CITADEL ENVIRONMENTAL GROUP INC, 10KSB, 1998-07-06

CITADEL ENVIRONMENTAL GROUP INC
10KSB, 1998-07-06
SECURITY & COMMODITY BROKERS, DEALERS, EXCHANGES & SERVICES

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[x] ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)

For the fiscal year ended December 31, 1997

[ ] TRANSITION REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the transition period from to

Commission file number 0-16423

CITADEL ENVIRONMENTAL GROUP, INC.
(Name of Small Business Issuer in Its Charter)

Colorado 84-0907969
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

3617 East Thousand Oaks Boulevard, Suite 223
Thousand Oaks, CA
91362
(Address of Principal Executive Offices)
(Zip Code)

Issuer's Telephone Number: (805) 777-3450

Securities registered under Section 12(b) of the Exchange Act:

None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, No Par Value
(Title of class)

Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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

Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB.[ ]

The issuer's revenues for the most recent fiscal year were $ 0.

The aggregate market value of the voting stock held by non-affiliates,
based upon the average bid and asked prices of the Common Stock on
February 26, 1998 was $ 3,952,546. Shares of Common Stock held by each
officer and director and by each person who owns 5% or more of the
outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

The number of shares outstanding of the issuer's Common Stock, as
of February 26, 1998 was 6,347,791.

DOCUMENTS INCORPORATED BY REFERENCE

NONE

PART I

ITEM 1.DESCRIPTION OF BUSINESS

GENERAL DEVELOPMENT OF BUSINESS

Citadel Asset Management, Ltd. was registered as an
investment adviser under the Investment Advisers Act of 1940
upon its incorporation in Colorado in July 1983 and, until
September 1992, was primarily engaged in the business of
rendering investment advisory and management services. The
Company was inactive from fiscal 1993 through fiscal 1995.
The name was changed to Citadel Environmental Group, Inc.
(The "Company", or "Citadel") in August 1996.

The Company's Articles of Incorporation were amended in
January 1995 to increase the Company's authorized common
stock to 25,000,000 shares with no par value, convert each
outstanding share of Series A preferred stock into one share
of common stock, and eliminate all unpaid dividends on any
share of preferred stock.

On August 12, 1996 Citadel acquired all the outstanding
common stock of Tonopah Resources International, Inc.,
("TRI"). All of the outstanding common stock of TRI was
acquired for 1,050,000 shares of newly issued common stock
of Citadel, and 1,500,000 shares of Series A Preferred,
1,500,000 shares of Series B Preferred, and 2,000,000 shares
of Series C Preferred. In conjunction with the acquisition,
Citadel assumed or guaranteed $1,134,000 of TRI
indebtedness.

Following the acquisition, the shareholders of TRI owned
approximately 56% of the outstanding shares of Citadel's
common stock and 100% of Citadel's preferred shares.
Effective September 30, 1996 the Board of Directors of the
Company voted to discontinue the operations of TRI. In
conjunction with the discontinuance and in order to strengthen
the financial position of the Company and encourage new
investors, the Company issued 2,840,000 shares of Citadel
Common Stock in exchange for all of the Series A, B and C
Preferred Stock and the cancellation of $1,100,000 in TRI
debt. On September 22, 1997, the Company sold its equity
interest in TRI to the Chairman of the Board of Citadel for
$9,250 in cash. (See Item 12. "Certain Relationships and
Related Transactions").

On March 26, 1997, the Company acquired a 64.45% interest
in Applied Medical Recovery, Inc. ("AMR"), an Arizona
corporation, engaged in reprocessing and recycling of non-
critical medical instruments and devices in exchange for
1,633,608 shares of common stock. In February 1998 Citadel
agreed to tender its investment in AMR and certain other
assets to Alliance Medical Corporation ("Alliance"). Alliance
was established for the sole purposes of acquiring controlling
interest of both AMR and a direct competitor, Orris, Inc.

The Company's executive offices are located at 3617 East
Thousand Oaks Boulevard, Suite 223 Thousand Oaks, CA
91362 and its telephone and fax numbers are (805) 777-3450
and (805) 777-3460, respectively.

DESCRIPTION OF BUSINESS

The Company acquired a 64.45% interest in Applied Medical
Recovery, Inc. ("AMR"), an Arizona corporation, engaged in
reprocessing and recycling of non-critical medical instruments
and devices on March 26, 1997. At the time of the
acquisition, it was anticipated that a subsequent business
combination involving AMR would occur in preparation for an
anticipated initial public offering.

In February 1998 Citadel agreed to tender its investment in
AMR and certain other assets to Alliance Medical
Corporation ("Alliance"). Alliance was established for the
sole purpose of acquiring controlling interest of both AMR
and a direct competitor, Orris, Inc. Concurrent with Citadel,
the majority shareholders' of Orris agreed to tender their
shares and certain other assets to Alliance. In conjunction
with the acquisition of AMR and Orris, Alliance commenced
an offering of up to 1,000,000 shares of its common stock at
approximately $2.00 per share and a tender offer for the
remaining AMR and Orris shares. Citadel received 545,035
shares of Alliance common stock in exchange for its equity
interest in AMR and 1,750,000 shares of Alliance convertible
preferred stock in exchange for $720,000 in AMR loans,
related accrued interest of $43,328 and accrued management
fees of $45,000. The shareholders of Orris received
1,000,000 shares of Alliance common stock and 1,750,000
shares of Alliance convertible preferred stock in exchange for
certain assets.

The terms of Citadel's investment in AMR provided that
shareholders of the previously separate companies comprising
AMR would receive shares in AMR providing that they agree
to sell 51% of the AMR shares received to Citadel in
exchange for Citadel common stock. Certain shareholders of
the previously separate companies comprising AMR have not
yet surrendered their shares for equity in AMR and therefore
represent a minority interest in AMR. If these shareholders
elect to exchange their shares for AMR stock, Citadel would
acquire 51% of these shares in exchange for 227,962 shares of
Citadel common stock. The tender offer with Alliance
provides that 76,251 shares of Alliance remain in escrow for
Citadel's benefit and represent the number of Alliance shares
issuable for Citadel's interest in the additional shares of AMR.

Alliance and its subsidiaries have developed a proprietary
service which allows for the recovery and re-use of previously
used and contaminated, (disposable) non-critical surgical
instruments and related medical devices. The FDA has not yet
developed regulations for the new niche reprocessing industry.
However, the regulations are expected to be issued by late
1998. Until there are published standards, Alliance is following
FDA Regulation #1722513 which relates to good
manufacturing practices. Prior to the creation of the
independent reprocessor of surgical instruments and/or
medical devices, only hospitals reprocessed instruments.
Hospitals do not fall under the regulation of the FDA and
therefore no known regulations are currently in place.
Instruments and/or devices are segregated and collected at the
point of use in specially designated containers, reprocessed at
Alliance's plants and are "sold back" to the healthcare facility
(point of origin) for reuse. Alliance believes that its
reprocessing system may save the healthcare facility up to
50% in instrument replacement costs.

The types of noncritical instruments and/or devices Alliance
reprocess include: floor grade instruments (laceration and
suture trays); laparoscopic babcocks, graspers, scissors;
cutting and saw blades; knives, shears, forceps, burs, and
others.

