U.S. SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                                 --------------

                                   FORM 10-KSB
(Mark One)

[X] ANNUAL  REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE ACT OF
1934.

For the fiscal year ended          May 31, 1998

                                       OR

[ ] TRANSITION  REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES  EXCHANGE ACT
OF 1934.

For the transition period from                        to

                         Commission file number 0-14401

                                  SANDATA, INC.
                 (Name of Small Business Issuer in Its Charter)

Delaware                                                              11-2841799
(State or Other Jurisdict                                          (IRS Employer
Incorporation or Organization)                               Identification No.)

26 Harbor Park Drive, Port Washington, NY                              11050
(Address of Principal Executive Offices)                              (Zip Code)

                                  516-484-9060
                (Issuer's Telephone Number, Including Area Code)

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

 Name of Each Exchange
 Title of Each Class                                         on Which Registered





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

                          Common Stock, $.001 par value
                                (Title of Class)


                                (Title of Class)

         Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing requirements for the past 90 days.

Yes        X               No

         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of  Regulation  S-B contained in this form,  and no disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

         The issuer's revenues at May 31, 1998 was $12,826,970.

         The aggregate  market value of the voting and non-voting  common equity
held by  non-affiliates  computed by  reference to the price at which the common
equity was sold, or the average bid and asked price of such common equity, as of
August 26, 1998 was $2,596,818.

                   ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
                           DURING THE PAST FIVE YEARS

         Check whether the issuer has filed all  documents and reports  required
to be  filed  by  Section  12,  13 or  15(d)  of  the  Exchange  Act  after  the
distribution of securities under a plan confirmed by a court.

Yes                        No

                    APPLICABLE ONLY TO CORPORATE REGISTRANTS

The  number of shares  outstanding  of each of the  issuer's  classes  of common
equity, as of August 27, 1998 was 2,481,482 shares.

         Transitional Small Business Disclosure Format  (check one):

Yes                        No       X

                       DOCUMENTS INCORPORATED BY REFERENCE

         None.


                           
                                     PART I

ITEM 1 - DESCRIPTION OF BUSINESS

Forward-Looking Statements

                  Certain  information  contained in this Annual  Report on Form
10-KSB (the "Form  10-KSB")  includes  "forward-looking  statements"  within the
meaning of the Private Securities  Litigation Reform Act of 1995, and is subject
to the safe  harbor  created by that act.  The  Company  cautions  readers  that
certain  important  factors may affect the  Company's  actual  results and could
cause such  results to differ  materially  from any  forward-looking  statements
which may be deemed to have been made in this Form 10-KSB or which are otherwise
made by or on behalf of the Company.  For this purpose, any statements contained
in this Form 10-KSB that are not statements of historical  fact may be deemed to
be forward-looking statements. Without limiting the generality of the foregoing,
words  such as  "may",  "will",  "expect",  "believe",  "anticipate",  "intend",
"could",  "estimate",  or  "continue"  or the  negative  variations  thereof  or
comparable  terminology  are  intended to identify  forward-looking  statements.
Factors which may affect the Company's results include,  but are not limited to,
the risks and  uncertainties  associated  with  matters  discussed  under Item 1
"Description of Business", Item 3 - "Legal Proceedings",  Item 6 - "Management's
Discussion   and  Analysis  or  Plan  of  Operation"  and  Item  12  -  "Certain
Relationships and Related Transactions" of this Form 10-KSB.

Business Development

General

Sandata, Inc. (the "Company"), through its wholly-owned subsidiaries, is engaged
in the business of providing  computerized  data processing  services and custom
software and programming services, by utilizing  Company-developed software, and
software  acquired or licensed by the  Company,  principally  to the health care
industry,  but also to the general commercial  market. In addition,  the Company
provides  hardware  maintenance  of personal  computers  ("PCs"),  printers  and
networks and training on PC software packages.

Applications  of the  Company's  software  include:  a home health care  system,
computerized   preparation  of  management   reports,   payroll  processing  and
electronic  time card with voice  recognition  systems.  Principal  products and
services provided by the Company include the Sandsport Home Attendant  Reporting
Program,  data entry services and specialized system development,  among others.
In addition, the Company provides  administration and processing services for an
affiliate engaged in the pharmacy prescription benefits management business.

Generally,  in providing data  processing  services,  the Company first receives
data from its  customers,  then  processes and  generates  reports based on such
data. Data processing services are generally provided to customers by processing
on the  Company's  equipment at its  premises.  The Company  also has  available
software which permits  information  retrieval from customers'  facilities which
communicate  with the  Company's  computers at its data center.  This allows the
Company's customers to have access to processing hardware and software without a
substantial  investment on their part.  The  Company's  software is written in a
variety of software languages including JAVA, COBOL, C and FoxPro.

The  Company  was  incorporated  in the  State  of New  York in  June,  1978 and
reincorporated  in the State of Delaware in December 1986, at which time it also
assumed its present name.

Business of Issuer

Principal Products and Services

Sandsport Home Attendant Reporting Programs ("SHARP").  The Company, through its
wholly-owned subsidiary,  Sandsport Data Services, Inc. ("Sandsport"),  provides
computer services to vendor agencies which, pursuant to contracts with the Human
Resources Administration ("HRA") of the City of New York, provide home attendant
services  to the elderly  and infirm in New York City.  The  Federal  Government
offers this program (the "Home Attendant  Program") to participating  states and
municipalities  as an  optional  part  of  its  Medicaid  program.  The  Federal
Government funds a substantial  portion of the program and in New York City, the
State  Department  of Social  Services and New York City fund the balance of the
program.  In New York City, the Home Attendant  Program is  administered by HRA,
which  sub-contracts  with  proprietary  and  not-for-profit  agencies  ("Vendor
Agencies")  to provide  home  attendant  services  to those in need.  HRA refers
patients to Vendor  Agencies  which,  in turn, send home attendants to patients'
homes to assist in homemaking  chores.  Vendor  Agencies  also provide  periodic
nurse's  visits to  patients.  Vendor  Agencies  enlist the  Company's  computer
services  to  provide  weekly  time  sheets,  billing,  payroll  processing  and
management  reports.  For  the  fiscal  years  ended  May  31,  1998  and  1997,
approximately  $4,628,000  or 37% and  $4,516,000 or 40%,  respectively,  of the
Company's total operating revenues were derived from services rendered to Vendor
Agencies.

Sandsport  processes  payroll,   preparing  paychecks  indicating   year-to-date
earnings and  deductions,  payroll  journals and payroll  earnings and deduction
summaries.  Sandsport  provides  computerized  information  which permits Vendor
Agencies to prepare on a quarterly basis their Employers  Quarterly  Federal Tax
Return,  New York State  unemployment  insurance  returns,  deposits for Federal
unemployment  insurance and all required New York City tax returns and deposits.
Annually,  Sandsport  prepares for each Vendor Agency  employee  Transmittal  of
Income and Tax  Statements,  reconciliation  of state tax  withheld  and Federal
Unemployment  Insurance  Returns.  Sandsport also  furnishes to Vendor  Agencies
employee  earning  ledgers  which  enable them to review a full year's  earnings
history for each of their employees.

In conjunction  with SHARP products,  Sandsport has developed an electronic time
card which allows the use of voice recognition technology to assist in capturing
payroll  information  known as  Sandata(R)  SANTRAX(R)  for its SHARP  clients.
Approximately twenty-five percent (25%) of the volume of SANTRAX users are other
than Vendor  Agencies.  SANTRAX is an automated  timekeeping  system designed to
monitor home attendants'  arrival and departure times when servicing  clients in
their homes.  In addition to collecting  the arrival and departure  times of the
home health care workers from the visit site, SANTRAX also collects a wide range
of additional  information  from the visit site. By collecting  additional data,
SANTRAX can replace the paper "duty sheet" used in home care with  SANTRAX,  and
enable the provider organization to generate administrative savings. Some of the
information  provided by SANTRAX includes  expense-related  data such as mileage
and supplies,  as well as tasks  performed  such as bathing and skilled  nursing
tasks. SANTRAX works by incorporating telephone technologies into the attendance
reporting process. Caregivers call their agency's own toll-free number to record
their arrival and departure from the patient's  side;  the system  automatically
and immediately confirms that the assigned caregiver is at the expected place at
the expected time for the approved and scheduled duration.  This data is used to
produce weekly payroll and to automatically prepare reimbursement submissions to
first and third party payors.  Reports are then  generated to the customer based
upon its  specific  requirements.  Presently,  the system is being  utilized  by
several of the Company's  home health care clients,  with the Company  receiving
approximately an aggregate of 500,000 calls per week. Although no assurances can
be given,  it is anticipated  that the SANTRAX  product can be utilized by other
industry  applications.  For the  fiscal  years  ended  May 31,  1998 and  1997,
approximately  $4,564,000  or 37% and  $3,766,000 or 33%,  respectively,  of the
Company's total operating  revenues were derived from services rendered relating
to SANTRAX (See Item 3 - "Legal Proceedings").

Data Entry  Services.

The Company, through Sandsport, provides data entry, editing and data conversion
services to various social services, municipal agencies, and the private sector.

Specialized System Development and Processing.

Sandsport designs, implements and supports specialized system applications based
upon its analysis of a client's  particular need.  Sandsport  currently provides
these  services to an affiliate,  National  Medical  Health Card  Systems,  Inc.
("Health  Card"),  of which Mr.  Brodsky is President,  a Member of the Board of
Directors and a principal shareholder (See Item 6 - "Management's Discussion and
Analysis  or Plan  of  Operation  -  Management's  Discussion  and  Analysis  of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
and Item 12 - "Certain Relationships and Related Transactions").

The  Company,   through  its  SandataNet(R)  product  line,  provides  computer,
communications   and  networking   sales  and  services,   including   training,
maintenance and repair  services,  to companies and government and  professional
services  organizations.  SandataNet also provides custom programming,  software
development and installation  services to customers.  For the fiscal years ended
May  31,  1998  and  1997  approximately  $646,000  or 5%  and  $325,000  or 3%,
respectively  of the  Company's  total  operating  revenues  were  derived  from
services rendered relating to SandataNet.

Seasonality

The Company's revenues are not subject to seasonal fluctuations.

Marketing and Distribution

The Company  provides  its  computerized  information  processing  services to a
variety of users, although principally to the health care industry.  Many of the
Company's  software  programs are, upon  development,  adaptable to customers in
related fields of  enterprise.  Thus, the components of the SHARP system for the
Home Attendant  Program - Medicaid  reimbursable  billing,  management  reports,
payroll  processing,  tax reports - may be utilized in other  settings,  such as
nursing homes, skilled nursing facilities, and rehabilitation facilities.

The Company  markets its products and services  throughout  the country by sales
representatives  directly  employed by the  Company in  addition to  independent
sales agents.

Competition

The computer  services  industry is characterized by competition in the areas of
service,  quality,  price,  technical  expertise,  software and  marketing.  The
Company competes with service bureaus and time-sharing  services as well as with
companies which offer stand-alone systems.

The Company  competes for customers on the basis of the range and quality of its
software  and on its  ability to develop  programs  tailored  to its  customers'
requirements.  Many of the  Company's  competitors  have  substantially  greater
financial  resources and  substantially  larger  marketing,  technical and field
organizations.

With  respect to the  Company's  SHARP  business,  there has been an increase in
competitive  pressure and uncertainty in recent years, partly as a result of the
City  of New  York  requiring  all  contracts  with  City  agencies  to  undergo
competitive  bidding.  Although the Company has been awarded  contracts based on
its  bids,  there can be no  assurance  that its bids  will be  accepted  in the
future.

Customers

The Company's  customer base is primarily  drawn from the health care  industry.
During the fiscal years 1998 and 1997, the Company derived revenues from a group
of  customers  who  are all  funded  by one  governmental  agency  amounting  to
approximately  $8,416,000  or 67%  and  $7,905,000  or 70%  of  total  operating
revenues, respectively. The Company also derived approximately $2,307,000 or 18%
and  $2,171,000  or 19%,  respectively,  of revenue  from Health Card, a related
party,  for data  processing and computer  software design services and from the
rental of office space.  Although the loss of any one of these  customers  would
have a material  adverse  effect on the Company,  the Company  believes that its
relationships with these customers are good (See Item 6 "Management's Discussion
and  Analysis or Plan of  Operation -  Management's  Discussion  and Analysis of
Financial Condition and Results of Operations Liquidity and Capital Resources").

Proprietary Rights

The Company filed a new United States  Trademark  application  which renames its
voice recognition timekeeping system to SANTRAX. The trademark was registered on
September 16, 1997.

On March 3, 1997 the Company filed an application  with the United States Patent
and Trademark  Office to register its  SandataNet  trademark.  The trademark was
registered on February 24, 1998.

The Company has not applied for Federal copyright  registration for its computer
software  systems now in  existence  or being  developed.  However,  the Company
believes  that its systems are trade  secrets and that they,  together  with the
documentation, manuals, training aids, instructions and other materials supplied
to users, are subject to the proprietary  rights of the Company and protected by
applicable trade secret laws. The Company generally seeks to obtain trade secret
protection  pursuant to non-disclosure and  confidentiality  agreements with its
employees. Although the Company's customers are advised that the Company retains
title to all of its products,  and they agree to safeguard against  unauthorized
use of such systems,  there can be no assurance that the Company will be able to
protect against misappropriation of its proprietary rights and trade secrets.

See Item 3 - "Legal  Proceedings"  for a discussion  of the proposed  settlement
terms of certain  litigation  between  the  Company  and MCI  Telecommunications
Corporation.

