UNITED STATES
                     SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C.  20549

                                  FORM 10-K

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


For Fiscal Year Ended                          Commission File Number 0-13318
December 31, 1998


                           STAR TECHNOLOGIES, INC.
           (Exact name of registrant as specified in its charter)


            Delaware                                            93-0794452
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                            Identification No.)


                           1151-A Seven Locks Road
                          Potomac, Maryland  20854
                  (Address of principal executive offices)
                                 (Zip Code)


                               (301) 315-0240
            (Registrant's telephone number, including area code)

Securities registered pursuant        None
to Section 12(b) of the Act:

Securities registered pursuant        Common Stock, $.01 par value
to Section 12(g) of the Act:              (Title of each class)   


         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 by check mark if disclosure of delinquent filers pursuant 
to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this form 10-K.

                           Yes   X         No     

         The aggregate market value of voting stock held by non-affiliates of 
the registrant as of March 24, 1999 was $5,255,000 based on the closing sale 
price as reported by the OTC Bulletin Board.  22,060,384 shares of Common 
Stock were outstanding as of March 24, 1999.

<PAGE>
Document incorporated by reference:

1.   Portions of the Registrant's definitive Proxy Statement for its Annual 
     Meeting to be held May 20, 1999, are incorporated by reference into Part 
     III of this Report on Form 10-K.


                                   PART I

     This annual report on Form 10-K for the year ended December 31, 1998 
contains forward-looking statements (as defined in Section 21E of the 
Securities Exchange Act of 1934) that are subject to risks and uncertainties.  
Forward-looking statements relate to, among other things:  (1) the outcome of 
our growth strategy, (2) anticipated new product introductions and market 
acceptance, (3) future liquidity and capital expenditures, (4) the ability to 
obtain financing and service debt and other obligations, and (5) the 
projected growth of the document imaging industry.  You may identify these 
statements by forward-looking words such as "may," "will," "expects," 
"anticipates," "believe," "estimate," "plan," "scheduled," "potential," and 
similar words.  We have based these statements on our current expectations 
about future events.  Although we believe that our expectations reflected in 
or suggested by our forward-looking statements are reasonable, we cannot 
assure you that we will achieve these expectations.  Our actual results and 
events may differ materially from what we currently expect.  Important 
factors that could cause our actual results to differ materially from the 
forward-looking statements in this annual report on Form 10-K are set forth 
in the "Risk Factors" and "Management's Discussion and Analysis of Financial 
Condition and Results of Operation" sections of this annual report on Form 
10-K.  All forward-looking statements attributable to us are expressly 
qualified by these cautionary statements.

Item 1.  Business

GENERAL

     Star Technologies, Inc. ("Star" or the "Company") provides products and 
services for government and commercial users involved in data capture, image 
capture and document imaging.  Its PowerScan, Inc. ("PowerScan") subsidiary 
develops image capture and image processing software and services.  Its 
Curran Data Technologies, Inc., ("CDT") subsidiary provides full-service data 
entry and document imaging services.  Star's long-term growth plan is to 
build market presence in the document imaging market by forging key strategic 
and marketing alliances, developing new products and capabilities, and 
through strategic acquisitions and technology partnerships.

Products and Services
     On July 30, 1997, PowerScan acquired certain assets and software 
technology for high-speed, high-volume document capture and processing from 
Intrafed, Inc.  (See Note 3 to the consolidated financial statements.)  The 
technology purchased included PowerScan(R) and StageWorks(R), document 
capture and image processing software.
     PowerScan(R) is a leading software for high-speed and high volume 
document capture.  This easy-to-use, off-the-shelf document imaging software 
drives and controls image scanners with a single, common user interface.  
This gives the software the flexibility to operate with scanners produced by 
leading manufacturers - from Bell & Howell, BancTec, Fuji, Fujitsu, Kodak, 
Panasonic, Ricoh, Siemens-CGK and others - at the rated speed of the scanner.  
PowerScan runs on the Windows/NT platform.  Its scanning and 

                                     -1-
<PAGE>
viewing features provide quality, high-speed images with the ability to view 
every nth image for image quality.  PowerScan software provides access to 
most scanner features, and lets the user index batches and perform visual 
quality checks during scanning.
     StageWorks is a post-scan, image processing system that provides 
advanced image processing functions, called stages, in a single system.  Some 
of these stages include quality control, image enhancement, optical character 
recognition, indexing and formatting.  The StageWorks system is scalable from 
a single-user system to a multi-user, networked system as the customer's 
needs expand, while maintaining the same user interface.  The StageWorks 
family of products includes Desktop, Office and Industrial.  Desktop and 
Office are single-user systems.  Desktop is an entry-level solution for 
low-end volume applications.  Office allows the operator to add specialized 
functions, such as Bates numbering or Bar Code reading.  Industrial is a 
networked system that automatically transfers image batches from 
stage-to-stage (StageFlow(TM)).  Industrial can process multiple image 
batches through many StageFlows simultaneously.  StageWorks also operates on 
the Windows/NT platform.
     In April 1999 at the Association for Information and Image Management 
(AIIM) annual Conference, PowerScan will be introducing Integrated Digital 
Environment Access ("IDEA"), an important new family of software products for 
the capture and processing of digital objects in a fully integrated 
environment.  IDEA was built specifically for the way businesses communicate 
and manage knowledge in today's digital economy.  In today's information 
collection solutions, capturing business documents alone is not enough.  
These solutions must deal seamlessly with data from scanners, faxes, e-mail, 
electronic forms as well as digital input from video, voice and audio files, 
and then be able to further process those objects in an integrated 
environment.  IDEA is designed to address such user requirements to provide 
an integrated platform for the processing of digital objects.  With IDEA, 
users will now be able to capture and process not only paper and film, but 
also other digital objects such as audio, visual, and electronic objects, in 
a single, integrated environment.  Using the digital object as the basic 
building block in the system, users can quickly and easily "snap in" 
additional capture technologies such as forms and item processing.  The 
system is Windows/NT based and was designed and developed using COM/DCOM 
object programming.  IDEA is distinguished by its use of non-proprietary ODBC 
databases.  The Company anticipates shipping the first production units in 
early May 1999.
     In October 1997, Star acquired CDT, a data entry and document imaging 
services company located in Indianapolis, Indiana.  (See Note 3 to the 
consolidated financial statements.)  CDT's comprehensive services include:  
data entry, image assisted data entry, also referred to as key from image, 
forms processing and reject repair, backfile conversion, automated data entry 
via Optical Character Recognition ("OCR")/Intelligent Character Recognition 
("ICR"), document imaging, EDI telecommunications, scanning and archival 
storage and retrieval.  Organizations in the private and public sectors use 
CDT for a broad range of image and data capture applications, including the 
processing of medical and insurance claims, state taxes, customer orders, 
loan and mortgage applications, and personnel records, among other 
applications.

History
     Star has historically been a supplier of performance-enhancing computing 
products and solutions for the image and signal processing marketplace, 
principally for medical imaging.  In fiscal 1992, the Company entered into a 
joint development agreement with GEMS to develop the next generation of GEMS' 
medical imaging product.  From inception of the original 1984 contract 
through May 1995, sales to GEMS represented a substantial share of Star's 
business.  In fiscal 1995, GEMS informed the Company that it did not intend 
to purchase additional units after May 1995.  The Company believed that GEMS 
was obligated to continue to obtain its requirements from the Company beyond 
those volumes ordered, and filed a demand for arbitration, in accordance with 
the terms of the development agreement.  The arbitration panel awarded Star 
$9.1 million in March 1996.  GEMS paid Star $9.4 million, which included 
interest, in August 1996.

                                     -2-
<PAGE>
     In fiscal 1994, the Company began research and development work on new 
products for the medical image and information management market.  In July 
1997, the Company sold this technology to CompuRAD, Inc., now Lumisys, 
Incorporated.

CUSTOMERS

     Star has more than 500 installations, in the private and public sectors, 
for its PowerScan and StageWorks software which perform a broad range of 
cross-industry applications including claims processing, litigation support, 
intelligence analysis and records management.  The Company's software 
solutions are used worldwide by a wide range of commercial and government 
customers.  The Company's data entry services provide processing for medical 
and insurance claims, state taxes, order processing, loan and mortgage 
applications, and personnel records, among other applications.
     No single customer accounted for more than 10% of the Company's 
consolidated revenue for the year ended December 31, 1998.

SALES, MARKETING AND DISTRIBUTION

     Star markets and distributes its products and services through 
independent distributors, value-added resellers ("VARs"), integrators, OEMs 
and its own direct sales force.  Sales teams are organized geographically, as 
well as by certain vertical markets and applications.  The Company has 
expanded its sales force geographically by opening sales offices in Houston, 
Dallas, Los Angeles and Boston.  Additional offices are planned for Chicago 
and Atlanta.  The Company intends to strengthen its distribution channel by 
increasing the number of VARs, distributors and integrators who will 
integrate the Company's products into their end users applications.  The 
Company has established relationships with OEMs who offer the Company's 
software products with their scanners using their own direct and channel 
distribution sales forces.  The Company has targeted additional OEMs with 
which it will attempt to establish similar relationships over the next fiscal 
year.  The Company expects sales and marketing expenses will continue to 
increase in the future as the Company expands its marketing programs and 
sales coverage of key markets.

PRODUCT MAINTENANCE AND CUSTOMER SERVICE

     Star believes that responsive technical support of its products and 
customer service is essential to support customer requirements.  The Company 
has an internal customer service department that handles installation, 
maintenance and service requirements.  The Company provides product 
maintenance and support on a contractual basis through both telephone and 
on-site support.  The majority of inquiries are handled by telephone, with 
visits to the customer's facilities as needed.  Customers with software 
maintenance coverage receive unspecified when-and-if deliverable software 
upgrades from the Company.  In addition, the Company provides its resellers 
with product support and comprehensive training programs.
     To the extent that the installed base of its products grows, the Company 
anticipates that the customer service function will become a more significant 
source of recurring revenue.  Costs incurred by the Company to supply 
maintenance and support services are charged to cost of revenue.  The Company 
currently provides a warranty of 90 days on its software.  The Company has 
not experienced any significant maintenance problems or unusual warranty 
expenses to date.

                                     -3-
<PAGE>
     Maintenance and customer service revenue as a percentage of total 
revenue was approximately 22% for the year ended December 31, 1998 ("fiscal 
1998"), 44% for the nine months ended December 31, 1997; and 45% for the year 
ended March 31, 1997 ("fiscal 1997").  The lower percentage for the year 
ended December 31, 1998 is due to higher total revenue.

BACKLOG

     Star typically ships its product within a short period of time after 
acceptance of orders, which is common in the software industry.  The 
Company's service operation typically operates under contracts for a 
specified time period or on a project-oriented basis.  Accordingly, the 
Company does not consider its level of backlog to be a significant or 
important indicator of future revenue or earnings.

RESEARCH AND DEVELOPMENT

     Star is committed to technological development to enhance its existing 
software products and services, to maintain the competitiveness of its 
products and services, and to develop or acquire software products that 
satisfactorily meet user needs.  The Company reviews customer feedback on its 
existing products and works with customers and potential customers to 
anticipate future functionality requirements, as part of its product 
development efforts.
     Research and development expenditures totaled $865,000 in fiscal 1998, 
$601,000 for the nine months ended December 31, 1997, and $1.1 million in 
fiscal 1997.  The Company currently expenses all software development costs.  
The Company anticipates that it will continue to make substantial investments 
in its research and development activities.

COMPETITION

     The document imaging market is highly competitive and characterized by 
rapid technological advances.  Frequent new product introductions and 
enhancements, increased capabilities and applications, and improvements in 
the relative price/performance of available products and services are common 
in the industry.  Other important competitive factors include product and 
service quality, reliability, and ease of use, marketing and distribution 
capability, and post-sale support.
     Star has a number of current and potential competitors for its products 
and services, many of which have significantly greater financial, technical, 
marketing and other resources than does the Company.  The Company expects 
additional competition from other established and emerging companies as the 
document imaging market continues to develop and expand.  The Company's 
principal competitors for its software products include Kofax Image Products, 
Inc. and Input Software, Inc.  A significant source of competition for its 
service revenue is the in-house document handling capability of the Company's 
targeted client base, as well as numerous outsourcing and data entry 
companies.  The Company expects that competition will increase as a result 
of, among other things, software industry consolidations.  Increased 
competition could result in additional price reductions, reduced margins and 
loss of market share, which could materially adversely affect the Company.  
There can be no assurance that the Company will be able to compete 
successfully against current and future competitors or that competitive 
pressures faced by the Company will not materially adversely affect its 
business, operating results and financial condition.


                                     -4-

<PAGE>
PROPRIETARY RIGHTS

     Star considers many of the principal elements of the design of its 
software to be valuable trade secrets and confidential proprietary 
information.  The Company relies on a combination of trade secret, copyright 
and trademark laws, nondisclosure and other contractual agreements and 
technical measures to protect its proprietary rights in its products.  In 
certain limited circumstances, the Company has obtained, and plans to 
continue to seek, patents on certain of its proprietary products and 
components.  There can be no assurance that the steps taken by the Company 
will prevent misappropriation of its technology, and such protections may not 
preclude competitors from developing products with features similar to the 
Company's products.  In addition, effective copyright and trade secret 
protection may be unavailable or limited in certain foreign countries.  The 
Company believes that its products and trademarks do not infringe upon the 
proprietary rights of third parties.  There can be no assurance, however, 
that third parties will not assert infringement claims against the Company in 
the future or that such claims will not require the Company to enter into 
royalty arrangements or result in costly litigation.  Because the document 
imaging industry is characterized by rapid technological change, the Company 
believes that factors such as the technological expertise and creative skills 
of its personnel, new product developments, frequent product and service 
enhancements, name recognition and reliable product maintenance are more 
important to establishing and maintaining a technology leadership position 
than various legal protections of its technology.

PERSONNEL

     At March 12, 1999, Star had 168 full- and part-time employees and 
contractors, of which 16 were engaged in engineering and research and 
development; 9 in marketing and sales; 128 in service and operations; and 15 
in general management, finance and administration.