The reprocessing system protocol includes performing the
following general functions:

I)Initial cleaning - both ultrasonic and manual;
2)Log-in inspection - tracking each instrument
for individual history;
3)Sharpening and honing (if necessary);
4)Quality control microscopic inspection;
5)Final cleaning - instrument is dried and
lubricated (if necessary) and prepared for
packaging;
6)Quality control inspection;
7)Packaging and sterilization;
8)Quality control inspection;
9)Sterilization of instrument is validated by
independent laboratory; and
10)Instrument shipped back to healthcare
facility client for reuse.

Under ordinary conditions, instruments can be reprocessed
from three to eight times, depending upon the nature and
quality of the instrument. Once an instrument is no longer
usable by Alliance's customers, the instrument may be sold
into the foreign (overseas) medical instrument markets, in
bulk to metal recyclers, to morticians or, disposed of through
regular in-house medical waste sterilization/disposal.

Industry research indicates that approximately 40 billion
medical instruments and devices are utilized in the U.S. each
year. Alliance believes that approximately 15-20% of these
instruments and devices are candidates for Alliance's
reprocessing protocol. Alliance's reprocessing service fees
range from $5.00 to $300.00 per instrument. Fees are
customarily based on the type of instrument reprocessed.

Alliance has developed an array of services which allow
hospitals and surgery centers to minimize the generation of
non-recyclable medical waste. Alliance's recovery and
reprocessing services address both used and unused medical
products utilized in intervention, diagnostic and surgical
procedures. Alliance's programs intend to safely and
effectively collect for recycle and/or resale: (i) disposable
operating room towels, (ii) stainless steel instruments, (iii)
plastic components and (iv) opened/unused surgical supplies.
Alliance will also purchase in bulk (from the healthcare
facility) floor grade instruments and out-sourced sterile kits
for reprocessing. The healthcare facility may purchase the
reprocessed floor grade instruments and out-sourced non-
sterile kits from Alliance at prices which are substantially
below historic costs. Alliance provides in-house training and
coordinating of its various collection programs within the each
healthcare facility.

It is expected that Alliance customers will realize cost
reductions as a result of purchasing reprocessed instruments
as well as a result of the reduced volume of medical waste
generated and requiring disposal.

In May 1997 AMR opened a reprocessing plant in Phoenix,
Arizona, in a leased facility of approximately 15,000 square
feet and in late June 1997 closed its 4,000 square foot facility
in St. George, Utah. Alliance will utilize this facility for the
combined operations of AMR and Orris.

Competition

The market in which Alliance operates and will be operating
can be characterized as a new developing market which has
not been fully defined. Many of Alliance's actual and potential
competitors are small companies with comparable financial
and human resources and most have shorter operating
histories. To the extent competitors and potential competitors
offer comparable or more efficient technologies and to the
extent larger companies, with greater resources, better
operating efficiencies, and more extensive capabilities to
collect, recycle and distribute products, enter into Alliance's
markets, the company's ability to compete effectively could be
adversely effected.

Employees

As of December 31, 1997, Citadel employs two persons full
time, all of which are in executive positions.

<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY

Citadel's executive and administrative offices are located in
Thousand Oaks, California. The Company leases
approximately 700 square feet, on a month-to-month basis,
with a monthly rental of approximately $700. These facilities
are believed to be adequate for current operations.

ITEM 3. LEGAL PROCEEDINGS

The Company is presently involved in legal arbitration
involving a past president regarding the payment of amounts
due under a severance agreement. See "Managements
Discussion and Analysis - Officer's Severance Agreement."
Although currently in legal arbitration, the Company has fully
accrued its potential liability for the claim.

In December 1997 an individual filed a complaint against the
Company alleging non payment of a $100,000 finders fee
relating to the AMR acquisition and seeking payment plus
accrued interest from March 26, 1997. Management believes
that the allegations are without merit and intends to vigorously
defend the Company in this matter. The Company has not
accrued any provision for this claim.

The Company is not a party to any other pending legal
proceedings which management believes could have a material
adverse effect on its financial position.

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

There have been no matters submitted to a vote of security
holders during the quarter ended December 31, 1997.

<PAGE>
PART II

ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS

The Company's Common Stock began trading in the over-the-
counter market on the OTC Bulletin Board under the symbol
"ASEM" in April 1996. In September 1996, the stock symbol
changed and currently trades under the symbol "CTEV".
There was no active trading market for the Company's
Common Stock for more than seven years prior to April 1996.
Since April 1996, trading activity with respect to the
Company's Common Stock has been limited and sporadic.

The following table reflects the high and low bid prices of the
Company's Common Stock as reported by the OTC Bulletin
Board commencing April 1996 . Such prices are inter-dealer
quotations without retail mark-ups, mark-downs or
commissions, and may not represent actual transactions.

Fiscal
Year Quarter High Low

1997 03/31/97 5/8 1 5/8
1997 06/30/97 1 1/16 1 9/16
1997 09/30/97 1 1/16 17/32
1997 12/31/97 15/16 1 3/8

1996 03/31/96 0 0
1996 06/30/96 1 15/16 1/4
1996 09/30/96 2 1 3/8
1996 12/31/96 1 7/16 5/8

As of February 26, 1998, there were approximately 109
holders of record of the Company's common stock.

The Company has no formal policy concerning the declaration
of dividends and has not issued any common stock dividends
to date. The payment of dividends is within the discretion of
the Board of Directors. The payment of any future dividends
will be contingent upon future earnings, if any, its financial
condition and capital requirements, general business
conditions and other factors.

<PAGE>
ITEM 6.MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF
OPERATIONS

Overview

Citadel's focus is to acquire controlling interest in operating
companies in growth industries and increase the value of the
investment by providing or locating the managerial,
administrative and financial assistance necessary to facilitate
growth. The Company is dependent upon additional debt or
equity financing in order to provide these services for the
benefit of its controlled subsidiaries. There is no assurance
that the Company will be able to raise such capital.

In August 1996, the Company acquired all of the outstanding
common stock of Tonopah Resources International, Inc.
("TRI") in exchange for a combination of Citadel Common
and Preferred Stock. See Liquidity and Capital Resources.
The investment did not meet performance objectives and
commenced liquidation in September 1996. In September
1997, the Company sold the stock in the substantially
liquidated subsidiary to Citadel's Chairman of the Board. (See
"Certain Relationships and Related Transactions").

On March 26, 1997, the Company acquired a 64.45% interest
in Applied Medical Recovery, Inc. ("AMR"), an Arizona
corporation, engaged in reprocessing and recycling of non-
critical medical instruments and devices in exchange for
1,633,608 shares of common stock. In February 1998 Citadel
agreed to tender its investment in AMR and certain other
assets to Alliance Medical Corporation ("Alliance"). Alliance
was established for the sole purpose of acquiring controlling
interest of both AMR and a direct competitor, Orris, Inc.

Plan of Operations

The Company intends to assist Alliance's expansion of its
medical reprocessing and recovery activities on a national and
international basis and explore possible new investments.

Citadel expects to assist in the national and international
expansion of Alliance by providing capital (generally in the
form of loans) and certain management expertise. Citadel had
committed to AMR that Citadel would make available either
through Citadel and/or other third parties a $1,500,000
working capital line of credit and assist in obtaining an
additional $2,000,000 in debt financing for expansion. To
date, Citadel has loaned AMR $720,000 under the line of
credit. In conjunction with the Alliance acquisition of AMR
discussed above, Citadel canceled this indebtedness and
certain other amounts due from AMR in exchange for
1,750,000 shares of Alliance convertible preferred stock.