Research and Development

The Company incurred approximately $185,000 and $276,000 during the fiscal years
1998  and  1997,  respectively,   on  research  and  development.   The  Company
incorporates its research and development into its on-going business activities.
The Company's  employees may develop new software  programs and expand or modify
existing  ones.  After  determining  that a program  has  reached  technological
feasibility,  the subsequent development costs are capitalized.  All other costs
are expensed.

Employees

The Company and its subsidiaries  employ 134 employees,  including 125 full-time
and 9 part-time employees.  The Company believes that its success will depend in
part on its ability in a highly  competitive  environment  to attract and retain
highly skilled technical, marketing and management personnel.

The Company considers its employee relations to be satisfactory.  The Company is
not a party to any collective bargaining agreement.

ITEM 2 - DESCRIPTION OF PROPERTY

The Company and its subsidiaries  currently occupy  approximately  28,000 square
feet of office space located at 26 Harbor Park Drive, Port Washington,  New York
11050 (the "Facility"). The Company subleases the Facility from BFS Realty, LLC,
an affiliate of the Company's  Directors  ("BFS").  BFS leases the Facility from
the Nassau County  Industrial  Development  Agency (the "NCIDA"),  pursuant to a
lease (the "Lease"), which was assigned by the Company to BFS in November, 1996,
and which expires in December 2005. BFS has the right to become the owner of the
Facility upon expiration of the Lease. The Company currently pays rent to BFS in
the amount of $54,030 per month.  BFS also receives  rent from other  companies,
which includes companies  affiliated with the Company's  Chairman,  which occupy
space in the  Facility.  The  Company's  facilities  are  adequate  for  current
purposes (See Item 6 - "Management  Discussion and Analysis or Plan of Operation
-  Management's  Discussion  and Analysis of Financial  Condition and Results of
Operations - IDA/SBA  Financing"  for a discussion  of the NCIDA and U.S.  Small
Business Administration financing transactions).

ITEM 3 - LEGAL PROCEEDINGS

On July 6, 1998,  the Company  and MCI  Telecommunications  Corporation  ("MCI")
entered into a letter of intent (the  "Letter of Intent")  pursuant to which the
parties have agreed on the principle terms of a settlement of certain litigation
pending in the United  States  District  Court for the  Eastern  District of New
York, captioned MCI Telecommunications Corporation v. Sandata, Inc., relating to
certain  alleged  patent  infringement  by the Company (the  "Litigation").  The
Letter of Intent provides,  among other things, that the Company will be granted
a license under certain of MCI's patents (the  "Patents")  for use in connection
with the  Company's  SANTRAX  system and that the  Company  will pay MCI certain
royalties.

Other than as described above, the Company is not involved in any material legal
proceeding, other than which is nonmaterial and routine litigation incidental to
its business.

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

Not applicable.

                                     PART II

ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

The Company's Common Stock is traded in over-the-counter market under the symbol
"SAND" on the National  Association of Securities  Dealers  Automated  Quotation
System  ("NASDAQ").  The table  below  sets forth high and low bid prices of the
Common Stock,  as furnished by NASDAQ.  The  quotations  set forth below reflect
interdealer  prices without  retail  markup,  markdown or commission and may not
necessarily represent actual transactions.
<PAGE>
<TABLE>

<S>     <C>    <C>    <C>    <C>    <C>    <C>
                                                                 Bid Prices
                                                           High              Low
Fiscal Year Ended
May 31, 1998
First Quarter                                             $10-1/2         $7-1/2
Second Quarter                                              9-1/4          6-7/8
Third Quarter                                               8-3/8          4
Fourth Quarter                                              5-3/4          3-3/4

Fiscal Year Ended
May 31, 1997
First Quarter                                             $ 6-1/4         $2-1/4
Second Quarter                                              8-3/4          4
Third Quarter                                              11              7-3/4
Fourth Quarter                                             10-7/8          8-3/4

Holders
</TABLE>

Management has been advised by its transfer agent (North American  Transfer Co.)
that the approximate  number of holders of record of the Company's Common Stock,
as of August 27, 1998 was 1,075.

Dividends

No cash  dividends have been paid by the Company on its Common Stock and no such
payment is anticipated in the foreseeable future.

Dividends are  restricted  pursuant to the terms of a revolving  credit and term
loan agreement between the Company and a bank.

ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations

Analysis of Operations

Fiscal Years ended May 31, 1998 compared with May 31, 1997

Service fee revenues for fiscal 1998 were $12,488,327 as compared to $11,312,809
for the previous  fiscal year, an increase of $1,175,518 or 10%. The increase is
primarily attributable to revenues derived from SANTRAX and SandataNet.

Real estate  rental  income was $-0- for fiscal 1998 as compared to $134,700 for
the  previous  fiscal  year.  The  decrease  in rental  income  relating  to the
operation  of the  Facility  for the year ended May 31, 1998  resulted  from the
Company's  becoming the  beneficial  owner and lessee of the Facility as of July
31,  1995  in  addition  to  the  effect  of  the  subsequent  Second  Amendment
transaction  as of November 1, 1996 (as  described  below),  whereby the Company
became the Sublessee of the Facility.

Other  income  for the year  ended May 31,  1998 was  $263,510  as  compared  to
$407,137 for the year ended May 31, 1997.  The decrease is primarily  due to the
prior year  recognition  of a  one-time  license  fee and a  decrease  in income
recognized  on  sales/leaseback  transactions.  In  January  1998,  the  Company
consummated  a  sale/leaseback  of certain  fixed assets  (principally  computer
hardware,  software and equipment). The fixed assets, which had a net book value
of approximately  $515,000,  were sold for $700,000 and concurrently leased back
to the Company.  The resulting  gain of  approximately  $185,000 was recorded as
deferred  income and is being  recognized  over the life of the lease,  which is
thirty-six  (36) months.  Approximately  $26,000 of deferred gain was recognized
for the year ended May 31, 1998.

Expenses Related to Services

Operating  expenses were $8,496,552 for the year ended May 31, 1998, as compared
to $6,884,989 for the year ended May 31, 1997, an increase of $1,611,563 or 23%.
Costs  associated  with  SANTRAX  and its  operations  including  telephone  and
payroll,  in addition to increases in equipment  rental payments and payroll for
all other product lines,  were the primary factors for the increase in operating
expenses.

Selling,  general and  administrative  expenses  for the year ended May 31, 1998
were  $2,695,427  compared to  $2,348,031  for the year ended May 31,  1997,  an
increase of  approximately  $347,396 or 15%. The increase is primarily due to an
increase in legal fees relative to discovery  proceedings in certain  litigation
with  MCI  Telecommunications   Corporation,  which  amounted  to  approximately
$235,000 for the fiscal year ended May 31, 1998 as compared  with  approximately
$27,000 for the year ended May 31, 1997 (See "Item 3 - Legal  Proceedings"),  as
well as approximately $117,000 in expense related to a proposed transaction with
Health Card which terminated in January 1998.

Depreciation  and  amortization  expenses were $1,460,105 for the year ended May
31, 1998, as compared to $1,358,600 for the year ended May 31, 1997, an increase
of  $101,505  or 7%. The  increase  was  primarily  attributable  to fixed asset
additions, including software capitalization costs.

Interest  expense  for the year ended May 31,  1998 was  $56,730 as  compared to
$221,042  for the year ended May 31,  1997,  a decrease of $164,312 or 74%.  The
decrease is attributable to no borrowings made by the Company against the Credit
Agreement and less outstanding debt.

Expenses Related to Real Estate Operations

Operating  expenses  were $-0- for the year ended May 31,  1998,  as compared to
$246,894 for the year ended May 31, 1997.

Interest  expense  was $-0- for the  year  ended  May 31,  1998 as  compared  to
$133,918 for the year ended May 31, 1997.

The decreases in expenses relating to the operation of the Facility for the year
ended May 31, 1998 resulted from the Company's becoming the beneficial owner and
lessee of the  Facility  as of July 31,  1995 in  addition  to the effect of the
subsequent  Second  Amendment  transaction  as of November 1, 1996 (as described
below),  whereby the Company  became the Sublessee of the Facility.  The Company
has  reported  real estate  operating  expenses  only  through the period  ended
November 1, 1996.

Income Tax Expenses

Income  tax  expense  was  $27,885  and  $307,000  for  fiscal  1998  and  1997,
respectively.  The decrease in income tax expense is due to lower pretax  income
and  recognition of a larger net operating loss  carryfoward in the current year
which offsets higher tax depreciation and amortization.  The effective tax rates
for fiscal 1998 and 1997 were 23.6% and 53.7%, respectively.

IDA/SBA Financing

On June 1, 1994, BFS Sibling  Realty,  Inc.  ("BSRI")  formerly known as Brodsky
Sibling  Realty,  Inc.,  a company  affiliated  with  certain  of the  Company's
Directors,  borrowed  $3,350,000 in the form of Industrial  Development  Revenue
Bonds  ("Bonds") to finance costs incurred in connection with the acquisition of
the Company's  Facility  from the NCIDA,  and for  renovating  and equipping the
Facility.  These Bonds were subsequently  purchased by a bank (the "Bank").  The
aggregate cost incurred by BSRI in conjunction with such acquisition, renovation
and equipping was approximately  $4,377,000.  In addition,  the Company incurred
approximately   $500,000  of  indebtedness  to  affiliates  of  Mr.  Brodsky  in
connection  with  additional  capital  improvements.  The Bonds bore interest at
prime plus 3/4 of 1% until  August 11,  1995,  at which time the  interest  rate
became fixed at 9% for a five-year term through September 1, 2000. At that time,
the interest  rate will be adjusted to a rate of either prime plus 3/4 of 1%, or
the applicable fixed rate if offered by the Bank. As a condition to the issuance
of the Bonds,  the NCIDA  obtained title to the Facility which it then leased to
BSRI.

On June 21, 1994 (as of June 1, 1994),  the Company and its Chairman  guaranteed
the full and  prompt  payment of  principal  and  interest  of the Bonds and the
Company  granted the Bank a security  interest and lien on all the assets of the
Company.  In connection with the issuance and sale of the Bonds, the Company, as
sublessee,  entered into a sublease  agreement (the "First Sublease") with BSRI,
whereby the Company  leased the Facility for the conduct of its business and, in
consideration  therefor,  was obligated to make lease payments in at least equal
amounts due to satisfy the underlying Bond obligations.

On July 31, 1995, by an Assignment and  Assumption and First  Amendment to Lease
between the Company and BSRI, the Company  assumed the obligations of BSRI under
the lease and became the direct tenant and the beneficial  owner of the Facility
(collectively  the "First  Amendment").  In connection with the First Amendment,
the First Sublease was terminated. During the period commencing July 1, 1995 and
ending  October 31, 1996 the Company  paid rent for the Facility to the NCIDA in
the amount of  $48,600  per month,  subject  to  adjustment  based upon the then
effective interest rate of the Bonds, among other things. In connection with the
First  Amendment,  the Company  obtained the right to acquire the Facility  upon
expiration of the Lease with the NCIDA and became  directly  liable to the NCIDA
for amounts due thereunder. Furthermore, in connection with the First Amendment,
the Company  assumed  certain  indebtedness  owed to affiliates of the Company's
Chairman as follows:  (i) the $364,570 remaining balance of a 48-month term loan
bearing interest at 8.7% per annum, and (ii) the $428,570 remaining balance of a
42-month term loan bearing  interest at 8.91%.  Each of the foregoing loans were
incurred in connection  with the  construction  of improvements to the Facility,
are  collateralized  by the assets of the primary  obligor and are guaranteed by
the Company's Chairman.

On August 11, 1995, the Company  entered into a $750,000 loan agreement with the
Long Island  Development  Corporation  ("LIDC"),  under a guarantee  by the U.S.
Small  Business  Administration  ("SBA") (the "SBA Loan").  The entire  $750,000
proceeds were used to repay a portion of the Bonds. The Company entered into the
First Amendment  primarily to satisfy  certain  requirements of the SBA. The SBA
Loan is payable in 240 monthly  installments of $6,255, which includes principal
and interest at a rate of 7.015%.

As of November 1, 1996, the Company  entered into the Second  Amendment with BFS
(which succeeded to the interest of BSRI with respect to the Second  Amendment),
the NCIDA and the Bank. In connection with the Second Amendment, (i) BFS assumed
all of the Company's obligations under the Lease with the NCIDA and entered into
the Second Sublease with the Company, as sublessee,  for the Facility;  and (ii)
the Company  conveyed to BFS the right to become the owner of the Facility  upon
expiration  of the Lease.  In  addition,  pursuant to the Second  Sublease,  the
Company  has  assumed  certain  obligations  owed by BFS to the NCIDA  under the
Lease.  BFS has  indemnified  the Company  with  respect to certain  obligations
relative to the Lease and the Second Amendment.

Liquidity and Capital Resources

The  Company's  working  capital  decreased as of May 31, 1998 to  $1,454,861 as
compared with $1,548,644 at May 31, 1997.

The  Company  has  spent  approximately  $2,510,000  in fixed  asset  additions,
including  software  capitalization  costs in connection with revenue growth and
new  product  development.  The  Company  expects a  reduction  in the levels of
capital expenditures in the future.