EXECUTIVE OFFICERS

     Star's executive officers are as follows:

     Name                   Age   Position
     -----------------------------------------------------------------------
     Robert C. Compton      51    Chairman of the Board, President
                                     and Chief Executive Officer
     Carol L. Curran        54    Executive Vice President,
                                     President, CDT, Inc.
     Curtis D. Abel         63    Vice President,
                                     President, PowerScan, Inc.
     Brenda A. Potosnak     36    Vice President of Finance & Administration,
                                     Chief Financial Officer, Treasurer &
                                     Secretary
     Philip A. Cannon       52    Vice President of Technology

     Robert C. Compton was elected Chairman of the Board in March 1990; he 
has served as Chief Executive Officer since October 1989, and as President 
since June 1988.  Formerly, he served as Executive Vice President and Vice 
President - Finance, Administration and Corporate Development.  Prior to 
joining the Company in 1985, he served for 17 years in various management, 
financial and corporate auditing positions at General Electric Company.

                                     -5-
<PAGE>
     Carol L. Curran was appointed an Executive Vice President of Star and 
President of Curran Data Technologies in October 1997.  She founded CDT in 
1988 and served as its Chief Executive Officer until the sale of CDT to Star 
in October 1997.  Previously, she was a division manager for Anacomp from 
1980 to 1988.  She has been in the document processing business for more than 
25 years.
     Curtis D. Abel was appointed a Vice President of Star and President of 
PowerScan in April 1998.  Mr. Abel has over 30 years of experience with 
successful imaging and computer companies.  Before joining PowerScan, Mr. 
Abel was Vice President of Sales and Marketing of Mitek Systems, Inc.  Prior 
to his association with Mitek Systems, Mr. Abel was Vice President of Sales 
and Marketing at Recognition Research, Inc., Scan-Optics, Inc., Intrafed, 
Inc. and Motorola Computer Systems.
     Brenda A. Potosnak was appointed Vice President and Chief Financial 
Officer in August 1996.  She has served as Treasurer and Secretary since 
March 1995.  Previously, she served as Controller and Principal Accounting 
Officer.  Prior to joining the Company in November 1992, she served as 
Controller at Sporting Life, Inc. from 1991 to 1992 and as Assistant 
Controller at Kay Jewelers, Inc. from 1988 to 1990.  Prior to that, she was 
an auditor with Arthur Young & Co.
     Philip A. Cannon was appointed Vice President of Technology in May 1998.  
Previously, he served as Director of Business Development, and was involved 
with Star's business refocus from the medical imaging market to the broader 
document imaging market.  Prior to that, he managed Star's successful OEM 
relationship with GE Medical Systems for more than a decade.  In the early 
1980's, he was involved in the development of Star's initial array processor 
product, a specialized high-speed computer used for high-performance data and 
image processing applications.  Mr. Cannon joined the Company in 1981.

RISK FACTORS

Potential Inability to Finance Future Capital Needs; Operating Losses
     Star's operations and acquisitions to date have consumed substantial 
amounts of cash.  The Company incurred operating losses of $3.0 million, $2.2 
million and $4.3 million for the fiscal year ended December 31, 1998, for the 
nine months ended December 31, 1997 and for the fiscal year ended March 31, 
1997, respectively.  The Company spent $2.4 million in connection with the 
acquisition of PowerScan and CDT in the nine months ended December 31, 1997.  
The continuing operation of the Company's business, and the continued 
development and commercialization of its technology, products and services, 
will require the availability of additional funds for the foreseeable future.  
The Company's ability to obtain cash adequate to fund its needs depends 
generally on the results of its operations and the availability of financing.  
Without continued increases in revenue or obtaining additional financing, the 
Company may be required to make additional reductions in operating expenses 
or sell certain assets, which may have a material adverse effect on the 
Company.  If the Company has insufficient funds for its needs, the Company 
may not be able to raise additional funds on favorable terms, if at all, or 
may not be able to do so on a timely basis.  Failure to obtain additional 
funds when needed could materially adversely affect the Company.
     As of March 31, 1999, the Company has received $225,000 from its 
officers and directors for short-term cash requirements.  (See Management's 
Discussion and Analysis - Liquidity.)  In March 1999, the Company sold its 
internet domain name, star.com, for $125,000.  In view of the Company's 
additional liquidity requirements, the Company may continue to seek to sell 
additional equity or convertible debt securities or pursue debt financing 
arrangements.  There can be no assurance that the Company will be able to 
consummate any such transaction or raise adequate funds from such transaction 
to meet the Company's cash needs.

                                     -6-
<PAGE>
Limited Software Operating History; Future Operating Results Uncertain
     Star has operated in the document imaging market since July 1997.  
Accordingly, the Company's prospects must be considered in light of the risks 
and difficulties frequently encountered by companies in the early stage of 
development, particularly companies in new and rapidly evolving markets.  To 
address these risks, the Company must, among other things, respond to 
competitive developments, continue to attract, retain and motivate qualified 
personnel and continue to improve its products.  The Company has not achieved 
operating profitability and has incurred operating losses in each quarter 
from its entry into the document imaging market through the quarter ending 
December 31, 1998.  The Company expects to continue to devote substantial 
resources to research and development and sales and marketing and as a result 
will need to achieve significant quarterly revenue to achieve profitability.  
In particular, the Company intends to continue to hire additional sales and 
research and development personnel in 1999 and beyond, which the Company 
believes is required if the Company is to achieve significant revenue growth 
in the future.  Although the Company's revenue generally has increased in 
recent periods, there can be no assurance that the Company's revenue will 
grow in future periods, that it will grow at historical or market rates or 
that the Company will become profitable on a quarterly or annual basis in the 
future.

Concentration of Business In Document Imaging Market
     Substantially all of Star's revenue in the foreseeable future will be 
attributable to sales of document imaging products and services.  The 
document imaging market is a rapidly evolving market, and it may not continue 
to grow at all or at historical rates.  If the document imaging market fails 
to grow or grows more slowly than the Company currently anticipates, the 
Company's business, operating results and financial condition could be 
materially and adversely affected.

Product Concentration
     The Company currently expects the sale of its software products to 
account for a substantial amount of the Company's revenue and revenue growth 
for the foreseeable future.  The Company's future operating results are, 
therefore, heavily dependent upon continued market acceptance of its imaging 
software products and enhancements to these products.  Consequently, a 
decline in the demand for, or market acceptance of, the Company's imaging 
software products as a result of competition, technological change or other 
factors, would have a material adverse effect on the Company's business, 
operating results and financial condition.

Risk of Technological Change and Uncertainty of Product Development
     The document imaging industry is characterized by rapid technological 
change.  The introduction of products and services embodying new technology 
and the emergence of new industry standards can create downward price 
pressure and render existing products and services obsolete and unmarketable.  
The Company's future success will depend on its ability to address the 
increasingly sophisticated needs of its customers by enhancing its current 
products and services and by developing and introducing on a timely basis new 
products and services that keep pace with technological developments and 
emerging industry standards.  There can be no assurance that the Company will 
be successful in developing and marketing product and service enhancements or 
new products and services that respond to technological change or evolving 
industry standards, that the Company will not experience difficulties or 
expenses that could delay or prevent the successful development, introduction 
and sale of these products and services, or that any new products, product 
enhancements or services will achieve market acceptance.  If the Company is 
unable, for technological or any other reason, to develop, introduce, and 
sell its products and services in a timely manner, the Company's business, 
operating results, and financial condition could be materially and adversely 
affected.

                                     -7-
<PAGE>
Probable Fluctuations in Operating Results
     Results for any period are not necessarily indicative of the results 
that Star may achieve for any subsequent period.  Quarterly or annual results 
may vary materially as a result of a number of factors, including, among 
others:  the size or timing of customer orders; the gain or loss of material 
customer relationships; the timing of new product or service introductions; 
changes in pricing policies by the Company, its competitors or suppliers; 
market acceptance of new or enhanced products or services of the Company; 
delays in the introduction of new products or product enhancements by the 
Company, the Company's competitors or other providers of hardware or software 
for the document imaging market; and fluctuations in general economic 
conditions.  In addition, since a significant portion of the Company's 
service revenue is generated on a project-by-project basis, the timing or 
completion of material projects could result in fluctuations in the Company's 
results of operations for particular periods.  Any of these factors may cause 
the Company's results of operations in some future quarters to be below the 
expectations of securities analysts and investors or operating results of 
prior quarters, which could have a material and adverse effect on the market 
price of the Company's common stock.
     Because quarterly revenue is dependent largely on the volume and timing 
of orders received during such quarter, which may be difficult to forecast, 
and the Company's operating expenses are based in part on its estimate of 
future revenue, the Company may be unable to adjust its spending in a timely 
manner to compensate for a shortfall in revenue.  Any significant decrease in 
customer orders, for any reason, could have an immediate material and adverse 
effect on the Company's business, operating results and financial condition.

Risks Associated With Acquisitions
     The Company's long-term growth plan includes building market presence in 
the document imaging market through strategic alliances and the acquisition 
of additional document imaging technologies or businesses that will 
complement its existing businesses.  There can be no assurance that the 
Company will be able to pursue acquisitions without additional financing, 
that the Company will be able to identify or reach mutually agreeable terms 
with acquisition candidates and their owners, or that the Company will be 
able to manage profitably its previously-acquired businesses or any 
additional businesses or to integrate successfully such businesses into the 
Company without substantial costs, delays or other problems.  The Company's 
recent acquisitions involve, and any future acquisitions will involve, a 
number of risks commonly encountered in such transactions, including:  
difficulties associated with assimilating the personnel and operations of an 
acquired business; the Company's potential inability to achieve expected 
financial results or strategic goals for the acquired product line or 
business; the potential disruption of the Company's ongoing business; the 
diversion of significant management and other Company resources; adverse 
short-term effects on the Company's operating results; increased dependence 
on the retention, hiring and training of key personnel; and risks associated 
with unanticipated problems or legal liabilities.  Some or all of these risks 
could have a material and adverse effect on the Company's business, operating 
results and financial condition.

Reliance on Key Personnel
     Star's operations are dependent on the continued efforts of its key 
technical and senior management personnel.  The Company's operations are also 
dependent on its continuing ability to attract and retain highly qualified 
technical, managerial and operational personnel.  Competition for such 
personnel is intense and there can be no assurance that the Company will 
retain its key managerial and technical employees or 

                                     -8-
<PAGE>
that it will be successful in attracting, assimilating or retaining other 
qualified technical, managerial and operational personnel in the future.  If 
any of these people is unable or unwilling to continue in his or her present 
role, or if the Company is unable to attract and retain other qualified 
personnel, the Company's business, operating results and financial condition 
could be materially and adversely affected.

Risk of Business Interruptions
     Certain of Star's service operations are performed at a single location 
and are dependent on continuous computer, electrical and telephone service.  
As a result, any interruption of such service would disrupt the Company's 
day-to-day operations and could have a material adverse effect on the 
Company's business, operating results and financial condition.  There can be 
no assurance that a fire, flood, power loss, telephone service loss or other 
event affecting one or more of the Company's facilities would not interrupt 
or disable these services.  Any significant damage to any such facility or 
other failure that causes significant interruptions in the Company's 
operations may not be covered by insurance.  Any uninsured or underinsured 
loss could have a material and adverse effect on the Company's business, 
operating results and financial condition.

Risk of Defects
     The Company has occasionally discovered errors or defects in its 
products after their commercial shipment.  To date, such defects and errors 
have not been significant; however, there can be no assurance that 
significant defects and errors will not be discovered in new products, 
existing products or in new versions or enhancements of existing products, 
and if discovered, will be successfully and timely corrected.  Discovery of 
errors or defects in the Company's products after commercial shipment could 
result in adverse customer reaction, negative publicity regarding the Company 
or its products, a delay in or failure to achieve market acceptance or a 
diversion of management and product development resources, any of which could 
have a material and adverse effect on the Company's business, operating 
results and financial condition.

Marketability of Common Stock
     In August 1998, the Company's common stock was delisted from the Nasdaq 
SmallCap Market.  The Company's common stock is currently being traded on the 
Over The Counter ("OTC") Bulletin Board of the National Association of 
Securities Dealers, Inc. under the symbol STRR.
     Because the Company's common stock is no longer listed on Nasdaq, 
trading in the Company's common stock is subject to certain rules promulgated 
under the Securities Exchange Act of 1934 ("Exchange Act"), which impose 
additional disclosure and various sales practice requirements on 
broker-dealers in connection with any trades involving a stock defined as a 
"penny stock" (generally, any non-exchange listed equity security that has a 
market price of less than $5.00 per share, subject to certain exceptions).  
Under Exchange Act Rule 15g-9 broker-dealers must, prior to selling a penny 
stock, (i) obtain from the investor information concerning the person's 
financial situation, investment experience and investment objectives, (ii) 
reasonably determine that transactions in penny stocks are suitable for such 
investor and that such investor (or such investor's independent adviser in 
the transaction) has sufficient knowledge and experience in financial matters 
so as reasonably to be expected to be capable of evaluating the risks of 
transactions in penny stocks, and (iii) deliver a written statement, which 
must be signed and returned to the broker-dealer by the investor, setting 
forth among other things the basis on which the broker-dealer approved the 
investor's account for the transaction.  If the penny stock rules are not 
followed by a 

                                     -9-

<PAGE>
broker-dealer, the investor has no obligation to purchase the shares.  The 
additional burdens imposed upon broker-dealers by such requirements may 
discourage broker-dealers from effecting transactions in the Company's common 
stock and the ability of purchasers of the Company's common stock to resell 
such stock in the secondary market.

Year 2000 Issues
     Star's software products are Year 2000 compliant as long as the 
operating system on which they are used is Year 2000 compliant.  The Company 
has made reasonable efforts to ensure that the third-party software sold with 
its products is Year 2000 compliant.  Based upon its efforts, the Company is 
confident that its use of third-party software will have no effect on its 
software products' ability to meet Year 2000 requirements.
     With respect to its internal computer systems, the Company's Year 2000 
corrective actions include reprogramming impacted software when appropriate 
and feasible, obtaining vendor-provided software upgrades when available and 
completely replacing impacted systems when necessary.  The Company expects to 
implement successfully the systems and programming changes necessary to 
address Year 2000 issues with respect to its internal systems by the fourth 
quarter of 1999.  The Company has not incurred significant costs to date and 
does not believe that the cost of additional actions will have a material 
adverse effect on its financial condition or results of operations.  
Contingency plans are being developed which include the purchase of 
off-the-shelf accounting software in the event existing systems cannot be 
corrected.  Although the Company is not aware of any material operational 
issues or costs associated with preparing its internal systems for the Year 
2000, the failure of the Company or its distributors, resellers, suppliers, 
manufacturers and customers to complete the conversions or upgrades necessary 
to fully address the Year 2000 issues in a timely manner could have a 
material adverse effect on the Company's business, results of operations, 
cash flows and financial condition.

