STAR TECHNOLOGIES INC, 10-K405, 1996-06-28

STAR TECHNOLOGIES INC
10-K405, 1996-06-28
ELECTRONIC COMPUTERS

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<PAGE>
UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the Fiscal Year Ended March 31, 1996 Commission File Number 0-13318

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.)

515 Shaw Road
Sterling, Virginia 20166
(Address of principal executive offices)
(Zip Code)

(703) 689-4400
(Registrant's telephone number, including area code)

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

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

The aggregate market value of voting stock held by non-affiliates of the
registrant as of June 25, 1996 was $9,323,589. 19,890,324 shares of Common
Stock were outstanding as of June 25, 1996.
<PAGE>
Document incorporated by reference:

1. Star's definitive Proxy Statement for its Annual Meeting to be held August
22, 1996, into Part III of this Report on Form 10-K.

PART I

Item 1. Business

GENERAL

Corporate Repositioning
For more than a decade, Star Technologies, Inc. ("Star" or the "Company")
has successfully developed medical imaging systems for radiology applications.
The Company has concentrated its R&D efforts over the past few years exploring
growth opportunities in the medical imaging business. The Company has targeted
the medical information systems market, including both medical reporting and
digital medical imaging and communications systems. Star's current product
focus is a family of DICOM 3.0-compliant solutions for the medical imaging and
information systems market, with special expertise in the area of DICOM image
storage.

Historically, the medical imaging industry has been severely restricted in
its development by the absence of connectivity standards that would enable
connectivity of devices from diverse imaging manufacturers. During late 1993,
however, the industry approved the ACR-NEMA Digital Imaging and Communications
in Medicine ("DICOM") 3.0 standard which established a set of industry-standard
protocols that enables connectivity of these devices. These changes, combined
with the impact of managed care and capitation, are anticipated to foster
growth and acceptance of picture archiving and communication systems ("PACS")
for the medical image and information market. Potential applications for
Star's DICOM solutions include modality cluster, on-line and off-line Long-Term
Archive, secondary capture, and display for PACS and teleradiology. Star also
provides other specialized radiology-related services, including digital
dictation reporting systems, board repair for computed tomography ("CT") image
reconstruction processors, and contract engineering services.

Star has historically been a supplier of performance-enhancing computing
products and solutions for the image and signal processing marketplace,
principally for medical imaging. Star's major customer, General Electric
Medical Systems ("GEMS"), ceased purchasing reconstruction processors in May
1995. The Company's revenue from shipments and related services to GEMS was
$2,304,000, $19,556,000, and $22,787,000 in fiscal 1996, 1995 and 1994,
respectively. (See Part II, Item 7 and Item 8, Notes 2 and 8.)

In May 1995, the Company engaged the investment banking firm of Broadview
Associates, LP of San Mateo, California to assist the Company in the
identification of strategic opportunities, including acquisitions. The Company
has engaged in discussions with two companies relating to the possible
acquisition of those companies, but has reached no formal agreements or
understandings with either company.

Image Management Server
Star's Image Management Server ("IMS") is a full DICOM 3.0 Storage Class
image management system for the integration, storage and access of medical
images and related information. The IMS is a key component of the Star family
of Image Management Solutions. It combines a proven industry-standard database
platform with a flexible hierarchical image storage system that is scalable to
a customer's needs. The Star IMS provides a cost-effective, centralized and
convenient means of accessing patient

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<PAGE>
information from multiple acquisition sources, for applications such as CT and
magnetic resonance imaging ("MRI") clustering, or longer term storage for an
in-house image distribution system. Star installed an IMS for evaluation at
the University of Virginia Medical Science Center in fiscal 1995. The IMS
received Federal Food and Drug Administration ("FDA") market clearance in May
1995 and anticipates generating initial revenue from the product in the second
quarter of fiscal 1997.

Film Image Scan System
Star's Film Image Scan System ("FISS") converts film into a DICOM image
information system environment. A component of the Star family of Medical
Information Management Solutions, the FISS combines the industry's leading film
digitizers, from Lumisys, Vidar and RDI, with a PC-based Image Quality and
Reformatter Station. This combination provides a cost-effective means to scan
film studies (CT, MRI, X-ray, etc.), convert them to digital images, include
patient information, reformat images into the DICOM 3.0 standard, and send
these images anywhere they are needed on a network (to a physician review
station or to an image management or archive system). The Image Quality and
Reformatter Station also provides the functionality to preview and control
image quality and ensure proper image orientation before storing and
distributing the data. The FISS is currently being tested at potential
customer sites. The FISS received FDA market clearance in August 1995.

First Results
First Results is an integrated medical reporting system providing a
convenient, cost-effective process for tracking and disseminating diagnostic
results. First Results is the first electronic medical reporting system that
interfaces directly with Hospital Information Systems, taking a strategic move
forward in making all clinical information electronically and immediately
available. First Results is installed in seven hospitals for which the Company
provides maintenance support and software upgrades. The original technology
was purchased from IBM in fiscal 1994.

Contract Engineering and Manufacturing Services
In addition, Star also does contract manufacturing projects and
engineering services work and continues to pursue additional work in these
areas to fully utilize its available manufacturing capacity and resources and
technical skills.

Service
The Company provides service repair and maintenance on its
high-performance computers as well as its older computing products known as
array processors. The Company provides software and hardware maintenance and
software development and upgrades on its dictation and transcription products.

History
The Company was in the development stage from its formation in August 1981
until the first array processor was shipped in July 1983. In February 1984,
Star contracted with General Electric Company ("GE") to develop and sell the
ST-CT array processor to GEMS under a multi-year OEM agreement. Shipments of
the ST-CT commenced in the second quarter of fiscal 1986. Since that time
through May 1995, sales to GEMS represented a substantial share of Star's total
business.

In fiscal 1992, the Company entered into a joint development agreement
with GEMS to develop the next generation of GEMS' medical imaging product. The
Company phased the new product, the ST-RP, into production in fiscal 1994 under
the OEM agreement. 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, under the terms of the Development and Technology Transfer
Agreement (the "Development Agreement") between

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<PAGE>
the Company and GEMS, to continue to obtain its requirements for ST-RPs from
the Company beyond those volumes ordered, and filed a demand for arbitration
in January 1995, in accordance with the terms of the Development Agreement.
The arbitration panel appointed to resolve the dispute awarded Star $9.1
million in March 1996. GEMS has filed an action asking that the award be set
aside, and has opposed the Company's separate action to confirm the award.
Both actions are pending. (See Part II, Item 8, Note 8.)

In April 1988, the Company acquired the GraphiconTM Products Division
from GE. The Company further developed this business, which included investing
in new 3-D graphics software and hardware technologies and marketing programs
to expand distribution channels. In March 1995, the Company sold this division
and licensed the G2000 technology to the prime contractor under the United
States Navy's SH-60 helicopter contract.

In fiscal 1994, the Company began R&D work on new products for the image
and information management market, including the IMS and FISS. The Company has
received FDA clearance to market both products.

In fiscal 1994, the Company purchased the rights to certain IBM software
technology which provides integrated and automated dictation and transcription
systems. The Company currently markets these products to hospitals under the
name First Results.

CUSTOMERS

Sales to GEMS accounted for approximately 54%, 90%, and 78% of the
Company's revenue in fiscal 1996, 1995 and 1994, respectively. Such sales
consisted primarily of ST-CT and ST-RP shipments for use in CT medical imaging
systems. CT systems use computers and scanners to produce cross-sectional
images of certain organs and body tissues. GEMS ceased purchasing such units
from the Company in May 1995. (See Part II, Item 7 and Item 8, Notes 2 and 8.)

Sales to a prime contractor under the United States Navy's SH-60 Program
to supply Graphicon 2000 image generators accounted for 18%, 1% and 13% of the
Company's revenue in fiscal 1996, 1995, and 1994, respectively. Work under the
contract began in fiscal 1993 and was completed in fiscal 1995. Revenue in
fiscal 1996 is the partial payment on the termination claim discussed in Part
II, Item 7, Results of Operations and Item 8, Note 1.

MARKETING AND CUSTOMER SERVICE

The Company markets and services its products through its own direct sales
force, distributors, and OEMs. Star has focused its primary marketing strategy
on providing solutions to strategic OEM partners. At June 15, 1996, the
Company had seven employees in sales, marketing and service activities in or
near Chicago and Washington, DC.