In October,  1996, the Company commenced a private offering,  on a "best efforts
-all or none"  basis,  to raise  $1,500,000  by issuing an  aggregate of 300,000
shares of Common Stock and five year warrants for the purchase of 150,000 shares
of Common Stock,  at an exercise price of $7.00 per share. In February 1997, the
Company completed such private offering. The net proceeds received in connection
with the sale of  300,000  shares of its  common  stock  were  $1,256,415  after
payment  of  expenses  related  to  the  offering.  Contemporaneously  with  the
execution  and  delivery  by the  Company of the letter of intent with regard to
such private offering, certain assignees of the placement agent acquired 100,000
shares of the Company's Common Stock at a purchase price of $3.00 per share; the
net proceeds from the sale of such 100,000 shares were $260,076.

In  connection  with the closing of such private  offering,  an affiliate of the
placement  agent  entered  into  a  one  year  financial   consulting  agreement
("Financial  Consulting  Agreement") with the Company,  pursuant to which, among
other things,  such affiliate will receive  aggregate annual payments of $36,000
and  certain  assignees  of such  affiliate  received  warrants  to  purchase an
aggregate of 200,000  shares of Common  Stock  exercisable  as follows:  100,000
shares at $5.00 per share and 100,000  shares at $7.00 per share,  such warrants
to be  exercisable  until  September  18,  1998 (with  respect  to the  warrants
exercisable  at $5.00 per share)  and two years  (with  respect to the  warrants
exercisable at $7.00 per share).  The warrants issued in such private  offering,
including  those issued to investors as well as the  assignees of the  placement
agent's affiliate, are redeemable by the Company under certain circumstances.

In August, 1997 the Board of Directors  authorized the execution and delivery of
a notice of redemption to holders of such  warrants.  As a result,  there were a
total of  166,000  warrants  exercised  at $7.00  per  share.  The net  proceeds
generated from warrant exercises were $1,105,827. In September, 1997 the Company
withdrew  its  election to redeem  warrants  issued  pursuant  to the  Financial
Consulting Agreement discussed above.

In August 1997  pursuant to the terms of the  Company's  incentive  stock option
plan,  certain officers of the Company  exercised 206,667 options at an exercise
price of $1.79 per share and 23,333  options at an exercise  price of $1.875 per
share.  Other  option  exercises  by  employees  of the  Company  amounted to an
aggregate  of 222  shares at an  exercise  price of $1.875  per  share.  The net
proceeds  generated from option  exercises  during the fiscal year ended May 31,
1998 were $408,693.

On July 14, 1998 Messrs. Brodsky, Freund, Stoller, Konigsberg, Gerald Shapiro, a
former  director of the Company and Carol Freund,  the spouse of Hugh Freund and
an employee of Sandsport,  exercised  their  respective  options and warrants to
purchase an  aggregate  of 921,334  shares of Common  Stock at  exercise  prices
ranging  from  $1.38 to $2.61  per share for an  aggregate  cost of  $1,608,861.
Payment  for such  shares is to be made to the Company (i) a portion in the form
of  non-recourse  promissory  notes due in July 2001, with interest at eight and
one-half percent  (8-1/2%) per annum,  payable  annually;  and (ii) a portion by
payment of an aggregate of $1,609  representing the par values paid in cash. The
shares of Common  Stock issued upon  exercise  have been pledged as security for
the debt.

On April 18, 1997, the Company's  wholly owned  subsidiary,  Sandsport,  entered
into the Credit  Agreement  with the Bank which  allows  Sandsport to borrow and
re-borrow  amounts up to  $3,000,000.  Interest  accrues on amounts  outstanding
under the Credit Agreement at a rate equal to the London Interbank  Offered Rate
plus 2% and  will be paid  quarterly  in  arrears  or,  at  Sandsport's  option,
interest  may accrue at the Bank's  prime rate.  The Credit  Agreement  required
Sandsport  to pay a  commitment  fee in the amount of $30,000 and a fee equal to
1/4% per annum payable on the unused  average daily balance of amounts under the
Credit  Agreement.  In addition,  there are other fees and charges imposed based
upon  Sandsport's  failure to  maintain  certain  minimum  balances.  The Credit
Agreement  will  expire on March 1,  2000.  The  indebtedness  under the  Credit
Agreement is guaranteed by the Company and Sandsport's sister  subsidiaries (the
"Group"). The collateral for the facility is a first lien on all equipment owned
by members of the Group,  as well as a collateral  assignment  of  $2,000,000 of
life insurance  payable on the life of Mr. Brodsky.  All of the Group assets are
pledged  to the  Bank as  collateral  for  the  amounts  due  under  the  Credit
Agreement. The Group's guaranty to the Bank was modified to conform covenants to
comply with those in the Credit Agreement.

In addition, pursuant to the Credit Agreement, the Group is required to maintain
certain  levels of net worth and meet  certain  financial  ratios in addition to
various other  affirmative and negative  covenants.  The Group has, in the past,
under  prior  agreements  with the  Bank,  failed  to meet  these  net worth and
financial  ratios,  and the Bank has  granted the Group  waivers.  As of May 31,
1998, there is no balance owed to the Bank on the Credit Agreement.

The  Company  has  been  providing   services  to  Federation  of  Puerto  Rican
Organizations,   and/or  its  affiliates  (individually  and  collectively,  the
"Federation"), an HRA Vendor Agency, since 1995. At May 31, 1998, the Federation
owed the Company  $51,865 for services  rendered by the Company.  On October 31,
1997 and November 30, 1997, respectively, the Company acquired a loan receivable
for an aggregate of $300,000 from a third party (a portion of which was acquired
from an affiliate of the Company's Chairman), due from the Federation. Such loan
receivable  is secured by accounts  receivable  due to the  Federation.  Shortly
following the Company's  acquiring such  receivable,  the  Federation  filed for
bankruptcy  protection.  The  Company  has filed,  among  other  things,  claims
representing  monies  owed to the  Company  with  respect  to the  loan  and the
receivables.  The Company has fully reserved against the loan and the receivable
in the event that it does not receive payment.

As of June 1, 1998,  Health Card hired 11  employees  of  Sandsport  in order to
provide  development,   enhancement,   modification  and  maintenance  services,
previously  provided by Sandsport.  Sandsport was paid $200,000 in consideration
of Sandsport's  waiving certain rights relative to such employees.  In addition,
Sandsport began leasing certain computer equipment to Health Card for $2,000 per
month as well as computer  hardware for its data processing  center at a monthly
cost of $20,000  from  Sandsport  pursuant to a verbal  agreement.  Sandsport is
expected to continue to provide to Health Card  consulting  services  related to
Health  Card's  information  systems  (See Item 12  "Certain  Relationships  and
Related Transactions").

The Company believes the results of its continued operations,  together with the
available Credit Line should be adequate to fund presently  foreseeable  working
capital requirements.

Prospects for the Future, Trends and Other Events

The Company has not focussed its marketing activities on its HealthPro(R) System
and Spectrum  Solid Waste  Management  System  products for several  years.  The
Company  believes that this will not have any significant  adverse impact on the
Company's  financial  condition  or  results of  operations.  At any time in the
future  the  Company  may  decide  to  re-focus  marketing  activities  on these
products.

There has been an  increase  in  competitive  pressure  and  uncertainty  in the
Company's  SHARP  business in recent years,  partly as the result of the City of
New York  requiring  all  contracts  with City  agencies to undergo  competitive
bidding.  Furthermore, the Company notes that, to a major extent, the success of
its SHARP business rests with a key officer of the Company,  who has established
various relationships with the Company's SHARP customers over the years.

Except  as  discussed  above,  the  Company  has no  knowledge  of any  specific
prospects,  industry, or other trends, events or uncertainties that might have a
material impact on the Company's net sales or income from continuing operations,
or  that  would  increase  the  value  of the  shares  in the  long-term  or the
short-term.

The Company  believes that inflation and changing prices have not had a material
impact on the Company's operations.

Year 2000

The Company  believes that its computer systems and those of its major customers
and suppliers are  substantially  Year 2000 compliant.  The Company upgrades its
computer  systems  from  time  to  time  as  part  of  its  ongoing  operations.
Accordingly,   it  is  anticipated  that  the  Company  will  incur  significant
expenditures  in connection  with such upgrades.  However,  the Company does not
expect any material  effect on its results of operations  or financial  position
solely as a result of Year 2000 compliance issues.

ITEM 7 - FINANCIAL STATEMENTS

(BEGINS ON PAGE F-1 BELOW)

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

Not applicable.

                                    PART III

ITEM  9  -  DIRECTORS,   EXECUTIVE  OFFICERS,  PROMOTERS  AND  CONTROL  PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

The following persons are the Directors and executive officers of the Company.

   ------------------------- --------- ====================================
                                              POSITIONS AND OFFICES
                                               PRESENTLY HELD WITH
             NAME            AGE                     THE COMPANY
   ------------------------- --------- ====================================
   ------------------------- --------- ====================================
   Bert E. Brodsky           55        Chairman of the Board, President and
                                       Treasurer
   ------------------------- --------- ====================================
   ------------------------- --------- ====================================
   Hugh Freund               60        Executive Vice President, Secretary 
                                       and Director
   ------------------------- --------- ====================================
   ------------------------- --------- ====================================
   Gary Stoller              45        Executive Vice President and 
                                       Director
   ------------------------- --------- ====================================
   ------------------------- --------- ====================================
   Paul J. Konigsberg        62        Director
   ------------------------- --------- ====================================
   ------------------------- --------- ====================================
   Ronald L. Fish            57        Director
   ------------------------- --------- ====================================

Bert E.  Brodsky  has been  Chairman of the Board and  Treasurer  of the Company
since June 1, 1983 and President since December, 1989. From August, 1983 through
November, 1984, from December, 1988 through January, 1991, from February 1998 to
June 1998,  Mr. Brodsky served as Chairman of the Board of Health Card and since
June 1998 has served as  President  of Health  Card.  From  October 1983 through
December 1993, Mr.  Brodsky  served as Chairman of the Board of  Compuflight,  a
provider of  computerized  flight  planning  services.  Since August  1980,  Mr.
Brodsky has served as Chairman of the Board of PW, which provides  financial and
consulting  services to  physicians.  Since 1979, Mr. Brodsky has also served as
President of Bert Brodsky Associates, Inc., which provides consulting services.

Hugh Freund, a founder of the Company,  was the Company's President from 1978 to
November, 1986, and a Director of the Company since its formation in 1978. Since
November  1986,  Mr.  Freund has served as an  Executive  Vice  President of the
Company and Secretary since 1995. Mr. Freund is also President of Sandsport, the
Company's  wholly-owned health care data processing  subsidiary.  In addition to
managing the  Company's  operations,  Mr.  Freund has been  responsible  for the
marketing efforts of the Company.

Gary  Stoller  joined the  Company at the time of its  formation  in 1978 as its
Senior  Programmer  and Analyst and has been an Executive  Vice  President and a
Director of the Company since January,  1983.  Mr. Stoller has been  responsible
for computer  design,  programming  and  operations  of the Company as its Chief
Information Officer and is the architect of the SHARP and SANTRAX systems.

Paul J. Konigsberg served as a Director of the Company since January,  1998. Mr.
Konigsberg  previously  served on the Company's Board of Directors from November
1987 through August 1995. Mr.  Konigsberg is a certified  public  accountant and
has been a senior partner in the accounting  firm of Konigsberg Wolf & Co., P.C.
since 1970. Mr. Konigsberg also serves on the Company's Audit Committee.

Ronald L. Fish served as a Director of the Company since  January,  1998.  Since
1975, Mr. Fish served as Administrator, Treasurer and Director of Unlimited Care
Inc.,  a nursing  services  firm.  Mr. Fish also serves on the  Company's  Audit
Committee.

Each Director will hold office until the next Annual Meeting of  Stockholders or
until his successor is elected and qualified.  Each executive  officer will hold
office until the next regular  meeting of the Board of Directors  following  the
next Annual Meeting of  Stockholders or until his or her successor is elected or
appointed and qualified.

To the Company's  knowledge,  based solely upon a review of copies of Forms 3, 4
and 5 furnished to the Company and written representations that no other reports
were  required  during the fiscal year ended May 31,  1998,  all  Section  16(a)
filing  requirements  applicable  to the Company's  officers,  Directors and 10%
shareholders were complied with, except with respect to (i) two Directors,  each
of  whom  filed  two  late  reports  on  Form  4,  each  reporting  one  and two
transactions,  respectively  and (ii) one  Director who filed one late report on
Form 4, reporting two transactions.