Item 2.  Properties

     The Company leases approximately 12,000 square feet of office space in 
Indianapolis, Indiana under a lease expiring in June 2000; and 27,000 square 
feet of office space in Potomac, Maryland under a lease expiring in July 
2005.  The Company relocated its corporate headquarters from Sterling, 
Virginia to Potomac, Maryland in June 1998.

Item 3.  Legal Proceedings

     Star is from time to time a party to litigation arising in the normal 
course of its business.  Such claims, even if lacking merit, could result in 
the expenditure of significant financial and managerial resources.  
Management believes that no currently pending or threatened actions will have 
a material and adverse effect on the financial condition or results of 
operations of the Company.

Item 4.  Submission of Matters to a Vote of Security Holders

     None.








                                    -10-

<PAGE>
                                   PART II

Item 5.  Market for the Registrant's Common Equity and
         Related Stockholder Matters

     The Company's common stock is traded on the Over-the-Counter Bulletin 
Board under the symbol STRR.  At March 23, 1999, there were approximately 
1,300 holders of record of the Company's common stock.  As a result of the 
delisting of the Company's common stock from the Nasdaq SmallCap Market in 
August 1998, investors may suffer a loss of liquidity in the shares of such 
stock.  Accordingly, there is a limited public trading market for the 
Company's shares of common stock.  Over-the-counter market quotations may 
reflect inter-dealer prices, without retail mark-up, mark-down or commission 
and may not necessarily represent actual transactions.  The table below 
represents the high and low closing prices of the common stock for the 
periods indicated during the last two fiscal years (in dollars).
<TABLE>
<CAPTION>
                                                  Year ended         Nine months ended
                                               December 31, 1998     December 31, 1997*
                                               -----------------     ------------------
                                                High        Low       High       Low
--------------------------------------------------------------------------------------
<S>                                            <C>           <C>     <C>        <C>
First Quarter..............................    1-1/2         7/8     11/32       1/4
Second Quarter.............................    1-1/16        3/8     21/32       1/4
Third Quarter..............................      1/2        7/32     2-3/8      13/16
Fourth Quarter.............................      1/2        3/16     N/A         N/A
</TABLE>
     The Company has never declared nor paid dividends on its common stock 
and anticipates that, for the foreseeable future, it will continue to retain 
any earnings for use in its business.  The Company is also restricted in the 
payment of dividends on its common stock by the rights of the holders of its 
preferred stock and certain debt holders.
     In connection with its acquisition from Intrafed, Inc., of the PowerScan 
and StageWorks software, the Company issued in September 1998, to Intrafed, 
Inc., 180,000 shares and in August 1998, to Frans Kok, 195,000 shares of its 
common stock without registration under the Securities Act of 1933, as 
amended (the "Securities Act").  In addition, the Company issued 325,000 
shares, without registration under the Securities Act, in February 1999 to 
Intrafed as the final stock issuance in connection with the acquisition.  
Such issuances of shares were exempt from registration pursuant to Section 
4(2) of the Securities Act and represented the only unregistered issuances of 
the Company's securities during the period covered by this annual report on 
Form 10-K and during the first quarter of 1999.

*Effective December 31, 1997, the Company changed its fiscal year end from 
March 31st to December 31st.  (See Note 1 to the consolidated financial 
statements.)

Item 6.  Selected Financial Data

     The following selected consolidated financial data relating to the 
Company should be read in conjunction with the Company's consolidated 
financial statements and the related notes thereto, "Management's Discussion 
and Analysis of Financial Condition and Results of Operations" and the other 
financial information included herein.  The selected financial data set forth 
below for the Company as of and for the year ended December 31, 1998, as of 
and for the nine months ended December 31, 1997, and as of and for the year 
ended March 31, 1997 are derived from the audited consolidated financial 
statements included elsewhere herein.  The selected financial data set forth 
below for the Company as of and for the nine months ended December 31, 1996 
are derived from the Company's unaudited financial statements, which are not 
included herein.  The selected financial data set forth below for the Company 
as of March 31, 1996 and 1995 and for each of the years in the two-year 
period ended March 31, 1996 are derived from the audited consolidated 
financial statements not included elsewhere herein.


                                    -11-
<PAGE>
     Results of operations for the year ended December 31, 1998 are not 
directly comparable to the results of operations for prior periods due to the 
repositioning of the Company's line of business from the medical imaging 
market to the document imaging market and the occurrence of other significant 
events since April 1, 1994.
<TABLE>
<CAPTION>
                                          Nine months ended          
                            Year ended      December 31,       Years ended March 31,  
                            December 31,  -----------------  -------------------------
(In thousands, except          1998        1997*     1996     1997     1996      1995 
  per share data)                                  (Unaudited)                        
                            ----------------------------------------------------------

Operations Statement Data:
   <S>                        <C>         <C>       <C>      <C>      <C>      <C>
   Revenue..................  $ 5,395     $ 1,706   $ 1,138  $ 1,247  $ 4,282  $21,623
   Operating income (loss)..  $(3,020)    $(2,196)  $(3,380) $(4,301) $(4,465) $   663
   Net income (loss)........  $(3,212)    $(1,552)  $ 3,331  $ 2,635  $(3,984) $ 1,193
   Net income (loss) per
     common share -
     assuming dilution......  $  (.16)    $  (.08)  $   .61  $   .58  $  (.02) $   .14

Balance Sheet Data:
   Working capital
     (deficit)..............  $(1,963)    $   482   $ 5,560  $ 5,094  $ 4,562  $ 9,399
   Property and equipment,
   net......................  $   685     $   775   $   392  $   271  $   502  $   698
   Total assets.............  $ 4,902     $ 5,663   $ 7,380  $ 6,031  $ 6,674  $13,020
   Total debt...............  $ 1,076     $    --   $    --  $    --  $    --  $    49
   Stockholders' equity.....  $ 1,133     $ 4,075   $ 6,096  $ 5,400  $ 5,208  $10,374

*Effective December 31, 1997, the Company changed its fiscal year end from 
March 31st to December 31st.  (See Note 1 to the consolidated financial 
statements.)
</TABLE>
Item 7.  Management's Discussion and Analysis of
         Financial Condition and Results of Operations

     The following discussion contains forward-looking statements (as defined 
in Section 21E of the Securities Exchange Act of 1934, as amended) which 
reflect management's current views with respect to certain future events and 
financial performance.  Actual future results and trends may differ 
materially depending upon a variety of factors, including, among others, 
those discussed below as well as those discussed under "Item 1.  
Business--Risk Factors".
     The following discussion of the Company's historical results of 
operations and its liquidity and capital resources should be read in 
conjunction with the selected financial data and the consolidated financial 
statements of the Company and related notes thereto and other financial 
information included elsewhere herein.  Effective December 31, 1997, the 
Company changed its fiscal year end from March 31st to December 31st.

Overview
     During the nine-month period ended December 31, 1997, Star Technologies, 
Inc. ("Star" or the "Company") completed a transition from providing 
performance-enhancing computing products and solutions principally for the 
medical imaging market to providing imaging solutions for the broader 
document imaging market.  In July 1997, the Company sold its medical imaging 
archival technology and, through its operating subsidiary, PowerScan, Inc. 
("PowerScan"), acquired document imaging and processing technology as its 
entry into this broader market.  Additionally, in October 1997, Star 

                                    -12-
<PAGE>
acquired Curran Data Technologies, Inc. ("CDT"), a provider of data entry 
imaging services.  See Notes 3 and 6 to the consolidated financial 
statements.  With these two acquisitions, Star provides products and services 
for government and commercial users involved in data capture, image capture 
and document imaging.
     Results of operations for the year ended December 31, 1998 are not 
directly comparable to the results of operations for prior periods due to the 
repositioning of the Company's line of business from the medical imaging 
market to the document imaging market and the occurrence of other significant 
events during prior periods.

Results of Operations - Fiscal Year Ended December 31, 1998 Compared to 
                        Twelve Months Ended December 31, 1997 (Unaudited)

     Revenue for the year ended December 31, 1998 was $5.4 million, which 
represents the first full year of revenue from sales of the document imaging 
products and services acquired during 1997.  (See Note 3 to the consolidated 
financial statements.)  Revenue for the twelve months ending December 31, 
1997 was $1.8 million, of which $1.4 million was from sales of the document 
imaging products and services, with the balance from customer service revenue 
on the Company's older medical imaging products.
     Product revenue was $2.1 million and $670,000 for the twelve months 
ended December 31, 1998 and 1997, respectively, representing 40% and 37% of 
total revenue for such periods.  Product revenue consists of revenue from the 
sale of PowerScan and StageWorks software as well as computer hardware and 
scanning equipment.  Service revenue was $3.3 million and $1.1 million for 
the twelve months ended December 31, 1998 and 1997, respectively, 
representing 60% and 63% of total revenue for such periods.  Service revenue 
consists of revenue from data entry and imaging services, maintenance, 
integration, installation and systems training provided to the Company's 
customers.  For the twelve months ended December 31, 1997, service revenue 
also included customer service revenue on the Company's older medical imaging 
products.
     Cost of revenue for the twelve months ended December 31, 1998 and 1997 
was $3 million, or 55% of total revenue, and $1.1 million, or 62% of total 
revenue, respectively.  The cost of revenue as a percentage of total revenue 
varies from period to period depending on the ratio of software revenue, 
which has a significantly lower cost than hardware revenue and revenue from 
data entry and imaging services.
         Cost of product revenue was $613,000 and $308,000 for the twelve 
months ended December 31, 1998 and 1997, respectively, representing 29% and 
46% of total product revenue in the respective periods.  Cost of product 
revenue primarily includes costs associated with the purchase of hardware 
products and scanning equipment for resale.  The Company purchases such items 
at the customer's request and does not stock an inventory of such items.  
Cost of service revenue was $2.4 million and $814,000 for the twelve months 
ended December 31, 1998 and 1997, respectively, representing 73% and 71% of 
total service revenue in the respective periods.  Cost of service revenue 
primarily includes compensation and related benefits, non-employee labor 
costs and other direct costs associated with the Company's data entry and 
imaging services.
     Research and development ("R&D") expense consists primarily of:  
compensation and related benefits; the use of independent contractors for 
development projects; and an allocated portion of general overhead costs, 
including occupancy.  At December 31, 1998, the research and development 
staff consisted of 16 employees and contractors.  The majority of product R&D 
expense for the year relates to new product development and on-going product 
enhancements.  R&D expense was $865,000 and $838,000 for the twelve months 
ended December 31, 1998 and 1997, respectively, representing 16% and 46% of 
total revenue in the respective periods.  The Company currently expenses all 
software development costs.  The decrease as a percentage of total revenue is 
due to the Company's corporate repositioning and the resultant increased 
revenue.  The Company believes that R&D expenditures, including compensation 
of technical personnel, are essential to maintaining its competitive position 
and expects these costs to increase and continue to constitute a significant 
percentage of revenue.


                                    -13-
<PAGE>
     Marketing and sales expense consists primarily of:  compensation and 
related benefits and reimbursable travel and living expenses related to the 
Company's marketing and sales personnel; advertising and marketing expenses, 
including trade shows and similar type sales and marketing expenses.  
Marketing and sales expense for the twelve months ended December 31, 1998 was 
$1.6 million, compared to $1.1 million for the same period a year ago.  The 
increase in the dollar amount of marketing and sales expense is primarily due 
to the additional marketing and sales expense associated with the Company's 
new PowerScan and CDT subsidiaries, offset in part by the elimination of 
certain costs associated with the Company's former medical imaging business.  
The Company expects sales and marketing expense will continue to increase in 
the future as the Company continues to expand sales and marketing programs 
related to its software products and services.
     General and administrative ("G&A") expense consists primarily of 
compensation and related benefits related to the Company's executive, 
administrative and financial personnel; professional expenses including 
accounting, legal and consulting and corporate expenses, including public 
company expenses and other business expenses.  G&A expense for the twelve 
months ended December 31, 1998 was $3.0 million, compared to $1.9 million for 
the same period a year ago.  The increase in the dollar amount of G&A expense 
is primarily due to additional G&A expense associated with the Company's new 
subsidiaries, including compensation and occupancy costs, as well as 
severance costs, incurred in fiscal 1998, associated with the departure of an 
officer of the Company.  During the year, the Company completed restructuring 
activities which included consolidation of its corporate headquarters with 
its PowerScan subsidiary in the third quarter of 1998 and a reduction of G&A 
personnel by 30%.
     During the twelve months ended December 31, 1998, the Company incurred 
$53,000 of net interest expense.  During the twelve months ended December 31, 
1997, the Company earned $236,000 of net interest income.
     Other expense for the twelve months ended December 31, 1998 was 
$139,000, which includes a loss of $120,000 representing an other than 
temporary decline in the market value of its Lumisys investment.  For the 
twelve months ended December 31, 1997, other income totaled $633,000 and 
included the gain on the sale of the Company's medical imaging archival 
technology in July 1997.
     The net loss for the twelve months ended December 31, 1998 was $3.2 
million compared with a net loss of $2.2 million for the twelve months ended 
December 31, 1997.  The net loss is due primarily to the corporate 
repositioning of the Company, and the associated integration of the document 
imaging operations acquired as a result of the two acquisitions discussed 
above.  In spite of the net loss, management continues to believe that the 
document imaging market is a significant market.  Management believes it has 
made investments in the talent and technology necessary to establish the 
Company in this marketplace.  However, there can be no assurance that the 
Company will be able to achieve consistent profitability on a quarterly or 
annual basis or that it will be able to sustain or increase its revenue 
growth in future periods.  Based upon the expenses associated with current 
and planned staffing levels, profitability is dependent upon increasing 
revenue.

Results of Operations - Nine Months Ended December 31, 1997 Compared to Nine 
                        Months Ended December 31, 1996 (Unaudited)

     Revenue for the nine months ended December 31, 1997 was $1.7 million, 
primarily from sales of the new document imaging products and services 
acquired, as well as customer service revenue on the older medical imaging 
products.  Revenue for the nine months ended December 31, 1996 was $1.1 
million and primarily consisted of customer service revenue on medical 
imaging products.  The Company's customer service revenue as a percentage of 
total revenue was approximately 44% and 40% for the nine months ended 
December 31, 1997 and 1996, respectively.