Liquidity and Capital Resources

The Company's cash and cash equivalents at December 31,
1997 are $1,548 compared to $43,256 at December 31, 1996.
The decrease in cash and cash equivalents of $41,708 is
principally due to proceeds of $935,324 from the issuance of
equity and debt, offset by loans to AMR of $670,000 and less
the cash requirements of operations for the period. Included
in the operating loss of $ 1,211,390 for the period is a gain
from discontinued operations of $86,020. The gain is due
principally to $101,836 in debt of TRI that had been assumed
by Citadel and was subsequently retired by TRI, offset by
$20,000 in previously unrecorded debt of TRI and a gain of
$9,251 on the sale of TRI.

In March 1997, the Company acquired controlling interest in
Applied Medical Recovery, Inc. ("AMR") in exchange for
Citadel Common Stock. At the time of the acquisition, it was
anticipated that a subsequent business combination involving
AMR would occur in preparation for an anticipated initial
public offering. As this business combination involving AMR
was anticipated when Citadel made its initial investment, it
was expected from the onset that Citadel's control position in
AMR would only be temporary. Accordingly, AMR is
reflected on the equity method on the December 31, 1997
balance sheet of Citadel.

Other significant components of the operating loss not
utilizing cash were a $151,398 increase in accrued expenses
and a $813,874 provision for uncollectible receivables from
AMR, offset by a $88,258 decrease in receivable from affiliate
representing accrued intercompany interest and management
fees, a $26,544 increase in accounts payable and other
liabilities and an $800 increase in accrued taxes payable.

Retirement of Series A, B, and C Preferred

The Company issued 2,840,000 shares of Citadel Common
Stock during fiscal 1997 in exchange for all of the Series A,
B and C Preferred Stock issued in conjunction with the TRI
acquisition and the cancellation of $1,100,000 in assumed TRI
indebtedness.

Private Placement of Convertible Preferred Stock

On April 30, 1997 the Company completed a private
placement of 797,500 units consisting of one share of no par
convertible preferred stock, one A warrant and one B warrant,
for $1.00 per unit. The preferred stock is convertible into
common stock on a one-for-one basis and carries a 5% annual
dividend payable in common shares. Two A warrants allow
the holder to purchase one share of common stock at $1.25
per share. The warrants expire one year from date of issuance
(October 1997) or 90 days following the registration of the
underlying common shares, whichever is greater. Two B
warrants allow the holder to purchase one share of common
stock at $1.50 per share. The warrants expire two years from
date of issuance (October 1998) or 90 days following the
registration of the underlying common shares, whichever is
greater. In conjunction with this private placement, all
shareholders who acquired stock in the Company's previous
private placement (See "Private Placement - Common Stock),
converted their common shares and warrants into preferred
stock and warrants issued in accordance with the terms of this
private placement.
On November 8, 1997 the Board of Directors voted to extend
the expiration dates for the Series A and B warrants to
October 1998 and October 1999, respectively.

Acquisition of Applied Medical Recovery, Inc.
On March 26, 1997, the Company acquired a 64.45% interest
in Applied Medical Recovery, Inc. ("AMR"), an Arizona
corporation, engaged in reprocessing and recycling of non-
critical medical instruments and devices in exchange for
1,633,608 shares of common stock. See " Subsequent Event -
Investment in Alliance Medical Corporation ("Alliance")."

Loan Agreement with Applied Medical Recovery, Inc.

On July 1, 1997, Citadel entered into a loan agreement with
AMR. The loans are covered by a Multiple Advance
Promissory Note in an amount not to exceed $3,500,000,
bearing interest at Wells Fargo prime rate plus two percent
(2%) per annum with principal and interest due and payable
on or before July 1, 1998. The note is secured by a Security
Agreement on all of the assets of AMR and its subsidiaries.
As of December 31, 1997, Citadel has advanced $720,000 to
AMR pursuant to this Multiple Advance Promissory Note.
See " Subsequent Event - Investment in Alliance Medical
Corporation ("Alliance")."

Officer's Severance Agreement

On January 14, 1997, the Company entered into an agreement
with Richard Landi, accepting his retirement as President of
the Company effective February 1, 1997. Pursuant to the
agreement the Company became liable for twelve months of
full compensation from February 1, 1997 through January 1,
1998 at $8,333 per month payable bi-monthly. The Company
made payments through March 31, 1997 and has not made
any further payment to date. The unpaid balance at December
31, 1997 is $83,333. The Company is seeking arbitration to
reach a mutually satisfactory settlement.

Provision for Uncollectibles from Affiliate

Selected unaudited financial information of AMR at
December 31, 1997 is as follows:

Total Assets $ 1,671,000
Total Liabilities 2,566,000
Stockholders' Deficit (895,000)
Total Liabilities and Stockholders' Deficit $ 1,671,000

For the Year ended December 31, 1997:
Revenue $ 1,382,000
Expenses (3,000,000)
Net Loss $ (1,618,000)

Due to uncertainty regarding the value of the company's
investment in AMR, as well as uncertainty regarding the
ability of AMR to repay indebtedness as of December 31,
1997, the Company has fully reserved the following assets as
of December 31, 1997 and has allocated no value to the
issuance of the 1,633,608 shares of common stock issued to
acquire AMR:

Management fees due from AMR $ 45,000
Interest receivable from AMR 43,327
Note receivable - AMR 720,000

Private Placement - Common Stock
Effective September 30, 1996, the Company completed a
private placement of 186,667 units consisting of one share of
no par convertible preferred stock and one warrant for $1.50
per unit. The warrant allows the purchaser to purchase one
share of common stock at $3.00 per share and expire two
years from date of issuance. In conjunction with a subsequent
private placement of preferred stock (See Private Placement
of Convertible Preferred Stock), all common shares acquired
under this private placement converted their shares and
warrants into convertible preferred stock and warrants issued
in accordance with the terms of the convertible preferred
private placement. The common shares issuable under this
placement were not issued as of December 31, 1996 and were
accordingly shown as stock subscriptions under current
liabilities on the December 31, 1996 financial statements.

Discontinued Operations

Effective September 30, 1996 the Board of Directors of the
Company voted to discontinue the operations of TRI. In
conjunction with the discontinuance, and in order to
strengthen the financial position of the Company and
encourage new investors, the Company issued 2,840,000
shares of Citadel Common Stock during fiscal 1997 in
exchange for all of the Series A, B and C Preferred Stock and
the cancellation of $1,100,000 in TRI debt. On September 22,
1997, the Company sold its equity interest in TRI to the
Chairman of the Board of Citadel for $9,250 in cash and
contingent consideration of $100,000.