The Company provides a factory warranty (usually 90 days) covering parts
and labor for its hardware. The Company also offers non-warranty maintenance
services and software maintenance services and upgrades on a contract basis.
Certain OEM customers elect to provide their own maintenance services, in which
case the Company generally trains the customers' service personnel. Service
revenue as a percentage of total revenue was approximately 19% in fiscal 1996,
7% in fiscal 1995, and 6% in fiscal 1994. The percentage increase in fiscal
1996 is not due to higher service revenue but to significantly lower total
revenue in fiscal 1996 due to the loss of the GEMS business discussed above.

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<PAGE>
BACKLOG

The Company does not have a backlog of orders at May 31, 1996.

RESEARCH AND DEVELOPMENT

The Company is committed to technological development to maintain the
competitiveness of its products. The Company's strategy has been to continue
enhancing its existing products while devoting substantial resources to the
development of new products. Research and development expenditures totaled
$2.2 million, $4.7 million, and $6 million in fiscal 1996, 1995 and 1994,
respectively. Of the fiscal 1995 and 1994 amounts, $1.1 million and
$2.4 million, respectively, are recorded as cost of revenue as part of a
long-term subcontract completed in fiscal 1995.

MANUFACTURING

Manufacturing operations are performed at the Company's facility in
Sterling, Virginia. The Company is currently pursuing potential contract
engineering and manufacturing projects to fully utilize its available capacity.

COMPETITION

The Company's products compete in markets which are highly competitive and
characterized by rapid technological advances. As a result, frequent new
product introductions, increased capabilities and applications, and
improvements in the relative price/performance of available products are common
in the industry. Other important competitive factors include the availability
of software required to be developed by both the manufacturer and its
customers, product quality and reliability, ease of use, marketing and
distribution capability, and post-sale service and support.

The image management market for medical imaging is highly competitive and
includes imaging equipment manufacturers, film companies, information systems
vendors, telephone companies, system integrators and a large number of small,
independent companies. Star has focused its primary marketing strategy on
providing solutions to strategic OEM partners.

Many of the Company's competitors have significantly larger financial,
marketing, and technical resources than the Company.

PATENTS

Because of rapid technological advances in the computer industry, the
Company generally has not sought patent protection for its products. The
Company believes that patents are of less significance to its industry than
such factors as the innovative skills, technological expertise and management
skills of its personnel. However, the Company considers many of the principal
elements of the design of its hardware and software to be valuable trade
secrets and confidential proprietary information. In certain limited
circumstances, the Company has obtained, and will continue to seek, patents on
certain of its proprietary products and components. (See Part II, Item 8, Note
8.)

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<PAGE>
EMPLOYEES

At June 15, 1996, the Company had 35 employees, of which 14 were engaged
in engineering and research and development; 7 in marketing, sales and service;
2 in manufacturing; and 12 in general management, finance and administration.

EXECUTIVE OFFICERS

The officers who may be deemed to be executive officers of the Company are
as follows:

Name Age Position

Robert C. Compton 49 Chairman of the Board, President
and Chief Executive Officer
Brenda A. Potosnak 34 Controller, Treasurer, Secretary
and Principal Accounting Officer

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 financial, management, and
corporate auditing positions at GE.

Brenda A. Potosnak joined the Company in November 1992 as Controller and
Principal Accounting Officer. She assumed the duties of Treasurer and
Secretary in March 1995. Prior to joining the Company, 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.

Item 2. Properties

The Company leases 79,000 square feet of a facility in Sterling, Virginia
for corporate headquarters and manufacturing, under a lease expiring in October
2000.

Item 3. Legal Proceedings

For a discussion of significant pending legal proceedings, refer to the
item entitled "Legal Proceedings" in Note 8 in Part II, Item 8 of this Report
on Form 10-K.

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

None.

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<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 NASDAQ National Market System
under the symbol STRR. At June 25, 1996, there were approximately 1,550
holders of record of the Company's common stock. The table below represents
the high and low closing prices for the last two fiscal years (in dollars).
<TABLE>
<CAPTION>
1996 1995
High Low High Low
<S> <C> <C> <C> <C>

First Quarter................................ 23/32 7/32 13/16 7/16
Second Quarter............................... 19/32 11/32 9/16 3/8
Third Quarter................................ 15/32 7/32 7/16 7/32
Fourth Quarter............................... 23/32 9/32 3/8 7/32
</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 its
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.

Item 6. Selected Financial Data
<TABLE>
FIVE-YEAR FINANCIAL SUMMARY
<CAPTION>
(In thousands, Years ended March 31,
except per share data) 1996 1995 1994 1993 1992

Operations Statement Data:
<S> <C> <C> <C> <C> <C>
Revenue............................ $ 4,282 $21,623 $29,351 $23,468 $32,937
Discontinued products and
related charges.................. $ -- $ -- $ -- $ -- $(4,527)
Operating income (loss)............ $(4,465) $ 663 $ 2,261 $ (46) $(4,288)
Net income (loss).................. $(3,984) $ 1,193 $ 2,175 $ (188) $(4,642)
Net income (loss) per common
and common equivalent share...... $ (.02) $ .16 $ .01 $ (.12) $ (.36)

Balance Sheet Data:
Working capital.................... $ 4,562 $ 9,399 $ 8,457 $ 4,670 $ 3,203
Property and equipment, net........ $ 502 $ 698 $ 1,308 $ 2,409 $ 3,945
Total assets....................... $ 6,674 $13,020 $13,299 $14,613 $17,804
Total debt......................... $ -- $ 49 $ 153 $ 2,660 $ 3,606
Stockholders' equity............... $ 5,208 $10,374 $10,624 $ 8,418 $ 7,935
</TABLE>

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<PAGE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations

Results of Operations - Fiscal 1996 Compared to Fiscal 1995

Revenue in fiscal 1996 was $4.3 million, compared with $21.6 million in
fiscal 1995. The 80% decrease from fiscal 1995 was due to the cessation of
sales to General Electric Medical Systems ("GEMS") of the Company's
reconstruction processor in May 1995, as discussed in Part I, Item 1, and
below. Revenue from sales to GEMS totaled $2.3 million and $19.6 million for
fiscal 1996 and 1995, respectively. Other sources of revenue during fiscal
1996 include partial payments received on a claim under the U.S. Navy's SH-60
Program, discussed below, in Part I, Item 1 and in Note 1 to the Consolidated
Financial Statements, from maintenance and support agreements, and from sales
of spare parts.

The Company previously reported that GEMS had informed the Company that
GEMS intended to stop purchasing the Company's most recently developed
reconstruction processor, the ST-RP. The Company has not shipped any ST-RP's
since May 1995. The Company filed a demand for arbitration in January 1995,
believing that GEMS was obligated, under the terms of a Development and
Technology Transfer Agreement between the Company and GEMS, to continue to
obtain its requirements for reconstruction processors from the Company. The
arbitration panel appointed to resolve the dispute awarded the Company $9.1
million in March 1996 for lost profits, related damages and a one-time royalty
payment. GEMS has filed an action asking that the award be set aside and has
opposed the Company's separate action to confirm the award. Both actions are
pending. The award has not been received and is not reflected in fiscal 1996
results. (See Note 8 to the Consolidated Financial Statements.)

The Company has pending with the prime contractor a claim for recovery of
related costs associated with one lot terminated in August 1993 for the
convenience of the government under the SH-60 long-term subcontract. During
fiscal 1996, the Company received payments of $724,000 on the claim covering a
portion of the related costs and the full cost of the inventory. This amount
is recorded as revenue in fiscal 1996. In June 1996, the Company and the prime
contractor agreed on a final settlement of $443,000 on the claim. This amount
will be recognized in the first quarter of fiscal 1997.

In response to the elimination of reconstruction processor sales to GEMS,
in early June 1995, the Company reduced its workforce by approximately 30%,
affecting manufacturing, engineering and administrative departments. Resultant
cost reductions are reflected beginning in the second quarter of fiscal 1996.

Research and development ("R&D") expense decreased 40% in fiscal 1996 from
fiscal 1995. The decrease is primarily attributable to lower costs as a result
of the sale of the Graphicon Products Division in March 1995 and a company-wide
reduction in workforce in June 1995. Due to the nature of its business, the
Company expects R&D expense as a percentage of revenue to continue to be a
significant operating expense.