                                    -14-
<PAGE>
     R&D expense for the nine-month period ended December 31, 1997 decreased 
33% from the comparable period in 1996 primarily due to the sale of the 
Medical Image Management Systems ("MIMS") technology in July 1997, offset 
partially by additional R&D expense associated with the document imaging 
software.
     Marketing and sales expense for the nine months ended December 31, 1997 
increased 19% from the same prior-year period due to additional marketing and 
sales expense associated with the new PowerScan and CDT subsidiaries.  The 
increase was offset partially by lower costs, primarily relating to the sale 
of the MIMS technology in July 1997.
     G&A expense decreased 19% for the nine months ended December 31, 1997 
compared to the nine months ended December 31, 1996.  The decrease is 
primarily attributable to lower professional fees, including legal fees, 
company-wide cost reductions, and reduced corporate facility costs due to the 
reduction of the Company's leased corporate facility space for which the 
Company incurred a one-time expense in the nine months ended December 31, 
1996.  The decrease is offset in part by additional G&A expense associated 
with the new PowerScan and CDT subsidiaries.
     During the nine months ended December 31, 1997 and 1996, the Company 
earned $157,000 and $495,000, respectively, of interest income.  Interest 
income for the nine months ended December 31, 1996 included approximately 
$276,000 of interest received on the GEMS arbitration settlement.
     Other income for the nine months ended December 31, 1997 totaled 
$487,000 and is primarily related to the gain on the sale of the MIMS 
technology.  (See Note 6 to the consolidated financial statements.)  For the 
nine months ended December 31, 1996, other income totaled $6.2 million and 
included the GEMS arbitration award of $9.1 million, excluding interest, 
offset by the settlement of a patent infringement lawsuit of $2.9 million.  
(See Note 4 to the consolidated financial statements.)

Liquidity and Capital Resources

     The Company's net losses from operations and acquisitions to date have 
consumed substantial amounts of cash.  At December 31, 1998, the Company had 
a working capital deficit of $2.0 million.  The continuing operation of the 
Company's business, and the continued development and commercialization of 
its technology, products and services, will require the availability of 
additional funds for the foreseeable future.  The Company's ability to obtain 
cash adequate to fund its needs depends generally on the results of its 
operations and the availability of financing.  Without continued increases in 
revenue or obtaining additional financing, the Company may be required to 
make additional reductions in operating expenses or sell certain assets, 
which may have a material adverse effect on the Company.  If the Company has 
insufficient funds for its needs, the Company may not be able to raise 
additional funds on favorable terms, if at all, or may not be able to do so 
on a timely basis.  Failure to obtain additional funds when needed could 
materially adversely affect the Company.
     In April 1999, the Company entered into a $175,000 two-month 
subordinated note agreement with an officer of the Company.  The note is 
secured by certain assets of the Company, carries interest at 10% per annum 
and is due June 1999.
     In September 1998, the Company entered into a subordinated note 
agreement with a Director.  The note is secured by certain assets of the 
Company and totaled $125,000 at December 31, 1998.  The note, originally due 
in February 1999, was extended until August 1999.  The note bears interest at 
12% through February 1999 and 10% thereafter.  The Director has the option to 
convert the note into shares of the Company's common stock, at a 30% discount 
at the date of conversion, if the note is not repaid on the maturity date.

                                    -15-
<PAGE>
     In April 1998, the Company entered into a $750,000 working capital line 
of credit with a financial institution.  The line of credit is secured by the 
Company's accounts receivable, inventory and other assets and allows 
borrowings of up to 80% of the eligible accounts receivable balance.  The 
line of credit carries an interest rate of prime plus 3% as well as a service 
fee ranging from .75% to 1.5% of the amount borrowed.  At December 31, 1998, 
the Company had borrowed $510,000 under this line of credit and had $160,000 
available for future borrowings.  Additional available credit under this 
facility will depend on the Company generating additional revenue.
     Also in April 1998, the Company entered into a one-year $300,000 line of 
credit with a bank.  The line of credit is secured by the Company's 
short-term investment in Lumisys common stock, carries interest at prime plus 
one percent and allows borrowings of up to 70% of the Lumisys stock's market 
value.  At December 31, 1998, the Company had borrowed all that was currently 
available under this line of credit.  Such borrowings totaled $264,000 at 
December 31, 1998.  The Company anticipates renewing the line of credit at 
the end of April 1999.
     The Company has a secured promissory note with a vendor in the amount of 
$114,000 at December 31, 1998.  The note bears interest of 9.5% per annum 
through September 1998, and 12% thereafter.  The Company is currently in 
default with respect to its payment obligations under this note.  Such 
default has resulted in the creditor having the right to accelerate the 
balance due under the note and exercise other rights available under the law, 
including foreclosing on CDT's essential computer equipment serving as 
collateral for such note.  The Company is working with the creditor to 
restructure the timing of remaining payments thereunder.  There can be no 
assurances that such creditor will agree to waive all existing defaults and 
extend the timing of remaining payments due under the note.  The existence of 
such default may also activate cross-default provisions under the Company's 
working capital line of credit and its bank line of credit.
     In addition, the Company is delinquent in its payments due many vendors 
and service providers of the Company.  Certain vendors have taken actions 
against the Company, including initiating collection proceedings.  The 
Company has extended payment terms with most of these vendors as well as 
others and continues to seek to extend payment terms from additional vendors 
and service providers.  If unsuccessful, such parties may take further 
actions against the Company, including the termination of their relationship 
with the Company or the initiation of legal proceedings.
     In view of the Company's additional liquidity requirements, the Company 
is also continuing to seek to sell additional equity or convertible debt 
securities or pursue debt financing arrangements.  To date, the Company has 
no commitments, agreements or understandings with respect to additional 
financing and there can be no assurance that the Company will be able to 
consummate any such transaction or raise adequate funds from such transaction 
to meet the Company's cash needs.  As a result of the delisting of the 
Company's common stock from the Nasdaq SmallCap Market in June 1998, 
investors may suffer a loss of liquidity in the shares of such stock and the 
Company may have difficulty raising funds in the capital markets.  Further, 
the sale of additional equity or convertible debt securities could result in 
dilution to the Company's stockholders.
     The Company's Series B and Series C Senior Preferred Stock (the 
"Preferred Stock") currently accrues dividends at a rate of 10% per annum.  
To the extent declared, such dividends would be payable quarterly in the 
amount of $50,000 in cash.  Unpaid cumulative dividends in arrears on the 
Preferred Stock totaled $475,000 as of December 31, 1998.  The Company does 
not intend to declare any dividend on the Preferred Stock or Common Stock and 
intends to retain any future earnings to finance the expansion and 
development of its business.  The Company is also restricted in the payment 
of dividends on its common stock by the rights of the holders of the 
Preferred Stock and certain debt holders.
     The Company evaluates the recoverability of its goodwill whenever events 
or changes in circumstances indicate that the carrying amount may not be 
recoverable.  Recoverability is measured by a comparison of the carrying 
amount of goodwill to future 

                                    -16-
<PAGE>
net cash flows expected to be generated from the acquired business.  Since 
the acquisition, the Company has generated losses and negative cash flows.  
In the event the Company remains unprofitable, the PowerScan goodwill could 
be impaired.  The Company will continue to re-evaluate such recoverability of 
the PowerScan goodwill during each quarter of 1999.  If the asset is 
considered to be impaired, the Company will write down the asset by the 
amount by which the carrying amount of the asset exceeds fair value.  No 
impairment was determined at December 31, 1998 based on this analysis.
     Capital expenditures for the fiscal year ended December 31, 1998, for 
the nine months ended December 31, 1997, and for the fiscal year ended March 
31, 1997 were $280,000, $223,000, and $80,000, respectively.  Capital 
expenditures for the year ended December 31, 1998 and for the nine months 
ended December 31, 1997 were primarily for technology infrastructure 
enhancements for CDT.

Year 2000 Disclosure
     The Company's software products are Year 2000 compliant as long as the 
operating system on which they are used is Year 2000 compliant.  The Company 
has made reasonable efforts to ensure that the third-party software sold with 
its products is Year 2000 compliant.  Based upon its efforts, the Company is 
confident that its use of third-party software will have no effect on its 
software products' ability to meet Year 2000 requirements.
     With respect to its internal computer systems, the Company's Year 2000 
corrective actions include reprogramming impacted software when appropriate 
and feasible, obtaining vendor-provided software upgrades when available and 
completely replacing impacted systems when necessary.  The Company expects to 
implement successfully the systems and programming changes necessary to 
address Year 2000 issues with respect to its internal systems by the fourth 
quarter of 1999.  The Company has not incurred significant costs to date and 
does not believe that the cost of additional actions will have a material 
adverse effect on its financial condition or results of operations.  
Contingency plans are being developed which include the purchase of 
off-the-shelf accounting software in the event existing systems cannot be 
corrected.  Although the Company is not aware of any material operational 
issues or costs associated with preparing its internal systems for the Year 
2000, the failure of the Company or its distributors, resellers, suppliers, 
manufacturers and customers to complete the conversions or upgrades necessary 
to fully address the Year 2000 issues in a timely manner could have a 
material adverse effect on the Company's business, results of operations, 
cash flows and financial condition.

Item 7a.  Quantitative and Qualitative Disclosures About Market Risk-Interest 
          Risk

     The Company is exposed to short-term market risks associated with 
interest rate changes as a result of its lines of credit and short-term debt 
used to fund the Company's operations.  At December 31, 1998, substantially 
all of the Company's debt is current.  The Company's interest rate risk 
management objective is to limit the impact of interest rate changes on 
earnings and cash flows and to lower its overall borrowing costs.  The 
Company does not enter into derivative or interest rate transactions for 
speculative purposes.




                                    -17-
<PAGE>
Item 8.  Financial Statements and Supplementary Data

                        INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders
of Star Technologies, Inc.:

     We have audited the consolidated financial statements of Star 
Technologies, Inc. and subsidiaries listed in the accompanying index 
appearing under Item 14(a) on page 39.  These consolidated financial 
statements are the responsibility of the Company's management.  Our 
responsibility is to express an opinion on these consolidated financial 
statements based on our audits.
     We conducted our audits in accordance with generally accepted auditing 
standards.  Those standards require that we plan and perform the 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 audits provide a 
reasonable basis for our opinion.
     In our opinion, the consolidated financial statements referred to above 
present fairly, in all material respects, the financial position of Star 
Technologies, Inc. and subsidiaries as of December 31, 1998 and 1997, and the 
results of their operations and their cash flows for the year ended December 
31, 1998, the nine months ended December 31, 1997 and for the year ended 
March 31, 1997, in conformity with generally accepted accounting principles.
     The accompanying financial statements have been prepared assuming that 
the Company will continue as a going concern.  As discussed in Notes 2 and 5 
to the consolidated financial statements, the Company has suffered recurring 
losses from operations, has a working capital deficiency and is currently in 
default on certain loan agreements as of December 31, 1998 that raise 
substantial doubt about its ability to continue as a going concern.  
Management's plans in regard to these matters are also described in Note 2.  
The consolidated financial statements do not include any adjustments that 
might result from the outcome of this uncertainty.



                                                         KPMG LLP
McLean, Virginia
March 31, 1999




                                    -18-
<PAGE>
<TABLE>
Consolidated Statements of Operations
(In thousands, except per share data)
<CAPTION>
                                                           Nine months ended
                                            Year ended        December 31,     Year ended
                                            December 31,   -----------------    March 31,
                                                1998         1997       1996      1997
                                                                     (Unaudited)         
----------------------------------------------------------------------------------------
Revenue
    <S>                                      <C>          <C>         <C>       <C>
    Products..............................   $ 2,139      $   660     $   678   $   688
    Services..............................     3,256        1,046         460       559
----------------------------------------------------------------------------------------
                                               5,395        1,706       1,138     1,247
----------------------------------------------------------------------------------------
Cost of revenue
    Products..............................       613          173         558       693
    Services..............................     2,375          628         339       525
----------------------------------------------------------------------------------------
                                               2,988          801         897     1,218
----------------------------------------------------------------------------------------
Gross margin..............................     2,407          905         241        29
----------------------------------------------------------------------------------------
Operating expenses
    Research and development..............       865          601         893     1,130
    Marketing and sales...................     1,593          876         734       952
    General and administrative............     2,969        1,624       1,994     2,248
----------------------------------------------------------------------------------------
                                               5,427        3,101       3,621     4,330
----------------------------------------------------------------------------------------
Operating income (loss)...................    (3,020)      (2,196)     (3,380)   (4,301)

Interest income (expense), net............       (53)         157         495       574
Other income (expense), net...............      (139)         487       6,216     6,362
----------------------------------------------------------------------------------------
Income (loss) before provision for
    income taxes..........................    (3,212)      (1,552)      3,331     2,635
Provision for income taxes................        --           --          --        --
----------------------------------------------------------------------------------------
Net income (loss).........................   $(3,212)     $(1,552)    $ 3,331   $ 2,635
========================================================================================

