Tier 1" Capital and "Tier 2" Capital. As the guidelines apply to
Keystone Heritage Group, Inc., Tier 1 Capital is total stockholders'  equity and
Tier 2 Capital  includes a portion of the allowance  for loan losses.  The rules
require  that  banking  organizations  must have ratios of 4.00 percent and 8.00
percent for Tier 1 and Total  Capital,  respectively.  At September 30, 1997 the
Company's  Tier 1 and Total Capital ratios were 12.95 percent and 14.27 percent,
respectively.  Tier 1 and Total  Capital  ratios  were 13.12  percent  and 14.43
percent  respectively,  at December  31,  1996.  In  addition to the  risk-based
capital ratio, a bank is also required to maintain a "Leverage  ratio" of Tier 1
capital to average total assets of 3 percent or higher.  The Company's  Leverage
ratio was 10.29  percent at September 30, 1997 and was 10.28 percent at December
31, 1996.

Off-Balance Sheet Items

     The  Company's  loan   portfolio   consists  of  loans  to  businesses  and
individuals  primarily  in its  five-county  market area of Lebanon,  Lancaster,
Berks, Dauphin, and Schuylkill counties.

     In the ordinary course of business, the Company enters into agreements with
customers,  such as commitments  to extend credit and standby  letters of credit
which involve, to varying degrees,  elements of credit and interest rate risk in
excess of the amounts presented in the balance sheet. The Company's  exposure to
possible loss in the event of nonperformance by the other party to the financial
instruments for commitments to extend credit and financial guarantees written is
represented by the contractual amount of those instruments.  The Company may not
be obligated to advance funds if the customer's financial condition deteriorates
or if the customer fails to meet certain terms.

                                      -12-
<PAGE>
     Commitments and  conditional  obligations  generally have fixed  expiration
dates or termination clauses and may require payment of a fee. Since many of the
commitments  are expected to expire  without  being used,  the total  commitment
amounts do not  necessarily  represent  future  cash  requirements.  The Company
evaluates each customer's creditworthiness on a case-by-case basis, applying the
same  credit   standards  used  in  the  lending   process,   through   periodic
reassessments  of the  customer's  creditworthiness  and through  ongoing credit
reviews. The amount of collateral  obtained,  if deemed necessary by the Company
upon  extension of credit,  is based on  management's  credit  evaluation of the
counterparty.  Collateral  held  varies  but may  include  accounts  receivable,
inventory,  property,  plant  and  equipment,  and  income-producing  commercial
properties.

     The Company has entered into  interest  rate swap  contracts as part of its
asset-liability  management  activities.  These contracts are used primarily for
the purpose of managing  interest  rate risk in order to minimize  mismatches in
the Bank's interest rate sensitivity and interest rate risk positions.

     Interest rate swap  contracts  generally  involve the exchange of fixed and
floating-rate   interest  payment   obligations  without  the  exchange  of  the
underlying  principal  amounts.  Entering  into  interest  rate  swap  contracts
involves not only the risk of dealing with  counterparties  and their ability to
meet the terms of the contracts but also the interest rate risk  associated with
unmatched  positions.  Notional  principal amounts often are used to express the
volume of these transactions.

     The interest  income or interest  expense  differential  from interest rate
swap  contracts is  recognized  on the accrual  basis as a component of interest
income or interest  expense over the life of the contract.  Gains or losses from
early  termination  of interest  rate swap  contracts are deferred and amortized
over the remaining term of the underlying assets or liabilities.  The Company is
not exposed to credit risk in terms of the notional  amounts of these contracts,
however, the receipt of payments representing the interest differential is based
on the creditworthiness of the counterparty to each contract.

         The  Company's  use of these  interest  rate swap  contracts is closely
monitored by the Company's  Board of Directors  and is closely  controlled as to
levels of exposure.  At September  30, 1997 the Company had five  interest  rate
agreements  outstanding  having a total  notional  amount of $50 million.  These
agreements  consisted  of  interest  rate swap  agreements  each with a notional
amount of $10 million.

         The Company  does not obtain  collateral  or other  security to support
financial instruments subject to credit risk but monitors the credit standing of
counterparties. The counterparties of the aforementioned interest rate contracts
are commercial banks having a rating of A1 from Moody's Investor Service.

