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

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

                |X| Annual Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934
                  For the fiscal year ended October 31, 1997

          |_| Transition Report Pursuant to Section 13 or 15(d) of the
                Securities Exchange Act of 1934 (No fee required)
                    for the transition period from ___ to ___
                         Commission file number 0-7642


                              MEGADATA CORPORATION
             (Exact name of registrant as specified in its charter)


           New York                                              11-2208938
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)


35 Orville Drive, Bohemia, New York                                    11716
   (Address of principal executive office)                           (Zip Code)


        Registrant's telephone number, including area code: 516-589-6800


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

               Securities of the Registrant registered pursuant to
                         Section 12(g) of the Act: 
                    Common shares, par value $0.01 per share


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


         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|


         The aggregate market value of the voting shares of the Registrant held
by non-affiliates as at January 20, 1998 was $455,388

        The number of common shares, $0.01 par value, outstanding as at
                         January 20, 1998 was 2,511,600

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

<PAGE>
                                     PART I

         Item 1.   Business.
         -------------------

                        (a)  General  Development  of  Business.
                        ----------------------------------------

                        The  Registrant  sells,   manufactures,   and  is
         continuing to develop hardware and software enhancements for its
         aircraft flight tracking systems.

                        The Registrant's product line includes the PASSUR
         (Passive  Secondary Surveillance Radar) systems.  These  systems
         receive aircraft  identification  and  altitude information from
         aircraft  transponder  transmissions which are  interrogated  by
         existing  secondary  surveillance  radars  without  emitting any
         active  signals.  Received signals are processed  in a  standard
         work station and displayed on a  high  resolution color graphics
         data display to provide real-time identification and tracking of
         aircraft in flight.  The display presentation is similar to that
         provided to Air Traffic Controllers.  The presentation of flight
         tracks can be in real time  or  can  be  switched to a mode that
         permits observance of historical data for selected time periods.
         A PASSUR system may be  integrated to work with noise monitoring
         and  measuring  equipment in a configuration that will supply  a
         correlation between aircraft location and noise levels generated
         by  it.   With  this real-time  information,  an  airport  noise
         abatement officer can  enforce  the  law  regarding noise levels
         emitted  by an aircraft.  When used as part of an airport  noise
         monitoring system, airport  managers  and noise control officers
         can  correlate noise events in the local community with specific
         airline flight tracks.

                        Another variation of the PASSUR  system is called
         ATMS (Air Traffic Monitoring System).  The ATMS was developed to
         address a request by a major U.S.  airline for use in its flight
         and airport operations management.  The ATMS provides tracks  of
         all  airborn  aircraft  within  a  150  mile  radius  around the
         airport.    It   performs  ETA  (Estimated  Time   of   Arrival)
         calculations that predict  accurately when arriving aircraft are
         expected  to  land.   It  also  detects  any  holding  patterns,
         assessing the  impact  of  Air  Traffic  Control  on  an airport
         operation  complex.   By using the information provided  by  the
         ATMS, an airline's Air  Traffic  Dispatcher  can more accurately
         predict  arrival  times,  enhancing customer  service  and  gate
         management.  Added benefits include more efficient scheduling of
         ground  support operations, such as food, baggage, cleaning  and
         refueling services.

                        Continued  R&D efforts conducted during the  year
         led to the enhancement of the software that correlates real-time
         ASD (Aircraft Situation Display) data supplied by the Department
         of Transportation with flight  tracks  identified by the PASSUR.
         This  correlation allows the PASSUR to identify the carrier  and
         the flight number of each aircraft displayed.

                        To  enhance   the   SA-9600   radio   modem,  the
         Registrant  has  implemented  a new design  for a  faster  modem
         increasing the speed of data communication to 28.8Kbps. Both the
         SA-9600  and  the previously developed PC-9600 are part  of  the
         AGILE DATA product line for wireless  communication of voice and
         data.   The  SA-9600 operates synchronously  or  asynchronously,
         half or full duplex, with  any  host  computer  with  an RS-232C
         serial port.  An optional data compression feature supports host
         system baud rates of 38,400 bps  when  in the asynchronous mode.
         (A data compression feature installed on an SA-9600 with the new
         28.8 Kbps modem can support  higher baud rates then 38,400 bps.)
         No  software modification of the host system is necessary.  As a
         reliable means of both voice  and  data  transfer, AGILE DATA is
         mainly  being marketed in third-world countries, where  existing
         telephone data services are  either  poor  or non-existent.  The
         new  DC-powered  SA-9600  enhances its  suitability  for  mobile
         applications where 12/24/48vdc power is commonly available.  The
         Registrant has received FCC approval for the marketing and  sale
         of these products in the  450-470Mhz business band.  In order to
         appeal  to  a  wider  group  of  potential  users  who,  due  to
         government  restrictions  or  unavailable  frequencies,  wish to
         utilize  other  radios transmitting on frequencies  outside  the
         standard SA-9600's  range,  the  Registrant  has  developed  the
         SA-9600/E.  The SA-9600/E is a modem-only version of the SA-9600
         which provides radio data transmission capability using commonly
         available,  off-the-shelf,  external radios  of  the  customer's
         choice.

                                       I-1
<PAGE>
                        The   Registrant's    experience   with   airline
         communication  protocols  such  as SABRE,  APOLLO,  PARS,  SITA,
         SYSTEM ONE, IPARS, DATAS  II,  PEGASUS,  WORLDSPAN,  GEMINI, and
         other  airline  network  protocols led  to  the  development  of
         various  reservation  network  access  products  for the airline
         industry.    These   include   communication   controllers   and
         multiplexers which  support  multiple  Interchange  and Terminal
         Addresses  (IAs  &  TAs) on a single  host  communication  line,
         reducing CRS  (Computerized  Reservation  System)  host  polling
         overhead  and  providing significant savings on  telephone  line
         charges and installation.   Other  communication  products allow
         the  use  of  public  or  private  X.25  networks  to  transport
         reservation  data  to  a   computer   reservation  system.   The
         Registrant  has received certification for these  products  from
         the major airline reservation networks.