Excluding the effect of the foreign translation gain recognized in fiscal
1995, marketing and sales expense decreased 44% in fiscal 1996 from fiscal
1995. The decrease is primarily the result of the sale of the Graphicon
Products Division in March 1995, the closing of the UK division in fiscal 1995
and the closing of the Houston sales office in early fiscal 1996.

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<PAGE>
General and administrative expense increased 4% in fiscal 1996 from fiscal
1995. The increase is due to substantially higher legal fees, totaling over
$1.2 million, primarily associated with the GEMS arbitration hearing and a
patent infringement litigation, partially offset by the company-wide workforce
reduction in June 1995. During fiscal 1996 and 1995, the Company earned
$429,000 and $285,000, respectively, of net interest income on its short-term
investments. Other income in fiscal 1995 primarily reflects the gain on the
sale of the Graphicon Products Division in March 1995.

Results of Operations - Fiscal 1995 Compared to Fiscal 1994

Revenue in fiscal 1995 was $21.6 million, compared with $29.4 million in
fiscal 1994. The 26% decrease from fiscal 1994 was due to sales of a
lower-priced medical imaging product to GEMS in fiscal 1995, despite comparable
unit sales, and the reduction in revenue from the completion of the long-term
SH-60 subcontract.

In fiscal 1995, the Company completed work under a subcontract to supply
Graphicon 2000 image generators to a prime contractor under the United States
Navy's SH-60 Program. The subcontract had an adjusted total contract value of
$7.6 million, before the termination claim discussed above, to the Company over
the life of the subcontract. Revenue totaling approximately $300,000 was
recognized during fiscal 1995, compared to $3.8 million in fiscal 1994. During
fiscal 1995, the Company also recorded higher costs for software modifications
on the program than were originally estimated. These additional costs are
reflected in cost of revenue.

The Company's gross margin percentage was 38% in fiscal 1995 and 39% in
fiscal 1994. The 1% decrease in fiscal 1995 is due to sales of a lower margin
medical imaging product during the first half of the year and higher completion
costs on the subcontract mentioned above during fiscal 1995, offset by cost
reductions on the medical imaging product during the second half of the fiscal
year.

R&D expense remained constant in fiscal 1995 and reflects expenses
associated with new business and product development. Excluding the effect of
the foreign translation gain, marketing and sales expense decreased 39% in 1995
as compared to 1994. The decrease is primarily the result of the Company's
fiscal 1994 fourth quarter reduction of its Graphicon sales and marketing
departments. General and administrative expense decreased 5% in fiscal 1995
from fiscal 1994. During fiscal 1995, the Company earned $285,000 of net
interest income on its short-term investments compared to net interest expense
in fiscal 1994 of $82,000.

Liquidity and Capital Resources

The table below shows selected financial highlights which reflect the
Company's liquidity position at the end of fiscal 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
At March 31,
1996 1995

<S> <C> <C>
Working Capital................................... $4,562 $9,399
Short-term Investments............................ $4,886 $7,900
Accounts Payable.................................. $ 608 $ 893
Bank Debt......................................... $ -- $ --
</TABLE>

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<PAGE>
Cash flow used for operations in fiscal 1996 totaled $2.5 million. This
cash deficit along with the Company's repurchase of a block of its preferred
stock decreased the Company's investment in short-term securities. The $1.7
million decrease in inventory is primarily due to a reduction of the
GEMS-related inventory as deliveries to GEMS for such inventory ceased during
May 1995. Property and equipment additions in fiscal 1996 totaled $91,000 and
depreciation expense was $286,000. Based on the Company's current plans,
fiscal 1997 capital expenditures are anticipated to be comparable to fiscal
1996.

The Series B and Series C Senior Preferred Stock (the "Preferred Stock")
accrues dividends at a rate of 14% per annum (exclusive of any penalty),
effective June 1, 1996. The original rate was 10% per annum and was subject to
2% per annum increases on both June 1, 1995 and 1996. The dividend rate is
subject to a final increase of 1% per annum on June 1, 1997. The per annum
dividend rate on the Preferred Stock is also subject to a 2% increase should
the Company breach any of certain covenants outlined in the Preferred Stock
Purchase Agreement or not pay in full when due any dividends on the Preferred
Stock. The Company is not in compliance with certain of the covenants in the
Preferred Stock Purchase Agreement and has not paid the dividends due on the
remaining Preferred Stock. Consequently, dividends have been calculated at an
aggregate dividend rate of 12% per annum through May 31, 1995, at 14% through
June 1, 1996 and are currently calculated at 16% per annum. To the extent
declared, such dividends would be payable quarterly in the amount of $348,000
in cash. Unpaid cumulative dividends in arrears on the Preferred Stock total
$4.8 million as of May 31, 1996. The Company is engaged in discussions with
GE, the sole remaining holder of the Preferred Stock, regarding the repurchase
and retirement of a portion of its holdings of Preferred Stock.

As discussed in Note 8 to the Consolidated Financial Statements, Legal
Proceedings, on June 13, 1995, Ronald Walters filed a claim against the Company
for patent infringement and unjust enrichment. While the Company cannot
predict the likely outcome of this matter at this time, a judgment against the
Company could have a material adverse impact on the Company's results of
operations and liquidity. Management believes that it has valid defenses
against this claim.

The Company expects to have sufficient cash, through its current cash and
short-term investment position and from operations, to meet its fiscal 1997
operating requirements. In the event that the Company requires more funds,
there can be no assurance that the Company would be successful in raising new
capital from external sources.

Corporate Repositioning

The Company has concentrated its R&D efforts over the past few years
exploring growth opportunities in the medical imaging business in which the
Company has over ten years of experience. The Company has targeted the medical
information systems market, including both medical reporting and digital
medical imaging and communications

-9-

<PAGE>
systems. In May and August 1995, the Company received Food and Drug
Administration clearance to market the Image Management Server and the Film
Image Scan System, respectively, two of the Company's new products. The
Company continues to work on these and other products in the imaging and
information systems market and anticipates initial sales of the products during
the second quarter of fiscal 1997. The Company can give no assurances that the
products will be accepted in the marketplace or will significantly offset the
lost revenue from GEMS.

Recent Accounting Pronouncements

In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed of ("Statement
121"). Statement 121 will require that the Company review its long-lived
assets for impairment whenever events or circumstances indicate that the
carrying amount of an asset may not be recoverable. To the extent that the
undiscounted net future cash flows expected to be generated from an asset are
less than the asset's carrying amount, an impairment loss is recognized as the
difference between that asset's carrying amount and its fair value. The
Company adopted Statement 121 as of April 1, 1996. In the opinion of
management of the Company, the adoption of Statement 121 will not have a
material impact on the Company's financial condition or results of operations.

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation ("Statement 123"). Under Statement 123, the Company may elect,
but is not required, to adopt a fair value approach to accounting for
stock-based awards granted to employees. The Company adopted Statement 123 as
of April 1, 1996. The Company does not expect to implement the fair value
methodology of Statement 123, although certain pro forma disclosures will be
required beginning with the Company's fiscal 1997 consolidated financial
statements.
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<PAGE>
Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT AUDITORS

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 28. In connection with our audits of the consolidated
financial statements, we have also audited the consolidated financial statement
schedule as listed in the accompanying index. These consolidated financial
statements and consolidated financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and consolidated financial statement
schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the 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 March 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended March 31, 1996, in conformity with generally accepted
accounting principles. Also in our opinion, the related consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.