     The following is the amount of financial instruments with off-balance sheet
risk not reflected in the consolidated  balance sheets at September 30, 1997 and
December 31, 1996:

                               Contractual Amounts
===============================================================================
                                                     September 30   December 31
(Dollars in thousands)                                   1997           1996

Financial instruments whose
 contractual amounts represent
 credit risk:
  Commitments to extend credit                         $96,733        $93,811
  Standby letters of credit                              8,302          7,335
Contractual amounts of off-balance sheet financial
  instruments not constituting
  credit risk:
  Interest rate swap, notional
   value                                                50,000         70,000

===============================================================================

                                      -13-
<PAGE>
Supervision and Regulation

     During the latter part of 1996, Congress agreed on a legislative package to
stabilize the Savings and Loan (S&L) industry's  deposit  insurance fund (SAIF).
The  legislation  required the S&L industry to  recapitalize  its insurance fund
with a one-time assessment.  Previous proposals required the bank insurance fund
(BIF) to contribute a substantial  amount to help  recapitalize  SAIF. Under the
current legislation,  banks are required to pay an annual rate of 1.29 cents for
every $100 of domestic  deposits  from 1997  through 1999 and pay 2.43 cents per
$100 of domestic deposits for the years of 2000 through 2017. The amount of FDIC
insurance to be paid under this new legislation  will not materially  impact the
financial  position,  equity or the  results of  operations  for the  Company in
future periods.

   The Bank is a national  bank,  chartered  under the National Bank Act, and is
subject to the primary  supervision  of, and is examined by, the  Comptroller of
the Currency.  As a member of the Federal Reserve System, the Bank is subject to
provisions of the Federal  Reserve Act, which restricts the ability of a bank to
extend  credit to its parent  holding  company  or to  certain  of the  parent's
subsidiaries,  or to invest in the Company's  common stock or to take such stock
as  collateral  for loans to any borrower.  The  operations of the Bank are also
subject to regulation by the FDIC.

New Accounting Standards

     In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share". SFAS
128,  which  supersedes  APB  Opinion  No. 15 (APB 15),  "Earnings  Per  Share",
specifies  the  computation,   presentation,  and  disclosure  requirements  for
earnings  per share (EPS) for  entities  with  publicly  held common  stock.  It
replaces the  presentation  of primary EPS with a presentation  of basic EPS and
fully  diluted EPS with diluted EPS,  Basic EPS,  unlike  primary EPS,  excludes
dilution and is computed by dividing income available to common  stockholders by
the weighted average number of common shares outstanding for the period. Diluted
EPS is  computed  similarly  to fully  diluted  EPS  under  APB 15.  Had the new
accounting  standard  been applied for current and prior periods it would of had
no effect on reported  EPS.  The Company  will adopt SFAS 128 as of December 31,
1997.  Management  does not expect SFAS 128 to have any effect on the EPS of the
Company.

                                      -14-
<PAGE>
          AVERAGE BALANCE SHEETS, RATES AND INTEREST INCOME AND EXPENSE
                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                             Three Months Ended September 30, 1997 Three Months Ended September 30, 1996
                                               Average                    Average   Average                   Average
                                               Balance     Interest         Rate    Balance      Interest       Rate
Assets
<S>                                          <C>             <C>            <C>    <C>            <C>           <C>  
Loans                                        $446,153        $9,984         8.88%  $415,632       $9,451        9.05%
Money market investments:
  Interest bearing deposits with banks            380             5         5.22        372            6        6.40
  Federal funds sold                           13,265           187         5.59      6,314           83        5.22
                                             --------      --------         ----   --------     --------        ----
    Total money market investments             13,645           192         5.58      6,686           89        5.31
Investment securities available for sale
 and held to maturity:
  Taxable investment securities
   available for sale                          65,034           965         5.89     55,859          777        5.52
  Taxable investment securities
   held to maturity                            63,594         1,025         6.39     65,569        1,055        6.38
  Non-taxable investment securities
   held to maturity                            18,723           324         6.86     12,035          202        6.68
                                             --------      --------         ----   --------     --------        ----
    Total investment securities               147,351         2,314         6.23    133,463        2,034        6.06
    Total earning assets                      607,149       $12,490         8.16%   555,781      $11,574        8.28%
                                             ========      ========         ====    =======      =======        ==== 

Other assets                                   31,549                                29,315
                                             --------                              --------
    Total assets                             $638,698                              $585,096
                                             ========                              ========

Liabilities and stockholders' equity
Interest bearing deposits:
   Demand                                     $55,421          $181         1.30%   $54,109         $171        1.26%
   Savings                                    129,285         1,051         3.23    131,209        1,048        3.18
   Time                                       290,789         4,064         5.54    247,289        3,453        5.56
                                             --------      --------         ----   --------     --------        ----
    Total interest bearing deposits           475,495         5,296         4.42    432,607        4,672        4.30

Short-term borrowings                          13,224           152         4.58     13,116          135        4.10
Other Borrowings                                5,547            86         6.15      6,814           98        5.69
                                             --------      --------         ----   --------     --------        ----
    Total interest bearing liabilities        494,266        $5,534         4.44%   452,537       $4,905        4.31%
                                             ========      ========         ====    =======      =======        ==== 

Non-interest bearing deposits                  69,550                                63,920
Other liabilities                               9,072                                 7,282
Stockholders' equity                           65,810                                61,357
                                             --------                              --------
    Total liabilities and
    stockholders' equity                     $638,698                              $585,096
                                             ========                              ========

Net interest income                                          $6,956                               $6,669
Total yield on earning assets                                               8.16%                               8.28%
Rate on supporting liabilities                                              3.62%                               3.51%
Net interest margin                                                         4.54%                               4.77%
                                                                            ====                                ==== 
</TABLE>
Interest and average interest rates are presented on a fully taxable  equivalent
basis,  using an effective  tax rate of 35%. For  purposes of  calculating  loan
yields,  average loan balances include non-accrual loans. Loan fees are included
in interest income.