                        (b)  Financial Information About Industry Segments.
                        ---------------------------------------------------

                        Not applicable.

                        (c)  Narrative  Description  of  Business.
                        ------------------------------------------

                        The  Registrant  is a supplier  of  communication
         products intended to  satisfy  the  needs of airports, airlines,
         and  travel  agents.   Its  principal business  is  the  design,
         manufacture, sale and service  of its product line consisting of
         wireless   modems,  access  equipment  to  airline   reservation
         systems,   communications   controllers,    multiplexers,    and
         multi-user,  UNIX-based microcomputers.

                        In addition to the  standard  line  of equipment,
         the  Registrant provides its customers with customized  software
         and hardware.  These  applications  include passive detection of
         aircraft  in  flight, file server configuration  for  networking
         personal computers, and  connectivity  solutions integrating the
         Registrant's   data  processing  systems   with   communications
         capabilities.

         1.  Products.
         -------------

                        The  Registrant's   software   and  hardware  are
         utilized in the following applications:

                        (i) Air Traffic Monitoring Systems
                        ----------------------------------

                        The Registrant, under a  sublicense  for patented
         technology   owned  by  a  third  party,  has  implemented   its
         proprietary software to develop an  enhanced line of air traffic
         monitoring systems. These PASSUR (Passive Secondary Surveillance
         Radar) systems receive and process  aircraft identification from
         aircraft   transponder  transmissions  interogated  by  existing
         secondary surveillance radars.  With  this information available
         in real time, the airport manager or an individual airline's Air
         Traffic Dispatcher can more  accurately  predict  arrival times,
         enhancing customer service and gate management.  Added  benefits
         include more efficient  scheduling of ground support operations,
         such  as food, baggage, cleaning, and refueling services.   When
         used as  part  of  airport  noise  monitoring  systems,  airport
         managers and noise abatement officers can correlate noise events
         in the local community with  specific  airline flight tracks for
         appropriate action.

                        (ii) Wireless Modem Communications
                        ----------------------------------

                        The SA-9600 and the PC-9600 are part of the AGILE
         DATA product line of  wireless  radio  modems, which communicate
         voice  and data at speeds up to 28.8K bps.  The SA-9600 operates
         synchronously or  asynchronously,  half or full duplex, with any
         host  computer with an RS-232C serial port.  Compatibility  with
         the "AT" command set is built  in.   No software modification of
         the  host  system is necessary for any of the  operating  modes.
         Encryption  of  transmitted   data  is  available  for  security
         purposes.  A data compression feature increases throughput up to
         four  times  (38,400  bps)   depending   on  the  type  of  data
         transmitted. The new DC-powered SA-9600 enhances its suitability
         for mobile  applications  where  12/24/48vdc  power  is commonly
         available.  A modem-only version is also available, allowing the
         SA-9600 to be used with  off-the-shelf radio equipment that meet
         existing local regulatory or customer requirements.

                                       I-2
<PAGE>
                        The PC-9600 is a  PC  compatible  plug-in circuit
         board.   Like the SA-9600, the PC-9600 is frequency "agile"  and
         is  able  to  communicate  on   any  frequency  channel  in  the
         400-500Mhz  band.   An  optional microphone  attachment  permits
         station-to-station  voice  communications  in  addition  to data
         transfer.   Both  wireless modems were designed to link  two  or
         more computers together  without  cables  or any form of wiring.
         Adjustable output power up to 2 watts will provide an  effective
         range of 15 miles; hundreds  of  miles  when used with repeaters
         and  amplifiers.   AGILE  DATA products are aimed  toward  large
         manufacturing and distribution  centers,  banks, oil exploration
         companies,  government agencies, defense contractors and others,
         where  physical  environments   make  standard  cabling  schemes
         impossible or impractical to implement.

                        The Registrant has  received FCC approval for the
         marketing  and sale of both products in the 450-470Mhz  business
         band.

                        (iii) Airline Reservation Access Systems
                        ----------------------------------------

                        The  Registrant's experience with ALC  protocols,
         such as SABRE, SYSTEM ONE, PARS, IPARS, GEMINI, APOLLO and other
         airline  network protocols has led to the development of various
         reservation  access   products   for   the  airline  reservation
         industry.   Offering  multi-user workstations  with  dual-screen
         displays and pop-up windows, MURS and RESNET controllers provide
         the lowest per-user-station cost in the industry.  They allow up
         to 32 workstations and 8  printers  to be interfaced to a single
         reservation  system  host communication  line.   MIAC  (Multiple
         Interchange  Address   Concentrator)   supports   many  separate
         interchange  addresses  on a single  communication  line.   This
         increases an airline's  CRS  (Computerized  Reservation  System)
         efficiency by reducing both host polling overhead and the number
         of separate communication lines needed.   ALCX.25 allows the use
         of public or private X.25 networks to transport reservation data
         to a  computer  reservation  system.   Configurable  for  either
         premise  or host site operation, ALCX.25 converts installed user
         sites to X.25 without modification to existing user equipment.


                        (iv) Custom Hardware and Software Activities
                        --------------------------------------------

                        The  Registrant  is,  occasionally,  involved  in
         specialized R & D projects sponsored  and paid for by customers.
         These  projects  involve the customization of  the  Registrant's
         standard products to suit specific customer requirements.

         2.  Services.
         -------------

                        The  Registrant   offers   maintenance   services
         pursuant  to  contractual  arrangements or an  "on-call"  basis.
         "On-call" services are provided on a time and material basis.