ITEM 10 - EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth certain  information  concerning the compensation
of Bert E. Brodsky, the Chairman and Chief Executive Officer of the Company, for
the fiscal years ended May 31,  1998,  1997 and 1996,  respectively,  as well as
named executive officers of the Company for the fiscal years ended May 31, 1998,
1997 and  1996.  No other  person  had a total  salary  and  bonus in  excess of
$100,000 for the fiscal years ended May 31, 1998, 1997 and 1996:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>


--------------------------- ------- ------------------------------------- ------------------------------- ===========
                                           Annual Compensation                Long-Term Compensation
--------------------------- ------- ------------ ------- ------------- ------------------------ --------- ===========
                                                                               Awards           Payouts
--------------------------- ------- ------------ ------- ------------- ------------------------ --------- ===========
--------------------------- ------- ------------ ------- ------------- ----------- ----------- ---------- ===========
                                                            Other      Restricted  Securities             All Other
                                                            Annual     Stock       Underlying  LTIP       Compensation
                                      Salary     Bonus    Compensa-      Awards    Options/    Payouts       ($)
    Name and Principal       Year       ($)       ($)        tion         ($)       SARs (#)      ($)
         Position                                            ($)

--------------------------- ------- ------------ ------- ------------- ----------- ----------- ---------- ===========
--------------------------- ------- ------------ ------- ------------- ----------- ----------- ---------- ===========
Bert E. Brodsky, Chairman    1998   200,000 (5)   -0-     13,374 (1)      -0-         -0-         -0-     20,401 (2)
       of the Board                                                                                       30,000 (3)
--------------------------- ------- ------------ ------- ------------- ----------- ----------- ---------- ===========
--------------------------- ------- ------------ ------- ------------- ----------- ----------- ---------- ===========
Bert E. Brodsky, Chairman
       of the Board          1997     200,000     -0-     13,374 (1)      -0-       110,000       -0-     20,670 (2)
--------------------------- ------- ------------ ------- ------------- ----------- ----------- ---------- ===========
--------------------------- ------- ------------ ------- ------------- ----------- ----------- ---------- ===========
Bert E. Brodsky, Chairman
       of the Board          1996     200,000     -0-     12,259 (1)      -0-        44,000       -0-     20,310 (2)
--------------------------- ------- ------------ ------- ------------- ----------- ----------- ---------- ===========
--------------------------- ------- ------------ ------- ------------- ----------- ----------- ---------- ===========
       Hugh Freund
Executive Vice President,    1998     165,000     -0-        -0-          -0-         -0-         -0-     22,669 (2)
        Secretary                                                                                         17,066 (4)
--------------------------- ------- ------------ ------- ------------- ----------- ----------- ---------- ===========
--------------------------- ------- ------------ ------- ------------- ----------- ----------- ---------- ===========
       Hugh Freund
Executive Vice President,    1997     165,000     -0-        -0-          -0-        90,000       -0-     5,605 (2)
        Secretary
--------------------------- ------- ------------ ------- ------------- ----------- ----------- ---------- ===========
--------------------------- ------- ------------ ------- ------------- ----------- ----------- ---------- ===========
       Hugh Freund
Executive Vice President,    1996     69,808      -0-     15,585 (1)      -0-        36,000       -0-     5,605 (2)
        Secretary
--------------------------- ------- ------------ ------- ------------- ----------- ----------- ---------- ===========
--------------------------- ------- ------------ ------- ------------- ----------- ----------- ---------- ===========
       Gary Stoller
 Executive Vice President    1998     115,000     -0-     22,391 (1)      -0-         -0-         -0-     16,040 (2)
--------------------------- ------- ------------ ------- ------------- ----------- ----------- ---------- ===========
--------------------------- ------- ------------ ------- ------------- ----------- ----------- ---------- ===========
       Gary Stoller
 Executive Vice President    1997     108,302     -0-     22,391 (1)      -0-        50,000       -0-        -0-
--------------------------- ------- ------------ ------- ------------- ----------- ----------- ---------- ===========
--------------------------- ------- ------------ ------- ------------- ----------- ----------- ---------- ===========
       Gary Stoller
 Executive Vice President    1996     95,650      -0-     21,756 (1)      -0-        20,000       -0-     1,751 (2)
--------------------------- ------- ------------ ------- ------------- ----------- ----------- ---------- ===========
</TABLE>

(1) Includes personal benefits relating to the use of Company-leased automobiles
provided for business purposes from an affiliate of the Company's Chairman.

(2) Represents  insurance premiums paid by the Company on behalf of Mr. Brodsky,
Mr.  Freund  and Mr.  Stoller  for  life  insurance  policies  on  their  lives,
respectively, the benefits of which are payable to their spouses, respectively.

(3) Represents  insurance  premiums paid by the Company on behalf of Mr. Brodsky
for life insurance policies on his life, the benefits of which are payable to an
insurance trust, of which Mrs. Brodsky is a co-Trustee.

(4)  Represents  insurance  premiums paid by the Company on behalf of Mr. Freund
for life insurance policies on his life, the benefits of which are payable to an
insurance trust, of which Mr. Freund is a co-Trustee.

(5) On May 29, 1998 Mr.  Brodsky  signed a waiver wherein he agreed to waive his
rights to an additional  $300,000 of compensation  due to be paid to him for the
fiscal year ended May 31, 1998  pursuant to the terms of the Brodsky  Employment
Agreement with the Company discussed below.

Option/SAR Grants in Last Fiscal Year

No stock  options were granted to executive  officers of the Company  during the
fiscal year ended May 31, 1998.

Aggregated  Option/SAR  Exercise in Last Fiscal Year and Fiscal  Year-End Option
Value Table

The  following  table sets forth  certain  information  concerning  the value of
unexercised options and warrants held by executive officers of the Company,  for
the fiscal year ended May 31, 1998:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

------------------ -------------------------- ----------------- -------------------------- ==========================
                                                                  Number of Securities       Value of Unexercised
                                                                 Underlying Unexercised    in-the-Money Options and
                                                                 Options and Warrants at      Warrants at May 31,
      Name            Shares Acquired on       Value Realized        May 31, 1998(#)                1998($)
                          Exercise(#)               ($)         Exercisable/Unexercisable  Exercisable/Unexercisable
------------------ -------------------------- ----------------- -------------------------- ==========================
------------------ -------------------------- ----------------- -------------------------- ==========================
 Bert E. Brodsky            74,000                607,540               658,667/0                 1,542,448/0
------------------ -------------------------- ----------------- -------------------------- ==========================
------------------ -------------------------- ----------------- -------------------------- ==========================
   Hugh Freund              43,000                353,030               162,000/0                  276,840/0
------------------ -------------------------- ----------------- -------------------------- ==========================
------------------ -------------------------- ----------------- -------------------------- ==========================
  Gary Stoller              46,667                383,136               110,000/0                  204,900/0
------------------ -------------------------- ----------------- -------------------------- ==========================
</TABLE>


On July 14, 1998 Messrs. Brodsky, Freund, Stoller, Konigsberg, Gerald Shapiro, a
former  director of the Company and Carol Freund,  the spouse of Hugh Freund and
an employee of Sandsport,  exercised  their  respective  options and warrants to
purchase an  aggregate  of 921,334  shares of Common  Stock at  exercise  prices
ranging  from  $1.38 to $2.61  per share for an  aggregate  cost of  $1,608,861.
Payment  for such  shares is to be made to the Company (i) a portion in the form
of  non-recourse  promissory  notes due in July 2001, with interest at eight and
one-half percent  (8-1/2%) per annum,  payable  annually;  and (ii) a portion by
payment of an aggregate of $1,609  representing the par values paid in cash. The
shares of Common  Stock issued upon  exercise  have been pledged as security for
the debt.


Employment   Contracts,   Termination   of  Employment   and   Change-in-Control
Arrangements

In May 1992,  Mr. Brodsky and the Company  entered into a deferred  compensation
agreement  pursuant to which the Company will pay (i) to Mr.  Brodsky a lump sum
ranging from $75,000 to $255,000 if he  voluntarily  terminates  his  employment
with the  Company  after  attaining  55  years  of age or (ii) to Mr.  Brodsky's
beneficiary  a lump sum  ranging  from  $200,000 to $450,000 in the event of Mr.
Brodsky's death during the term of his employment  with the Company.  The amount
of the  payment  is  dependent  upon  the  age of Mr.  Brodsky  at the  time  of
termination  of employment or death.  The Company has obtained  insurance on Mr.
Brodsky's life to fund its obligations under the above agreement.

Effective February 1, 1997, the Company and Mr. Brodsky entered into the Brodsky
Employment  Agreement  providing  for, among other things,  compensation  at the
annual rate of $500,000 or lesser amount if mutually  agreed,  plus such bonuses
or  additional  compensation  that the Board of Directors of the Company may, on
the basis of  improvements  in the  Company's  performance  or other  reasonable
criteria,  deem  appropriate.  During the 5-year term of the Brodsky  Employment
Agreement, the employee shall also be provided with a full-time use of a Company
automobile, six (6) weeks paid vacation annually and group medical insurance and
other benefits or programs  which the Company  establishes or has made available
to its employees.  Mr. Brodsky agreed to accept a reduction in compensation  for
the  fiscal  year  ended May 31,  1998 and has  signed a waiver  evidencing  his
agreement to such reduction.

ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the beneficial share ownership of (i) each person
who is known by the  Company to be the  beneficial  owner of more than five (5%)
percent of the Company's Common Stock; (ii) each of the Company's directors; and
(iii) all of the  Company's  executive  officers and  directors as a group.  The
ownership  percentages  indicated are calculated,  on a fully-diluted  basis, in
accordance with Rule 13d-3 promulgated  pursuant to the Securities  Exchange Act
of 1934, as amended,  which attributes  beneficial  ownership of securities to a
person or entity who holds options or warrants to purchase such securities.
<TABLE>

<S>     <C>    <C>    <C>    <C>    <C>    <C>

======================================= ----------------------------------------- =========================================

Name of Director and Name and Address                                                      Approximate Percentage
         of Beneficial Owner                        Number of Shares                        of Outstanding Shares
======================================= ----------------------------------------- =========================================
Bert E. Brodsky
26 Harbor Park Drive
Port Washington, NY                            835,809  (1)                               33.7%  (1)
======================================= ----------------------------------------- =========================================
Hugh Freund
26 Harbor Park Drive
Port Washington, NY                            238,493  (2)                                 9.6%  (2)
======================================= ----------------------------------------- =========================================
Gary Stoller
26 Harbor Park Drive
Port Washington, NY                            252,786  (3)                                 9.9%  (3)
======================================= ----------------------------------------- =========================================
Steven N. Bronson
201 South Biscayne Boulevard
Suite 2950
Miami, FL  33131                                136,950  (4)                               5.3%  (4)
======================================= ----------------------------------------- =========================================
James S. Cassel
201 South Biscayne Boulevard
Suite 2950
Miami, FL  33131                                  79,100  (5)                             3.1%  (5)
======================================= ----------------------------------------- =========================================
Private Opportunity Partners
II, Ltd. FL Limited Partnership
201 South Biscayne Boulevard
Suite 2950
Miami, FL  33131                                  71,593  (6)                             2.9%  (6)
======================================= ----------------------------------------- =========================================
Paul J. Konigsberg
Konigsberg Wolf & Co.
440 Park Avenue South                               8,000                                   *
New York, NY 10016
======================================= ----------------------------------------- =========================================
Ronald L. Fish
Unlimited Care Inc.
245 Main Street                                            --                              --
White Plains, NY 10601
======================================= ========================================= =========================================
All executive officers and Directors
as a group (5 persons)                       1,622,731  (1)(2)(3)                       59.8%  (1)(2)(3)
======================================= ========================================= =========================================


</TABLE>

(1) Includes  68,352  shares of the  Company's  Common Stock owned by the trusts
established for the benefit of Mr. Brodsky's four children, of which Mr. Brodsky
is a trustee.

(2) Excludes 8,000 shares of Common Stock owned by Mr.  Freund's adult children;
excludes  83,000 shares of Common Stock owned by Mr. Freund's wife. As set forth
in Mr. Freund's Schedule 13G, filed with the SEC on February 6, 1998, Mr. Freund
disclaims any  beneficial  interest in, or voting or  dispositive  control over,
such shares.

(3) Includes presently  exercisable  options to purchase 20,000 shares of Common
Stock at $2.34 per share  under the 1995  Plan;  includes  presently  exerciable
options to purchase  50,000  shares of Common Stock at $2.61 per share under the
1995 Plan.  Includes  21,000 shares of Common Stock owned by trusts  established
for the benefit of Mr. Stoller's children of which Mr. Stoller is a trustee.

(4) Includes 50,600 shares  issuable upon the exercise of currently  exercisable
warrants,  which were due to expire on December 22, 1997,  which expiration date
has been extended until September 18, 1998, at $5.00 per share and 34,600 shares
issuable upon the exercise of currently  exercisable  warrants,  which expire on
December 22, 1998, at $7.00 per share. Excludes 47,500 shares beneficially owned
by Private Opportunity Partners II, L.P., a Florida limited partnership ("POP").
Mr . Bronson is the  President  of the  corporate  general  partner of POP.  Mr.
Bronson has advised the Company  that he disclaims  beneficial  ownership of the
shares beneficially owned by POP.

(5) Includes 30,800 shares  issuable upon the exercise of currently  exercisable
warrants,  which were due to expire on December 22, 1997,  which expiration date
has been  extended to September  18, 1998,  at $5.00 per share and 20,800 shares
issuable upon the exercise of currently  exercisable  warrants,  which expire on
December 22, 1998, at $7.00 per share.  Excludes 4,000 shares beneficially owned
by Mr. Cassel's  children.  Mr. Cassel has advised the Company that he disclaims
beneficial ownership of the shares beneficially owned by his children.

(6) Includes 23,750 shares  issuable upon the exercise of currently  exercisable
options,  which  expire  on  December  22,  2001,  and 343  shares  owned by the
corporate general partner of POP.

* Less than one percent (1%)

ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

IDA/SBA Financing

Reference is hereby made to Item 6 -  "Management's  Discussion  and Analysis or
Plan of Operation - Management's  Discussion and Analysis of Financial Condition
and Results of Operations - IDA/SBA Financing" for a discussion of an industrial
development revenue bond and SBA financing transactions among the Company, BSRI,
BFS (as successor to BSRI's interest in such  transactions),  the NCIDA, the SBA
and the Bank.

Advances and Loans to Affiliates

In July 1994 the Company advanced  certain fees on behalf of Bert Brodsky,  Hugh
Freund, Gary Stoller,  Leland H. Freund and Emily B. Freund  (collectively,  the
"Proponents") arising from a 1994 proposal by the Proponents to take the Company
"private" for purposes of the Federal  Securities  Laws which they  subsequently
withdrew. These fees were repaid by the Proponents in August 1997.