========================================================================================
Net income (loss).........................   $(3,212)     $(1,552)    $ 3,331   $ 2,635
Preferred stock dividend requirement......      (200)        (150)       (597)     (647)
Repurchase of preferred stock.............        --           --      10,580    10,580
----------------------------------------------------------------------------------------
Net income (loss) applicable to common
    shares................................   $(3,412)     $(1,702)    $13,314   $12,568
========================================================================================
Net income (loss) per common share
  Basic...................................   $  (.16)     $  (.08)    $   .67   $   .63
  Diluted.................................   $  (.16)     $  (.08)    $   .61   $   .58
Weighted average common shares outstanding
  Basic...................................    21,535       20,645      19,884    19,873
  Diluted.................................    21,535       20,645      21,996    21,985
========================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
                                          -19-
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Financial Position                        At December 31,    
(In thousands, except share data)                              -------------------------
                                                                   1998          1997    
----------------------------------------------------------------------------------------
Assets
Current assets
    <S>                                                         <C>            <C>  
    Cash......................................................  $     26       $    95
    Short-term investments....................................       394         1,117
    Accounts receivable, net..................................     1,178           630
    Other current assets......................................       176           228
----------------------------------------------------------------------------------------
    Total current assets......................................     1,774         2,070
Property and equipment, net...................................       685           775
Goodwill and other intangible assets, net
    of accumulated amortization of $479 and $135..............     2,329         2,673
Other assets                                                         114           145
----------------------------------------------------------------------------------------
    Total assets..............................................  $  4,902       $ 5,663
========================================================================================
Liabilities and Stockholders' Equity
Current liabilities
    Notes payable and capital lease obligations...............  $    919       $    --
    Notes payable to related parties..........................       125            --
    Accounts payable..........................................     1,712           665
    Accrued payroll and related benefits......................       147           105
    Deferred revenue..........................................       445           451
    Other accrued liabilities.................................       389           367
----------------------------------------------------------------------------------------
    Total current liabilities.................................     3,737         1,588
----------------------------------------------------------------------------------------
Capital lease obligations, net of current portion.............        32            --
Commitments and contingencies.................................        --            --
----------------------------------------------------------------------------------------
Stockholders' equity
   Preferred stock; $.01 par value; 1,000,000 shares authorized
    Series A convertible; 500,000 shares designated; 13,200
      shares issued and outstanding; aggregate
      liquidation preference of $475..........................         1              1
    Series B convertible; 120,117 shares designated; 11,917
      shares issued and outstanding; aggregate
      liquidation preference of $1,192........................         1              1
    Series C convertible; 80,079 shares designated; 7,945
      shares issued and outstanding; aggregate
      liquidation preference of $795..........................         1              1
   Common stock; $.01 par value; 60,000,000 shares authorized;
      21,830,575 and 21,351,575 shares issued; 21,735,384
      and 21,256,384 shares outstanding.......................       218            214
   Additional paid-in capital.................................    61,489         61,357
   Accumulated other comprehensive loss.......................        --           (134)
   Treasury stock, at cost; 95,191 shares.....................      (209)          (209)
   Retained deficit...........................................   (60,368)       (57,156)
----------------------------------------------------------------------------------------
   Total stockholders' equity.................................     1,133          4,075
----------------------------------------------------------------------------------------
   Total liabilities and stockholders' equity.................  $  4,902       $  5,663
========================================================================================

See accompanying notes to consolidated financial statements.
</TABLE>
                                          -20-
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
(In thousands)
<CAPTION>
                                                                 Nine months 
                                                                   ended
                                                 Year ended     December 31,   Year ended
                                                 December 31, ----------------  March 31,
                                                     1998      1997     1996     1997
                                                                    (Unaudited)
----------------------------------------------------------------------------------------
Cash flows from (used for) operating activities  
   <S>                                           <C>        <C>       <C>      <C>
   Net income (loss)............................ $(3,212)   $ (1,552) $ 3,331  $ 2,635
Adjustments to reconcile net income (loss) to
  net cash from (used for) operating activities
   Depreciation and amortization................     694         319      154      198
   Stock compensation expense...................     125          --       --       --
   Gain on sale of MIMS technology..............      --        (489)      --       --
   (Gain) loss on sale of property and equipment     (11)         40        7      101
   Loss on investment in Lumisys stock..........     134          --       --       --
   Decrease in restricted cash..................      --          --       17       17
   (Increase) decrease in accounts receivable...    (548)       (613)      25      121
   Decrease in other current assets.............      52          48      437      673
   Increase (decease) in other assets...........      31         (90)      --      109
   Increase (decrease) in accounts payable......   1,047         387     (292)    (447)
   Increase (decrease) in accrued liabilities...      27        (229)     110     (388)
----------------------------------------------------------------------------------------
Net cash from (used for) operating activities...  (1,661)     (2,179)   3,789    3,019
----------------------------------------------------------------------------------------
Cash flows from (used for) investing activities
   Proceeds from sale of property and equipment.      94          --       --       12
   Capital expenditures.........................    (280)       (223)     (51)     (80)
   Proceeds from sale of Lumisys stock..........      47          --       --       --
   Purchase of Intrafed technology..............      --      (2,165)      --       --
   Purchase of CDT, net of cash acquired........      --        (240)      --       --
----------------------------------------------------------------------------------------
Net cash from (used for) investing activities...    (139)     (2,628)     (51)     (68)
----------------------------------------------------------------------------------------
Cash flows from (used for) financing activities
   Net borrowings under line of credit
     agreements.................................     774          --       --       --
   Proceeds from issuance of notes payable......     238          --       --       --
   Proceeds from issuance of notes payable
     to related parties.........................     125          --       --       --
   Repayment of notes payable...................    (124)         --       --       --
   Repurchase of preferred stock................      --          --   (2,435)  (2,435)
   Proceeds from stock option exercises.........      42          35       --       --
   Purchase of treasury stock...................      --          --       (8)      (8)
----------------------------------------------------------------------------------------
Net cash from (used for) financing activities...   1,055          35   (2,443)  (2,443)
----------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents.    (745)     (4,772)   1,295      508
Cash and equivalents, beginning of year.........     771       5,543    5,035    5,035
----------------------------------------------------------------------------------------
Cash and equivalents, end of year............... $    26    $    771  $ 6,330  $ 5,543
========================================================================================

See accompanying notes to consolidated financial statements.
</TABLE>
                                          -21-

<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Stockholders' Equity                    Accu-
  and Comprehensive Income  (In thousands)                                   mulated
                                                                              Other
                           Number of Shares                       Additional Compre-
                          ------------------   Preferred  Common   Paid-In   hensive  Treasury  Retained
                          Preferred   Common     Stock     Stock   Capital    Loss     Stock     Deficit   Total
------------------------------------------------------------------------------------------------------------------
<S>                          <C>      <C>          <C>     <C>     <C>      <C>        <C>     <C>        <C>
Balance, March 31, 1996      146      19,927       $3      $199    $63,446  $   --     $(201)  $(58,239)  $ 5,208
 Net income.................                                                                      2,635     2,635
 Conversion of preferred
    (Series A)..............  (1)         10                 --         --                                     --
 Repurchase of preferred
    (Series A).............. (29)                  --                 (36)                                    (36)
    (Series B and C)........ (79)                  --              (2,399)                                 (2,399)
 Purchase of treasury stock.                                                              (8)                  (8)
------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1997       37      19,937        3       199     61,011      --      (209)   (55,604)    5,400
 Conversion of preferred
    (Series A)..............  (4)         31                  1         --                                      1
 Stock options exercised....              84                  1         34                                     35
 Acquisition of Intrafed
   Technology...............           1,300                 13        312                                    325
 Comprehensive income (loss):
   Net loss.................                                                                     (1,552)   (1,552)
   Unrealized loss on short-
     term investments.......                                                 (134)                           (134)
                                                                             -----              -------    ------
 Total comprehensive loss...                                                 (134)               (1,552)   (1,686)
------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997    33      21,352        3       214     61,357   (134)      (209)   (57,156)    4,075
 Stock options exercised....             104                  1         41                                     42
 Stock issued as
     compensation...........             175                  1         43                                     44
 Acquisition of Intrafed
     Technology.............             200                  2         48                                     50
 Comprehensive income (loss):
   Net loss.................                                                                     (3,212)   (3,212)
   Reclassification adjustment
     for losses recognized
     into income............                                                   134                            134
                                                                             -----              -------    ------
 Total comprehensive income
  (loss)....................                                                   134               (3,212)   (3,078)
------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998    33      21,831       $3      $218    $61,489  $   --     $(209)  $(60,368)  $ 1,133
==================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>

                                                       -22-

<PAGE>
Notes to Consolidated Financial Statements

NOTE 1 - Summary of Significant Accounting Policies

Description of business
     During the nine-month period ended December 31, 1997, Star Technologies, 
Inc. ("Star" or the "Company") completed a transition from providing 
performance-enhancing computing products and solutions principally for the 
medical imaging market to providing imaging solutions for the broader 
document imaging market.  In July 1997, the Company sold its medical imaging 
archival technology and, through PowerScan, Inc. ("PowerScan") acquired 
document imaging and processing technology as its entry into this broader 
market.  Additionally, in October 1997, the Company acquired Curran Data 
Technologies, Inc. ("CDT"), a provider of data entry imaging services.  (See 
Note 3.)  With these two acquisitions, Star provides products and services 
for government and commercial users involved in data capture, image capture 
and document imaging.
     The document imaging market is a highly competitive, evolving market, 
characterized by rapid technological change.  Frequent new product 
introductions and enhancements and increased capabilities and applications 
are common in the industry.  See "Item 1.  Business--Risk Factors."  
Substantially all of Star's revenues in the foreseeable future will be 
attributed to sales of document imaging products and services.

Change in fiscal year end
     The Company's Board of Directors voted to change the Company's fiscal 
year end from March 31st to December 31st, effective December 31, 1997.  The 
accompanying consolidated statements of operations, stockholders' equity and 
cash flows are presented for the twelve months ended December 31, 1998 
("fiscal 1998"), for the nine months ended December 31, 1997 and 1996 
(unaudited) and for the twelve months ended March 31, 1997 ("fiscal 1997").  
The accompanying consolidated statements of financial position are presented 
as of December 31, 1998 and 1997.

Principles of consolidation
     The consolidated financial statements include the accounts of Star 
Technologies, Inc. and its wholly-owned subsidiaries.  Intercompany balances 
and transactions have been eliminated.  Certain 1997 amounts have been 
reclassified for comparative purposes.

Revenue recognition
     On January 1, 1998, the Company adopted Statement of Position 97-2, 
"Software Revenue Recognition" ("SOP 97-2") which superseded Statement of 
Position 91-1, "Software Revenue Recognition."  SOP 97-2 focuses on when and 
in what amounts revenue should be recognized for licensing, selling, leasing 
or otherwise marketing computer software.  The adoption of SOP 97-2 did not 
have a material impact on the Company's revenue recognition policies.
     Revenue from the sale of commercial, off-the-shelf software is 
recognized when the following four criteria are met:  (1) the agreement for 
sale is in writing, (2) the software has been shipped, (3) the fee is fixed 
or determinable and (4) collectibility is probable.  Customized software 
revenue is recognized when the software is accepted by the customer.
     Maintenance revenue, which includes unspecified when-and-if deliverable 
software upgrades, user documentation and technical support for software 
products, is deferred and recognized on a straight-line basis over the term 
of the maintenance agreement, generally one year.  Revenue from services 
including data entry, integration, installation and system training is 
recognized when the services are performed.  Amounts received but not earned 
are deferred.


                                    -23-
<PAGE>
Cash and equivalents and short-term investments
     Cash and equivalents include cash and short-term investments in 
commercial paper.  Short-term investments in commercial paper, which are held 
to maturity (less than three months from the date of purchase), are carried 
at cost which approximates their market value.  These investments totaled 
$676,000 at December 31, 1997.  There were no such investments at December 
31, 1998.
     At December 31, 1998 and 1997, other short-term investments include 
82,800 and 92,800 shares, respectively, of common stock of Lumisys, Inc. 
("Lumisys").  (See Note 6.)  The Company does not actively seek to trade this 
investment for purposes of maximizing trading gains and classifies it as 
"available for sale."  Accordingly, the temporary excess (deficiency) of 
market value over (under) the underlying cost is reported as an unrealized 
gain (loss) as a separate component of stockholders' equity.  During 1998, 
the Company recorded a loss of $120,000 representing an other than temporary 
decline in the market value of its Lumisys investment.
     Interest income was $7,000, $157,000 and $574,000 in fiscal 1998, for 
the nine months ended December 31, 1997, and in fiscal 1997, respectively.

Accounts receivable
     Accounts receivable are shown net of an allowance for doubtful accounts 
of $13,000 and $22,000 at December 31, 1998 and 1997.  The provision for 
doubtful accounts was $11,000 and $1,000 for the nine months ended December 
31, 1997 and in fiscal 1997, respectively.  No such provision was recorded 
during fiscal 1998.

Property and equipment
     Property and equipment are recorded at cost or estimated fair market 
value if acquired in a business combination.  Depreciation and amortization 
are recorded on a straight-line basis over the estimated useful lives of the 
assets, which range from three to five years.  Leasehold improvements and 
assets under capital leases are amortized on a straight-line basis over the 
shorter of the related asset lives or lease terms.
     Property and equipment consist of (in thousands):
<TABLE>
<CAPTION>
                                                               At December 31,      
                                                       -----------------------------
                                                           1998               1997    
-----------------------------------------------------------------------------------------
     <S>                                                 <C>                 <C>
     Engineering and manufacturing equipment.........    $  751              $  979
     Office equipment and leasehold improvements.....       304                 719
     Equipment under capital leases..................        73                   8
-----------------------------------------------------------------------------------------
                                                          1,128               1,706
Less accumulated depreciation and amortization.......      (443)               (931)
-----------------------------------------------------------------------------------------
                                                         $  685              $  775
=========================================================================================
</TABLE>
Stock-based compensation
     Statement of Financial Accounting Standards No. 123, "Accounting for 
Stock-Based Compensation," encourages, but does not require, companies to 
record stock-based employee compensation plans at fair value.  The Company 
has elected to account for stock-based employee compensation using the 
intrinsic value method prescribed in Accounting Principles Board Opinion No. 
25, "Accounting for Stock Issued to Employees," and its related 
interpretations.  Accordingly, compensation cost for employee stock options 
is measured as the excess, if any, of the quoted market price of the 
Company's stock at the date of the grant over the exercise price an employee 
must pay to acquire the stock.

                                    -24-
<PAGE>
Net income (loss) per share
     The Company has adopted Statement of Financial Accounting Standards No. 
128, "Earnings Per Share" ("SFAS 128").  SFAS 128 requires the presentation 
of basic and diluted net income per share.  Basic net income (loss) per share 
is computed as net income (loss) less preferred dividends divided by the 
weighted average number of shares of common stock outstanding during the 
period.  Diluted net income (loss) per share is computed as net income (loss) 
less preferred dividends divided by the weighted average number of shares of 
common stock and common equivalent shares outstanding during the period.  
Common equivalent shares consist of convertible preferred stock (using the if 
converted method) and stock options and warrants (using the treasury stock 
method).  Common equivalent shares are excluded from the diluted computation 
if their effect is antidilutive.

Income taxes
     The Company accounts for income taxes using the asset and liability 
method.  Under the asset and liability method, deferred tax assets and 
liabilities are recognized for the future tax consequences attributable to 
differences between the financial statement carrying amounts of existing 
assets and liabilities and their respective tax bases.  Deferred tax assets 
and liabilities are measured using enacted tax rates expected to apply to 
taxable income in the years in which those temporary differences are expected 
to be recovered or settled.  The effect on deferred tax assets and 
liabilities of a change in tax rates is recognized in income in the period 
that includes the enactment date.