         3.  Sources  of  Raw  Materials.
         --------------------------------

                        The  Registrant  obtains its raw  materials  from
         component distributors and  manufacturers  throughout the United
         States.   The  Registrant has multiple sources of supply  for  a
         majority of its  components.

         4.  Dependence  on  Certain  Customers.
         ---------------------------------------

                        During  the  fiscal year ended October 31,  1997,
         three customers accounted for 63.4% of revenue.  Harris, Miller,
         Miller & Hanson accounted for 27.2%, Bruel & Kjear accounted for
         21.7%, and San  Francisco  International  Airport  accounted for
         14.5%.  The loss of any of these customers would have an adverse
         effect on the  Registrant's  business.   During fiscal year 1996
         only   one  customer  accounted  for  more  than  10%   of   the
         Registrant's revenue.  ITS Leasing accounted for 24.8% of fiscal
         year  1996  revenues.  During fiscal year 1995  three  customers
         accounted for 61.9% of revenues.   United Airlines accounted for
         25.6%,  Bruel  &  Kjear accounted for  20.4%,  and  ITS  Leasing
         accounted for 15.8%.

                                       I-3
<PAGE>
         5.  Backlog.
         ------------

                        The  Registrant's   backlog   for   products  and
         services at October 31, 1997 amounted to approximately  $286,000
         all of which is scheduled for  delivery before October 31, 1998.
         The   backlog  at  October  31,  1996  and  1995   amounted   to
         approximately  $278,000  and  $212,000,  respectively.   Backlog
         consists  of written purchase orders or contracts.  Registrant's
         low level backlog can  be  explained  by  the current prevailing
         approach  of "Just In Time" in purchasing.  The  Registrant  has
         demonstrated that  it  can  satisfy  customer  requirements in a
         relatively  short  time  due  to availability of  parts  in  its
         inventory.


         6.  Competition.
         ----------------

                        The  Registrant  is offering the PASSUR and  ATMS
         systems for passive  detection  of  aircraft  in  flight.  These
         products  are, to the best of its knowledge,  relatively  unique
         with low  competition.   Other  products,  such  as the enhanced
         version   of   the  wireless  radio  modems  and  some   airline
         communication products offered  by  the Registrant fall into the
         category  of  highly competitive business.  For these  products,
         although price is a factor, the Registrant believes that design,
         technical  and software capabilities in tailoring it's  products
         to   customers'   individualized   needs   are   more  important
         competitive  factors  in  the market  to  which  the  Registrant
         directs its  efforts.   Depending  on the end use of the systems
         and  peripherals, the Registrant's primary competitors are  Data
         Radio, Cylink, Dimensions  International, Motorola, Memorex, and
         Videcom,   all  of  which  are  significantly  larger  than  the
         Registrant, and have larger  sales  forces and greater financial
         resources.


         7.  Research  and  Development.
         -------------------------------

                        The Registrant's Research and Development ("R&D")
         group  continued  to  enhance the Registrant's products  in  the
         following areas:

                       (i) software  enhancements  to  PASSUR  and   ATMS
                           products.

                      (ii) wireless  connectivity:

                           (a)Software  enhancements  to incorporate  new
                              customers' needs.

                           (b)development of a 28.8K bps modem.

                        During the fiscal year ended October 31, 1997 the
         Registrant  incurred approximately $147,000 in expenditures  for
         R&D.  In  fiscal  year  ended  October  31,  1996  approximately
         $180,000   was  expended  on  R&D  and  in  fiscal   year   1995
         approximately $174,000 was expended on R&D.

         8.  Employees.
         --------------

                        The  Registrant  employs 11 employees  on a  full
         time  basis  consisting  of:   3   officers;   2  engineers  and
         programmers; 1 technician; 1 employee in sales and marketing;  2
         employees   involved   in    manufacturing;   1   clerical   and
         administrative  personnel;  and  a  service  department  with  1
         employee.


                                       I-4
<PAGE>
                        (d)Financial Information About Foreign and
                           Domestic Operations and Export Sales
                           ------------------------------------------        

                        The following table sets  forth the dollar amount
         and  the percentages attributable to the sale by the  Registrant
         of its products during the past three fiscal years in the United
         States and abroad:

      Net 
      Revenues           1997                  1996                 1995
      --------           ----                  ----                 ----

      Domestic   $1,306,345   88.3%   $  878,364   79.0%   $1,319,429   78.3%
      -------- 

      Exports       172,607   11.7%      233,597   21.0%      365,096   21.7%
      -------    ----------   -----   ----------   -----   ----------   -----

      Total   
      Revenues:  $1,478,952  100.0%   $1,111,961  100.0%   $1,684,525  100.0%
      ---------  ==========  ======   ==========  ======   ==========  ======
               


         Item 2.   Properties.
         ---------------------

                         The     Registrant's     executive      offices,
         manufacturing, and  research  facility  are located in a modern,
         one-story  building at 35 Orville Drive, Bohemia, New York.  The
         Registrant owns the entire building which contains 36,000 square
         feet.   The  Registrant is currently utilizing approximately 50%
         of this building for its manufacturing activities.

         Item 3.   Legal  Proceedings.
         -----------------------------

                         There are no material pending legal proceedings,
         other  than  routine litigation incidental to  the  business  to
         which the Registrant or any of its subsidiaries is a party or of
         which any of their properties are subject.


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

                         None.


                                       I-5
<PAGE>
                                    PART II

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

                        (a) Market  Information.
                        ------------------------

                        The  Registrant's common shares are traded in the
         over-the-counter market.