At May 31,  1997,  the Company was owed  approximately  $138,000  from a company
affiliated  with the officers of the Company.  Subsequent  to May 31, 1997,  the
Company  received  approximately  $18,000 and a promissory  note for the balance
due. The note is payable in 24 monthly  payments of principal and interest at 8%
commencing  September 1, 1997.  The Company  deferred  principal  payments  from
April, 1998 to October, 1998, at which time principal and interest payments will
resume.  At May 31,  1998,  the Company was owed  approximately  $87,000 on such
note.

During the fiscal  year ended May 31,  1998 the  Company  paid an  aggregate  of
$35,765 on behalf of certain officers to companies affiliated with the Company's
Chairman for payment of automobile leases.

Sale/Leaseback Transaction

In March 1997,  Sandsport  assigned its  $200,000  option to purchase the assets
leased pursuant to the 1997 Sale/Leaseback  Transaction to PWCC, an affiliate of
the Company's  Chairman.  PWCC acquired the purchase option in consideration for
posting a letter of credit to secure the purchase option obligation.  Subsequent
to March 1997,  PWCC assigned the purchase  option to a third party which is not
affiliated  with the Company.  Reference  is made to Note 8 for a discussion  of
additional sale/leaseback transactions.

Registration Statement

On June 3, 1997 the Securities and Exchange  Commission  declared  effective the
Company's  registration  statement  on Form S-3 (the  "Registration  Statement")
which covered, among other things, the reoffer of 820,213 shares of common stock
beneficially owned by Bert Brodsky,  255,696 shares of common stock beneficially
owned by Hugh Freund and 162,231  shares of common stock  beneficially  owned by
Gary Stoller (See Item 11 "Security  Ownership of Certain  Beneficial Owners and
Management").

On July 14, 1997 the Company filed a Registration Statement on Form S-8 relative
to  reofferings  of shares of Common Stock of the Company  which may be acquired
pursuant to stock option plans.

In August 1997  pursuant to the terms of the  Company's  incentive  stock option
plan,  certain officers of the Company  exercised 206,667 options at an exercise
price of $1.79 per share and 23,333  options at an exercise  price of $1.875 per
share.  Other  option  exercises  by  employees  of the  Company  amounted to an
aggregate  of 222 shares at an  exercise  price of $1.875  per share.  The total
proceeds  generated from option  exercises  during the fiscal year ended May 31,
1998 were $414,100.

On July 14, 1998 certain  officers and directors,  among others,  of the Company
exercised  options and warrants to purchase an  aggregate  of 921,334  shares of
Common  Stock (See "Item 6 -  Management's  Discussion  and  Analysis or Plan of
Operation -  Management's  Discussion  and Analysis of Financial  Condition  and
Results of Operations - Liquidity and Capital Resources" for a discussion of the
option/warrant exercises).

National Medical Health Card Systems, Inc.

The Company  derives  revenue from Health Card,  a company  affiliated  with the
Company's  Chairman  of the Board,  principally  for  computer  software  design
services.  The revenues  generated  from Health Card  amounted to  approximately
$2,307,000   and  $2,171,000  for  the  years  ended  May  31,  1998  and  1997,
respectively.   Included  in  the  current   year   revenues   are  billings  of
approximately  $2,036,000 for computer  software design services.  Subsequent to
May 31, 1998, the Company received  $293,389 from Health Card in full payment of
amounts due, which totalled $293,389 at May 31, 1998 (See "Item 6 - Management's
Discussion  and  Analysis or Plan of  Operation -  Management's  Discussion  and
Analysis of  Financial  Condition  and  Results of  Operations  - Liquidity  and
Capital Resources").

Equipment Leases

The  Company  leases  various  equipment  from a  company  affiliated  with  the
Company's  Chairman.  The  equipment  is leased on a monthly  basis at a rate of
approximately $24,000 per month.

Medical Arts Office Services, Inc.

For purposes of the Federal Securities Laws, Medical Arts Office Services,  Inc.
("MAOS")  may be deemed an  affiliate  of the  Company.  During the fiscal years
ending  May  31,  1998,  and  May 31,  1997,  MAOS  provided  the  Company  with
accounting,  bookkeeping and paralegal services.  For the fiscal years ended May
31, 1998 and 1997 the total  payments  made by the Company to MAOS were $223,813
and $223,395 , respectively.

Federation of Puerto Rican Organizations

The  Company  has  been  providing   services  to  Federation  of  Puerto  Rican
Organizations,   and/or  its  affiliates  (individually  and  collectively,  the
"Federation"), an HRA Vendor Agency, since 1995. At May 31, 1998, the Federation
owed the Company  $51,865 for services  rendered by the Company.  On October 31,
1997 and November 30, 1997, respectively, the Company acquired a loan receivable
for an aggregate of $300,000 from a third party (a portion of which was acquired
from an affiliate of the Company's Chairman), due from the Federation. Such loan
receivable  is secured by accounts  receivable  due to the  Federation.  Shortly
following the Company's  acquiring such  receivable,  the  Federation  filed for
bankruptcy  protection.  The  Company  has filed,  among  other  things,  claims
representing  monies  owed to the  Company  with  respect  to the  loan  and the
receivables.  The Company has fully reserved against the loan and the receivable
in the event that it does not receive payment.

ITEM 13 - EXHIBITS, LISTS AND REPORTS ON FORM 8-K

(a) Exhibits

3(A)(i)   Certificate  of  Incorporation   and  Amendments   thereto   including
Certificate of Ownership and Merger (DE) and Agreement and Plan of Merger (1)

3(A)(ii) Certificate of Amendment to Certificate of Incorporation filed July 27,
1993 (1)

3(A)(iii) Certificate of Amendment to Certificate of Incorporation filed May 26,
1995 (1)

3(B) By-Laws (1)

4(A) Nassau County Industrial  Development Agency Industrial Development Revenue
Bonds (1994 Brodsky Sibling Realty Inc. Project) dated June 1, 1994 (1)

4(B)  Revolving  Credit  Agreement  dated  as of  April  20,  1995 by and  among
Sandsport Data Services, Inc. and Marine Midland Bank (1)

4(C) Nassau County Industrial  Development Agency Industrial Development Revenue
Bonds (1994 Brodsky  Sibling  Realty Inc.  Project)  Assumption and Amendment of
Certain Agreements dated July 1, 1995 (1)

4(D) Loan Agreement dated August 11, 1995 between Sandata,  Inc. and Long Island
Development Corporation (1)

4(E)  "504"  Note  dated  August  11,  1995  from  the Long  Island  Development
Corporation to Sandata, Inc. (1)

4(F) Nassau County Industrial  Development Agency Industrial Development Revenue
Bonds (1994 Brodsky  Sibling  Realty Inc.  Project)  Assumption and Amendment of
Certain Agreements dated November 1, 1996

4(G)  Revolving  Credit  Agreement  dated  as of  April  18,  1997 by and  among
Sandsport Data Services, Inc. and Marine Midland Bank

10(A)  License  Agreement  dated as of September  1, 1988 by and among  Sandata,
Inc.,  Sandata Images,  Inc., Sandata Spectrum,  Inc., P.W. Medical  Management,
Inc., P.W. Spectrum, Inc. and P.W. Subsidiary I, Inc., d/b/a Images (1)

10(B) Amendment to License Agreement by and among Sandata, Inc., Sandata Images,
Inc., Sandata Spectrum, Inc., P.W. Medical Management, Inc., P.W. Spectrum, Inc.
and P.W. Subsidiary I, Inc., d/b/a Images dated August 31, 1989 (1)

10(C) Amendment to License Agreement by and among Sandata, Inc., Sandata Images,
Inc., Sandata Spectrum, Inc., P.W. Medical Management, Inc., P.W. Spectrum, Inc.
and P.W. Subsidiary I, Inc., d/b/a Images dated December 1, 1990 (1)

10(D) Software License Agreement and Distribution Agreement between Sandata Home
Health Systems,  Inc. and Fastrack Healthcare Systems, Inc. dated as of June 15,
1995 (1)

10(E) Employees' Incentive Stock Option Plan (1)

10(F) First Amendment to Incentive Stock Option Plan dated April 4, 1989 (1)

10(G) Second  Amendment to Incentive  Stock Option Plan dated  December 18, 1990
(1)

10(H) 1986 Non-Qualified Stock Option Plan (1)

10(I) Amendment to 1986 Non-Qualified Stock Option Plan dated April 4, 1989 (1)

10(J) 1995 Stock Option Plan (1)

10(K) Common Stock Purchase Warrants as issued to Bert E. Brodsky (1)

10(L)  Deferred  Compensation  Plan dated May 1, 1992 between the Registrant and
Bert E. Brodsky (1)

10(M) Form of agreement between Sandsport Data Services,  Inc. and vendor agency
(2)

10(N) Form of agreement between Sandsport Data Services,  Inc. and vendor agency
(2) 10(O) Form of Subscription Agreement dated December 23, 1996 (2)

10(P) Form of Subscription Agreement dated September 12, 1996 (2)

10(Q) Form of Common Stock Purchase Warrant ($5.00 Exercise Price) (2)

10(R) Form of Common Stock Purchase Warrant ($7.00 Exercise Price) (2)

10(S) Form of Redeemable Common Stock Purchase Warrant (2)

10(T)  Employment  Agreement  dated  February 1, 1997 between the Registrant and
Bert E. Brodsky (3)

10(U) Form of Pledge Agreement

10(V) Form of Non-Negotiable Promissory Note

16 Letter re Change in Certifying Accountant (1)

21 Subsidiaries of Registrant (2)

23 Consent of Accountants

27 Financial Data Schedule (for electronic filing)
---------------------------

(1) The Company  hereby  incorporates  the  footnoted  Exhibit by  reference  in
accordance with Rule 12b-32,  as such Exhibit was originally filed as an Exhibit
to the Company's Report on Form 10-KSB for the fiscal year ended May 31, 1995.

(2) The Company  hereby  incorporates  the  footnoted  Exhibit by  reference  in
accordance with Rule 12b-32,  as such Exhibit was originally filed as an Exhibit
to  Amendment  No.  1 to Form  S-3  Registration  Statement  as  filed  with the
Securities and Exchange Commission on May 27, 1997.

(3) The Company  hereby  incorporates  the  footnoted  Exhibit by  reference  in
accordance with Rule 12b-32,  as such Exhibit was originally filed as an Exhibit
to the Company's Report on Form 10-KSB for the fiscal year ended May 31, 1997.

(b) Reports on Form 8-K

None.

                                  SANDATA, INC.

                     FINANCIAL STATEMENTS COMPRISING ITEM 7
                            OF REPORT ON FORM 10-KSB
                      TO SECURITIES AND EXCHANGE COMMISSION
                             YEAR ENDED MAY 31, 1998


                                       
                         Sandata, Inc. and Subsidiaries


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                            Page

Report of Independent Certified Public Accountants                           F-2

Financial Statements

Consolidated Balance Sheets as of May 31, 1998 and 1997                F-3 - F-4

Consolidated Statements of Income for the years ended May 31, 1998
and 1997                                                                     F-5

Consolidated Statements of Shareholders' Equity for the years
ended May 31, 1998 and 1997                                                  F-6

Consolidated  Statements of Cash Flows for the years
ended May 31, 1998 and 1997
                                                                             F-7

Notes to Consolidated Financial Statements                            F-8 - F-22



                      
                        REPORT OF INDEPENDENT CERTIFIED
                               PUBLIC ACCOUNTANTS



Board of Directors and Shareholders
of Sandata, Inc. and Subsidiaries



We have audited the accompanying  consolidated  balance sheets of Sandata,  Inc.
and  Subsidiaries  as of May 31,  1998 and 1997,  and the  related  consolidated
statements  of  income,  shareholders'  equity and cash flows for the years then
ended.  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  consolidated  financial  statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and disclosures in the  consolidated  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 our audits  provide a reasonable
basis for our opinion.

As more fully described in the Notes to the consolidated  financial  statements,
the  Company  had  certain  transactions  with  companies  affiliated  with  the
Company's Officers and Chairman of the Board.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Sandata, Inc. and Subsidiaries as of May 31, 1998 and 1997, and the consolidated
results  of their  operations  and their  cash flows for the years then ended in
conformity with generally accepted accounting principles.