Goodwill
     The excess of the cost over the fair value of net tangible and 
identifiable intangible assets acquired in the PowerScan and CDT business 
combinations ("goodwill") is amortized on a straight-line basis over periods 
of 8 and 10 years, respectively.  Goodwill amortization totaled $326,000 and 
$127,000 for fiscal 1998 and for the nine months ended December 31, 1997, 
respectively.  In accordance with the provisions of Statement of Financial 
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived 
Assets and for Long-Lived Assets to be Disposed of", the Company evaluates 
the recoverability of its goodwill whenever events or changes in 
circumstances indicate that the carrying amount may not be recoverable.  
Recoverability is measured by a comparison of the carrying amount of goodwill 
to future net cash flows expected to be generated from the acquired business.  
If the asset is considered to be impaired, the impairment to be recognized is 
measured by the amount by which the carrying amount of the asset exceeds its 
fair value.

Software development costs
     Software development costs incurred subsequent to establishing the 
technological feasibility of a product are capitalized and amortized over the 
life of the related product.  As of December 31, 1998, all software 
development costs have been expensed because technological feasibility was 
not yet established.

Comprehensive income
     On January 1, 1998, the Company adopted Statement of Financial 
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").  
SFAS 130 establishes standards for reporting and presentation of 
comprehensive income and its components in financial statements.  
Comprehensive income consists of net income and net unrealized losses on 
securities and is presented in the consolidated statements of stockholders' 
equity and comprehensive income.  The Statement requires only additional 
disclosures in the consolidated financial statements; it does not affect the 
Company's financial position or results of operations.  Prior year amounts 
have been reclassified to conform to the requirements of SFAS 130.

                                    -25-
<PAGE>
Segment information
     Effective December 31, 1998, the Company adopted SFAS No. 131, 
"Disclosures About Segments of Enterprise and Related Information", which 
establishes standards for reporting information about operating segments and 
related disclosures about products and services.  See Note 9.

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


NOTE 2 - Liquidity

     Star's operations and acquisitions to date have consumed substantial 
amounts of cash.  The Company incurred operating losses of $3.0 million, $2.2 
million and $4.3 million for the fiscal year ended December 31, 1998, for the 
nine months ended December 31, 1997 and for the fiscal year ended March 31, 
1997, respectively.  The Company spent $2.4 million in connection with the 
acquisition of PowerScan and CDT in the nine months ended December 31, 1997.  
As of December 31, 1998, the Company had a working capital deficit of $2.0 
million due to recurring operating losses.  The continuing operation of the 
Company's business, and the continued development and commercialization of 
its technology, products and services, will require the availability of 
additional funds for the foreseeable future.  The Company's ability to obtain 
cash adequate to fund its needs depends generally on the results of its 
operations and the availability of financing.  Without continued increases in 
revenue or obtaining additional financing, the Company may be required to 
make additional reductions in operating expenses or sell certain assets, 
which may have a material adverse effect on the Company.  If the Company has 
insufficient funds for its needs, the Company may not be able to raise 
additional funds on favorable terms, if at all, or may not be able to do so 
on a timely basis.  Failure to obtain additional funds when needed could 
materially adversely affect the Company.
     In addition, the Company is delinquent in its payments due many vendors 
and service providers of the Company.  Certain vendors have taken actions 
against the Company, including initiating collection proceedings.  The 
Company has extended payment terms with most of these vendors as well as 
others and continues to seek to extend payment terms from additional vendors 
and service providers.  If unsuccessful, such parties may take further 
actions against the Company, including the termination of their relationship 
with the Company or the initiation of collection proceedings.
     As of March 31, 1999, the Company has received $225,000 from its 
officers and directors for short-term cash requirements.  (See Management's 
Discussion and Analysis-Liquidity.)  In view of the Company's additional 
liquidity requirements, the Company may continue to seek to sell additional 
equity or convertible debt securities or pursue debt financing arrangements.  
There can be no assurance that the Company will be able to consummate any 
such transaction or raise adequate funds from such transaction to meet the 
Company's cash needs.  As a result, substantial doubt exists regarding the 
Company's ability to meet its obligations in 1999 and to continue as a going 
concern.


                                    -26-
<PAGE>
NOTE 3 - Acquisitions

     In July 1997, PowerScan, Inc. ("PowerScan"), a newly-formed, 
wholly-owned subsidiary of the Company, acquired from Intrafed, Inc. 
("Intrafed") intellectual property related to the PowerScan(R) and 
Stageworks(R) software products, and certain related fixed assets, 
inventory, contracts and licenses, and assumed certain liabilities, including 
those under customer maintenance contracts.  At closing, the consideration 
paid to Intrafed was $1,880,000 in cash and 1.3 million shares of Star common 
stock valued at $325,000.  Under the terms of the purchase agreement, 500,000 
shares of Star common stock were payable to Intrafed in connection with the 
termination from PowerScan of a former executive of Intrafed.  The fair value 
of the shares totaled $125,000 and was expensed in fiscal 1998.  175,000 
shares were issued in September 1998.  The remaining 325,000 shares, issued 
in February 1999, were accrued at a value of $81,000 at December 31, 1998.  
No additional shares of Star common stock will be issued under the purchase 
agreement.
     The business combination has been accounted for using the purchase 
method under Accounting Principles Board Opinion No. 16, "Business 
Combinations"  ("APB Opinion 16").  The purchase price was allocated to the 
assets acquired and liabilities assumed based on management's estimate of the 
fair value as of the date of acquisition.  Based on the allocation of the 
purchase price to the net assets acquired, goodwill of approximately 
$2,393,000 was recorded.  Such goodwill is being amortized on a straight-line 
basis over 8 years.
     The purchase price of the assets acquired and liabilities assumed from 
Intrafed is computed as follows (in thousands):
<TABLE>
     <S>                                                       <C>
     Cash consideration                                        $1,880
     Fair value of common stock issued                            375
     Transaction costs                                            285
                                                               ------
                                                               $2,540
                                                               ======

     The purchase price is allocated as follows (in thousands):

     Current assets                                            $   88
     Property and equipment                                       382
     Other assets                                                  20
     Patents and trademarks                                       150
     Goodwill                                                   2,393
     Liabilities assumed                                         (493)
                                                               ------
                                                               $2,540
                                                               ======
</TABLE>
     In October 1997, the Company acquired Curran Data Technologies, Inc. 
("CDT"), a data entry and document imaging services company located in 
Indianapolis, Indiana.  At closing, the consideration paid for the 
acquisition was $212,000 in cash and $96,000 in a note payable.  The note 
payable is unsecured and bears interest at a rate of 8% per annum.  At 
December 31, 1998 and 1997, the note totaled $50,000 and $96,000, 
respectively, and is included in other accrued liabilities.
     The CDT business combination has been accounted for using the purchase 
method under APB Opinion 16.  The purchase price was allocated to the assets 
acquired and liabilities assumed based on management's estimate of the fair 
value as of the date of acquisition.  Based on the allocation of the purchase 
price to the net assets acquired, goodwill of approximately $264,000 was 
recorded.  Such goodwill is being amortized on a straight-line basis over 10 
years.

                                    -27-
<PAGE>
     The purchase price paid for CDT is computed as follows (in thousands):
<TABLE>
     <S>                                                       <C>
     Cash consideration                                        $  212
     Transaction costs                                             30
     Note payable                                                  96
                                                               ------
                                                               $  338
                                                               ======

     The purchase price is allocated as follows (in thousands):

     Current assets                                            $   25
     Property and equipment                                       209
     Goodwill                                                     264
     Liabilities assumed                                         (160)
                                                               ------
                                                               $  338
                                                               ======
</TABLE>
     APB Opinion 16 requires, for purchase business combinations, the 
presentation of pro-forma combined results of operations for the year of 
acquisition and comparable prior-year period as if the two transactions 
described above had occurred at the beginning of each period.  The following 
unaudited pro-forma results of operations are not necessarily indicative of 
actual future results of operations (in thousands, except per share data).
<TABLE>
<CAPTION>
                                                          Nine Months Ended 
                                                            December 31,   
                                                         ------------------
                                                           1997      1996 
                                                           ----      ----

     <S>                                                 <C>       <C>
     Revenue                                             $ 4,374   $ 4,851
     Gross margin                                        $ 1,962   $ 1,942
     Net income (loss) before
        provision for income taxes                       $(1,698)  $ 1,856
     Net income (loss)                                   $(1,698)  $ 1,856
                                                         =======   =======

     Net income (loss) per share -
        assuming dilution                                $  (.08)  $   .61
                                                         =======   =======
</TABLE>

NOTE 4 - Related Party Transactions

Indebtedness to certain directors and officers
      As of December 31, 1998, the Company was indebted to a Director in the 
amount of $96,000 for consulting services incurred during the year.
      In September 1998, the Company entered into a subordinated note 
agreement with a Director.  The note is secured by certain assets of the 
Company, and totaled $125,000 at December 31, 1998.  The note, originally due 
in February 1999, was extended until August 1999.  The note bears interest at 
12% through February 1999 and 10% thereafter.  The Director has the option to 
convert the note into shares of the Company's common stock, at a 30% discount 
on the conversion date, if the note is not repaid on the maturity date.  The 
value of the beneficial conversion feature is not considered to be 
significant.

                                    -28-
<PAGE>
Transactions with General Electric Company ("GE")
      In August 1996, General Electric Medical Systems ("GEMS") paid Star 
$9.4 million, which amount, including interest, was awarded to Star in March 
1996 in its arbitration claim against GEMS for breach of contract related to 
the prior medical imaging business.  The payment from GEMS arose from a 
demand for arbitration that Star filed against GEMS in January 1995.  
Following a hearing on Star's demand, a three-member panel of the American 
Arbitration Association found that GEMS violated the agreement.  Of the $9.4 
million received, $9.1 million is included in other income and $300,000 is 
included in interest income in the fiscal 1997 Consolidated Statement of 
Operations.
      GEMS paid the arbitration award described above in connection with an 
agreement with Star that provided for Star to concurrently repurchase 80% of 
Series B and Series C Senior Preferred Stock (the "Preferred Stock") held by 
GE.  Pursuant to the agreement, in August 1996, Star paid GE $2.4 million for 
47,667 shares of Series B Senior Preferred Stock and 31,778 shares of Series 
C Senior Preferred Stock which had an aggregate redemption price of $13.0 
million, including 100% of cumulative, undeclared dividends that totaled in 
excess of $5.0 million.  GE also granted to Star a three-year option to 
repurchase the remaining Preferred Stock at the same per share price that 
Star paid in the August 1996 repurchase.
      Equity holdings by GE totaled 19,862 shares of the Company's Series B 
and Series C Senior Preferred Stock and 624,339 shares of the Company's 
common stock at December 31, 1998.  (See Note 7.)


NOTE 5 - Notes Payable and Capital Lease Obligations

      The table below reflects the amounts outstanding under the Company's 
notes payable and capital lease obligations at December 31, 1998.  No such 
amounts were outstanding at December 31, 1997.  (Amounts are in thousands.)
<TABLE>
<CAPTION>
                                                               At December 31,
                                                                    1998      
      -------------------------------------------------------------------------

      <S>                                                         <C>
      Revolving line of credit up to $750, due on demand,
        interest at prime plus 3%, secured by
        substantially all assets...........................       $  510
      Bank line of credit, expiring April 30, 1999,
        interest at prime plus 1%, secured by the
        Company's short-term investment in Lumisys, Inc.
        common stock.......................................          264
      Secured promissory note, interest at 9.5% through
        September 1998 and 12% thereafter, due on demand...          114
      Secured promissory note with a Director (see Note 4),
        expiring August 1999, interest at 12% through
        February 1999 and 10% thereafter...................          125
      Capital lease obligations............................           63
      -------------------------------------------------------------------------
            Total..........................................        1,076
      Less current portion.................................        1,044
      -------------------------------------------------------------------------
      Non-current portion..................................       $   32
      =========================================================================
</TABLE>

                                    -29-
<PAGE>
      In April 1998, the Company entered into a $750,000 working capital line 
of credit with a financial institution.  The line of credit is secured by the 
Company's accounts receivable, inventory and other assets and allows 
borrowings of up to 80% of the eligible accounts receivable balance.  The 
line of credit carries an interest rate of prime plus 3% as well as a service 
fee ranging from .75% to 1.5% of the amount borrowed.  At December 31, 1998, 
the Company had borrowed $510,000 under this line of credit and had $160,000 
available for future borrowings.  Additional available credit under this 
facility will depend on the Company generating additional revenue.
      Also in April 1998, the Company entered into a one-year $300,000 line 
of credit with a bank.  The line of credit is secured by the Company's 
short-term investment in Lumisys common stock, carries interest at prime plus 
one percent and allows borrowings of up to 70% of the Lumisys stock's market 
value.  At December 31, 1998, the Company had borrowed all that was currently 
available under this line of credit.  Such borrowings totaled $264,000 at 
December 31, 1998.
      The Company has a secured promissory note with a vendor in the amount 
of $114,000 at December 31, 1998.  The note bears interest of 9.5% per annum 
through September 1998, and 12% thereafter.  The Company is currently in 
default with respect to its payment obligations under this note.  Such 
default has resulted in the creditor having the right to accelerate the 
balance due under the note and exercise other rights available under the law, 
including foreclosing on the computer equipment serving as collateral for 
such note.  The Company is working with the creditor to restructure the 
timing of remaining payments thereunder.  There can be no assurances that 
such creditor will agree to waive all existing defaults and extend the timing 
of remaining payments due under the note.  The existence of such default may 
also activate cross-default provisions under the Company's working capital 
line of credit and its bank line of credit.
      Interest expensed and paid in fiscal 1998 was $60,000.  No such amounts 
were incurred during the nine months ended December 31, 1997 or in fiscal 
1997.