KPMG PEAT MARWICK LLP

McLean, Virginia
May 31, 1996

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<PAGE>
<TABLE>
Consolidated Statements of Operations
(In thousands, except per share data)
<CAPTION>
Years ended March 31,
1996 1995 1994

<S> <C> <C> <C>
Revenue (includes revenue from GE of $2,354,
$19,582 and $22,839)..................... $ 4,282 $21,623 $29,351
Cost of revenue.............................. 2,714 13,452 18,002
------- ------- -------
Gross margin................................. 1,568 8,171 11,349
------- ------- -------
Operating expenses
Research and development................. 2,151 3,590 3,588
Marketing and sales...................... 839 993 2,429
General and administrative............... 3,043 2,925 3,071
------- ------- -------
6,033 7,508 9,088
------- ------- -------
Operating income (loss)...................... (4,465) 663 2,261

Interest income (expense) net................ 429 285 (82)
Other income (expense), net.................. 52 245 (4)
------- ------- -------
Income (loss) before provision for income
taxes.................................... (3,984) 1,193 2,175
Provision for income taxes................... -- -- --
------- ------- -------
Net income (loss)............................ $(3,984) $ 1,193 $ 2,175
======= ======= =======

Net income (loss)............................ $(3,984) $ 1,193 $ 2,175
Preferred stock dividend requirement......... (1,342) (2,065) (2,065)
Repurchase of preferred stock................ 4,954 3,968 --
------- ------- -------
Net income (loss) applicable to common
shares................................... $ (372) $ 3,096 $ 110
======= ======= =======
Earnings (loss) per share:
Per common and common equivalent share..... $ (.02) $ .16 $ .01
Assuming full dilution..................... $ (.02) $ .14 $ .01
======= ======= =======
</TABLE>

See accompanying notes to consolidated financial statements.

-12-

<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Financial Position At March 31,
(In thousands, except share data) 1996 1995

<S> <C> <C>
Assets
Current assets
Cash........................................................ $ 166 $ 1,353
Short-term investments...................................... 4,886 7,900
Accounts receivable, net (includes GE receivables of
$1 and $91)............................................... 156 248
Inventory, net.............................................. 726 2,462
Other current assets........................................ 94 70
------- -------
Total current assets........................................ 6,028 12,033
Property and equipment, net..................................... 502 698
Other assets.................................................... 144 289
------- -------
Total assets................................................ $ 6,674 $13,020
======= =======
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable............................................ $ 608 $ 893
Accrued payroll and related benefits........................ 408 615
Other accrued liabilities................................... 438 1,089
Notes payable and capital lease obligations................. 12 37
------- -------
Total current liabilities................................... 1,466 2,634
Capital lease obligations, net of current portion............... -- 12
------- -------
Total liabilities........................................... 1,466 2,646
------- -------
Commitments and contingencies................................... -- --
Stockholders' equity
Preferred stock; $.01 par value; 1,000,000 shares authorized
Series A convertible; 500,000 shares designated; 46,900
shares issued; 46,900 shares outstanding; aggregate
liquidation preference of $1,688......................... 1 1
Series B convertible; 120,117 shares designated; 59,584
and 87,513 shares issued; 59,584 and 87,513 shares
outstanding; aggregate liquidation preference of $5,958
and $8,751............................................... 1 1
Series C convertible; 80,079 shares designated; 39,723 and
58,343 shares issued; 39,723 and 58,343 shares outstanding;
aggregate liquidation preference of $3,972 and $5,834.... 1 1
Common stock; $.01 par value; 60,000,000 shares authorized;
19,927,035 and 19,919,035 shares issued; 19,880,244 and
19,872,244 shares outstanding............................ 199 199
Additional paid-in capital.................................. 63,446 64,628
Treasury stock, at cost; 46,791 shares...................... (201) (201)
Retained deficit............................................ (58,239) (54,255)
------- -------
Total stockholders' equity.................................. 5,208 10,374
------- -------
Total liabilities and stockholders' equity.................. $ 6,674 $13,020
======= =======
</TABLE>

See accompanying notes to consolidated financial statements.

-13-
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
(In thousands)
<CAPTION>
Years ended March 31,
1996 1995 1994

<S> <C> <C> <C>
Cash flows from (used for) operating activities
Net income (loss).................................. $(3,984) $ 1,193 $ 2,175
Adjustments to reconcile net income (loss) to net
cash from (used for) operating activities
Depreciation and amortization...................... 319 1,358 1,878
Gain on recognition of translation adjustment...... -- (494) --
Gain on sale of Graphicon assets................... -- (257) --
(Increase) decrease in restricted cash............. 513 (530) --
(Increase) decrease in accounts receivable......... 92 2,518 (599)
Decrease in inventory.............................. 1,736 2,673 1,437
Increase in other current assets................... (24) -- (9)
Decrease in accounts payable....................... (285) (249) (1,156)
Increase (decrease) in accrued liabilities......... (858) 324 143
------- ------- -------
Net cash from (used for) operating activities.......... (2,491) 6,536 3,869
------- ------- -------
Cash flows from (used for) investing activities
Net proceeds from sale of Graphicon assets......... -- 1,836 --
Capital expenditures............................... (91) (437) (316)
Other investing activities, net.................... 113 65 89
------- ------- -------
22 1,464 (227)
------- ------- -------
Cash flows from (used for) financing activities
Decrease in notes payable and capital lease
obligations...................................... (37) (104) (2,507)
Repurchase of preferred stock...................... (1,187) (950) --
Proceeds from stock option exercises............... 5 1 34
------- ------- -------
(1,219) (1,053) (2,473)
------- ------- -------
Net increase (decrease) in cash and equivalents........ (3,688) 6,947 1,169
Cash and equivalents, beginning of year................ 8,723 1,776 607
------- ------- -------
Cash and equivalents, end of year...................... $ 5,035 $ 8,723 $ 1,776
======= ======= =======
</TABLE>

See accompanying notes to consolidated financial statements.

-14-

<PAGE>

<TABLE>
Consolidated Statements of Changes in Stockholders' Equity
(In thousands)
<CAPTION>
Number of Shares Additional
------------------ Preferred Common Paid-In Other Retained
Preferred Common Stock Stock Capital (a) Deficit Total

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1993 297 19,393 $3 $194 $65,548 $296 $(57,623) $ 8,418

Net income................... 2,175 2,175
Stock options exercised...... 43 34 34
Translation adjustment....... (3) (3)
--- ------ -- ---- ------- ----- -------- -------
Balance, March 31, 1994 297 19,436 3 194 65,582 293 (55,448) 10,624

Net income................... 1,193 1,193
Stock options exercised...... 3 1 1
Conversion of preferred
(Series A).................. (67) 480 5 (5) --
Repurchase of preferred
(Series B and C)............ (37) (950) (950)
Translation adjustment....... (494) (494)
--- ------ -- ---- ------- ----- -------- -------
Balance, March 31, 1995 193 19,919 3 199 64,628 (201) (54,255) 10,374

Net loss..................... (3,984) (3,984)
Stock options exercised...... 8 5 5
Repurchase of preferred
(Series B and C)............ (47) (1,187) (1,187)
--- ------ -- ---- ------- ----- -------- -------
Balance, March 31, 1996 146 19,927 $3 $199 $63,446 $(201) $(58,239) $ 5,208
=== ====== == ==== ======= ===== ======== =======
(a) Includes treasury stock and translation adjustment.
</TABLE>

See accompanying notes to consolidated financial statements.

-15-
<PAGE>
Notes to Consolidated Financial Statements

NOTE 1 - Summary of Significant Accounting Policies

Description of business
Star Technologies, Inc. has historically designed and manufactured
performance-enhancing computing products and solutions for the image and signal
processing marketplace, principally for medical imaging. Star is currently
developing products for the image and information management market. A key
segment of this market is medical imaging, which draws upon Star's historical
skills and experience. Star's current product focus is a family of DICOM
3.0-compliant solutions, with special expertise in the area of DICOM image
storage. Star markets its products and technology to OEM suppliers of medical
imaging equipment. The Company anticipates generating initial revenue from
these products in the second quarter of fiscal 1997. In addition, Star
continues to pursue contract engineering and manufacturing business
opportunities. The Company's products compete in markets which are highly
competitive and characterized by rapid technological advances.

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.

Revenue recognition
Product sales are recognized when legal title passes, which is generally
at time of shipment, or in certain cases, when accepted by the customer.
Engineering and service revenue are recognized as revenue when such services
are provided, or ratably over the contractual service period. Amounts received
but not earned are deferred and are reflected as other accrued liabilities.
Revenue on a long-term subcontract, completed during fiscal 1995, was
recognized under the percentage-of-completion method of accounting based on the
ratio of costs incurred to total estimated costs. Losses on the long-term
contract were recognized when they became known. Revenue under this long-term
subcontract for the U.S. Navy's SH-60 Program totaled approximately $750,000,
$300,000 and $3.8 million in fiscal 1996, 1995 and 1994, respectively.