Marcum & Kliegman LLP


Woodbury, New York
July 24, 1998


                               
<PAGE>


                         Sandata, Inc. and Subsidiaries


                           CONSOLIDATED BALANCE SHEETS

                                     May 31,
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>


                               ASSETS                                                       1998                     1997

CURRENT ASSETS
       Cash and cash equivalents                                                         $1,794,947              $1,200,014
       Accounts receivable, net of allowance for doubtful accounts
           of $443,000 and $331,000 at 1998 and 1997, respectively                        1,611,457               1,254,589
       Receivables from affiliates                                                          619,687                 949,906
       Receivable from former affiliate                                                         ---                  12,074
       Notes receivable - officers                                                              ---                 102,867
       Inventories                                                                           27,003                  16,335
       Prepaid expenses and other current assets                                            140,873                 212,114

                  Total Current Assets                                                    4,193,967               3,747,899

FIXED ASSETS, NET                                                                         5,814,381               5,279,512

OTHER ASSETS
       Notes receivable                                                                     100,000                 100,000
       Cash surrender value of officer's life insurance, security
           deposits and other                                                               525,281                 411,137

                  Total Assets                                                          $10,633,629              $9,538,548







</TABLE>

                                  See notes to consolidated financial statements


<PAGE>


                         Sandata, Inc. and Subsidiaries

                     CONSOLIDATED BALANCE SHEETS (Continued)

                                     May 31,
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                  LIABILITIES AND SHAREHOLDERS' EQUITY                                      1998                     1997

CURRENT LIABILITIES
       Accounts payable and accrued expenses                                             $2,507,042              $1,691,456
       Current portion of long-term debt                                                     22,296                 267,864
       Deferred/unearned revenue                                                             23,410                   2,733
       Deferred income                                                                      186,358                 237,202

                  Total Current Liabilities                                               2,739,106               2,199,255

LONG-TERM DEBT                                                                                  ---               1,034,201

DEFERRED INCOME                                                                             215,945                 243,305

DEFERRED INCOME TAXES                                                                       382,000                 370,000

                  Total Liabilities                                                       3,337,051               3,846,761

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY 
       Common stock; par value $.001;  authorized 3,000,000 shares
         in 1998 and  1997,  1,560,149  and  1,216,727  shares  issued  in 1998 
         and 1997, respectively; 1,560,149  and  1,163,955  shares  outstanding
         in 1998 and 1997, respectively                                                       1,560                   1,216 
       Additional paid in capital                                                         4,173,091               2,795,801 
       Retained earnings                                                                  3,121,927               3,031,656 
                                                                                          7,296,578               5,828,673

       Less  Treasury  stock - at  cost (0 and 52,772  shares  in  1998  and  
         1997, respectively)                                                                    ---                (136,886)

                  Total Shareholders' Equity                                              7,296,578               5,691,787

                  Total Liabilities and Shareholders' Equity                            $10,633,629              $9,538,548
                          


</TABLE>

                         See notes to consolidated financial statements
<PAGE>


                         Sandata, Inc. and Subsidiaries

                        CONSOLIDATED STATEMENTS OF INCOME

                               Years ended May 31,

<TABLE>
<S>                                                                                         <C>                      <C> 
                                                                                            1998                     1997

REVENUES:
       Service fees                                                                     $12,488,327             $11,312,809
       Real estate rental income                                                                ---                 134,700
       Other income                                                                         263,510                 407,137
       Interest income                                                                       75,133                  26,823
                                                                                         12,826,970              11,881,469
COSTS AND EXPENSES:
       Service Fees:
           Operating                                                                      8,496,552               6,884,989
           Selling, general and administrative                                            2,695,427               2,348,031
           Depreciation and amortization                                                  1,460,105               1,358,600
           Interest expense                                                                  56,730                 221,042
                                                                                         12,708,814              10,812,662
       Real Estate:
           Operating                                                                            ---                 246,894
           Depreciation and amortization                                                        ---                  47,302
           Interest expense                                                                     ---                 133,918
           Real estate taxes                                                                    ---                  71,012
                                                                                                ---                 499,126

TOTAL COSTS AND EXPENSES                                                                 12,708,814              11,311,788

Earnings from operations before income taxes                                                118,156                 569,681

       Income tax expense                                                                    27,885                 307,000

NET EARNINGS                                                                          $      90,271           $     262,681

BASIC EARNINGS PER SHARE                                                              $         .06           $         .28

DILUTED EARNINGS PER SHARE                                                            $         .04           $         .14


</TABLE>



                 See notes to consolidated financial statements


<PAGE>


                         Sandata, Inc. and Subsidiaries

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                        Years ended May 31, 1998 and 1997

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                                                   
                                     Common      Stock             Additional
                                 --------------- -------------      Paid-in           Retained        Treasury
                                     Shares         Amount          Capital           Earnings          Stock           Total

Balance at June 1, 1996                 816,727    $    816          $1,279,710      $2,768,975       $(136,886)      $3,912,615
Sale of common stock in
connection with private
offering                                400,000         400           1,516,091             ---              ---       1,516,491

Net earnings                                ---         ---             262,681             ---         262,681

Balance at May 31, 1997               1,216,727        $1,216        $2,795,801      $3,031,656       $(136,886)      $5,691,787
Effect of fractional shares
paid out in cash                           (28)           ---               ---             ---              ---             ---

Exercise of common stock
purchase warrants                       166,000           166         1,105,661             ---              ---       1,105,827

Exercise of common stock
options                                 230,222           230           408,463             ---              ---         408,693

Reissuance of treasury stock
                                       (52,772)          (52)          (136,834)            ---           136,886             ---

Net earnings                               ---            ---               ---          90,271               ---          90,271

Balance at May 31, 1998               1,560,149        $1,560          $4,173,091     $3,121,927               ---     $7,296,578







</TABLE>




                 See notes to consolidated financial statements



<PAGE>


                         Sandata, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                               Years ended May 31,
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
                                                                                      <C>                    <C> 
                                                                                           1998                   1997
Cash flows from operating activities:
    Net earnings                                                                        $  90,271            $  262,681
    Adjustments to reconcile net earnings to net cash
      provided by operating activities:
         Depreciation and amortization                                                  1,460,105             1,405,902
         (Gain) on disposal of fixed assets                                              (184,642)             (375,714)
         (Gain) on transfer of facility                                                       ---               (15,586)
         Provision for losses on accounts receivable                                      112,542               (19,481)
         (Decrease) in deferred income                                                   (262,846)             (277,989)
         Recognition of deferred revenue                                                  (53,780)              (19,300)
         Deferred tax provision                                                            12,000               287,000
           (Increase) decrease in operating assets
                Accounts receivable                                                      (469,410)              (54,203)
                Receivables from affiliates                                               330,219              (759,271)
                Receivable from former affiliate                                           12,074                14,184
                Notes receivable - officers                                               102,867                   ---
                Inventories                                                               (10,668)               11,637
                Prepaid expenses and other current assets                                  71,241               (39,217)
                Other assets                                                             (114,144)                 (454)
         Increase in operating liabilities
                Accounts payable and accrued expenses                                     815,586               669,396
                Deferred revenue                                                           74,457                17,734
                Deferred income                                                           184,642               375,714
           Net cash provided by operating activities                                    2,170,514             1,483,033
Cash flows from investing activities:
         Purchases of fixed assets                                                     (2,510,332)           (1,941,372)
         Proceeds from sale/leaseback transactions                                        700,000             1,906,000
         Issuance of notes receivable                                                         ---              (100,000)
         Collection of note receivable - former affiliate                                     ---                77,100
           Net cash used in investing activities                                       (1,810,332)              (58,272)
Cash flows from financing activities:
         Proceeds from stock transactions                                               1,514,520             1,516,491
         Principal payments on term loans                                                (279,769)             (609,638)
         Proceeds from line of credit                                                         ---             3,750,000
         Principal payments on line of credit                                          (1,000,000)           (3,788,000)
         Proceeds from notes payable - affiliates                                             ---             3,010,000
         Principal payments on notes payable - affiliates                                     ---            (4,472,000)
           Net cash provided by (used in) financing activities                            234,751              (593,147)

Increase in cash and cash equivalents                                                     594,933               831,614
Cash and cash equivalents at beginning of year                                          1,200,014               368,400
Cash and cash equivalents at end of year                                            $   1,794,947         $   1,200,014
</TABLE>

Supplemental  Disclosure of Noncash  Investing and Financing  Activities:  As of
November 1, 1996 a company  affiliated with the Directors of the Company assumed
certain lease  obligations  relative to the transfer of a facility in the amount
of $3,140,884.

                 See notes to consolidated financial statements


<PAGE>


                         Sandata, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Principles of Consolidation

The consolidated  financial statements include the accounts of Sandata, Inc. and
its wholly owned  subsidiaries:  Sandsport  Data  Services,  Inc.,  Sandata Home
Health Systems,  Inc., Sandata Spectrum,  Inc.,  SANTRAX Systems,  Inc., SANTRAX
Productivity,  Inc. and Sandata  Inteck,  Inc.  SANTRAX  Productivity,  Inc. and
Sandata Inteck,  Inc. are inactive  subsidiaries.  All significant  intercompany
accounts and transactions have been eliminated in consolidation.

b. Nature of Business and Economic Dependency

Sandata,  Inc. and  Subsidiaries  (the  "Company") are primarily  engaged in the
business of providing  computerized data processing services and custom software
and  programming   services  using   Company-developed   and  licensed  software
principally to the healthcare  industry.  The Company primarily  operates in the
New York  metropolitan  area.  During  fiscal  years 1998 and 1997,  the Company
received  revenues  from  a  group  of  customers  who  are  all  funded  by one
governmental  agency,  amounting to  approximately  $8,416,000  and  $7,905,000,
respectively.

c. Fixed Assets

Fixed assets are recorded at cost.  Depreciation  and  amortization are computed
principally by the straight-line  method over the lesser of the estimated useful
lives or lease terms of the related assets.

d. Income Taxes

The Company uses the liability  method to account for income taxes.  The primary
objectives of accounting for income taxes are to (a) recognize the amount of tax
payable  for the  current  year and (b)  recognize  the amount of  deferred  tax
liability or asset based on management's  assessment of the tax  consequences of
events that have been  reflected in the  Company's  financial  statements or tax
returns.

e. Software Costs

The Company capitalizes  software development costs from the point in time where
technological  feasibility  has been  established  until the  computer  software
product is available to be sold.  The  Company's  amortization  is computed on a
straight line basis over a five year period,  which represents the estimated use
for life of the software.  The Company matches its software amortization against
its respective product revenue, which is reported on a product by product basis.

f. Inventories

Inventories,  consisting of computer  hardware and peripherals  held for resale,
are stated at the lower of cost or market; cost is determined using the specific
identification method.

g. Net Earnings Per Common Share

In February  1997, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting Standards No. 128 "Earnings per Share" ("SFAS
128"),  which  establishes  standards for computing and presenting  earnings per
share. The new standard  replaces the presentation of primary earnings per share
prescribed  by  Accounting  Principles  Board Option No. 15 "Earnings per Share"
("APB 15"),  with a  presentation  of basic earnings per share and also requires
dual  presentation  of basic and diluted  earnings  per share on the face of the
statement of operations for all entities with complex capital structures.  Basic
earnings  per  share  excludes  dilution  and is  computed  by  dividing  income
available to common stockholders by the weighted-average number of common shares
outstanding for the period.  Diluted earnings per share is computed similarly to
fully diluted  earnings per share  pursuant to APB 15. The Company  adopted SFAS
128 in the third  quarter of fiscal 1998 and has restated  all prior  periods in
its financial statements.

Basic earnings per share are based on the  weighted-average  number of shares of
common stock  outstanding,  which were  1,478,419 at May 31, 1998 and 922,288 at
May 31,  1997.  Diluted  earnings  per share  are based on the  weighted-average

NOTE 1 (Continued)

number of shares of common stock adjusted for the effects of assumed exercise of
options and warrants  under the treasury  stock  method,  which were as follows:
2,246,206 at May 31, 1998 and 1,864,463 at May 31, 1997.

h. Revenue Recognition

The Company recognizes  revenues and direct costs as the contractual  service is
rendered and the expense associated with such service is incurred. Revenues from
hardware and software maintenance contracts are deferred and recognized over the
life of the contracts.

i. Cash and Cash Equivalents

The Company  considers all short-term  investments with an original  maturity of
three months or less to be cash equivalents.

The Company has cash balances in banks in excess of the maximum  amount  insured
by the FDIC as of May 31, 1998.

j. Statement of Cash Flows

The Company paid income taxes of  approximately  $25,000 and $7,000 and interest
of approximately $57,000 and $355,000 for the years ended May 31, 1998 and 1997,
respectively.

k. Use of Estimates in the Financial Statements

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.

l. Fair Value of Financial Instruments

The Company's  financial  instruments  include  cash,  accounts  receivable  and
accounts payable.  Due to the short-term nature of these  instruments,  the fair
value of these  instruments  approximate  their recorded value.  The Company has
long-term debt instruments which it believes are stated at estimated fair market
value.

m. Stock Options

In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123,  "Accounting for Stock-Based  Compensation" ("SFAS 123"). SFAS 123 requires
compensation  expense to be recorded (i) using the new fair value method or (ii)
using  existing  accounting  rules  prescribed  by Accounting  Principles  Board
Opinion  No.  25,  "Accounting  for Stock  Issued to  Employees"  ("APB 25") and
related  interpretations  with  pro  forma  disclosure  of what net  income  and
earnings  per share would have been had the  Company  adopted the new fair value
method. The Company continues to account for its stock-based  compensation plans
in  accordance  with  the  provisions  of APB  25 and  will  provide  pro  forma
disclosure in accordance with SFAS 123 if material.

n. Effect of Recently Issued Accounting Standards

In June 1997, the Financial Accounting Standards Board issued two new disclosure
standards.

Statement of Financial  Accounting  Standards No. 130, "Reporting  Comprehensive
Income"  ("SFAS  130")  establishes  standards  for  reporting  and  display  of
comprehensive income.

Among other  disclosures,  SFAS 130 requires that all items that are required to
be recognized as components of  comprehensive  income be reported in a financial
statement  that is  displayed  with  the  same  prominence  as  other  financial
statements.

Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131") establishes standards for
the way that public  enterprises  report  information about operating  segments.
SFAS 131 defines  operating  segments as components of an enterprise about which
separate financial  information is available that is evaluated  regularly by the
chief  operating  decision  maker in deciding how to allocate  resources  and in
assessing  performance.  SFAS 131 requires  separate  disclosures  for different
operating segments.