                        The  following table sets forth the range of high
         and low bid and  asked  quotations  of  the  Registrant's common
         shares  for each quarterly period during the  Registrant's  last
         two fiscal years, as reported  by the National Quotation Bureau,
         Inc.:

          P e r i o d              Bid Prices*          Asked Prices*
          -----------              -----------          -------------
                                   High      Low        High      Low  
                                   ----      ---        ----      ---  

          Fiscal Year Ended October 31, 1997

            First Quarter          .75       .375       1.0625    .75
            Second Quarter         .4375     .375       .75       .625
            Third Quarter          .53125    .3125      .625      .5625
            Fourth Quarter         .3125     .1875      .625      .50

          Fiscal Year Ended October 31, 1996

            First Quarter          .25       .1875      .4375     .3125
            Second Quarter         .1875     .0625      .3125     .15625
            Third Quarter          .625      .0625      .875      .24
            Fourth Quarter         1.125     .75        1.50      1.0

          -----------------------
          * The  quotations  represent  prices in  the  over-the  counter
            market between dealers in  securities,  do not include retail
            markup,  markdown,  or  commission, and  do  not  necessarily
            represent actual transactions.

                        (b) Holders.
                        ------------

                        The approximate number of equity security holders
         of record at January 20, 1998 was 361.

                        (c) Dividends.
                        --------------

                        The Registrant has  never  paid cash dividends on
         its  shares.   The  Registrant does not anticipate  paying  cash
         dividends in the foreseeable future.


                                      II-1
<PAGE>
         Item 6.   Selected  Financial  Data.
         ------------------------------------

         Selected income statement data:

                                       Year Ended October 31 
                 ---------------------------------------------------------------
                       1997        1996        1995        1994        1993
                       ----        ----        ----        ----        ----

      Net      
      Revenues   $1,478,952   $1,111,961   $1,684,525   $1,732,558   $1,828,090

      Net    
      (Loss)        (54,500)    (584,750)    (576,553)   ($267,507)   ($309,465)

       Primary   
       (Loss)    
       Per Share (1)  ($.03)       ($.36)      ($ .36)      ($ .17)      ($ .19)

       Dividend  
       Declared          --          --          --          --          --


         Selected balance sheet data:

                                    October 31                               
       ---------------------------------------------------------------------
                       1997        1996        1995        1994        1993
                       ----        ----        ----        ----        ----

    Total Assets  $2,595,296   $2,183,896   $2,303,722   $2,930,151   $3,172,484

    Long-Term      
    Debt (2)(3)     $721,036     $674,278     $770,663     $823,009     $874,710

    Total Share-  
    holders'
    Equity        $1,193,625    $ 657,285   $1,242,035   $1,818,588   $2,086,095
        ------------------------------------------------------------------------
          (1) Primary earnings per share are  based on the average number of
          common shares outstanding.

          (2) Registrant's mortgage loan from the Roosevelt Savings Bank was
          due to expire on February 1,  1996  requiring a balloon payment of
          $756,000.  As such, it was classified as a current liability.  The
          Registrant was granted an extension  to negotiate a refinancing of
          the  balance  due.  On May 31, 1996, Roosevelt Savings  Bank,  the
          holder of the mortgage,  and  the  Registrant,  signed  a mortgage
          agreement refinancing the mortgage for five additional years at an
          interest rate of 9.250%.

          (3)  Long  Term Debt for 1997 includes $100,000 of a note  payable
          which is due after October 31, 1998.

         Item 7.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations.
         ----------------------------------------------------------       

         Results  of  Operations
         -----------------------

                          Revenue  during the fiscal year ended October  31,
         1997 increased by approximately  $367,000 or 33% as compared to the
         revenue during fiscal year 1996.  The increase was mainly due to an
         increase in sales of PASSUR related products and services.

                          Revenue  during the fiscal year ended October  31,
         1996 decreased by approximately  $573,000 or 34% as compared to the
         revenue  during fiscal year 1995.  The large decrease was due to  a
         reduction in revenue in two categories: a) Some of the Registrant's
         maintenance  services were not needed due to the replacement of the
         equipment maintained.  This resulted  in a reduction of $105,825 in
         revenue from hardware maintenance services.  b) During fiscal  year
         1996 no new sales  of  PASSUR  equipment  occured  while during the
         previous  fiscal  year the Registrant had revenue of  approximately
         $570,000 from the sale of three long range PASSUR systems.

                                      II-2
<PAGE>
         Cost of Sales and Service
         -------------------------

                          During  the fiscal year ended October 31,  1997
         cost and expenses, not  including  interest  related items, were
         lower  than total revenue, thus, yielding an income of  $29,603.
         However,  after   including   finance     related  expenses  the
         Registrant  had  a net loss of ($53,477) or ($.03) per share  as
         compared to a net loss  of  ($584,750)  or  ($.36)  per share in
         fiscal  year 1996.  Total cost and expenses during  fiscal  year
         1997 decreased by $186,522  or  11.4%  as compared to such costs
         during  fiscal year 1996.  Cost reductions were due to  cutbacks
         in payroll expenses and reductions in some overhead expenses.

                          Cost  of  sales and service during fiscal  year
         1996 exceeded total revenue  by  6.7%,  whereas,  in fiscal year
         1995 such costs were at a level of 79.9% of sales. During fiscal
         year 1996 no  inventory  adjustments  were  made.  During fiscal
         1995, the Registrant, after evaluating changes in technology and
         market requirements and conditions,  determined that adjustments
         should  be  made  to reflect the  realizable  value  of  certain
         assets.  Accordingly, approximately $369,000 was charged to cost
         of  sales  and  service in fiscal year 1995.  Overall  cost  and
         expenses during fiscal year 1996  decreased by $556,167 or 25.4%
         as  compared  to  such  costs during  fiscal  year  1995.   Cost
         reductions were due  to  cutbacks  in  payroll,  savings in real
         estate taxes, lower costs of goods sold, and reduction in  other
         overhead  costs.   The  reduction  in  costs  was not at a level
         sufficient  to  eliminate the losses.