NOTE 6 - Sale of Medical Image Management Systems ("MIMS") Technology

      On July 30, 1997, the Company sold its MIMS technology, including the 
Image Management Server and Film Image Scan System software, to CompuRAD, 
Inc. ("CompuRAD").  As consideration, the Company received 100,000 shares of 
CompuRAD common stock, valued at approximately $575,000 on the date of the 
transaction, and possible future payments by CompuRAD on software sales by 
CompuRAD of the MIMS technology for a five-year period commencing July 30, 
1997.  To date, no significant payments on CompuRAD software sales have been 
received.  The Company retained the rights to use the technology in 
non-medical imaging markets.
      Included with the technology sold to CompuRAD was property and 
equipment with a net book value of $86,000.  The gain recognized on the 
transaction was $489,000 and is included as other income on the consolidated 
statement of operations for the nine months ended December 31, 1997.
      In November 1997, CompuRAD merged with Lumisys, Incorporated 
("Lumisys"), a publicly-traded medical imaging company.  In the transaction, 
each share of CompuRAD common stock was converted into .928 shares of Lumisys 
common stock.  Accordingly, the Company's 100,000 shares of CompuRAD common 
stock were converted into 92,800 unrestricted shares of Lumisys common stock.  
Lumisys has assumed the obligations of CompuRAD relating to the sale of the 
MIMS technology discussed above.


                                    -30-
<PAGE>
NOTE 7 - Stockholders' Equity

Preferred stock - series A
      The Company has authorized a total of 1,000,000 shares of preferred 
stock.  Of the total preferred stock, 500,000 shares have been designated 
Series A preferred stock, which shares are convertible into common stock.  
The conversion rate, which is subject to adjustment based on certain equity 
issuances, was 7.20 as of December 31, 1998.
      In December 1996, the Company repurchased 28,000 shares of Series A 
Preferred Stock, representing 201,600 shares of common stock on an 
as-converted basis, from State Farm Mutual Automobile Insurance Company 
("State Farm") for $35,000.  The Company also repurchased 48,400 shares of 
the Company's common stock from State Farm for $8,000.

Preferred stock - series B and C
      The Company has designated 120,117 and 80,079 shares of convertible 
preferred stock as Series B Senior Preferred Stock and Series C Senior 
Preferred Stock (collectively, the "Preferred Stock"), respectively.  As of 
December 31, 1998, the Company had outstanding 11,917 and 7,945 shares of 
Series B Senior Preferred Stock and Series C Senior Preferred Stock, 
respectively.  The Preferred Stock is convertible into common stock of the 
Company.  The conversion price, which is subject to adjustment, is currently 
$1.00 per share.
      In August 1996, the Company repurchased 79,445 shares of the Preferred 
Stock (the "Repurchased Preferred Stock") for $2.4 million.  The Repurchased 
Preferred Stock had an aggregate redemption price of $13.0 million, including 
cumulative undeclared dividends in excess of $5.0 million.  The repurchase 
transaction was accounted for as a reduction of additional paid-in capital in 
fiscal 1997.
      The Preferred Stock accrues dividends at a rate of 10% per annum.  To 
the extent declared, such dividends would be payable quarterly in the amount 
of $50,000 in cash.  Unpaid cumulative dividends in arrears on the Preferred 
Stock total $475,000, or $.02 per common share, as of December 31, 1998.  All 
dividends accrued and accumulated prior to August 1996 were eliminated with 
the repurchase of the Preferred Stock.
      Pursuant to the amended preferred stock purchase agreement, the Company 
is subject to restrictions on payment of dividends in respect of any capital 
stock of the Company other than the Preferred Stock.

Stock option and purchase plans
      At December 31, 1998, the Company has three stock-based compensation 
plans, which are described below.  The Company applies APB Opinion No. 25 and 
its related interpretations in accounting for its plans.  Accordingly, as all 
options have been granted at exercise prices equal to or in excess of the 
fair market value as of the date of grant, no compensation cost has been 
recognized under these plans in the accompanying consolidated financial 
statements.  Had compensation cost for the Company's three stock-based 
compensation plans been determined consistent with FASB Statement No. 123, 
the Company's net income (loss) and earnings (loss) per common share would 
have been reported as the pro forma amounts indicated below (in thousands, 
except per share data):

                                          -31-
<PAGE>
<TABLE>
<CAPTION>
                                          Year ended      Nine Months     Year ended
                                          December 31,       ended         March 31,
                                              1998     December 31, 1997     1997
     -------------------------------------------------------------------------------
     
      Net income (loss)
           <S>                            <C>              <C>              <C>
           As reported                    $ (3,212)        $(1,552)         $2,635
           Pro forma                      $ (3,278)        $(1,577)         $2,630

      Earnings (loss) per common share-
           assuming dilution
           As reported                    $   (.16)        $  (.08)         $  .58
           Pro forma                      $   (.16)        $  (.08)         $  .58
     ================================================================================
</TABLE>
1984 and 1994 stock option plans
     The 1984 Stock Option Plan (the "1984 Plan") and the 1994 Stock Option 
Plan (the "1994 Plan") provide for the issuance of common stock and 
incentive, qualified and non-qualified stock options to employees and 
consultants, subject to certain limitations.  Under both plans, the option 
prices and terms are determined by the Company's Board of Directors.  
Generally, options are issued with terms of up to ten years, often with 
vesting restrictions, and the option exercise price is normally equal to 100% 
of fair market value of the stock at the date of grant.
     The fair value of each option grant is estimated on the date of grant 
using the Black-Scholes option-pricing model with the following weighted 
average assumptions used for grants under the 1994 Plan for the year ended 
December 31, 1998, for the nine months ended December 31, 1997 and for the 
year ended March 31, 1997, respectively:  0.0% dividend yield for each of the 
three periods; expected volatility of 87%, 145% and 15%; risk-free interest 
rates of 4.56%, 5.71% and 6.61%; and expected lives of five, five and three 
years.

1989 stock option plan
     The 1989 Stock Option Plan for Nonemployee Directors (the "1989 Plan") 
provides for the granting of stock options to nonemployee directors of the 
Company.  The plan provides for the issuance of non-qualified options at 
exercise prices equal to 100% of the fair market value of the Company's 
common stock at the date of grant, with terms of up to ten years from the 
date of grant.
     The fair value of each option grant is estimated on the date of grant 
using the Black-Scholes option-pricing model with the following weighted 
average assumptions used for grants under the 1989 Plan for the year ended 
December 31, 1998, for the nine months ended December 31, 1997 and for the 
year ended March 31, 1997, respectively:  0.0% dividend yield for each of the 
three periods; expected volatility of 87%, 145%, and 15%; risk-free interest 
rates of 4.55%, 5.68%, and 6.78%; and expected lives of five, five and three 
years.


                                    -32-
<PAGE>
<TABLE>
     The following table summarizes the Company's stock option plans:
<CAPTION>
                                 1984 Plan            1989 Plan           1994 Plan     
                          --------------------------------------------------------------
                                      Weighted             Weighted             Weighted
                             Shares    Average    Shares    Average   Shares     Average
                             Under    Exercise    Under    Exercise   Under     Exercise
                             Option    Price      Option    Price     Option     Price
-----------------------------------------------------------------------------------------
Outstanding options,
 <S>                       <C>          <C>      <C>         <C>      <C>
 March 31, 1996..........  1,486,813    $0.99    140,000     $0.93         --       --    
  Granted................         --       --     20,000     $0.41    754,375    $0.41    
  Cancelled.............. (1,349,313)   $0.99    (30,000)    $0.68     (8,000)   $0.41    
  Exercised..............         --       --         --        --         --       --    
-----------------------------------------------------------------------------------------
Outstanding options,
 March 31, 1997..........    137,500    $1.00    130,000     $1.00    746,375    $0.41
  Granted................         --       --     60,000     $0.40    362,000    $0.38
  Cancelled..............         --       --    (80,000)    $1.11   (101,500)   $0.41
  Exercised..............         --       --         --        --    (83,500)   $0.41
-----------------------------------------------------------------------------------------
Outstanding options,
 December 31, 1997.......    137,500    $1.00    110,000     $0.48    923,375    $0.40
  Granted................         --       --     10,000     $0.56    262,000    $0.90
  Cancelled..............         --       --         --        --   (126,625)   $0.38
  Exercised..............         --       --         --        --   (104,000)   $0.41
-----------------------------------------------------------------------------------------
Outstanding options,
 December 31, 1998.......    137,500    $1.00    120,000     $0.49    954,750    $0.54

=========================================================================================
</TABLE>
<TABLE>
<CAPTION>
                                                   1984 Plan    1989 Plan    1994 Plan   
                                                 ----------------------------------------
Options exercisable at:
     <S>                                            <C>          <C>          <C>
     March 31, 1997...............................   52,866      130,000      330,259
     December 31, 1997............................  137,500      110,000      390,830
     December 31, 1998............................  137,500      120,000      534,070

Weighted average fair value at date of grant
  of options granted during the:
     Year ended March 31, 1997....................       --         $.12         $.08 
     Nine months ended December 31, 1997..........       --         $.31         $.36
     Year ended December 31, 1998.................       --         $.32         $.64
=========================================================================================
</TABLE>
                                          -33-
<PAGE>
<TABLE>
     The following table summarizes information about the Company's stock options 
outstanding at December 31, 1998:
<CAPTION>
                           Options Outstanding                    Options Exercisable    
               ------------------------------------------    ----------------------------
                                Weighted
                                 Average         Weighted                      Weighted
 Range of                       Remaining         Average                       Average
 Exercise         Number       Contractual       Exercise       Number         Exercise
  Prices       Outstanding        Life            Price      Exercisable        Price
-----------------------------------------------------------------------------------------
<C>             <C>            <S>                <C>          <C>              <C>
$0.38-1.25      1,212,250      5 yrs. 4 mos.      $0.59        791,570          $0.53
=========================================================================================
</TABLE>
Common stock reserved for issuance
     At December 31, 1998, the Company had 3,293,490 shares of common stock 
reserved for issuance, consisting of 1,212,250 shares for stock options 
outstanding, and 2,081,240 shares for conversion of preferred stock.

Net income per share
     Basic and diluted net income (loss) per share were computed in 
accordance with SFAS 128.  The differences between basic weighted average 
common shares outstanding and diluted weighted average common shares 
outstanding are as follows (in thousands):
<TABLE>
<CAPTION>
                                                        Nine months ended
                                         Year ended,       December 31,     Year ended
                                         December 31,   -----------------    March 31,
                                             1998        1997      1996        1997
                                                               (Unaudited)
---------------------------------------------------------------------------------------
<S>                                         <C>         <C>       <C>         <C>
Basic weighted average common shares....    21,535      20,645    19,884      19,873
Convertible preferred stock.............       N/A         N/A     2,112       2,112
                                            ------      ------    ------      ------
Diluted weighted average common shares..    21,535      20,645    21,996      21,985
                                            ======      ======    ======      ======
</TABLE>

NOTE 8 - Income Taxes

     There was no current or deferred income tax expense for fiscal 1998, for 
the nine months ended December 31, 1997 or for fiscal 1997.
     A reconciliation of the expected amount of income tax expense (benefit) 
by applying the statutory Federal income tax rate of 34% to the actual amount 
of income tax expense recognized follows (in thousands):
<TABLE>
<CAPTION>
                                          Year ended    Nine months ended   Year ended  
                                         December 31,     December 31,       March 31,
                                             1998             1997             1997
--------------------------------------------------------------------------------------
<S>                                        <C>               <C>                <C>
Expected expense (benefit).........        $(1,092)          $(528)             $ 896
Change in valuation allowance......          1,087             524               (898)
Other..............................              5               4                  2
--------------------------------------------------------------------------------------
         Income tax expense........        $    --           $  --              $  --
======================================================================================
</TABLE>
                                         -34-
<PAGE>
     The tax effects of temporary differences that give rise to significant 
portions of the deferred tax assets are presented below (in thousands):
<TABLE>
<CAPTION>
                                                               At December 31,        
                                                       -------------------------------
                                                            1998             1997     
---------------------------------------------------------------------------------------
Deferred tax assets:
    <S>                                                  <C>               <C>
    Reserves for potentially excess inventory....        $  1,675          $ 1,681
    Other accruals and reserves..................             128              135
    Property and equipment, principally due
      to differences in depreciation.............               7                1
    Net operating loss carryforwards
      - domestic and foreign.....................          23,408           22,082
    General business credit carryforwards........           3,315            3,315
    Alternative minimum tax credit carryforwards.              84               84
---------------------------------------------------------------------------------------
       Total gross deferred tax assets...........          28,617           27,298
       Less valuation allowance..................         (28,617)         (27,298)
---------------------------------------------------------------------------------------
       Net.......................................        $     --         $     --
=======================================================================================
</TABLE>
     The net operating loss ("NOL") and general business credit carryforwards 
expire in the tax years ending December 31, 1998 through December 31, 2013.  
However, as a result of the May 1990 issuance of the Preferred Stock, the 
utilization of the NOL and general business carryforwards generated prior to 
that date is subject to an annual limitation of approximately $823,000.  NOLs 
generated in periods subsequent to May 1990 are not currently subject to an 
annual limitation.
     The valuation allowance for deferred tax assets increased by $1,319,000 
for the year ended December 31, 1998, increased by $658,000 for the nine 
months ended December 31, 1997 and decreased by $1,231,000 for the year ended 
March 31, 1997.  Management believes that it is more likely than not that 
deferred tax assets are not realizable based on estimates of future taxable 
income and consideration of available tax planning strategies.


NOTE 9 - Segment Reporting

     Operating segments are defined as components of an enterprise about 
which separate financial information is available that is evaluated regularly 
by Star's chief operating decision maker, or decision making group, in 
deciding how to allocate resources and in assessing performance.  Star's 
chief operating decision maker is its Chief Executive Officer.  The operating 
segments of the Company are managed separately because each segment 
represents a strategic business unit that offers different products or 
services.  The Company's reportable operating segments include products and 
related services and data entry and imaging services.  The accounting 
policies of the Company's operating segments are the same as those described 
in Note 1 - Summary of Significant Accounting Policies.

                                    -35-
<PAGE>
<TABLE>
     Summarized information concerning the reportable segments is presented 
in the following table (in thousands).
<CAPTION>
                                                    Data
                                       Products     Entry
                                         and         and
                                       Related     Imaging
                                       Services    Services    Other*     Total 
                                       --------    --------   -------    -------

   Year ended December 31, 1998:
     <S>                                <C>        <C>        <C>        <C>
     Revenue                            $ 3,114    $2,029     $   252    $ 5,395
     Depreciation and amortization      $   482    $  172     $    40    $   694
     Operating loss                     $(1,306)   $ (491)    $(1,223)   $(3,020)
     Net loss                           $(1,373)   $ (496)    $(1.343)   $(3.212)
     Total assets                       $ 3,343    $1,016     $   543    $ 4,902
     Capital expenditures               $    25    $  255     $    --    $   280

   Nine Months ended December 31, 1997:
     Revenue                            $ 1,080    $  288     $   338    $ 1,706
     Depreciation and amortization      $   219    $   33     $    67    $   319
     Operating loss                     $  (402)   $ (112)    $(1,682)   $(2,196)
     Net loss                           $  (402)   $ (117)    $(1,033)   $(1,552)
     Total assets                       $ 3,340    $  897     $ 1,426    $ 5,663
     Capital expenditures               $    29    $  192     $     2    $   223

   Year ended March 31, 1997:
     Reportable segments disclosed did not exist prior to July 1997.