Cash and equivalents
Cash and equivalents include cash and short-term investments. Cash
includes cash in banks and, at March 31, 1995, overnight reverse repurchase
agreements. The overnight reverse repurchase agreements totaled $822,000 at
March 31, 1995. At March 31, 1996 and 1995, cash included approximately
$17,000 and $530,000, respectively, of restricted cash held in escrow for
payment of certain engineering services to be provided by the purchaser of the
assets of the Graphicon Products Division. (See Note 3.)
The Company's short-term investments consist entirely of commercial paper.
These investments, which are held to maturity (less than three months from the
date of purchase), are carried at cost which approximates their market value.
Interest income was $429,000, $287,000, and $16,000 in fiscal 1996, 1995, and
1994, respectively.

Accounts receivable
Accounts receivable are shown net of an allowance for doubtful accounts of
$22,000 and $74,000 at March 31, 1996 and 1995, respectively. The provision
for doubtful accounts was $4,000, $32,000, and $89,000 in fiscal 1996, 1995,
and 1994, respectively.
Inventory
Inventory is stated at the lower of cost (first-in, first-out basis) or
market. All classifications of inventory include materials and an allocation
of manufacturing overhead. Systems-in-process and completed systems include an
allocation of labor.

-16-
<PAGE>
<TABLE>
The major classifications of inventory are as follows (in thousands):
<CAPTION>
At March 31,
1996 1995

<S> <C> <C>
Components and subassemblies..................... $686 $1,973
Systems-in-process............................... 22 413
Completed systems................................ 18 76
---- ------
$726 $2,462
==== ======
</TABLE>
Approximately $400,000 of inventory at March 31, 1995 related to a lot
terminated for the convenience of the government during fiscal 1994 under a
long-term subcontract under the United States Navy's SH-60 Program. The
Company submitted a claim for recovery of related costs and inventory. During
fiscal 1996, the Company received a partial payment on the claim covering a
portion of the related costs and the full cost of the inventory. In June 1996,
the Company and the prime contractor agreed on a final settlement of $443,000
on the claim. This amount will be recognized in the first quarter of fiscal
1997.
The Company records a provision for damaged or potentially excess
inventory based on a percentage of the cost of all purchased materials. Such
provisions are reflected in the consolidated statements of operations as cost
of revenue. Additionally, due to the nature of the high technology industry,
the Company analyzes, on a quarterly basis, its levels of inventory, by product
line, for any excess quantities or additional obsolescence which may arise as a
result of changes in the marketplace, new product introductions by competitors,
or other factors which could cause the Company's levels of inventory for
specific products to be in excess of what the Company believes will be disposed
of through future sales of the given product. If, after such analysis, the
Company concludes that it has inventory in excess of saleable quantities,
additional reserves are recorded to reduce the carrying value of the inventory
to its net realizable value.
Inventory is shown net of a reserve for damaged or potentially excess
inventory of $7,288,000 and $7,040,000 at March 31, 1996 and 1995,
respectively, of which $4,123,000 and $4,135,000 is for fully reserved
inventory used by the Company to service existing customers. The Company
recorded provisions to cost of revenue for damaged or potentially obsolete
inventory of $404,000, $1,291,000, and $1,111,000 during fiscal 1996, 1995, and
1994, respectively.

Property and equipment
Property and equipment are recorded at cost. 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.

Translation of foreign currencies
Prior to the significant reduction of its foreign business and the closing
of its European offices, operating accounts of the Company's foreign
subsidiaries were translated into U.S. dollars using average currency exchange
rates during the year. Statements of financial position were translated using
the applicable exchange rates in effect at year end. Adjustments resulting
from translation of foreign financial statements were reported as a component
of consolidated stockholders' equity.

-17-
<PAGE>
The Company recognized an accumulated foreign translation gain of $494,000
in the first quarter of fiscal 1995 relating to the closing of its European
offices. The gain is reflected as a reduction of marketing and sales expense
in the fiscal 1995 Consolidated Statement of Operations.

Earnings (loss) per common share
Earnings (loss) per common and common equivalent share computations are
based on the weighted average number of common and common equivalent shares
outstanding and income applicable to common shares after preferred stock
dividends. Common equivalent shares result from the assumed exercise of
outstanding stock options and warrants that have a dilutive effect when
applying the treasury stock method. The computation of fully diluted earnings
(loss) per common and common equivalent share includes all other shares of
common stock that potentially may be issued, principally because of conversion
privileges. For fiscal 1996 and 1994, the computations of fully diluted
earnings per share are antidilutive; therefore, primary and fully diluted
earnings per share are identical.
The weighted average number of common and common equivalent shares used in
the computations of earnings (loss) per common and common equivalent share was
19,879,000, 19,680,000, and 19,378,000 for the years ended March 31, 1996,
1995, and 1994, respectively.
For the earnings (loss) per common share calculations only, earnings
(loss) is reduced (increased) for the undeclared cumulative preferred stock
dividends of $1,342,000 for the year ended March 31, 1996 and $2,065,000 for
each of the years ended March 31, 1995 and 1994. For the years ended March 31,
1996 and 1995, earnings is also increased by $4,954,000 and $3,968,000,
respectively, the difference between the carrying amount of the redeemed
preferred stock, including cumulative undeclared dividends, and the price paid
by the Company to repurchase the stock. (See Note 6.)

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.

Use of estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare the consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.

NOTE 2 - Transactions with General Electric Company ("GE")

Sales to GE
In February 1984, the Company entered into a multi-year agreement with GE
which provided for sales of the ST-CT and its next-generation versions of
high-speed medical imaging processors to General Electric Medical Systems
("GEMS"). In October 1991, the Company entered into a Development and
Technology Transfer Agreement with GEMS (the "Development Agreement") to
develop the next generation of GEMS' medical imaging product.

-18-
<PAGE>
The Company previously reported that GEMS had informed the Company that GEMS
intended to stop purchasing the Company's most recently developed
reconstruction processor, the ST-RP. The Company has not shipped any ST-RPs
since May 1995.
The Company filed a demand for arbitration in January 1995, believing that
GEMS was obligated, under the terms of the Development Agreement, to continue
to obtain its requirements for reconstruction processors from the Company. The
arbitration panel appointed to resolve the dispute awarded the Company $9.1
million in March 1996 for lost profits, related damages and a one-time royalty
payment. GEMS has filed an action asking that the award be set aside and has
opposed the Company's separate action to confirm the award. Both actions are
pending. The award has not been received and is not reflected in fiscal 1996
results of operations. (See Note 8.)
The Company had sales to GE in fiscal 1996, 1995, and 1994 of $2,354,000,
$19,582,000 and $22,839,000, respectively.

Equity holdings
In March 1995, the Company repurchased 22,344 shares of Series B Senior
Preferred Stock and 14,896 shares of Series C Senior Preferred Stock held by
General Electric Pension Trust. Equity holdings by GE totaled 99,307 shares of
the Company's Series B and Series C Senior Preferred Stock and 624,339 shares
of the Company's common stock at March 31, 1996. (See Note 6.)

NOTE 3 - Sale of Graphicon Products Division

On March 2, 1995, the Company sold substantially all of the assets of the
Company's Graphicon Products Division located in Research Triangle Park, North
Carolina, to AAI Systems Management, Inc. ("AAI/SMI"). AAI/SMI is the prime
contractor under the United States Navy's Visual System Upgrade Program for the
SH-60 helicopter, for which the Company, under a subcontract with AAI/SMI, has
supplied Graphicon 2000 image generators.
The assets sold included certain property and equipment and all amounts
due the Company from AAI/SMI under the SH-60 subcontract. Net proceeds from
the sale totaled $1.8 million and resulted in a gain of $257,000.
In addition, the Company contracted with AAI/SMI for AAI/SMI to provide
engineering services relating to product enhancements for an amount not to
exceed $530,000. To date, the Company has been provided engineering services
totaling $513,000. AAI/SMI will pay the Company a yearly license fee and a 10%
royalty on future sales of the G2000 product, once G2000 sales have aggregated
$500,000. Upon paying the Company an aggregate of $2 million in license fees
and royalties, AAI/SMI will own the G2000 technology. To date there have been
no sales of the G2000 product except for insignificant maintenance and repair
work. The Company does not expect G2000 sales to result in the payment of the
yearly license fee to the Company or to meet the requirements for AAI/SMI to
own the technology.