<TABLE>
<CAPTION>
Discontinued operations for the years ended December 31,
1997 and 1996 includes the following:

1997 1996
<S> <C> <C>
Value of Citadel common and preferred stock issued $ 0 $ (1,646,000)
Debt (assumed) retired 81,836 (1,134,000)
Subsequent debt incurred 0 (71,836)
Accrued interest on above debt 0 (33,761)
Write-off of loan to TRI, net of repayments 0 (61,539)
Gain on Sale 9,251 0
$ 91,087 $ (2,947,136)
</TABLE>

The Company during 1996 acquired 100% of the common
stock outstanding of Tonopah Resources International, Inc.,
which owned a controlling interest in Allen-Moore Diversified
Services, Inc., Arizona Hazardous Waste, Inc. and GEC
Construction and Management, Inc. Tonopah and its
subsidiaries had operating debts unpaid and environmental
violation problems prior to the date of the Company's
acquisition. At the time, the Company decided to discontinue
its operation of Tonopah and its subsidiaries and to liquidate
its ownership position, the various entities continued to have
financial and legal problems. The contingent liability discussed
herein, regards the potential for any of these unpaid debts
and/or potential fines by government agencies becoming the
financial responsibility of the Company. Legal counsel is
unable to render an opinion as to the probability of any of
these events becoming a financial liability against the assets of
the Company and a reasonable estimate of the potential
financial impact is unascertainable.

Management estimates the maximum amount of exposure to
be no greater than $250,000 and $1,000,000 for 1997 and
1996, respectivly based on the last known liabilities of the
various entities and the maximum potential fines the courts
could levy on the alleged environmental violations. The
potential fines that were unascertainable at December 31,
1996 have been resolved. During the year the U.S. District
Court assessed TRI $5,400 in fines and the obligation was
settled by the new owner of TRI. See Note 3 - Investments -
Tonopah Resources International, Inc. Management has
elected to still identify $250,000 as its potential maximum
exposure based on the last known unresolved issues.

Subsequent Event - Sale of AMR Shares to Alliance
Medical Corporation.

In February 1998 Citadel agreed to sell its investment in AMR
and certain other assets to Alliance Medical Corporation
("Alliance"). Alliance was established for the sole purpose of
acquiring controlling interest of both AMR and a direct
competitor, Orris, Inc. Concurrent with Citadel, the majority
shareholders of Orris agreed to tender their shares and certain
other assets to Alliance. In conjunction with the acquisition of
AMR and Orris, Alliance commenced an offering of up to
1,000,000 shares of its common stock at approximately $2.00
per share and a tender offer for the remaining AMR and Orris
shares. Citadel received 545,035 shares of Alliance common
stock in exchange for its equity interest in AMR and
1,750,000 shares of Alliance convertible preferred stock in
exchange for $720,000 in AMR loans, related accrued interest
of $43,328 and accrued management fees of $45,000. The
shareholders of Orris received 1,000,000 shares of Alliance
common stock and 1,750,000 shares of Alliance convertible
preferred stock in exchange for certain assets.

The Alliance private placement resulted in the issuance of
approximately 3,000,000 common shares and 3,500,000
convertible preferred shares. Citadel's percentage ownership
in Alliance after the completion of the private placement is
18%, or 35% assuming conversion of the preferred and no
issuance of the shares in escrow. As this business combination
involving AMR was anticipated when Citadel made its initial
investment, it was expected from the onset that Citadel's
control position in AMR would only be temporary. Due to
uncertainty as to whether the subsequent business combination
involving AMR would actually occur, however, Citadel
reflected AMR's financial position and results of operation in
Citadel's consolidated financial statements for the quarters
ended March 31,1997, June 30, 1997 and September 30,
1997. Subsequent to September 30, 1997 the likelihood of
the business combination involving AMR occurring increased
to where it was no longer considered appropriate to include
AMR in Citadel's consolidated financial statements.
Accordingly, AMR is reflected on the equity method on the
December 31, 1997 balance sheet of Citadel. Citadel's results
of operations for the year ended December 31, 1997 include
a loss of $776,569 representing the portion of AMR's
operations consolidated with Citadel during the period.

ITEM 7.FINANCIAL STATEMENTS

The Consolidated Financial Statements of the Company are
attached as follows:

Index to Financial Statements F-1
Citadel Environmental Group, Inc. Financial
Statements as of and for the year ended December 31,
1997 and 1996 F-3 through F-17

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

None

PART III

ITEM 9.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

Information with respect to the executive officers and
directors of the Company is set forth below:

Company Positions
Name Age and Offices

Robert R. Barber 56 Chairman of the Board

Louis F. Coppage 60 President,Chief Financial
Officer and Director

Georgette W. Pagano 40 Corporate Secretary

Business experience of Directors and Executive Officers of
Citadel.

Robert R. Barber. Mr. Barber was elected to the Board of
Directors of Citadel in August 1996 and was elected Chairman
of the Board in January 1997. Mr. Barber has for more than
the past five years been Chairman of the Board and the Chief
Executive Officer of North American Recycling Systems, Inc..
Prior to forming North American Recycling Systems, he was
the President and Chief Executive Officer of North American
Recycling Corporation since its inception in 1974 which has
been involved in medical waste treatment among other
businesses. He is a past Vice Chairman of the National Solid
Waste Recyclers Council and is a member of the Steering
Committee for the New York Solid Waste Industries
Association. Mr. Barber is also a member of the National
Solid Waste Management Association. Mr. Barber obtained
a BA degree in Liberal Arts from Siena College in 1970.

Louis F. Coppage. Mr. Coppage was elected to the Board
of Directors of Citadel in August, 1997 and was elected
President and Chief Financial Officer in September 1997. Mr.
Coppage is also acting Chairman and CEO of American
Consolidated Growth Corporation (AMGC). He has over
twenty years of executive and managerial experience with both
domestic and international operations involving finance and
business development for both private and public
corporations. From 1993 to present, he has held advisory
positions and has provided investment banking consulting
services for AMGC and its affiliate companies, where he
assisted in the turnaround and restructuring of the companies.
He is currently a member of the Board of Directors of
AGTsports, Inc.. Mr. Coppage has served as financial
consultant for numerous clients in real estate, energy,
insurance management and investment holdings related
businesses. He holds memberships in several civic, social and
charitable organizations.

Georgette W. Pagano. Ms. Pagano has been Corporate
Secretary since March 1997. Ms. Pagano has extensive
corporate experience with a number of public companies
beginning with Conversion Industries in 1984. Prior to joining
Conversion, Ms. Pagano was a stockbroker with the firm of
Thomson McKinnon Securities. She has served as a Director
of two public companies.

Compliance With Section 16(a) of the Exchange Act

The following officers, directors and/or 10 percent
shareholders of the Company have filed late reports of Forms
3, 4 or 5 with respect to the number of transactions indicated
or have failed to file a required Form 3, 4 or 5 for the period
of January 1, 1997 to December 31, 1997 as indicated in the
following table:

Name Number of Late Reports 0
Number of Transactions 0
Failure to File a Report 0

No late reports

<PAGE>
ITEM 10.EXECUTIVE COMPENSATION

The following table sets forth the total remuneration of the
Chief Executive Officer and the four most highly compensated
executives whose salary and bonus for the year ended
December 31, 1997 exceeded $100,000.

SUMMARY COMPENSATION TABLE

Name and
Principal Position Year Salary Bonus Other
- ------------------ ------ ------- ------ ------

Louis F. Coppage, 1997 0 0 0
President and CEO (1) 1996 0 0 0

Richard Landi, 1997 0 0 0
President and CEO (2) 1996 $ 25,000 0 0

Wayne Boss, 1997 0 0 0
President and CEO (3) 1996 0 0 0
_____________________________
(1) Mr. Coppage commenced employment in September 1997 and serves
without salary.
(2) Mr. Landi commenced employment in September 1996 and resigned
in February 1997.
(3) Mr. Boss resigned in August 1996.