   * Other includes customer service revenue and expenses associated with the 
     Company's older medical imaging products as well as corporate expenses 
     for executive and financial compensation and benefits, legal, 
     accounting, insurance, occupancy and other corporate costs.

   Substantially all sales were made domestically and all assets are held in 
the United States.
</TABLE>

NOTE 10 - Commitments and Contingencies
<TABLE>
Operating leases                                         Fiscal          Amount
     The Company leases its facilities and certain       ----------------------
                                                         <S>             <C>
equipment under noncancelable operating lease            1999........... $  356
agreements expiring through fiscal 2005.  Several        2000...........    321
of the leases contain options for renewal periods        2001...........    291
of up to five years.  Future minimum rentals under       2002...........    288
these lease agreements are shown at right (in            2003...........    286
thousands).                                              Thereafter.....    449
                                                         ----------------------
                                                                         $1,991
                                                         ======================
</TABLE>
     Rent expense was $540,000, $302,000, and $733,000 in fiscal year 1998, 
for the nine months ended December 31, 1997, and in fiscal 1997, respectively.

                                    -36-
<PAGE>
Legal proceedings
     The Company is from time to time a party to litigation arising in the 
normal course of its business.  Such claims, even if lacking merit, could 
result in the expenditure of significant financial and managerial resources.  
Management believes that no currently pending or threatened actions will have 
a material adverse effect on the financial condition or results of operations 
of the Company.

Settlement of patent litigation
     In August 1996, the Company settled all claims asserted by Ronald G. 
Walters ("Walters") against the Company and certain officers and directors of 
the Company in a patent infringement and unjust enrichment lawsuit.  Under 
the terms of the settlement agreement, the Company paid Walters a one-time 
payment of $2.9 million for which Walters dismissed the claims he had brought 
against the Company, and the Company dismissed the counterclaim it had 
asserted against Walters.  The settlement payment is reflected as a reduction 
of other income on the fiscal 1997 Consolidated Statement of Operations.

<TABLE>
Quarterly Financial Summary (Unaudited)
(In thousands, except per share data)
<CAPTION>
                                                       Net      Net Income (Loss)
                                        Gross        Income        Per Share -
                           Revenue      Margin       (Loss)     Assuming Dilution
-----------------------------------------------------------------------------------
Year ended December 31, 1998:
     <S>                   <C>          <C>         <C>             <C>
     First Quarter         $1,143       $  475      $(1,117)*       $(.05)
     Second Quarter         1,541          721         (665)         (.03)
     Third Quarter          1,673          763         (561)         (.03)
     Fourth Quarter         1,038          448         (869)         (.04)
-----------------------------------------------------------------------------------
        Total              $5,395       $2,407      $(3,212)        $(.16)
===================================================================================

Nine months ended
  December 31, 1997**:
     First Quarter         $  169       $   32      $  (702)        $(.04)
     Second Quarter           439          315         (124)         (.01)
     Third Quarter          1,098          558         (726)         (.04)
-----------------------------------------------------------------------------------
        Total              $1,706       $  905      $(1,552)        $(.08)
===================================================================================
 *Includes year-end adjustment of $125,000 for issuance of common stock
  associated with the termination from PowerScan of a former Intrafed          
  executive.
**Effective December 31, 1997, the Company changed its fiscal year end from    
  March 31st to    December 31st.  (See Note 1 to the consolidated financial   
 statements.)
</TABLE>
Item 9.   Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure

     Not applicable.


                                    -37-
<PAGE>
                                  PART III


Item 10.  Directors and Executive Officers of the Registrant

     Information set forth in the Company's definitive Proxy Statement for 
its Annual Meeting to be held on May 20, 1999, which Proxy Statement will be 
filed with the Securities and Exchange Commission no later than 120 days 
after the end of the fiscal year covered by this Report, is incorporated 
herein by this reference.  Also refer to the item entitled "Executive 
Officers" in Part I of this Report on Form 10-K.

Item 11.  Executive Compensation

     Information set forth in the Company's definitive Proxy Statement for 
its Annual Meeting to be held on May 20, 1999, which Proxy Statement will be 
filed with the Securities and Exchange Commission no later than 120 days 
after the end of the fiscal year covered by this Report, is incorporated 
herein by this reference.

Item 12.  Security Ownership of Certain
          Beneficial Owners and Management

     Information set forth in the Company's definitive Proxy Statement for 
its Annual Meeting to be held on May 20, 1999, which Proxy Statement will be 
filed with the Securities and Exchange Commission no later than 120 days 
after the end of the fiscal year covered by this Report, is incorporated 
herein by this reference.

Item 13.  Certain Relationships and Related Transactions

     Information set forth in the Company's definitive Proxy Statement for 
its Annual Meeting to be held on May 20, 1999, which Proxy Statement will be 
filed with the Securities and Exchange Commission no later than 120 days 
after the end of the fiscal year covered by this Report, is incorporated 
herein by this reference.


                                    -38-
<PAGE>
                                   PART IV


Item 14.   Exhibits, Financial Statement Schedules,
           and Reports on Form 8-K

(a)  The following documents are filed as part of this report:

1.   Report of Independent Auditors
     and Financial Statements                                          PAGE

           Report of Independent Auditors                               18

           Consolidated Statements of Operations for the fiscal
             year ended December 31, 1998, for the nine
             months ended December 31, 1997 and 1996 (unaudited),
             and for the fiscal year ended March 31, 1997.              19

           Consolidated Statements of Financial Position as of
             December 31, 1998 and 1997.                                20

           Consolidated Statements of Cash Flows for the fiscal
             year ended December 31, 1998, for the nine
             months ended December 31, 1997 and 1996 (unaudited),
             and for the fiscal year ended March 31, 1997.              21

           Consolidated Statements of Changes in Stockholders'
             Equity and Comprehensive Income for the fiscal year
             ended December 31, 1998, for the nine months ended
             December 31, 1997, and for the fiscal year ended
             March 31, 1997.                                            22

           Notes to Consolidated Financial Statements                   23

2.   Financial Statement Schedules

           All schedules are omitted because they are not applicable or the 
           required information is shown in the consolidated financial 
           statements or notes thereto.

3.   The exhibits filed herewith or incorporated by reference are set forth 
     on the Exhibit Index immediately preceding the exhibits.

(b)  Reports on Form 8-K.

           None.

                                    -39-
<PAGE>
                                 SIGNATURES


     Pursuant to the requirements of the Securities Exchange Act of 1934, 
Star Technologies, Inc., certifies that it has duly caused this Transition 
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto 
duly authorized, in Montgomery County, State of Maryland, on the 15th day of 
April, 1999.


                                   STAR TECHNOLOGIES, INC.

                                   By: /s/ Brenda A. Potosnak              
                                       ------------------------------------
                                       Brenda A. Potosnak
                                       Vice President of Finance and
                                       Administration, Secretary, Treasurer
                                       and Chief Financial Officer


     Pursuant to the requirements of the Securities Exchange Act of 1934, 
this report has been signed below on April 15, 1999, by the following persons 
in the capacities indicated:


  /s/  Robert C. Compton           Chairman of the Board of Directors,
       Robert C. Compton           President and Chief Executive Officer
                                   and Director


 /s/   Carol L. Curran             Executive Vice President;
       Carol L. Curran             President, Curran Data Technologies, 
                                   Inc.


 /s/   Curtis D. Abel              Vice President;
       Curtis D. Abel              President, PowerScan, Inc.


 /s/   Brenda A. Potosnak          Vice President of Finance and
       Brenda A. Potosnak          Administration, Secretary, Treasurer
                                   and Chief Financial Officer

 /s/   Philip A. Cannon            Vice President of Technology
       Philip A. Cannon

 /s/   Alan O. Maxwell             Director
       Alan O. Maxwell


 /s/   Carl E. Ravin               Director
       Carl E. Ravin


 /s/   Herbert F. Schantz          Director
       Herbert F. Schantz


                                    -40-

<PAGE>
                                EXHIBIT INDEX

    Exhibit
      No.  

      3.1*       Restated Certificate of Incorporation of the Company, as 
                 amended, incorporated by reference from the Company's Annual 
                 Report on Form 10-K for the fiscal year ended March 31, 1988 
                 (Registration No. 0-13318) filed with the Commission on June 
                 29, 1988.

      3.2*       Certificate of Designation, Preferences and Rights of Series 
                 B Senior Preferred Stock and Series C Senior Preferred Stock 
                 ("Certificate of Designation"), incorporated by reference 
                 from the exhibit filing to the Company's Annual Report on 
                 Form 10-K for the fiscal year ended March 31, 1990 
                 (Registration No. 0-13318) filed with the Commission on June 
                 29, 1990.

      3.3*       Certificate of Amendment of Restated Certificate of 
                 Incorporation of the Company, dated August 29, 1994, 
                 incorporated by reference from the Company's Annual Report 
                 on Form 10-K for the fiscal year ended March 31, 1995 
                 (Registration No. 0-13318) filed with the Commission on June 
                 29, 1995.

      3.4*       Certificate of Amendment of Restated Certificate of 
                 Incorporation of the Company dated August 23, 1996, 
                 incorporated by reference from the exhibit filing to the 
                 Company's Quarterly Report on Form 10-Q for the quarter 
                 ended September 30, 1996 (Registration No. 0-13318) filed 
                 with the Commission on November 14, 1996.

      3.5*       By-Laws of the Company, as amended and restated on February 
                 24, 1994, and as further amended on August 22, 1996, 
                 incorporated by reference from the exhibit filing to the 
                 Company's Quarterly Report on Form 10-Q for the quarter 
                 ended September 30, 1996 (Registration No. 0-13318) filed 
                 with the Commission on November 14, 1996.

      4.1*       Restated Certificate of Incorporation, as amended (see 
                 Exhibit 3.1).

      4.2*       Certificate of Amendment of Restated Certificate of 
                 Incorporation (see Exhibit 3.2).

      4.3*       Certificate of Designation (see Exhibit 3.3).

      4.4*       Certificate of Amendment of Restated Certificate of 
                 Incorporation (see Exhibit 3.4).

                                     -1-
<PAGE>
    Exhibit
      No.  

     10.1*       Star Technologies, Inc. 1989 Stock Option Plan for 
                 Nonemployee Directors (the "1989 Plan"), incorporated by 
                 reference from the exhibit filing to the Company's Annual 
                 Report on Form 10-K for the fiscal year ended March 31, 1990 
                 (Registration No. 0-13318) filed with the Commission on June 
                 29, 1990.

     10.2*       1989 Plan Stock Option Letter Agreement, incorporated by 
                 reference from the Company's Annual Report on Form 10-K for 
                 the fiscal year ended March 31, 1994 (Registration No. 
                 0-13318) filed with the Commission on June 24, 1994.

     10.3*       Preferred Stock Purchase Agreement, dated as of May 31, 
                 1990, among the Company, General Electric Capital 
                 Corporation, Trustees of General Electric Pension Trust, and 
                 State Farm Mutual Automobile Insurance Company, incorporated 
                 by reference from the exhibit filing to the Company's Annual 
                 Report on Form 10-K for the fiscal year ended March 31, 1990 
                 (Registration No. 0-13318) filed with the Commission on June 
                 29, 1990.

     10.4*       Registration Rights Agreement, dated as of May 31, 1990, 
                 among the Company, General Electric Capital Corporation, 
                 Trustees of General Electric Pension Trust, and State Farm 
                 Mutual Automobile Insurance Company, incorporated by 
                 reference from the exhibit filing to the Company's Annual 
                 Report on Form 10-K for the fiscal year ended March 31, 1990 
                 (Registration No. 0-13318) filed with the Commission on June 
                 29, 1990.

     10.5*       Star Technologies, Inc. 1994 Stock Option Plan, incorporated 
                 by reference from the exhibit filing to the Company's 
                 Registration Statement on Form S-8 (Registration No. 
                 33-84184) filed with the Commission on September 20, 1994.

     10.6*       Stock Repurchase Agreement, dated August 16, 1996, between 
                 the Company and General Electric Company, incorporated by 
                 reference from the exhibit filing to the Company's Quarterly 
                 Report on Form 10-Q for the quarter ended September 30, 1996 
                 (Registration No. 0-13318) filed with the Commission on 
                 November 14, 1996.

     10.7*       Amendment No. 1 to Preferred Stock Purchase Agreement, dated 
                 August 16, 1996, between General Electric Company and the 
                 Company, incorporated by reference from the exhibit filing 
                 to the Company's Quarterly Report on Form 10-Q for the 
                 quarter ended September 30, 1996 (Registration No. 0-13318) 
                 filed with the Commission on November 14, 1996.


                                     -2-
<PAGE>
    Exhibit
      No.  

     10.8*       Stock Option Agreement, dated August 16, 1996, between 
                 General Electric Company and the Company, incorporated by 
                 reference from the exhibit filing to the Company's Quarterly 
                 Report on Form 10-Q for the quarter ended September 30, 1996 
                 (Registration No. 0-13318) filed with the Commission on 
                 November 14, 1996.

     10.9*       Asset Purchase Agreement dated July 30, 1997 between 
                 PowerScan, Inc. and Intrafed, Inc., incorporated by 
                 reference from the exhibit filing to the Company's Current 
                 Report on Form 8-K (Registration No. 0-13318) dated July 30, 
                 1997 filed with the Commission on August 14, 1997.

     10.10*      Technology Purchase Agreement dated July 30, 1997 between 
                 Star Technologies, Inc. and CompuRAD, Inc., incorporated by 
                 reference from the exhibit filing to the Company's Current 
                 Report on Form 8-K (Registration No. 0-13318) dated July 30, 
                 1997 filed with the Commission on August 14, 1997.

     10.11*      Employment Agreement dated October 16, 1997 between Star 
                 Technologies, Inc. and Carol L. Curran.

     11          Statement Regarding Computation of Per Share Earnings.

     21          Subsidiaries of the Registrant.

     23          Consent of KPMG LLP.

     27          Financial Data Schedule





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