         Research and Development
         ------------------------

                          Research   and   development  activities   were
         continued to meet potential customers'  needs.  The Registrant's
         expenditures for R&D during fiscal year 1997 were  approximately
         $147,000 as compared to  $180,000  in 1996 and $174,000 in 1995.
         The Registrant anticipates continuing to incur R&D  expenditures
         at current levels.   R&D  efforts  include activities associated
         with   maintenance,   enhancement,   and  improvement   of   the
         Registrant's  existing   hardware   and  software  coupled  with
         customer sponsored R&D expenditures for new product development.
         No customer sponsored R&D was conducted during fiscal year 1997.
         During  fiscal  year  1996  $40,000  of  R&D  expenditures  were
         sponsored  by  a  customer.   No   customer  sponsored  R&D  was
         conducted during fiscal year 1995.

         General and Administrative
         --------------------------

                          General    and   administrative    expenditures
         increased by $8,683 or 3.2% during  fiscal year 1997 compared to
         a  decrease  of 11.4% or $34,516 during fiscal year  1996.   The
         reductions  or   increases   in   these   costs   are  primarily
         attributable  to  changes  in  the  level  of  expenditures  for
         salaries and overhead costs.

         Income Taxes
         ------------
                          The   Registrant  has  available  approximately
         $4,600,000 in tax loss  carryforwards  to offset possible future
         income.   The  Registrant also has available $25,000 in  general
         business tax credit  carryforwards.   These carryforwards expire
         in various amounts through 2012.

         Impact of Inflation
         -------------------

                          In the opinion of management, inflation has not
         had a material effect on the operations of the Registrant.

         The Year 2000 Issue
         -------------------

                          In  the  opinion of management, the  year  2000
         will not have a  material  adverse  effect  on the operations or
         liquidity of the Registrant.

         Net Loss
         --------
                          The Registrant incurred a net loss of ($54,500)
         or ($.03) per share during  the  fiscal  year  ended October 31,
         1997.  In the previous fiscal year the Registrant incurred a net
         operating loss of  ($584,750)  or  ($.36)  per share.  The large
         losses  during fiscal year 1996 were mostly due to the fact that

                                       II-3
<PAGE>
         the Registrant did  not  sell  any  PASSUR  systems  during that
         fiscal  year.  The lack of sales of PASSUR systems is attributed
         to two factors.  First,  some  major  airlines,  who, during the
         fiscal  year, have expressed interest in the Registrant's PASSUR
         and ATMS, did  not  get  approval  for  funds  to purchase them.
         Second,  under  an existing agreement between the PASSUR  patent
         holder and Bruel & Kjaer, Bruel &  Kjaer had exclusive rights to
         market  and  sell  the  PASSUR  equipment  for  noise  detection
         applications.  During  Fiscal  year  1996 the Registrant did not
         receive  any  orders  for  PASSUR  from  Bruel &  Kjaer.   These
         circumstances  created  conditions  under  which sales of PASSUR
         systems   to  airports  were  suspended.   At  the  Registrant's
         request, Bruel & Kjaer  and  the  patent  holder  have agreed to
         transfer  to  the  Registrant their  exclusive  noise  abatement
         rights for the sale of PASSUR in the United States.  On the 27th
         of  March, 1997, the Registrant has signed a  license  agreement
         with the patent holder under  which  it has the exclusive rights
         to manufacture, use, lease, and sell PASSUR and ATMS systems.

                          During  fiscal  year  1995, after  taking  into
         effect the inventory  write-off,  the  Registrant incurred a net
         operating loss of ($576,553) or ($.36) per share.  The operating
         loss,  excluding  the  $368,789   of  inventory  write-off,  was
         ($207,764) or ($.13) per share.

         Liquidity  and  Capital  Resources
         ----------------------------------

                          During fiscal year 1997 the Registrant incurred
         a  net  operating loss of ($54,500).  Financing to  cover  these
         losses came from depreciation, some  cost reductions, and from a
         private investor.  (See Private Investor).

                          A  turnaround  in  the  Registrant's  prospects
         could lead to profitability due  to  the following: (a) On March
         27,  1997,  the Registrant entered into an  exclusive  licensing
         agreement with the  owner  of  the  PASSUR  patents.   Under the
         agreement, the Registrant has world-wide exclusive rights to the
         manufacturing, marketing, sale, installation, and maintenance of
         PASSUR systems. (b) Bruel & Kjaer's exclusive rights to the sale
         of PASSUR  for  United  States  noise  abatement  programs  were
         transferred to the Registrant, and (c) The Registant was able to
         attract   additional   financing   which   is   enabling  it  to
         aggressively market and sell the products it offers.

                          During January 1998 the Registrant received one
         contract  valued  at $185,000 for a long  range  PASSUR  system.
         This is in addition to the  backlog  reported previously in this
         report.

                          Interest   by   potential  customers   in   the
         Registrant's PASSUR  systems  remains  strong and the Registrant
         anticipates   an  increase  in  future  sales.    However,   the
         Registrant cannot predict  if  such  sales will materialize.  If
         sales  do  not  increase, losses my recur.  The extent  of  such
         profits or losses will be dependent on sales volume achieved.

         Risk Factors; Forward Looking Statements
         ----------------------------------------

                          The  Management's  Discussion and Analysis  and
         the  information  provided  elsewhere  in  this  10K (including,
         without limitation, in "Item 1.  Business" as well as "Liquidity
         and Capital Resources" above) contain forward looking statements
         regarding   the  Registrant's  future  plans,  objectives,   and
         expected performance.  These statements are based on assumptions
         that  the Registrant believes are reasonable, but are subject to
         a wide range of risks and uncertainties, and a number of factors
         could cause the Registrant's actual results to differ materially
         from those expressed in the forward-looking  statements referred
         to   above.    These   factors  include,   among   others,   the
         uncertainties related to  the  ability  of the Registrant to get
         new sales of its PASSUR and other product lines due to potential
         competitive pressure  from  other  companies  or other products.
         Other  uncertainties  which  could  impact  the  Registrant  are
         uncertainties with respect  to  future  changes  in governmental
         regulation affecting the product and its use in flight dispatch.
         Additional uncertainties are related to the Registrant's ability
         to   find  and  maintain  the  personnel  necessary   to   sell,
         manufacture, and service its products.