-19-
<PAGE>
NOTE 4 - Property and Equipment
<TABLE>
Property and equipment consist of (in thousands):
<CAPTION>
At March 31,
1996 1995

<S> <C> <C>
Engineering and manufacturing equipment........... $6,322 $6,402
Office equipment and leasehold improvements....... 1,160 1,146
Equipment under capital leases.................... 281 291
------ ------
7,763 7,839
Less accumulated depreciation and amortization.... (7,261) (7,141)
------ ------
$ 502 $ 698
====== ======
</TABLE>

NOTE 5 - Notes Payable and Capital Lease Obligations

On September 30, 1995, the Company's revolving credit note agreement
expired and was not renewed. The Company had not borrowed under this agreement
since December 1993 and has had sufficient cash reserves for its operating
needs since that time. Although the Company does not currently need borrowing
availability to meet its anticipated operating requirements, the Company is in
discussion with several banks regarding potential revolving credit
arrangements. The Company's remaining short-term obligations relate entirely
to capital lease obligations, all of which mature in 1997.
The Company expects to have sufficient cash, through its current cash and
short-term investments position and from operations, to meet its fiscal 1997
operating requirements. In the event that the Company requires more funds,
there can be no assurance that the Company would be successful in raising new
capital from external sources.

NOTE 6 - 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 March 31, 1996.

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. The
Preferred Stock is convertible into common stock of the Company. The conver-
sion price, which is subject to adjustment, is currently $1.00 per share.
The Company may, at its option, redeem all or part of the outstanding shares of
the Preferred Stock, at a redemption price equal to 100% of the issue price of
the Preferred Stock plus an amount equal to accrued but unpaid dividends on
such shares.
In March 1995, the Company repurchased and retired the Preferred Stock
held by General Electric Pension Trust ("GEPT"). The Company paid GEPT
$950,000 for 37,240 shares of the Preferred Stock which had a redemption price
of more than $4.9 million, including cumulative undeclared dividends of $1.2
million. In April 1995, the Company repurchased and retired the Preferred
Stock held by State Farm Mutual Automobile Insurance Company ("State Farm").
The Company paid State Farm $1.2 million for 46,549

-20-
<PAGE>
shares of the Preferred Stock, which had a redemption price of nearly $6.2
million, including cumulative undeclared dividends in excess of $1.5 million.
These transactions were accounted for as reductions of additional paid-in
capital in fiscal 1995 and 1996. GE remains the only holder of the Preferred
Stock. The Company is engaged in discussions with GE regarding the repurchase
and retirement of a portion of its holdings of Preferred Stock.
Dividends on the Preferred Stock accrue and are payable at the rate of 14%
of the issue price of the Preferred Stock per annum per share (exclusive of any
penalty), effective June 1, 1996. The original rate was 10% per annum and was
subject to 2% per annum increases on both June 1, 1995 and 1996. The dividend
rate is subject to a final increase of 1% per annum on June 1, 1997. In the
event that dividends payable on the Preferred Stock are not paid in full on any
dividend payment date, or the Company breaches certain covenants, the dividend
rate otherwise applicable increases by 2% per annum from the applicable payment
date or breach through the day of payment or cure or waiver of any such
breach. The Company is not in compliance with certain of the covenants in
the Preferred Stock Purchase Agreement and has not paid in full the dividends
due on the Preferred Stock. Consequently, dividends have been calculated at
an aggregate dividend rate of 12% per annum through May 31, 1995, at 14%
through June 1, 1996 and are currently calculated at 16% per annum.
Dividends are now payable quarterly in arrears in the amount of $348,000
in cash. Unpaid cumulative dividends in arrears total $4.8 million through May
31, 1996, of which $4.6 million, or $.23 per common share, were unpaid and not
declared as of March 31, 1996. The Preferred Stock ranks prior to all other
classes of stock of the Company with respect to dividend rights, rights on
liquidation, winding up and dissolution. The liquidation preference on the
Preferred Stock is $100 per share, in addition to any and all accrued and
unpaid dividends on the Preferred Stock.
The holder of the Preferred Stock has the following rights: to one vote
for each share of common stock of the Company into which the Preferred Stock
could be converted; to vote as a class to elect two members of the Board of
Directors of the Company; and, in circumstances described below, to elect a
majority of the Company's Board of Directors.
Pursuant to the Preferred Stock Purchase Agreement, the Company was
required to enter into a loan agreement with a bank, on or prior to December
31, 1990, which would provide the Company with at least $5 million, but not
more than $8 million, in borrowings. The Company did not enter into a loan
agreement that provided for such borrowings. As a result, the holder of the
Preferred Stock has the right to elect a majority of the Company's Board of
Directors until such time as the Company obtains financing as required by the
Preferred Stock Purchase Agreement. To date, the holder of the Preferred Stock
has not exercised such right.
Pursuant to the 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
During fiscal 1984 and 1985, the Company's stockholders approved various
stock option and stock purchase plans, providing for the issuance of common
stock and incentive, qualified, and non-qualified stock options to
employees and consultants, subject to certain limitations. For all 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 the greater of
100% of the fair market value of the stock at the date of grant or $1 per
share. In fiscal 1995, the Company's stockholders approved a stock option plan
that effectively replaced the 1984 stock option plan, on essentially the same
terms, which expired in January 1994. The 1985 plan expired May 31, 1995.

-21-
<PAGE>
In fiscal 1989, the Company's stockholders approved a stock option plan
for 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.
<TABLE>
Stock option activity under these plans is as follows:
<CAPTION>
Average
Price Shares

<S> <C> <C>
Balance, March 31, 1993........................... $1.00 3,873,962
Granted......................................... 1.01 150,950
Cancelled....................................... 1.03 (859,054)
Exercised....................................... 0.80 (42,713)
---- ----------
Balance, March 31, 1994........................... 1.00 3,123,145
Granted......................................... 1.00 30,000
Cancelled....................................... 1.07 (483,002)
Exercised....................................... 0.31 (2,700)
----- ----------
Balance, March 31, 1995........................... 0.99 2,667,443
Granted......................................... 1.00 20,000
Cancelled....................................... 0.99 (1,052,630)
Exercised....................................... 0.59 (8,000)
----- ----------
Balance, March 31, 1996........................... $0.99 1,626,813
===== ==========
</TABLE>
At March 31, 1996, 1995, and 1994, options for 940,162, 1,648,738, and
752,607 shares, respectively, were exercisable under all plans combined.

Other common stock and warrants issuances
In October 1993, the Company issued a warrant to purchase 300,000 shares of
common stock at $1.15 per share. The warrant expires in October 1998.

Common stock reserved for issuance
At March 31, 1996, the Company had 12,195,193 shares of common stock
reserved for issuance, consisting of 1,926,813 shares for stock options and
warrants outstanding, and 10,268,380 shares for conversion of preferred stock.

-22-
<PAGE>
NOTE 7 - Income Taxes

There was no current or deferred income tax expense for the years ended
March 31, 1996, 1995 and 1994.
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>
Years ended March 31,
1996 1995 1994

<S> <C> <C> <C>
Expected expense (benefit).............. $(1,354) $ 406 $ 740
Change in valuation allowance........... 1,353 (406) (741)
Other................................... 1 -- 1
------- ----- -----
Income tax expense.................. $ -- $ -- $ --
======= ===== =====
</TABLE>
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 March 31,
1996 1995

<S> <C> <C>
Deferred tax assets:
Reserves for potentially excess inventory....... $ 2,915 $ 2,816
Other accruals and reserves..................... 182 486
Property and equipment, principally due
to differences in depreciation................ 44 188
Net operating loss carryforwards
- domestic and foreign........................ 21,331 19,426
General business credit carryforwards........... 3,315 3,315
Alternative minimum tax credit carryforwards.... 84 84
------- -------
Total gross deferred tax assets.............. 27,871 26,315
Less valuation allowance..................... (27,871) (26,315)
------- -------
Net.......................................... $ -- $ --
======= =======
</TABLE>
The net operating loss ("NOL") and general business credit carryforwards
expire in the tax years ending March 31, 1998 through March 31, 2010. 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
$1,556,000 and $698,000 for the years ended March 31, 1996 and 1995,
respectively, and decreased by $898,000 for the year ended March 31, 1994.