NOTE 1 (Continued)

Both of these new standards are effective for financial  statements  for periods
beginning  after  December  15, 1997 and  require  comparative  information  for
earlier years to be restated. The Company does not expect that adoption of these
standards will significantly impact its financial statements.

In February 1998, the Financial  Accounting  Standards Board issued Statement of
Financial Accounting  Standards No. 132, "Employers'  Disclosures about Pensions
and  Other   Postretirement   Benefits"  ("SFAS  132")  which  standardizes  the
disclosure  requirements  for pensions and other  postretirement  benefits.  The
adoption  of SFAS 132 is not  expected  to  significantly  impact the  Company's
financial statements.

NOTE 2 - FIXED ASSETS

Fixed assets consist of the following:

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                                                                                  <C>
                                                                 Useful                           May 31,
                                                                  Life                     1998              1997
         Computer equipment and software costs                    5 years             $ 9,391,943       $ 7,484,857
         Furniture, fixtures and automobiles                    4-7 years                 304,580           299,138
         Leasehold improvements                                  10 years               2,421,036         2,421,036

                                                                                      $12,117,559       $10,205,031

         Less accumulated depreciation and amortization                                 6,303,178         4,925,519
                                                                                      $ 5,814,381       $ 5,279,512

</TABLE>

Depreciation  and  amortization  expense  relating to fixed  assets  (other than
software  costs)  amounted to  approximately  $586,000  and $642,000 in 1998 and
1997, respectively.

Unamortized  software costs amounted to approximately  $2,990,000 and $2,252,000
at May 31,  1998 and 1997,  respectively.  Amortization  expense for these costs
totaled approximately $874,000 and $764,000 in 1998 and 1997, respectively.

Research  and  development  expenses  amounted  to  approximately  $185,000  and
$276,000 in 1998 and 1997, respectively.

NOTE 3 - DEBT

Credit Agreement

On April 18, 1997, the Company's wholly owned subsidiary Sandsport, entered into
a revolving  credit  agreement  (the "Credit  Agreement")  with the a bank ( the
"Bank") in the amount of  $3,000,000.  The unpaid balance of any loans under the
Credit  Agreement  bear interest at either the Bank's prime rate or the adjusted
LIBOR rate, as defined in the Credit Agreement,  and will be paid quarterly. The
Company was required to pay a commitment  fee in the amount of $30,000 and a fee
equal to 1/4% per annum  payable on the unused  average daily balance of amounts
under the Credit  Agreement.  Any  indebtedness  under the Credit  Agreement  is
guaranteed by the Company and Sandsport's sister subsidiaries (the "Group"). The
collateral for the facility is a first lien on all equipment owned by members of
the Group as well as a collateral  assignment of  $2,000,000  of life  insurance
payable on the life of a key officer of the Company. All of the Group assets are
pledged  to the  Bank as  collateral  for  the  amounts  due  under  the  Credit
Agreement.  In addition,  the Company is required to maintain certain  financial
and restrictive covenants. The Credit Agreement will expire on March 1, 2000, at
which time any outstanding  principal balance will be due and payable. As of May
31, 1998, there is no balance owed to the Bank under the Credit Agreement.
<PAGE>
Long Term Debt

Long-term debt at May 31, 1998 and 1997 was as follows:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                                                                 1998               1997

         8.7% Term Loan payable to affiliate, due 1998                       $  10,401          $  135,405
         8.91% Term Loan payable to affiliate, due 1998                         11,895             166,660
         Variable Rate Term Loan under Credit Agreement                             --           1,000,000
                                                                                22,296           1,302,065

         Less: current portion of long-term debt                                22,296             267,864

         Long-term debt                                                      $      --          $1,034,201
</TABLE>
NOTE 3 (Continued)

The Term Loans  payable to affiliates  represent  assumed  indebtedness  owed to
affiliates  of the  Company's  Chairman and were  incurred by the  affiliates in
connection with the  construction of improvements to the Company's  office space
(the  "Facility").  The loans are  collateralized  by the assets of the  primary
obligor, BFS Realty, LLC ("BFS"), an affiliate of the Company's Directors,  from
whom the Company  leases office space at the Facility.  The loans are guaranteed
by the Company's Chairman (see Note 6).

NOTE 4 - INCOME TAXES

         The income tax expense is comprised of the following:
<TABLE>

<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                                                                 Year ended May 31,
                                                                               1998              1997
         Current
                  Federal                                              $        ---        $    3,000
                  State                                                       15,885           17,000

         Deferred - Federal and state                                         12,000          287,000
                                                                           $  27,885         $307,000


         The Company's effective income tax rate differs from the statutory U.S.
         Federal income tax rate as a result of the following:

                                                                                    Year ended May 31,
                                                                                  1998              1997
 
         Statutory U.S. federal tax rate                                           34.0%            34.0%
         State taxes                                                               15.9              3.2
         Net operating loss carryforwards                                        (204.0)           (25.9)

         Impact of changes in items giving rise to deferred taxes:
             Depreciation and amortization                                        158.9             29.2
             Deferred revenue                                                      25.8             (6.7)
             Other                                                                 (7.0)            19.9

                                                                                   23.6%            53.7%

</TABLE>

As of May 31, 1998 and 1997  depreciation and amortization gave rise to deferred
tax  liabilities  of  approximately   $1,047,000  and  $860,000,   respectively.
Allowance for doubtful accounts,  employee benefit accruals, deferred gains, net
operating loss  carryforwards and contribution  carryovers gave rise to deferred
tax assets of approximately,  $665,000 and $490,000, respectively. These amounts
are presented net in the consolidated balance sheet as of May 31, 1998 and 1997,
as a noncurrent deferred tax liability.

At May 31,  1998,  the  Company had net  operating  loss  carryforwards  for tax
purposes of $689,000, expiring at various dates through 2013.

NOTE 5- COMMITMENTS AND CONTINGENCIES

Lease Agreements

The Company  leases  office space at the  Facility  from BFS (see Note 6). Total
office space and equipment  rental expense under  operating  leases  amounted to
approximately  $2,173,000 and $1,728,000 in fiscal 1998 and 1997,  respectively.
The  Company  paid rent in the amount of  $604,350  and  $340,200 to BFS for the
years ended May 31, 1998 and May 31, 1997, respectively.

The Company  has  obligations  to pay rental  expense in  connection  with seven
sale/leaseback  transactions.  The rental  expenses  amounted  to  approximately
$1,025,900 and $773,600 for the years ended May 31, 1998 and 1997  respectively.
(See Note 8).

In connection with a February 1995 sale/leaseback, the Company previously issued
irrevocable letters of credit in an aggregate amount of $375,000 for the benefit
of the lessor.  One letter of credit in the amount of $225,000 is cancellable if
the Company meets certain  financial  covenants.  This same letter of credit has
been  extended  until  the  earlier  of the  Company's  meeting  such  financial
covenants or the  termination  of the June 1995 lease with the same lessor.  The
other letter of credit in the amount of $150,000 expired upon the termination of
the February 1995 lease.

Future minimum lease payments for all noncancellable operating leases at May 31,
1998 are as follows:

                                                                          Amount
                  Year ending May 31,
                           1999                                       $1,781,480
                           2000                                        1,663,094
                           2001                                          890,948
                           2002                                          664,212
                           2003                                          648,360
                           Thereafter                                    864,480

                                                                      $6,512,574

Litigation

On July 6, 1998,  the Company  and MCI  Telecommunications  Corporation  ("MCI")
entered into a letter of intent (the  "Letter of Intent")  pursuant to which the
parties have agreed on the principle terms of a settlement of certain litigation
pending in the United  States  District  Court for the  Eastern  District of New
York, captioned MCI Telecommunications Corporation v. Sandata, Inc., relating to
certain  alleged  patent  infringement  by the Company (the  "Litigation").  The
Letter of Intent provides,  among other things, that the Company will be granted
a license under certain of MCI's patents (the  "Patents")  for use in connection
with the  Company's  SANTRAX  system and that the  Company  will pay MCI certain
royalties.

Employment and Deferred Compensation Agreements

On  February  1, 1997 the Company and Mr.  Brodsky  entered  into an  employment
agreement for a five year term (the "Brodsky Employment Agreement"). Among other
things,  the Brodsky Employment  Agreement  provides  compensation at the annual
rate of $500,000 or a lesser amount if mutually agreed.  The Brodsky  Employment
Agreement also provides for payment of an annual bonus at the sole discretion of
the Board of Directors. Mr. Brodsky agreed to accept a reduction in compensation
for the fiscal  year ended May 31, 1998 and has signed a waiver  evidencing  his
agreement to such reduction.

The Company also has a deferred compensation agreement with Mr. Brodsky pursuant
to which the Company will pay (i) to Mr. Brodsky a lump sum ranging from $75,000
to $255,000 if he voluntarily  terminates his employment  with the Company after
attaining 55 years of age (ii) to Mr.  Brodsky's  beneficiary a lump sum ranging
from $200,000 to $450,000 in the event of Mr. Brodsky's death during the term of
his employment with the Company. The amount of the payment is dependent upon the
age of Mr. Brodsky at the time of termination or death. The Company has obtained
insurance  on Mr.  Brodsky's  life to  fund  its  obligations  under  the  above
agreement.

NOTE 6 - RELATED PARTY TRANSACTIONS

a. On June 1, 1994, BFS Sibling Realty,  Inc. ("BSRI") formerly known as Brodsky
Sibling  Realty,  Inc.,  a company  affiliated  with  certain  of the  Company's
Directors,  borrowed  $3,350,000 in the form of Industrial  Development  Revenue
Bonds  ("Bonds") to finance costs incurred in connection with the acquisition of
the Company's  Facility  from the NCIDA,  and for  renovating  and equipping the
Facility.  These Bonds were subsequently  purchased by a bank (the "Bank").  The
aggregate cost incurred by BSRI in conjunction with such acquisition, renovation
and equipping was approximately  $4,377,000.  In addition,  the Company incurred
approximately   $500,000  of  indebtedness  to  affiliates  of  Mr.  Brodsky  in
connection  with  additional  capital  improvements.  The Bonds bore interest at
prime plus 3/4 of 1% until  August 11,  1995,  at which time the  interest  rate
became fixed at 9% for a five-year term through September 1, 2000. At that time,
the interest  rate will be adjusted to a rate of either prime plus 3/4 of 1%, or
the applicable fixed rate if offered by the Bank. As a condition to the issuance
of the Bonds,  the NCIDA  obtained title to the Facility which it then leased to
BSRI.

NOTE 6 (Continued)

On June 21, 1994 (as of June 1, 1994),  the Company and its Chairman  guaranteed
the full and  prompt  payment of  principal  and  interest  of the Bonds and the
Company  granted the Bank a security  interest and lien on all the assets of the
Company.  In connection with the issuance and sale of the Bonds, the Company, as
sublessee,  entered into a sublease  agreement (the "First Sublease") with BSRI,
whereby the Company  leased the Facility for the conduct of its business and, in
consideration  therefor,  was obligated to make lease payments in at least equal
amounts due to satisfy the underlying Bond obligations.

On July 31, 1995, by an Assignment and  Assumption and First  Amendment to Lease
between the Company and BSRI, the Company  assumed the obligations of BSRI under
the lease and became the direct tenant and the beneficial  owner of the Facility
(collectively  the "First  Amendment").  In connection with the First Amendment,
the First Sublease was terminated. During the period commencing July 1, 1995 and
ending  October 31, 1996 the Company  paid rent for the Facility to the NCIDA in
the amount of  $48,600  per month,  subject  to  adjustment  based upon the then
effective interest rate of the Bonds, among other things. In connection with the
First  Amendment,  the Company  obtained the right to acquire the Facility  upon
expiration of the Lease with the NCIDA and became  directly  liable to the NCIDA
for amounts due thereunder. Furthermore, in connection with the First Amendment,
the Company  assumed  certain  indebtedness  owed to affiliates of the Company's
Chairman as follows:  (i) the $364,570 remaining balance of a 48-month term loan
bearing interest at 8.7% per annum, and (ii) the $428,570 remaining balance of a
42-month term loan bearing  interest at 8.91%.  Each of the foregoing loans were
incurred in connection  with the  construction  of improvements to the Facility,
are  collateralized  by the assets of the primary  obligor and are guaranteed by
the Company's Chairman.

On August 11, 1995, the Company  entered into a $750,000 loan agreement with the
Long Island  Development  Corporation  ("LIDC"),  under a guarantee  by the U.S.
Small  Business  Administration  ("SBA") (the "SBA Loan").  The entire  $750,000
proceeds were used to repay a portion of the Bonds. The Company entered into the
First Amendment  primarily to satisfy  certain  requirements of the SBA. The SBA
Loan is payable in 240 monthly  installments of $6,255, which includes principal
and interest at a rate of 7.015%.

As of November 1, 1996, the Company  entered into the Second  Amendment with BFS
(which succeeded to the interest of BSRI with respect to the Second  Amendment),
the NCIDA and the Bank. In connection with the Second Amendment, (i) BFS assumed
all of the Company's obligations under the Lease with the NCIDA and entered into
the Second Sublease with the Company, as sublessee,  for the Facility;  and (ii)
the Company  conveyed to BFS the right to become the owner of the Facility  upon
expiration  of the Lease.  In  addition,  pursuant to the Second  Sublease,  the
Company  has  assumed  certain  obligations  owed by BFS to the NCIDA  under the
Lease.  BFS has  indemnified  the Company  with  respect to certain  obligations
relative to the Lease and the Second Amendment.