                                     II-4
<PAGE>
         Private Investor
         ----------------

                          During  the  period between September 18,  1996
         and June 6, 1997 the Registrant  signed  various agreements with
         Mr.   G.S.   Beckwith Gilbert, a private investor.  Under  these
         agreements, Mr.   Gilbert  provided  the  Registrant  with three
         $100,000  loans bearing a 9% interest rate, payable by July  30,
         1997, and secured by  the  Registrant's  assets,  excluding  the
         building.  In consideration, the Registrant granted Mr.  Gilbert
         three warrants to purchase up  to  1,400,000 of the Registrant's
         common  shares.   On June 6, 1997, Mr.  Gilbert  and  affiliated
         entities  completed  the  purchase  of  700,000  shares  of  the
         Registrant's  common  stock for an aggregate purchase  price  of
         $500,000.  Of such purchase price, $400,000 was paid in cash and
         $100,000  was  paid  by  the  cancellation  of a  $100,000  loan
         previously made by Mr.  Gilbert  to  the Registrant.  On October
         31,  1997,  Mr.   Gilbert and two other  directors  exercised  a
         warrant  to  purchase  an  additional   200,000  shares  of  the
         Registrant's  common  stock for an aggregate purchase  price  of
         $150,000.  The exercise of  this  warrant  has validated a third
         warrant  issued to Mr.  Gilbert under which he has the right  to
         purchase up to  500,000  additional  shares  at a share price of
         $1.25.   The 500,000 share warrant expires October 31, 2001  and
         is  exercisable  during  the  year  preceding  expiration.   The
         Registrant   has  also  agreed  to  provide  Mr.   Gilbert  with
         incidental  registration  rights  for  all  the shares purchased
         under  the warrants.  The Registrant has no assurance  that  Mr.
         Gilbert will exercise  his  rights  under the third warrant.  On
         July 30, 1997, Mr.  Gilbert and the Registrant signed an amended
         and restated loan  agreement  under  which  the outstanding loan
         balance  of $200,000 will continue to accrue an annual  interest
         of 9% but will have a  maturity  of  July  30,1999.  All accrued
         interest  on such loan will be paid on a quarterly basis and the
         principal balance of such  loan  will  be  repaid at the rate of
         $25,000 per quarter, beginning December 31, 1997.

                          Mr.  Gilbert has been  elected  a  director and
         Chairman  of the Board and has designated two  additional  board
         members to the Registrant's six  person Board of Directors.  Mr.
         Gilbert  is President and Chief Executive Officer of Field Point
         Capital Management Corp.,  a  merchant  banking  firm located in
         Greenwich, Connecticut.




                                      II-5
<PAGE>
         Item 8.   Financial  Statements  and  Supplemental  Data.
         ---------------------------------------------------------














                      MEGADATA CORPORATION AND SUBSIDIARIES

                     ----------------------------------------


                   CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
                 COMPRISING ITEM 8 OF ANNUAL REPORT ON FORM 10-K
                    TO SECURITIES AND EXCHANGE COMMISSION
                        YEARS ENDED OCTOBER 31, 1997






                                      II-6
<PAGE>



                              MEGADATA CORPORATION

                              FINANCIAL STATEMENTS

                                OCTOBER 31, 1997










                            GHASSEMI, PHOEL & COMPANY
                          CERTIFIED PUBLIC ACCOUNTANTS
<PAGE>
                      MEGADATA CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

                   FOR THE THREE YEARS ENDED OCTOBER 31, 1997

                        AND INDEPENDENT AUDITORS' REPORT




                                      INDEX


                                                                     Page

Independent auditors' report                                          S-1

Consolidated financial statements:

      Balance sheets                                                  S-2

      Statements of operations and retained earnings                  S-3

      Statements of cash flows                                        S-4

      Notes to financial statements                                   S-5-11

Additional financial information pursuant to the requirements 
of Form 10-K:

      Schedules:

         V  -    Property, plant and equipment                        S-12

         VI - Accumulated depreciation and amortization
                 of property, plant and equipment                     S-13



Schedules not listed above have been omitted because they are either not
applicable or the required information has been given elsewhere in the
consolidated financial statements or notes thereto.
<PAGE>
GHASSEMI, PHOEL & COMPANY                 23 LANGDON PLACE, LYNBROOK, NY  11563
CERTIFIED PUBLIC ACCOUNTANTS              TEL: 516-887-4444
                                          FAX: 519-887-4450



                          INDEPENDENT AUDITORS' REPORT
                          ----------------------------

Board of Directors and Shareholders
Megadata Corporation:

We have audited the accompanying consolidated balance sheets of Megadata
Corporation and subsidiaries as of October 31, 1997 and 1996 and the related
consolidated statements of operations and retained earnings and cash flows for
each of the three years in the period ended October 31, 1997. Our audits also
included the financial statement schedules listed in the Index at Item 14(a)2.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on the 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Megadata Corporation
and subsidiaries at October 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.