OPTION GRANTS IN LAST FISCAL YEAR
NONE

INDIVIDUAL GRANTS
NONE

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NONE

Compensation of Directors

Non-employee directors are not compensated for each Board
meeting they attend, other than for the reimbursement of
expenses. Employee directors do not receive any additional
compensation for Board or committee service.
<PAGE>
ITEM 11.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The following table sets forth information regarding the
ownership of the Company's equity securities by (i) each
person known by the Company to own 5 % or more of each
class of equity securities, (ii) each officer and director of the
Company, and by (iii) all executive officers and directors as a
group.

Name and Address of Amount and Nature of
Beneficial Owner Ownership Percent of Class

Robert R. Barber (1) 0 0
3617 East Thousand Oaks Blvd
Suite 223
Thousand Oaks, CA 91362

Louis F. Coppage (1) 10,000 *
3617 East Thousand Oaks Blvd
Suite 223
Thousand Oaks, CA 91362

Georgette W. Pagano 0 0
3617 East Thousand Oaks Blvd
Suite 223
Thousand Oaks, CA 91362

Pauline R. Sill 517,620 8%
c/o Arizona Medical Waste
4519 W. Colter
Glendale, AZ 85301

Frances Enterprises Limited 808,400 13%
c/o Ms. Pauline Gale
Royal Bank of Scotland
Trust Company "IOM Limited"
P.O. Box 151
Victory House
Douglas, Isle on Man IM99 1NJ

Koshar Limited 1,467,205 23%
c/o Jean-Paul da Costa
Piper, Smith & Basham
31 Warwick Square
London, England SWIV2AF

All Directors and Officers 10,000 *
as a Group (2)
________________________

(1) Director.
* under 1%
<PAGE>
ITEM 12.CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS

On September 22, 1997, the Company sold its equity interest
in Tonopah Resources International, Inc. to the Chairman of
the Board of Citadel for $9,250 in cash.

ITEM 13.EXHIBITS AND REPORTS ON FORM 8-K

(a)Exhibits
Exhibit No. Description Page

3.1 Articles of Incorporation.

3.2 By-laws.

10.1 Share Exchange Agreement between Citadel
Environmental Group, Inc. and Applied Medical
Recovery, Inc. dated as of March 26, 1997.

10.2 Purchase and Sales Agreement between Citadel
Environmental Group, Inc. and Robert R. Barber
dated September 22, 1997.

27 Financial Data.*

* Filed herewith

(b)Reports on Form 8-K

No reports on Form 8-K were filed during the last quarter of the
period covered by this report.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

Citadel Environmental Group, Inc.
(Registrant)

Date: July 6, 1998 By: Louis F Coppage
President

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

Signature Title
Date
President, Chief Financial
Louis F. Coppage Officer and Director 7/6/98

Robert R. Barber Chairman of the Board 7/6/98

CITADEL ENVIRONMENTAL GROUP, INC.
INDEX TO FINANCIAL STATEMENTS

PAGE
Citadel Environmental Group, Inc. as of and for the years
ended
December 31, 1997 and 1996:

Report of Independent Accountants F-3/4
Balance Sheets F-5/6
Statements of Operations F-7
Statements of Cash Flows F-8
Statements of Changes in Stockholders' Equity F-9
Notes to Financial Statements F-10

F-1

FINANCIAL STATEMENTS
CITADEL ENVIRONMENTAL GROUP, INC.
AS OF AND FOR THE YEARS ENDED DECEMBER
31, 1997 AND 1996

F-2

INDEPENDENT AUDITORS' REPORT

To The Board of Directors and Stockholders
of Citadel Environmental Group, Inc.
(Formerly Citadel Asset Management, Ltd.)
Thousand Oaks, California

We have audited the accompanying balance sheets of
Citadel Environmental Group, Inc. (formerly Citadel Asset
Management, Ltd.), as of December 31, 1997 and 1996 and
the related statements of operations, cash flows, and changes
in stockholders' equity for the years then ended. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on
these financial statements based on our audit.

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

In our opinion, the financial statements referred to in
the first paragraph present fairly, in all material respects, the
financial position of Citadel Environmental Group, Inc.
(formerly Citadel Asset Management, Ltd.) as of December
31, 1997 and 1996 and the results of its operations and its
cash flows for the years then ended, in conformity with
generally accepted accounting principals.

The accompanying financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 8, Going Concern, to the
financial statements, the Company has not had significant
operating revenues in several years and as of December 31,
1997 does not own any assets that would generate any
significant operating revenues. These conditions raise
substantial doubt about its ability to continue as a going
concern. Management's plans regarding those matters are
described in Note 9, Subsequent Events. The financial
statements do not include any adjustments that might result
from the outcome of this uncertainty.

F-3
To The Board of Directors and Stockholders
of Citadel Environmental Group, Inc.
Page 2

INDEPENDENT AUDITORS' REPORT

As more fully discussed in Note 7, Discontinued
Operations, during 1996 the Company discontinued its
operations of its wholly owned subsidiary Tonopah Resources
International, Inc. and instituted a plan of liquidation.

The Company, through its ownership of Tonopah
Resources International, Inc. has a potential Contingent
Liability as more fully discussed in Note 10, Contingent
Liability. Management has elected not to accrue any liability
due to the undeterminable probability of the Contingent
Liability and the unascertainable financial impact.

SKEEHAN & COMPANY
Pasadena, California
June 29, 1998

F-4

CITADEL ENVIRONMENTAL GROUP, INC.
(Formerly Citadel Asset Management, Ltd.)
<TABLE>
<CAPTION>

BALANCE SHEETS
ASSETS
December 31,
Current Assets 1997 1996
<S> <C> <C>
Cash $ 1,548 $ 43,256
Note receivable from affiliate 0 50,000
Receivable from affiliate 0 69
Total current assets 1,548 93,325

Investments 0 0

$ 1,548 $ 93,325

</TABLE>

See Accompanying independent Auditor's Report
F-5

CITADEL ENVIRONMENTAL GROUP, INC.
(Formerly Citadel Asset Management, Ltd.)
<TABLE>
<CAPTION>
BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS' DEFEICT

December 31,
Current Liabilities 1997 1996
<S> <C> <C>
Accounts payable $ 102,017 $ 75,473
Payroll taxes payable 4,540 16,518
Notes payable 118,000 1,225,836
Accrued expenses 197,136 33,761
Franchise tax payable 800 0
Stock subscriptions 0 280,000
Convertible debentures 210,000 0
Total current liabilities 632,494 1,631,588
Total liabilities 632,494 1,631,588

Stockholders' deficit
Preferred stock- convertible, no par
value, authorized 1,199,000 shares,
issued and outstanding: 1,199,000
shares in 1997 and 0 shares in 1996 953,250 0

Preferred stock-series A, .01 par value,
authorized 1,500,000 shares, issued and
outstanding: 0 shares in 1997 and
1,500,000 shares in 1996 0 15,000

Preferred stock-series B, .01 par value,
authorized 1,500,000 shares, issued and
outstanding: 0 shares in 1997 and
1,500,000 shares in 1996 0 15,000

Preferred stock-series C, .01 par value,
authorized 2,000,000 shares, issued
and outstanding: 0 shares in 1997 and
2,000,000 shares in 1996 0 20,000

Common stock, no par value, authorized
25,000,000 shares, issued and
outstanding: 6,304,647 shares in
1997 and 1,784,644 shares in 1996 3,353,032 2,112,637