As a result of the Second  Amendment and related  transactions  discussed above,
the  Company  reduced  its  fixed  assets,  consisting  of  land,  building  and
improvement  costs,  by the  amount  of the  cost  thereof,  net of  accumulated
depreciation,  in the amount of  $3,125,298  and  reduced  its long term debt by
$3,140,884,  which was assumed by BFS; the net  difference was recorded as other
income in the financial statements.

b. The Company  derives  revenue from a company  affiliated  with the  Company's
Chairman of the Board for data processing services and computer software design.
The revenues generated from this company,  amounted to $2,307,000 and $2,171,000
for the years ended May 31, 1998 and 1997,  respectively.  At May 31, 1998,  the
Company was owed approximately $293,000 by such affiliate, which was received in
full subsequent to May 31, 1998.

As of June 1, 1998, this affiliate hired 11 employees of the Company in order to
provide  development,   enhancement,   modification  and  maintenance  services,
previously   provided  by  the  Company.   The  Company  was  paid  $200,000  in
consideration  of  the  Company's   waiving  certain  rights  relative  to  such
employees.  In addition, the Company began leasing certain computer equipment to
this  affiliate  for $2,000 per month as well as computer  hardware for its data
processing  center at a monthly cost of $20,000  from the Company  pursuant to a
verbal  agreement.  The  Company  is  expected  to  continue  to provide to this
affiliate consulting services related to this affiliate's information systems.

c. The Company is indebted  under two Term Loans to  affiliates of the Company's
Chairman,  as described in Note 3. Each of the foregoing  loans were incurred in
connection  with  the   construction  of  improvements  to  the  Facility,   are
collateralized  by the assets of the primary  obligor and are  guaranteed by the
Company's Chairman.

d. The Company makes various lease payments to certain affiliated companies. The
payments are for:  equipment  rental,  which was $366,796 and $367,228 in fiscal
1998 and 1997,  respectively,  and rent for the Facility  which was $604,350 and
$340,200 in fiscal 1998 and 1997, respectively.

e. Due from Officers at May 31, 1997 in the amount of $102,867,  represented the
amount  advanced  by the  Company to pay certain  fees  arising  from a proposed
privatization,  which was withdrawn in December 1994. These notes were repaid by
the officers in August 1997.

f. At May 31, 1997, the Company was owed  approximately  $138,000 from a company
affiliated  with the officers of the Company.  Subsequent  to May 31, 1997,  the
Company  received  approximately  $18,000 and a promissory  note for the balance
due. The note is payable in 24 monthly  payments  with interest at 8% commencing
September 1, 1997. The Company deferred  principal  payments from April, 1998 to

NOTE 6 (Continued)

October, 1998, at which time principal and interest payments will resume. At May
31, 1998, the Company was owed approximately $87,000 on such note.

g. On June 3, 1997 the Securities  Exchange  Commission  declared  effective the
Company's  registration  statement  on Form S-3 (the  "Registration  Statement")
which covered, among other things, the reoffer of 820,213 shares of common stock
beneficially  owned by Mr. Brodsky and 417,927 shares  beneficially owned by two
directors and executive officers of the Company.

h.  For the  purposes  of the  Federal  Securities  Laws,  Medical  Arts  Office
Services,  Inc.  ("MAOS") may be deemed an affiliate of the Company.  During the
fiscal years ended May 31, 1998 and May 31, 1997, MAOS provided the Company with
accounting,  bookkeeping and paralegal services.  For the fiscal years ended May
31, 1998 and 1997 the total  payments  made by the Company to MAOS were $223,813
and $223,395, respectively.

NOTE 6 - (Continued)

i. The  Company  has been  providing  services  to  Federation  of Puerto  Rican
Organizations,   and/or  its  affiliates  (individually  and  collectively,  the
"Federation"), an HRA Vendor Agency, since 1995. At May 31, 1998, the Federation
owed the Company  $51,865 for services  rendered by the Company.  On October 31,
1997 and November 30, 1997, respectively, the Company acquired a loan receivable
for an aggregate of $300,000 from a third party (a portion of which was acquired
from an affiliate of the Company's Chairman), due from the Federation. Such loan
receivable  is secured by accounts  receivable  due to the  Federation.  Shortly
following the Company's  acquiring such  receivable,  the  Federation  filed for
bankruptcy  protection.  The  Company  has filed,  among  other  things,  claims
representing  monies  owed to the  Company  with  respect  to the  loan  and the
receivables.  The Company has fully reserved against the loan and the receivable
in the event that it does not receive payment.

NOTE 7 - SHAREHOLDERS' EQUITY

a. Common Stock Purchase Warrants

At May 31, 1998,  there were  outstanding and  exercisable  400,000 common stock
purchase  warrants  issued to the  Company's  Chairman.  For each  warrant,  the
Chairman  may  purchase  one share of common  stock at $1.38  per  share,  which
represented  the fair market value of the Company's  common stock at the date of
issuance of the warrants, which expire in 2001.

b. Private Offering and Related Common Stock Purchase Warrants

In October, 1996, the Company commenced a private offering, on a "best efforts -
all or none"  basis,  to raise  $1,500,000  by issuing an  aggregate  of 300,000
shares of Common Stock and five year warrants for the purchase of 150,000 shares
of Common Stock,  at an exercise price of $7.00 per share. In February 1997, the
Company completed such private offering. The net proceeds received in connection
with the sale of  300,000  shares of its  common  stock  were  $1,256,415  after
payment  of  expenses  related  to  the  offering.  Contemporaneously  with  the
execution  and  delivery  by the  Company of the letter of intent with regard to
such private offering, certain assignees of the placement agent acquired 100,000
shares of the Company's Common Stock at a purchase price of $3.00 per share; the
net proceeds from the sale of such 100,000 shares were $260,076.

In  connection  with the closing of such private  offering,  an affiliate of the
placement  agent  entered  into  a  one  year  financial   consulting  agreement
("Financial  Consulting  Agreement") with the Company,  pursuant to which, among
other things,  such affiliate will receive  aggregate annual payments of $36,000
and  certain  assignees  of such  affiliate  received  warrants  to  purchase an
aggregate of 200,000  shares of Common  Stock  exercisable  as follows:  100,000
shares at $5.00 per share and 100,000  shares at $7.00 per share,  such warrants
to be  exercisable  until  September  18,  1998 (with  respect  to the  warrants
exercisable  at $5.00 per share)  and two years  (with  respect to the  warrants
exercisable at $7.00 per share).  The warrants issued in such private  offering,
including  those issued to investors as well as the  assignees of the  placement
agent's affiliate, are redeemable by the Company under certain circumstances.

In August, 1997 the Board of Directors  authorized the execution and delivery of
a notice of redemption to holders of such  warrants.  As a result,  there were a
total of  166,000  warrants  exercised  at $7.00  per  share.  The net  proceeds
generated from warrant exercises were $1,105,827.

In September,  1997 the Company  withdrew its election to redeem warrants issued
pursuant to the Financial Consulting Agreement discussed above.

c. Stock Options

The Company has stock options outstanding under three stock option plans. At May
31, 1998, there were 2,536 options  outstanding  under an incentive stock option

NOTE 7 (Continued)

plan adopted in October 1984 and  subsequently  amended.  Options  granted under
this plan were granted at exercise prices not less than fair market value on the
date of grant. Options outstanding under this plan expire in 2001. No additional
options may be granted  under this plan.  During 1998,  certain  officers of the
Company  exercised  206,667  options at an exercise price of $1.79 per share and
23,333 options at an exercise  price of $1.875 per share under this plan.  Other
option  exercises under this plan amounted to 222 shares at an exercise price of
$1.875 per share.  Net proceeds  generated from option  exercises  during fiscal
1998 were $408,693.

At May 31, 1998,  there were 141,334  options  outstanding  under a nonqualified
stock option plan adopted in November,  1986 and subsequently  amended.  Options
outstanding under this plan expire in 2001. No additional options may be granted
under this plan.

At May 31, 1998, there were also 450,000 incentive  options  outstanding under a
stock option plan adopted in January 1995, which provides for both incentive and
nonqualified  stock  options and reserves  1,000,000  shares of common stock for
grant  under the plan.  The plan  requires  that  options be granted at exercise
prices not less than the fair market value at the date of grant, over a ten-year
period. All options  outstanding under this plan are exercisable at May 31, 1998
at prices ranging from $1.38 to $2.61 per share over a period of five years from
date of grant.

On July 14, 1997 the Company filed a Registration Statement on Form S-8 relative
to  reofferings  of shares of Common Stock of the Company  which may be acquired
pursuant to stock option plans.

Summary information with respect to the stock option plans follows:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                                       Range of                 Outstanding      Outstanding
                                                       exercise                     options          options
                                                       prices ($)                   granted       exercisable

              Balance, June 1, 1997                    1.38 - 2.34                 575,259           575,259
              Granted                                  2.61                        250,000           250,000
              Canceled                                 1.875                        (1,167)           (1,167)
              Balance, May 31, 1997                    1.38 - 2.61                 824,092           824,092
              Exercised                                1.79 - 1.875               (230,222)         (230,222)
              Balance, May 31, 1998                    1.38 - 2.61                 593,870           593,870
</TABLE>

On July 14, 1998 Messrs. Brodsky, Freund, Stoller, Konigsberg, Gerald Shapiro, a
former  director of the Company and Carol Freund,  the spouse of Hugh Freund and
an employee of Sandsport,  exercised  their  respective  options and warrants to
purchase an  aggregate  of 921,334  shares of Common  Stock at  exercise  prices
ranging  from  $1.38 to $2.61  per share for an  aggregate  cost of  $1,608,861.
Payment  for such  shares is to be made to the Company (i) a portion in the form
of  non-recourse  promissory  notes due in July 2001, with interest at eight and
one-half percent  (8-1/2%) per annum,  payable  annually;  and (ii) a portion by
payment of an aggregate of $1,609  representing the par values paid in cash. The
shares of Common  Stock issued upon  exercise  have been pledged as security for
the debt.

NOTE 8 - SALE/LEASEBACK TRANSACTIONS

The Company is a party to various sale/leaseback  transactions involving certain
fixed  assets.  Gains on these  transactions  have been  deferred  and are being
recognized over the lives of the related leases, ranging from thirty-six (36) to
sixty (60) months.  Approximately  $263,000  and $278,000 of the deferred  gains
were recognized in fiscal 1998 and 1997, respectively. Included in these amounts
are the  effects of  sale/leaseback  transactions  entered  into fiscal 1998 and
1997, as follows:

In June 1996, the Company entered into a  sale/leaseback  transaction of certain
fixed assets (principally furniture, fixtures, computer hardware and equipment).
The fixed assets,  which had a net book value of  approximately  $657,000,  were
sold for $925,000.  The resulting gain of approximately $268,000 was recorded as
deferred  income and is being  recognized  over the life of the lease,  which is
forty-eight  (48)  months.  Approximately  $67,000  of  the  deferred  gain  was
recognized for fiscal 1998 and 1997, respectively.

In March 1997, the Company entered into a sale/leaseback  transaction of certain
fixed assets  (principally  computer  hardware and software).  The fixed assets,
which had a net book value of  approximately  $874,000,  were sold for $981,000.
The resulting gain of approximately $107,000 was recorded as deferred income and
is being  recognized  over the life of the  lease,  which is  thirty-eight  (38)

NOTE 8 (Continued)

months. Approximately $34,000 and $6,000 of the deferred gain was recognized for
fiscal 1998 and 1997, respectively.  The Company assigned the option to purchase
such assets to an entity affiliated with the Company's  Chairman.  The affiliate
acquired the purchase option in consideration  for posting a letter of credit to
secure the purchase  option  obligation.  Subsequent to March 1997 the affiliate
assigned the purchase option to an unaffiliated third party.

In January  1998,  the Company  consummated  a  sale/leaseback  of certain fixed
assets  (principally  computer  hardware,  software  and  equipment).  The fixed
assets,  which had a net book  value of  approximately  $515,000,  were sold for
$700,000.  The resulting gain of approximately $185,000 was recorded as deferred
income and is being  recognized over the life of the lease,  which is thirty-six
(36) months.  Approximately  $26,000 of deferred gain was  recognized for fiscal
1998.

NOTE 9 - RETIREMENT PLAN

The Company has a 401(k)  savings plan covering all eligible  employees in which
the Company matches a portion of the employees' contribution. The amount of this
match was $20,641 and $18,385 in fiscal years 1998 and 1997, respectively.





<PAGE>





                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                  SANDATA, INC.
----------------------------------------------------------------------------
                                  (Registrant)

                             By /s/ Bert E. Brodsky
                     Bert E. Brodsky, Chairman of the Board
                        (Principal Executive Officer and
                   Principal Financial and Accounting Officer)

                               Date August 26, 1998


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

                             By /s/ Bert E. Brodsky
            Bert E. Brodsky, Chairman, President, Treasurer, Director


                               Date August 26, 1998


                               By /s/ Hugh Freund
                 Hugh Freund, Executive Vice President, Secretary, Director


                               Date August 26, 1998


                              By /s/ Gary Stoller
                Gary Stoller, Executive Vice President, Director


                               Date August 26, 1998


                           By /s/ Paul J. Konigsberg
                          Paul J. Konigsberg, Director

                               Date August 26, 1998


                             By /s/ Ronald L. Fish
                            Ronald L. Fish, Director

                               Date August 26, 1998
<PAGE>