                                            /s/ Ghassemi, Phoel & Co.
                                            ----------------------------
                                            Certified Public Accountants


Lynbrook, New York
January 21, 1998
<PAGE>
                                                                            S-2

                      MEGADATA CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                     ASSETS

<TABLE>
<CAPTION>
                                                                        October 31,
                                                                        -----------
                                                                   1997             1996
                                                                   ----             ----
<S>                                                         <C>              <C>
Current Assets:
    Cash   ...............................................  $    318,595      $    119,458
    Accounts receivable...................................       299,586            91,855
    Inventories...........................................       448,775           399,642
    Prepaid expenses and other current assets.............        87,561            68,582
                                                            ------------      ------------

           Total current assets...........................     1,154,517           679,537

Property, plant and equipment, net........................     1,418,891         1,476,593
Other assets..............................................        21,888            27,766
                                                            ------------      ------------

                                                            $  2,595,296        $2,183,896
                                                            ============        ==========

                                   LIABILITIES

Current Liabilities:
    Accounts payable......................................  $    155,989      $    137,367
    Accrued expenses and taxes............................       120,475            98,827
    Accrued expenses - related parties....................        89,215           179,036
    Notes payable - related party
        (current portion).................................       100,000           200,000
    Loans payable - officers..............................             -            36,883
    Deferred income.......................................       150,122           136,220
    Installment note payable..............................        11,592            15,444
    Current portion of long-term debt.....................        53,242            48,556
                                                            ------------      ------------

           Total current liabilities......................       680,635           852,333

Notes payable - related party
    (less current portion)................................       100,000                 -
Long-term debt............................................       621,036           674,278
                                                            ------------      ------------

                                                               1,401,671         1,526,611

                              STOCKHOLDERS' EQUITY

Common shares - authorized 5,000,000 shares,
    par value $.01 a share; issued 3,203,100
    and 2,303,100 shares in 1997 and 1996.................        32,031            23,031
Additional paid-in capital................................     2,465,571         1,883,731
Retained earnings.........................................       313,248           367,748
                                                            ------------      ------------

                                                               2,810,850         2,274,510
Less cost of 691,500 common shares held
    in treasury...........................................     1,617,225         1,617,225
                                                            ------------      ------------

                                                               1,193,625           657,285
                                                            ------------      ------------

                                                            $  2,595,296        $2,183,896
                                                            ============        ==========
</TABLE>

            The notes to financial statements are made a part hereof.
<PAGE>
                                                                           S-3


                      MEGADATA CORPORATION AND SUBSIDIARIES

           CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS

<TABLE>
<CAPTION>
                                                         Year Ended October 31,
                                                         ----------------------
                                                 1997             1996            1995
                                                 ----             ----            ----
<S>                                          <C>               <C>             <C>   
Revenues:
    Net sales...............................   $1,406,231       $1,068,814      $1,535,553
    Service.................................       72,721           43,147         148,972
                                             ------------     ------------    ------------

        Total revenues......................    1,478,952        1,111,961       1,684,525
                                             ------------     ------------    ------------

Cost and expenses:
    Cost of sales...........................      951,654        1,090,719       1,237,156
    Cost of service.........................       73,045           96,166         109,000
    Inventory adjustment....................            -                -         368,789
    Research and development................      147,383          119,960          76,313
    Research and development -
        related party.......................            -           60,442          97,680
    General and administrative
        expenses............................      277,267          268,584         303,100
                                             ------------     ------------    ------------

                                                1,449,349        1,635,871       2,192,038
                                             ------------     ------------    ------------

Income (Loss) from operations...............       29,603         (523,910)       (507,513)

Other income/(expense):
    Interest income.........................        5,932              902           5,533
    Interest expense........................      (67,537)         (67,933)        (68,914)
    Interest expense -
        related party.......................      (21,475)               -               -
    Other income............................            -            8,567               -
                                             ------------     ------------    ------------

Loss before income taxes....................      (53,477)        (582,374)       (570,894)

Income tax expense..........................        1,023            2,376           5,659
                                             ------------     ------------    ------------

Net loss....................................      (54,500)        (584,750)       (576,553)

Retained earnings - beginning...............      367,748          952,498       1,529,051
                                             ------------     ------------    ------------

Retained earnings - ending.................. $    313,248     $    367,748    $    952,498
                                             ============     ============    ============

Net loss per share..........................        $(.03)           $(.36)          $(.36)
                                                    =====            =====           =====

Weighted average number of
    shares outstanding......................    1,903,267        1,611,600       1,611,600
                                             ============     ============    ============

</TABLE>
            The notes to financial statements are made a part hereof.
<PAGE>
                                                                          S-4

                      MEGADATA CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                         Year Ended October 31,
                                                         ----------------------
                                                 1997             1996             1995
                                                 ----             ----             ----
<S>                                          <C>            <C>               <C>
Cash flows from operating activities:
   Net loss.................................. $   (54,500)      $ (584,750)     $ (576,553)
                                              -----------       ----------      ----------
Adjustment to reconcile net
   loss to net cash provided by
   (used in) operating activities:
     Depreciation............................      63,335           63,268          62,962
     Changes in operating assets
        and liabilities:
        (Increase) Decrease in
          accounts receivable................    (207,731)         (54,050)         51,887
        (Increase) Decrease in
          Inventories........................     (49,133)         150,247         492,252
        (Increase) Decrease in prepaid
          expenses and other current
          assets.............................     (18,979)          11,216          19,826
        Decrease in other assets.............           -            2,164           4,961
        Increase in accounts payable.........      18,622           38,431          27,315
        (Decrease) Increase in accrued
          expenses and other current
          liabilities........................     (54,271)         234,714         (25,654)
                                              -----------       ----------      ----------

            Total adjustments................    (248,157)         445,990         633,549
                                              -----------       ----------      ----------

     Net cash (used in) provided
         by operating activities.............    (302,657)        (138,760)         56,996
                                              -----------       ----------      ----------

Cash flows from investing activities:
   Capital expenditures......................      (5,633)          (3,583)              -
                                              -----------       ----------      ----------

     Net cash used in investing
     activities..............................      (5,633)          (3,583)              -
                                              -----------       ----------      ----------