Accumulated deficit (4,937,228) (3,700,900)

Total Stockholders' deficit (630,946) (1,538,263)

$ 1,548 $ 93,325
</TABLE>
See Accompanying independent Auditor's Report

F-6

CITADEL ENVIRONMENTAL GROUP, INC.
(Formerly Citadel Asset Management, Ltd.)
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
Year Ended December 31,
1997 1996
Revenues:
<S> <C> <C>
Management fees - affiliate $ 45,000 $ 0
Interest income - affiliate 43,259 86
88,259 86

Operating expenses:
General and administrative expenses 571,026 247,286
Total Operating Expenses 571,026 247,286

Net loss from operations (482,736) (247,200)

Other Income/Expenses:
Provision for uncollectible from
affiliate (813,874) 0
Net Loss Before Income Tax (1,296,610) (247,200)

Provision for income tax 800 0
Net Loss Before Discontinued Operations (1,297,410) (247,200)

Income (loss) from discontinued
operations 86,020 (2,943,136)

Net loss $ (1,211,390)$ (3,190,336)

Net loss per weighted-average share
of CommonStock outstanding:
From continuing operations $ (0.24) $ (0.22)
From discontinued operations 0.01 (2.65)
Total loss per share $ (0.23) $(2.87)

Weighted-average number of common
shares outstanding 5,189,492 1,108,694
</TABLE>

See Accompanying independent Auditor's Report

F-7

CITADEL ENVIRONMENTAL GROUP, INC.
(Formerly Citadel Asset Management, Ltd.)
<TABLE>
<CAPTION>

STATEMENTS OF CASH FLOWS
Year Ended December 31,
1997 1996
Operating activities:
<S> <C> <C>
Net loss $ (1,211,390) $(3,190,336)
Adjustments to reconcile net loss to
Net cash used in operating activities:
Provision for uncollectibles from
affiliate 813,874 0
(Increase) decrease in:
Receivable from affiliate (88,258) 12,431
Increase (decrease) in:
Accounts payable 26,544 75,211
Payable to stockholders 0 (7,730)
Assumption of Tonopah debt 0 1,225,836
Franchise tax payable 800 0
Accrued expenses 151,398 50,279
Stock issued to acquire
discontinued operations 0 1,596,000

Net cash used in operating activities (307,032) (238,309)

Investing activities:
Loans to affiliates (670,000) 0
Net cash used in investing activities (670,000) 0

Financing activities:
Proceeds from the sale of
preferred stock 903,250 0
Proceeds from the sale of
common stock 1,209,910 0
Proceeds from the sale of
convertible debt 210,000 0
Decrease in notes payable (1,107,836) 0
Stock subscriptions (280,000) 280,000
Net cash provided by financing
activities 935,324 280,000

Net increase (decrease) in cash (41,708) 41,691

Cash and cash equivalents at the
beginning of the year 43,256 1,565

Cash and cash equivalents at the
end of the year $ 1,548 $ 43,256
</TABLE>

See Accompanying independent Auditor's Report

F-8

CITADEL ENVIRONMENTAL GROUP, INC.
(Formerly Citadel Asset Management, Ltd.)
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

Common Stock Preferred Stock Contri- Accumu- Stock-
------------ --------------- buted lated holders'
Shares Amount Shares Amount Capital (Deficit) (Deficit)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, 12/31/95 432,744 $476,637 $ $40,000 $(510,564) $ 6,073
Reclassify to Common 40,000 (40,000)
Correct Shares Issued 1,900
Shares Issued to
Purchase Tonopah 1,050,000 1,596,000 2,000,000 50,000 1,646,000
Net (Loss) 12/31/96 (3,190,336) (3,190,336)
Balance 12/31/96 1,784,644 2,112,637 2,000,000 50,000 0 (3,700,900) (1,538,263)
Common Shares Issued 186,667 280,000 280,000
Preferred Shares Issued 717,500 673,250 673,250
Conversion of Common (186,667) (280,000) 280,000 280,000 0
Shares Issued to
Acquire AMR 1,633,608 0 0
Conversion of Preferred
and Debt 2,840,000 1,150,000 (2,000,000) (50,000) 1,100,000
Conversion of Debt
and Interest 84,601 65,457 65,457
Preferred Dividend 24,938 24,938 (24,938) 0
Net Loss 12/31/97 (1,211,390) (1,211,390)

</TABLE>
See Accompanying independent Auditor's Report

F-9

CITADEL ENVIRONMENTAL GROUP, INC.
(Formerly Citadel Asset Management, Ltd.)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Company Organization
Citadel Environmental Group, Inc. (formerly Citadel Asset
Management, Ltd.) (the "Company") was organized on July
1, 1983 for the primary purpose of providing investment
advisory services. The Company was a registered
investment advisor under the Investment Advisors Act of
1940 until December, 1992. The Company was inactive
during 1993, 1994, and 1995. On August 12, 1996 the
Company changed its name, recommenced operations and
changed its purpose to that of an investment company
which acquires controlling and non-controlling interest in
operating companies. The Company will provide operating
capital, management advisory services, and assistance in
market development for emerging growth companies in
which it invests.

Accounting Method
The Company maintains its books and records, presents its
financial statements, and files its income tax returns utilizing
the accrual method of accounting. The accrual method
recognizes income when earned and expenses when
incurred.

Property and Equipment
Property and Equipment consisting of office furniture and
equipment are recorded at cost. Depreciation is recorded
using allowable methods over the useful lives of the assets.
All property and equipment assets were fully depreciated at
December 31, 1995 and therefore, no expense is recorded
in these financial statements.

Upon sale or retirement of property and equipment the
related cost and accumulated depreciation are eliminated
from the accounts and the resulting gain or loss is
recognized. Repairs and maintenance expenditures that do
not extend the useful lives are included in expenses during
the period they are incurred.

Principles of Consolidation

It is the Company's policy to prepare its financial
statements consolidated with subsidiaries when the
Company owns a controlling interest of 50% or more of the
outstanding voting stock in the subsidiary. The Company
will prepare its financial statements on the equity method
when the controlling interest is between 20% and 50%, or
when the controlling interest exceeds 50%, but expectation
for maintaining a controlling interest is temporary. On
investments for less than 20% the Company will present the
investment at cost.

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

Investment of Subsidiary
During 1997 the Company acquired an interest in Applied
Medical Recovery, Inc. (AMR). The acquisition has been
reported on the equity method, see Note 3 - Investments.
As of the date of this report, the financial statements of
AMR have not been audited, although they are in the
process. Because of this, the Company has decided to
attach no value to either the investment in AMR or any
monies advances to or due from AMR, see Notes 2 and
3. Upon completion of audited financial statements of
AMR a more reasonable value may be ascertained.
Selected unaudited financial information of AMR at
December 31, 1997 is as follows:

Total Assets $ 1,671,000
Total Liabilities 2,566,000
Stockholders' Deficit (895,000)
Total Liabilities and Stockholders' Deficit $ 1,671,000

For the Year ended December 31, 1997:
Revenue $ 1,382,000
Expenses (3,000,000)
Net Loss $ (1,618,000)

NOTE 2 NOTE RECEIVABLE FROM AFFILIATE

The note receivable is evidenced by a Multiple Advance
Promissory Note from AMR in an amount not to exceed
$3,500,000, bearing interest at Wells Fargo prime rate plus
two percent (2%) per annum and dated July 1, 1997, with
principal and interest due and payable on or before July 1,
1998. The note is secured by a Security Agreement on all
of the assets of AMR and its subsidiaries.