-23-
<PAGE>
NOTE 8 - Commitments and Contingencies

Operating leases
The Company leases its corporate headquarters, Fiscal Amount
an office and production facility, and certain equip- 1997.......... $ 461
ment under noncancelable operating lease agreements 1998.......... 471
expiring through fiscal 2001. Several of the leases 1999.......... 483
contain options for renewal periods of up to five 2000.......... 496
years. Future minimum rentals under these lease 2001.......... 203
agreements are shown at right (in thousands). ------
$2,114
======

Rent expense was $559,000, $856,000 and $972,000 in fiscal 1996, 1995, and
1994, respectively.

Legal proceedings
In July 1991, the Company filed a lawsuit against Ronald G. Walters
("Walters") in the United States District Court for the Northern District of
Ohio alleging breach of contract arising from Walters' interference with the
Company's ownership of a certain technology used in its reconstruction
processor business. Walters alleged ownership of the technology, and in a
counterclaim filed in August 1991, sought unstated damages and a declaratory
judgment regarding the disputed technology. In April 1995, a trial was held
in that Court on the Company's claim for breach of contract against Walters and
Walters' counterclaim for breach of contract against the Company. On April 24,
1995, a jury returned a verdict for Walters, finding in his favor on his claim
for breach of contract and against Star on its claim for breach of contract.
The jury found that Walters does not have an obligation to assign his ownership
rights in the disputed technology to Star. On June 13, 1995, Walters filed a
separate lawsuit against the Company, its directors, and certain officers in
the United States District Court for the Northern District of Ohio alleging
patent infringement and unjust enrichment in connection with the Company's
use of the disputed technology. Walters seeks damages of $67,500,000,
trebling of any damages awarded, and an injunction that would prohibit the
Company from using the disputed technology. The Company has filed motions
with the court seeking dismissal of certain of Walters' claims, and the
individual directors and officers have filed a motion requesting that the
court dismiss them from the case. Management believes it has valid defenses
to this claim. However, the Company cannot predict the likelihood, nor
estimate the amount of loss, if any, which could result from an unfavorable
outcome to this matter. No amounts have been recognized in the accompanying
consolidated financial statements pertaining to this matter.
On January 25, 1995, the Company filed a demand for arbitration (the
"Demand") with the Commercial Arbitration Tribunal of the American Arbitration
Association (the "AAA") requesting arbitration of certain contract claims
against GEMS brought under the Development Agreement. The Development Agree-
ment obligated GEMS to purchase its requirements for up to 900 reconstruction
processors, defined in the Development Agreement as "GE Commercial
Reconstruction Processors" ("GECRPs"), from the Company and to pay royalties
for certain reconstruction processors that GEMS has the right to produce
under the Agreement. GEMS developed its own reconstruction processor instead
of purchasing the Company's. As discussed in Note 2, in May 1995, GEMS ceased
ordering reconstruction processors from the Company. Additionally, GEMS
informed the Company that GEMS is using in its reconstruction processors
certain technology in which the Company has a proprietary interest.
Accordingly, the Demand alleged that GEMS breached its obligation to purchase
its requirements for GECRPs from the Company and breached its obligation not
to use certain proprietary technology in its reconstruction processors. The
Company presented its claims in a hearing conducted by a three-member
arbitration

-24-
<PAGE>
panel of the AAA in December 1995 and January 1996. On March 14, 1996, the
panel ruled unanimously for the Company on its claims and awarded damages
totaling $9.1 million, with interest at nine percent per annum from April 14,
1996, until the award is paid. On April 4, 1996, GE filed a complaint against
the Company in the Court of Chancery of the State of Delaware, New Castle
County, asking the court to vacate the arbitration award, alleging that the
award is improper and should be set aside. The Company has filed a motion to
dismiss or stay GE's complaint. On April 15, 1996, the Company filed an
application in the United States District Court for the District of Columbia,
seeking an order confirming the arbitration award and to have judgment entered
on the award. GE has filed a motion to dismiss or stay the Company's
application. The Company's application and GE's motion are pending before the
court. The award has not been received and is not reflected in fiscal 1996
results of operations.

-25-
<PAGE>
<TABLE>
Quarterly Financial Summary (Unaudited)
(In thousands, except per share data)

<CAPTION>
Net Net Income (Loss) Per
Gross Income Common and Common
Revenue Margin (Loss) Equivalent Share
<S> <C> <C> <C> <C>

Year ended March 31, 1996:
First Quarter $ 2,576 $1,220 $ (334) $ .22
Second Quarter 505 186 (964) (.07)
Third Quarter 875 203 (1,165) (.08)
Fourth Quarter 326 (41) (1,521) (.09)
------- ------ ------- -----
Total $ 4,282 $1,568 $(3,984) $(.02)
======= ====== ======= =====
Year ended March 31, 1995:
First Quarter $ 5,907 $2,017 $ 602 $ --
Second Quarter 5,962 2,242 171 (.02)
Third Quarter 4,905 2,211 233 (.01)
Fourth Quarter 4,849 1,701 187 .18
------- ------ ------- -----
Total $21,623 $8,171 $ 1,193 $ .16
======= ====== ======= =====
</TABLE>
-26-
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.

PART III

Item 10. Directors and Executive Officers of the Registrant

Information set forth under the heading "Election of Directors" in the
Company's definitive Proxy Statement for its Annual Meeting to be held on
August 22, 1996, is incorporated herein by 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 under the heading "Executive Compensation" in the
Company's definitive Proxy Statement for its Annual Meeting to be held on
August 22, 1996 is incorporated herein by reference.

Item 12. Security Ownership of Certain
Beneficial Owners and Management

Information set forth under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive Proxy Statement
for its Annual Meeting to be held on August 22, 1996, is incorporated herein by
reference.

Item 13. Certain Relationships and Related Transactions

Information set forth under the heading "Election of Directors" in the
Company's definitive Proxy Statement for its Annual Meeting to be held on
August 22, 1996, is incorporated herein by reference.

-27-
<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 11

Consolidated Statements of Operations for
each of the years in the three-year period
ended March 31, 1996. 12

Consolidated Statements of Financial
Position at March 31, 1996 and 1995. 13

Consolidated Statements of Cash Flows for
each of the years in the three-year
period ended March 31, 1996. 14

Consolidated Statements of Changes in Stock-
holders' Equity for each of the years in the
three-year period ended March 31, 1996. 15

Notes to Consolidated Financial Statements 16

2. Financial Statement Schedule

Schedule VIII - Valuation and Qualifying Accounts. S-1

All other 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

-28-
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
Star Technologies, Inc., certifies that it has duly caused this Annual Report
on Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Sterling, Commonwealth of Virginia, on the 28th day
of June, 1996.

STAR TECHNOLOGIES, INC.

By: /s/ Robert C. Compton

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

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on June 28, 1996, 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/ Brenda A. Potosnak Controller, Treasurer, Secretary and
Brenda A. Potosnak Principal Accounting Officer

/s/ Francis Jungers Director
Francis Jungers

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

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

/s/ Herbert S. Shaw Director
Herbert S. Shaw

-29-

<PAGE> S-1
STAR TECHNOLOGIES, INC.

<TABLE>
SCHEDULE VIII - Valuation and Qualifying Accounts
(In thousands)

<CAPTION>
Balance at Charged to Write-offs Balance
Beginning Costs and Net of at End
of Period Expenses Recoveries of Period

For the year ended
March 31, 1994:
<S> <C> <C> <C> <C>

Allowance for doubtful accounts $ 87 $ 89 $ (134) $ 42
Warranty reserve 30 119 (109) 40
Scrap reserve 24 175 (159) 40
Inventory valuation reserve 9,464 1,111 (3,562) 7,013
------- ------- ------- -------
Totals $ 9,605 $ 1,494 $(3,964) $ 7,135
======= ======= ======= =======

For the year ended
March 31, 1995

Allowance for doubtful accounts $ 42 $ 32 $ -- $ 74
Warranty reserve 40 -- (16) 24
Scrap reserve 40 -- (30) 10
Inventory valuation reserve 7,013 1,291 (1,264) 7,040
------- ------- ------- -------
Totals $ 7,135 $ 1,323 $(1,310) $ 7,148
======= ======= ======= =======

For the year ended
March 31, 1996

Allowance for doubtful accounts $ 74 $ (46) $ (6) $ 22
Inventory valuation reserve 7,040 404 (156) 7,288
------- ------- ------- -------
Totals $ 7,114 $ 358 $ (162) $ 7,310
======= ======= ======= =======
</TABLE>
<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 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.

3.3* 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.