                                      -15-
<PAGE>
          AVERAGE BALANCE SHEETS, RATES AND INTEREST INCOME AND EXPENSE
                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                            Nine Months Ended September 30, 1997   Nine Months Ended September 30, 1996
                                             Average                      Average   Average                    Average
                                             Balance       Interest         Rate    Balance    Interest         Rate
Assets
<S>                                          <C>            <C>             <C>    <C>           <C>            <C>  
Loans                                        $436,150       $29,384         9.01%  $403,776      $27,340        9.04%
Money market investments:
   Interest bearing deposits with banks           293            13         5.93        282           13        6.16
   Federal funds sold                           8,735           361         5.52      3,600          143        5.31
                                              -------       -------         ----    -------      -------        ---- 
     Total money market investments             9,028           374         5.54      3,882          156        5.38
Investment securities available for sale
 and held to maturity:
   Taxable investment securities
    available for sale                         64,588         2,846         5.89     57,193        2,314        5.41
   Taxable investment securities
    held to maturity                           66,142         3,207         6.48     69,247        3,274        6.32
   Non-taxable investment securities
    held to maturity                           16,920           876         6.92     11,942          588        6.58
                                              -------       -------         ----    -------      -------        ---- 
     Total investment securities              147,650         6,929         6.27    138,382        6,176        5.96
     Total earning assets                     592,828       $36,687         8.27%   546,040      $33,672        8.24%
                                              =======       =======         ====    =======      =======        ==== 

Other assets                                   30,511                                28,529
                                              -------                               ------- 
     Total assets                            $623,339                              $574,569
                                              =======                               =======

Liabilities and stockholders' equity
Interest bearing deposits:
   Demand                                     $54,643          $526         1.29%   $54,724         $534        1.30%
   Savings                                    128,582         3,065         3.19    129,923        3,047        3.13
   Time                                       282,366        11,695         5.54    238,854       10,045        5.62
                                              -------       -------         ----    -------      -------        ---- 
      Total interest bearing deposits         465,591        15,286         4.39    423,501       13,626        4.30

Short-term borrowings                          12,406           401         4.32     11,832          369        4.17
Long-term debt                                  6,017           278         6.18      9,620          420        5.82
                                              -------       -------         ----    -------      -------        ---- 
   Total interest bearing liabilities         484,014       $15,965         4.41%   444,953      $14,415        4.33%
                                              =======       =======         ====    =======      =======        ==== 

Non-interest bearing deposits                  66,817                                61,856
Other liabilities                               8,516                                 7,418
Stockholders' equity                           63,992                                60,342
                                              -------                               ------- 
   Total liabilities and
   stockholders' equity                      $623,339                              $574,569
                                              =======                               =======

Net interest income                                         $20,722                              $19,257
Total yield on earning assets                                               8.27%                               8.24%
Rate on supporting liabilities                                              3.60%                               3.53%
                                                                            ----                                ----
Net interest margin                                                         4.67%                               4.71%
                                                                            =====                               ====
</TABLE>
Interest and average interest rates are presented on a fully taxable  equivalent
basis,  using an effective  tax rate of 35%. For  purposes of  calculating  loan
yields,  average loan balances include non-accrual loans. Loan fees are included
in interest income.

                                      -16-
<PAGE>

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

None.

ITEM 2.  CHANGES IN SECURITIES

None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

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

None.
ITEM 5.  OTHER INFORMATION

None

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a.)  None.

(b.) The Company filed a report on Form 8-K on September 10, 1997. This Form 8-K
was filed in reference to the  announcement  made on August 15, 1997 of Keystone
Heritage Group,  Inc's.  agreement to merge with Fulton  Financial  Corporation.
This agreement is described in Note 3 on page 7 of this 10-Q report.


                                      -17-
<PAGE>
                          KEYSTONE HERITAGE GROUP, INC.

                                   SIGNATURES


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



                                         Keystone Heritage Group, Inc.
                                         (Registrant)


Date  November 10, 1997             By
                                       Kurt A. Phillips
                                       Chief Financial and Accounting Officer

                                      -18-