On December 31, 1996 the note receivable represented a
loan to Applied Medical Technologies, Inc., (an Arizona
Limited Liability Company), and subsequently a subsidiary
of AMR, in the amount of $50,000, bearing interest at the
rate of 10% per annum. The note was converted into the
AMR Multiple Advance Promissory Note on July 1, 1997.

Accrued interest receivable at December 31, 1997 and 1996
was $43,327 and $69, respectively.

In conjunction with the Alliance Medical Corporation
acquisition of AMR in February 1998, Citadel will cancel
this indebtedness and certain other amounts due from AMR
in exchange for 1,750,000 shares of Alliance convertible
preferred stock. See Note 9, Subsequent Event - Sale of
AMR Shares to Alliance Medical Corporation.

NOTE 3 INVESTMENTS

Tonopah Resources International, Inc., ("TRI")

On August 12, 1996 Citadel acquired all the outstanding
common stock of Tonopah Resources International, Inc.,
("TRI"). All of the outstanding common stock of TRI was
acquired for 1,050,000 shares of newly issued common
stock of Citadel, and 1,500,000 shares of Series A
Preferred, 1,500,000 shares of Series B Preferred, and
2,000,000 shares of Series C Preferred. In conjunction
with the acquisition, Citadel assumed or guaranteed
$1,134,000 of TRI indebtedness.

CITADEL ENVIRONMENTAL GROUP, INC.
(Formerly Citadel Asset Management, Ltd.)
NOTES TO THE FINANCIAL STATEMENTS

Following the acquisition, the shareholders of TRI owned
approximately 56% of the outstanding shares of Citadel's
common stock and 100% of Citadel's preferred shares.
Effective September 30, 1996 the Board of Directors of the
Company voted to discontinue the operations of TRI. In
conjunction with the discontinuance and in order to
strengthen the financial position of the Company and
encourage new investors, the Company issued 2,840,000
shares of Citadel Common Stock in exchange for all of the
Series A, B and C Preferred Stock and the cancellation of
$1,100,000 in TRI debt. On September 22, 1997, the
Company sold its equity interest in TRI to the Chairman of
the Board of Citadel for $9,250 in cash. See Note 7 -
Discontinued Operations.

Applied Medical Recovery, Inc. ("AMR")

On March 26, 1997, the Company acquired a 64.45%
interest in Applied Medical Recovery, Inc. ("AMR"), an
Arizona corporation, engaged in reprocessing and recycling
of non-critical medical instruments and devices in exchange
for 1,633,608 shares of common stock. In February 1998
Citadel agreed to tender its investment in AMR and certain
other assets to Alliance Medical Corporation ("Alliance").
Alliance was established for the sole purposes of acquiring
controlling interest of both AMR and a direct competitor,
Orris, Inc. See Note 9, Subsequent Event - Sale of AMR
Shares to Alliance Medical Corporation.

NOTE 4 NOTES PAYABLE
<TABLE>
<CAPTION>
Notes payable are as follows as of December 31, 1997 and 1996:
1997 1996
<S> <C> <C>
Unsecured promissory note payable to previous Chief
Financial Officer of Citadel dated August 1, 1997,
representing unpaid compensation, due on demand
with interest at 10%. $ 52,000 $ 0

Unsecured convertible promissory note dated August
11, 1997, due on demand with interest at 10%. (1) 30,000 0

Unsecured convertible promissory note dated September
17, 1997, due on demand with interest at 10%. (1) 10,000 0

Unsecured convertible promissory note in the amount of
$200,000 dated September 26, 1997, due March 26, 1998
with interest at 10%. Note is convertible into common
shares of Citadel based on a conversion price equal to
50% of the average closing bid price as reported by the NASD
for the ten days prior to the notice of conversion. On
December 8, 1997, $20,000 in principal and $4,000 in
accrued interest were converted into 43,144 shares of
Citadel common stock. 180,000 0

CITADEL ENVIRONMENTAL GROUP, INC.
(Formerly Citadel Asset Management, Ltd.)
NOTES TO THE FINANCIAL STATEMENTS

NOTE 4 NOTES PAYABLE (Continued)
Unsecured promissory note dated December 20, 1997, due
on demand with interest at 10%. 16,000 0

Promissory notes payable to Stockholder's of TRI, secured
by the Stock in TRI bearing interest at Prime plus 3.5%
per annum. (2) 0 1,100,000

Short term debt on related party stockholders' of TRI
assumed by the Company. (2) 0 30,000

Promissory note payable in favor of Charine Management
dated December 1, 1996 bearing interest at the rate of
10% per annum. Principal is repayable on demand with
interest Payable monthly starting January 1, 1997 and
continuing each month until the principal is fully paid.
The note is unsecured and was for services rendered in
connection with the acquisition of TRI. (2) 0 20,000

Promissory note payable bearing interest at the rate of 10%
per annum. Principal and interest are repayable on
demand. This note was assumed during the acquisition of
TRI. (2) 0 4,000

Promissory note payable to a former director of the
Company and an officer of TRI, for various loans made
and services rendered and unpaid by TRI. (2) 0 71,836

Total notes payable $ 298,000 $1,225,836
</TABLE>
________________
(1) The notes provide the lender with the option to convert
the principal and accrued interest into either Citadel
common stock at $1.00 per share or into shares of a
private placement which is to be concluded in the
Company's subsidiary, AMR, or its merged company,
if formed, at $2.00 per share.
(2) The Company had note payable obligations as of
December 31, 1996 that were assumed and or
guaranteed through the acquisition of Tonopah
Resources International, Inc. (TRI) as of August 12,
1996. The notes were retired in 1997 through the
issuance of Citadel stock. See Note 6 - Stockholders'
Equity.

Accrued interest payable at December 31, 1997 and 1996
is $ 33,803 and $33,761, respectively.

<PAGE>
CITADEL ENVIRONMENTAL GROUP, INC.
(Formerly Citadel Asset Management, Ltd.)
NOTES TO THE FINANCIAL STATEMENTS

NOTE 5 ACCRUED EXPENSES
<TABLE>
<CAPTION>
Accrued expenses are as follows as of December 31, 1997
and 1996:

1997 1996
<S> <C> <C>
Interest on notes payable $ 33,803 $ 33,761
Accrued severance 83,334 0
Accrued consulting fees 80,000 0
$ 197,137 $ 33,761
</TABLE>

On January 14, 1997 the Company entered into an
agreement with Richard Landi, accepting his retirement as
President of the Company effective February 1, 1997.
Pursuant to the agreement the Company became liable for
twelve months of full compensation from February 1, 1997
through January 1, 1998 at $8,333 per month payable bi-
monthly. The Company made payments through March 31,
1997 and due to lack of available funds has not made any
further payment to date. The remaining balance at October
31, 1997 is $83,333. The Company is seeking arbitration
to reach a mutually satisfactory settlement.