3.4* By-Laws of the Company, as amended and restated on February
24, 1994, 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.

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).

10.1* Purchase Agreement between General Electric Company and the
Company dated February 16, 1984, as amended, incorporated by
reference from the exhibit filing to the Company's
Registration Statement on Form S-1 (Registration No. 2-94124)
filed with the Commission on November 2, 1984.

10.2* Ninth Amendment dated October 31, 1993 to Purchase Agreement
between General Electric Company and the Company dated
February 16, 1984, 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.

-1-
<PAGE>
Exhibit
No.

10.3* Credit Agreement and Amendment to Purchase Agreement between
the Company and General Electric Company dated as of December
20, 1985 together with form of Patent and Technology License
and Technical Assistance Agreement, Revolving Credit Note and
Amended and Restated Security Agreement of the same date,
incorporated by reference from the exhibit filing to the
Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1985 (Registration No. 0-13318) filed with the
Commission on February 14, 1984.

10.4* Amendment A to Patent and Technology License and Technical
Assistance Agreement between General Electric Company and the
Company dated as of September 15, 1991, incorporated by
reference from the exhibit filing to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1992
(Registration No. 0-13318) filed with the Commission on July
9, 1992.

10.5* Lease Agreement between Richard E. Curtis and the Company
dated August 19, 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.

10.6* 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.

10.7* 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.

10.8* Asset Purchase Agreement dated as of April 15, 1988 between
the Company and General Electric Company, incorporated by
reference from the exhibit filing to the Company's Current
Report on Form 8-K (Registration No. 0-13318) filed with the
Commission on May 2, 1988.

10.9* First Amendment to Asset Purchase Agreement, dated as of May
31, 1990, between the Company and General Electric 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.

-2-
<PAGE>
Exhibit
No.

10.10* Amended and Restated Loan and Security Agreement dated as of
December 9, 1991, between the Company and Sovran Bank, N.A.,
incorporated by reference from the exhibit filing to the
Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1991 (Registration No. 0-13318) filed with the
Commission on February 14, 1992.

10.11* 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.

10.12* 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.

10.13* Development and Technology Transfer Agreement dated as of
October 4, 1991, between the Company and General Electric
Medical Systems, incorporated by reference from the exhibit
filing to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1992 (Registration Statement No.
0-13318) filed with the Commission on July 9, 1992.

10.14* First Amendment to Amended and Restated Loan and Security
Agreement dated as of December 31, 1992, between NationsBank
of Virginia, N.A. (formerly known as Sovran Bank, N.A.) and
the 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, 1993 (Registration No. 0-13318) filed
with the Commission on June 28, 1993.

10.15* First Amendment to Development and Technology Transfer
Agreement dated as of August 30, 1993, between the Company and
General Electric Medical Systems, 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.

-3-
<PAGE>
Exhibit
No.

10.16* Second Amendment to Amended and Restated Loan and Security
Agreement dated as of September 30, 1993, between NationsBank
of Virginia, N.A. (formerly known as Sovran Bank, N.A.), 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, 1994 (Registration No. 0-13318) filed with
the Commission on November 14, 1994.

10.17* Letter Agreement dated September 26, 1994, between NationsBank
of Virginia, N.A. (formerly known as Sovran Bank, N.A.), 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, 1994 (Registration No. 0-13318) filed with
the Commission on November 14, 1994.

10.18* Third Amendment to Amended and Restated Loan and Security
Agreement dated as of October 31, 1994, between NationsBank of
Virginia, N.A. (formerly known as Sovran Bank, N.A.), 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, 1994 (Registration No. 0-13318) filed with
the Commission on November 14, 1994.

10.19* Asset Purchase Agreement dated March 2, 1995, between the
Company and AAI Systems Management, Inc., incorporated by
reference from the exhibit filing to the Company's Current
Report on Form 8-K (Registration No. 0-13318) filed with the
Commission on March 3, 1995.

10.20* Stock Purchase Agreement dated March 31, 1995, between the
Company and Trustees of General Electric Pension Trust,
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.

10.21* Stock Purchase Agreement dated April 12, 1995, between the
Company and State Farm Mutual Automobile Insurance Company,
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.

10.22* Fourth Amendment to Amended and Restated Loan and Security
Agreement, dated as of April 11, 1995, between NationsBank,
N.A. (formerly known as NationsBank of Virginia, N.A., and
formerly known as Sovran Bank, N.A.), and the Company,
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.

-4-
<PAGE>
Exhibit
No.

10.23* Fifth Amendment to Amended and Restated Loan and Security
Agreement dated as of April 30, 1995 between NationsBank, N.A.
(formerly known as NationsBank of Virginia, N.A., and formerly
known as Sovran Bank, N.A.), and the Company, 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.

10.24* 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.

11 Statement Regarding Computation of Per Share Earnings.

21* Subsidiaries of the Registrant, 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.

23 Consent of KPMG Peat Marwick LLP.

-5-

<PAGE>
<TABLE>
EXHIBIT 11

COMPUTATION OF PER SHARE EARNINGS (LOSS)
(In thousands, except per share data)

<CAPTION>
Fiscal year ended March 31,
Primary Per Share Earnings (Loss) 1996 1995 1994

<S> <C> <C> <C>
Average shares outstanding during period 19,879 19,680 19,378
======= ======= =======

Net income (loss) $(3,984) $ 1,193 $ 2,175

Undeclared cumulative dividends on
preferred stock (1,342) (2,065) (2,065)

Excess carrying amount and cumulative
undeclared dividends of Preferred Stock
over consideration 4,954 3,968 --
------- ------- -------
Net income (loss) applicable to common shares $ (372) $ 3,096 $ 110
======= ======= =======

Primary earnings (loss) per common and common
equivalent share:

Net income (loss) per common and common
equivalent share $ (.02) $ .16 $ .01
======= ======= =======
</TABLE>

<PAGE>
<TABLE>
EXHIBIT 11

COMPUTATION OF PER SHARE EARNINGS (LOSS) (Cont'd)
(In thousands, except per share data)

<CAPTION>
Fiscal year ended March 31,
Fully Diluted Per Share Earnings 1996 1995 1994

<S> <C> <C> <C>
Average shares outstanding during period 19,879 19,680 19,378

Dilutive effect of convertible securities
computed by the "if converted" method:
Series A preferred stock 338 338 818
Series B & C preferred stock 9,931 14,585 18,309
------- ------- -------
30,148 34,603 38,505
======= ======= =======

Net income (loss) $(3,984) $ 1,193 $ 2,175

Adjustment for repurchase of Senior
Preferred Stock -- (413) --

Excess carrying amount and cumulative
undeclared dividends of Preferred Stock
over consideration 4,954 3,968 --
------- ------- -------
Net income applicable to common shares $ 970 $ 4,748 $ 2,175
======= ======= =======

Fully diluted earnings per common and
common equivalent share:

Net income per common and common
equivalent share $ .03 $ .14 $ .06
======= ======= =======
</TABLE>

<PAGE>
EXHIBIT 23

CONSENT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Stockholders
Star Technologies, Inc.:

We consent to incorporation by reference in the Registration
Statement (No. 33-42042 and No. 2-97518) on Forms S-8 of Star
Technologies, Inc. of our report dated May 31, 1996, relating
to the consolidated statements of financial position of Star
Technologies, Inc. and subsidiaries as of March 31, 1996 and
1995, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for each of
the years in the three-year period ended March 31, 1996, and
the related consolidated schedule, which report appears in
the March 31, 1996 annual report on Form 10-K of Star
Technologies, Inc.

KPMG PEAT MARWICK LLP

McLean, Virginia
June 28, 1996

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC
Form 10-K and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 166
<SECURITIES> 4886
<RECEIVABLES> 178
<ALLOWANCES> 22
<INVENTORY> 726
<CURRENT-ASSETS> 6028
<PP&E> 7763
<DEPRECIATION> 7261
<TOTAL-ASSETS> 6674
<CURRENT-LIABILITIES> 1466
<BONDS> 0
0
3
<COMMON> 199
<OTHER-SE> 5006
<TOTAL-LIABILITY-AND-EQUITY> 6674
<SALES> 4282
<TOTAL-REVENUES> 4282
<CGS> 2714
<TOTAL-COSTS> 2714
<OTHER-EXPENSES> 6033
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3984)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3984)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3984)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)

</TABLE>