NOTE 6 STOCKHOLDERS' EQUITY

Private Placement of Convertible Preferred Stock

On April 30, 1997 the Company completed a private
placement of 717,500 units consisting of one share of no
par convertible preferred stock, one A warrant and one B
warrant, for $1.00 per unit. The preferred stock is
convertible into common stock on a one-for-one basis and
carries a 5% annual dividend payable in common shares.
Two A warrants allow the holder to purchase one share of
common stock at $1.25 per share. The warrants expire one
year from date of issuance (October 1997) or 90 days
following the registration of the underlying common shares,
whichever is greater. Two B warrants allow the holder to
purchase one share of common stock at $1.50 per share.
The warrants expire two years from date of issuance
(October 1998) or 90 days following the registration of the
underlying common shares, whichever is greater. In
conjunction with this private placement, all shareholders
who acquired stock in the Company's previous private
placement (See Private Placement - Common Stock below),
converted their common shares and warrants into preferred
stock and warrants issued in accordance with the terms of
this private placement.

On October 31, 1997 the Board of Directors authorized the
issuance of 24,938 shares of common stock in payment of
the semi annual dividend requirement on the preferred
stock.

On November 8, 1997 the Board of Directors voted to
extend the expiration dates for the Series A and B warrants
to October 1998 and October 1999, respectively.

Private Placement - Common Stock

CITADEL ENVIRONMENTAL GROUP, INC.
(Formerly Citadel Asset Management, Ltd.)
NOTES TO THE FINANCIAL STATEMENTS

NOTE 6 STOCKHOLDERS' EQUITY (Continued)
Effective September 30, 1996, the Company completed a
private placement of 186,667 units consisting of one share
of no par convertible preferred stock and one warrant, for
$1.50 per unit. The warrant allows the purchaser to
purchase one share of common stock at $3.00 per share and
expireS two years from date of issuance. In conjunction
with a subsequent private placement of preferred stock see
above, all common shares acquired under this private
placement converted their shares and warrants into
convertible preferred stock and warrants issued in
accordance with the terms of the subsequent private
placement. The common shares issuable under this
placement were not issued as of December 31, 1996 and
were accordingly shown as stock subscriptions under
current liabilities on the December 31, 1996 financial
statements.

Retirement of Series A, B, and C Preferred

The Company issued 2,840,000 shares of Citadel Common
Stock during fiscal 1997 in exchange for all of the Series
A, B and C Preferred Stock issued in conjunction with the
TRI acquisition and the cancellation of $1,100,000 in
assumed TRI indebtedness.

Accrued Interest

Subsequent to December 31, 1996 and pursuant to the
Company's Board of Directors meeting held October 21,
1996 the Company issued 21,457 shares of Common Stock
as partial payment on the accrued interest as of December
31, 1996.

NOTE 7 DISCONTINUED OPERATIONS

Effective September 30, 1996 the Board of Directors of the
Company voted to discontinue the operations of TRI. In
conjunction with the discontinuance, and in order to
strengthen the financial position of the Company and
encourage new investors, the Company issued 2,840,000
shares of Citadel Common Stock during fiscal 1997 in
exchange for all of the Series A, B and C Preferred Stock
and the cancellation of $1,100,000 in TRI debt. On
September 22, 1997, the Company sold its equity interest
in TRI to the Chairman of the Board of Citadel for $9,250
in cash and contingent consideration of $100,000.

Discontinued operations for the years ended December 31,
1997 and 1996 includes the following:

1997 1996
Value of Citadel common and preferred
stock issued $ 0 $ (1,646,000)
Debt (assumed) retired 81,836 (1,134,000)
Subsequent debt incurred 0 ( 71,836)
Accrued interest on above debt 0 (33,761)
Write-off of loan to TRI, net of
repayments 0 (61,539)
Gain on Sale 9,251 0
$ 91,087 $ (2,947,136)

CITADEL ENVIRONMENTAL GROUP, INC.
(Formerly Citadel Asset Management, Ltd.)
NOTES TO THE FINANCIAL STATEMENTS

NOTE 7 DISCONTINUED OPERATIONS (Continued)
In conjunction with the discontinuance of TRI, certain
subsidiaries of TRI were sold. Despite the sale of these
subsidiaries, certain liabilities at the subsidiary level could be
asserted to be Citadel liabilities. These contingent liabilities
related to the disposal of TRI subsidiaries aggregate
approximately $1,000,000. See Note 10 - Contingent
Liability.

NOTE 8 GOING CONCERN

The Company's continued existence is in doubt. The
Company has not had any significant operating revenues in
several years and as of December 31, 1997 the Company does
not own any liquid assets that would generate any operating
revenues.

Management believes that actions subsequent to December
31, 1997 and that were started before December 31, 1997 will
correct their financial requirements and provide the necessary
funds to acquire the assets needed to generate the required
operating revenues and therefore, be able to recover from
prior operating losses.

NOTE 9 SUBSEQUENT EVENTS

Subsequent Event - Sale of AMR Shares to Alliance
Medical Corporation.

In March 1997, the Company acquired controlling interest in
Applied Medical Recovery, Inc. in exchange for Citadel
Common Stock. At the time of the acquisition, it was
anticipated that a subsequent business combination involving
AMR would occur in preparation for an anticipated initial
public offering.

In February 1998 Citadel agreed to sell its investment in AMR
and certain other assets to Alliance Medical Corporation
("Alliance"). Alliance was established for the sole purposes of
acquiring controlling interest of both AMR and a direct
competitor, Orris, Inc. Concurrent with Citadel, the majority
shareholders' of Orris agreed to tender their shares and certain
other assets to Alliance. In conjunction with the acquisition of
AMR and Orris, Alliance commenced an offering of up to
1,000,000 shares of its common stock at approximately $2.00
per share and a tender offer for the remaining AMR and Orris
shares. Citadel received 545,035 shares of Alliance common
stock in exchange for its equity interest in AMR and
1,750,000 shares of Alliance convertible preferred stock in
exchange for $720,000 in AMR loans, related accrued interest
of $43,328 and accrued management fees of $45,000. The
shareholders of Orris received 1,000,000 shares of Alliance
common stock and 1,750,000 shares of Alliance convertible
preferred stock in exchange for certain assets.

CITADEL ENVIRONMENTAL GROUP, INC.
(Formerly Citadel Asset Management, Ltd.)
NOTES TO THE FINANCIAL STATEMENTS

NOTE 9 SUBSEQUENT EVENTS (Continued)

The Alliance private placement resulted in the issuance of
approximately 3,000,000 common shares and 3,500,000
convertible preferred shares, reducing Citadel's percentage
ownership in Alliance to 18%, or 35% assuming conversion of
the preferred and no issuance of the shares in escrow. As this
business combination involving AMR was anticipated when
Citadel made its initial investment, it was expected from the
onset that Citadel's control position in AMR would only be
temporary. Accordingly, AMR is reflected on the equity
method on the December 31, 1997 balance sheet of Citadel.
No value has been attributed to this transaction due to the lack
of audited financials of AMR at December 31, 1997.

NOTE 10CONTINGENT LIABILITY

NOTE 11 LITIGATION

The Company is presently involved in legal arbitration involving a past
president regarding the payment of amounts due under a severance agreement.
See Note 5 Accrued Expenses.

In December 1997 an individual filed a complaint against the Company alleging
non payment of a $100,000 finders fee relating to the AMR acquisition and
seeking payment plus accrued interest from March 26, 1997. Management
believes that the allegations are without merit and intends to vigorously
defend the Company in this matter. The Company has not accrued any provision
for this claim.

The Company is not a party to any other pending legal proceedings which
management believes could have a material adverse effect on its financial
position.