Cash flows from financing activities:
   Decrease (Increase) in other
     assets - deferred mortgage cost.........       5,878          (25,539)          5,592
   (Payments of) Proceeds from notes
     and loan payable........................     (36,883)         236,883               -
   (Payments of) Proceeds from
     installment note........................      (3,852)           2,725             809
   Repayments of mortgage loan...............     (48,556)         (47,829)        (52,346)
   Proceeds from sale of shares - net........     590,840                -               -
                                              -----------      -----------      ----------

     Net cash provided by (used
     in) financing activities................     507,427          166,240         (45,945)
                                              -----------      -----------      ----------

Increase in cash and cash
   equivalents...............................     199,137           23,897          11,051

Cash and cash equivalents, beginning.........     119,458           95,561          84,510
                                              -----------      -----------      ----------

Cash and cash equivalents, ending               $ 318,595        $ 119,458       $  95,561
                                              ===========      ===========      ==========
</TABLE>

            The notes to financial statements are made a part hereof.
<PAGE>
                                                                            S-5


                      MEGADATA CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                OCTOBER 31, 1997



SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------

      a.    Nature of Operations
      --------------------------

            The Company operates primarily in one segment, the design,
            manufacture, sale and service of multi-user, UNIX-based
            microcomputers, wireless modems, access equipment to airline
            reservation systems and communication controllers, multiplexers, and
            programmable intelligent video display computer terminals. Accounts
            receivable at October 31, 1997 primarily is due from customers in
            the airline industry.

      b.    Consolidation
      -------------------

            Principles of Consolidation - The consolidated financial statements
            include the accounts of Megadata Corporation (the Company) and its
            subsidiaries (all of which are wholly-owned). All intercompany
            investments, advances and transactions have been eliminated.

      c.    Inventories
      -----------------

            Inventories are stated at the lower of cost (first-in, first-out
            method) or market.

      d.    Property, Plant and Equipment
      -----------------------------------

            Property, plant and equipment are recorded at cost. At the time
            assets are sold or otherwise disposed of, the cost and accumulated
            depreciation are eliminated from the asset and depreciation
            accounts; profits and losses on such dispositions are reflected in
            current operations. Expenditures for maintenance and repairs are
            charged to operations; replacements, renewals and betterments are
            capitalized. Depreciation for financial accounting purposes is
            computed on the straight-line method to amortize the cost of various
            classes of assets over their estimated useful lives.

      e.    Income taxes
      ------------------

            Deferred taxes provide for the tax effect of temporary differences
            between financial and tax reporting, primarily arising from the
            provisions for obsolete inventories not currently deductible for tax
            purposes and the availability of net operating loss carryforward.
            Tax credits are accounted for by the flow-through method.

<PAGE>
                                                                           S-6


                      MEGADATA CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                OCTOBER 31, 1997



      f.    Research and development costs
      ------------------------------------

            Research and development costs are charged to operations as
            incurred.

      g.    Cash and cash equivalents
      -------------------------------

            All highly liquid investments with a maturity of three months or
            less at date of purchase are carried at fair value and considered to
            be cash equivalents.

      h.    Use of Estimates
      ----------------------

            The preparation of financial statements in conformity with generally
            accepted accounting principles requires management to make estimates
            and assumptions that affect certain report amounts and disclosures.
            Accordingly, actual results could differ from those estimates.

      i.    Reclassification
      ----------------------

            Certain items within the 1995 financial statements have been
            reclassified to conform to the 1996 presentation.

      j.    Fair Value of Financial Instruments
      -----------------------------------------

            The carrying value of financial instruments approximate their fair
            value.

PREPAID EXPENSES AND OTHER CURRENT ASSETS:
------------------------------------------

                                                        October 31,
                                                    1997           1996

      Prepaid real estate taxes................. $   28,073     $  22,776
      Prepaid insurance.........................     18,478        21,809
      Other current assets......................     41,010        23,997
                                                 ----------     ---------

                                                 $   87,561     $  68,582
                                                 ==========     =========

<PAGE>
                                                                          S-7


                      MEGADATA CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                OCTOBER 31, 1997



INVENTORIES:
------------

Inventories are summarized as follows:

                                                        October 31,
                                                        -----------
                                                   1997           1996
                                                   ----           ----

      Parts and raw materials.................. $  103,251     $ 107,860
      Work-in-process..........................    282,352       142,224
      Finished goods...........................     63,172       149,558
                                                ----------     ---------

                                                $  448,775     $ 399,642
                                                ==========     =========

PROPERTY, PLANT AND EQUIPMENT:
------------------------------

Property, plant and equipment consists of the following:

                                      Estimated          Cost and Book Value
                                       Useful                October 31,
                                        Lives            1997           1996
                                       -------          ------         -----

      Land..........................  -      years   $    200,000   $    200,000
      Building......................  32     years      1,793,805      1,793,805
      Building improvements           3-5    years         65,420         65,420
      Factory equipment. ...........  5-10   years      2,241,645      2,236,012
      Furniture, fixtures and
        improvements................  5-10   years        113,158        113,158
      Automobile....................  3-5    years         31,395         31,395
                                                     ------------   ------------
                                                        4,445,423      4,439,790
      Less accumulated depreciation.................    3,026,532      2,963,197
                                                     ------------   ------------

            Net..................................... $  1,418,891   $  1,476,593
                                                     ============   ============


ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
-----------------------------------------------

                                                           October 31,
                                                           -----------
                                                      1997           1996
                                                      ----           ----
      Accrued payroll, payroll taxes
        and benefits.............................. $   51,673     $  45,480
      Accrued professional fees...................     18,000        19,000
      Other accrued liabilities...................     50,802        34,347
                                                   ----------     ---------

                                                   $  120,475     $  98,827
                                                   ==========     =========

<PAGE>
                                                                          S-8

                      MEGADATA CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                OCTOBER 31, 1997


NOTES PAYABLE - RELATED PARTY:
------------------------------

During the period between September 18, 1996 and June 6, 1997 the Company signed
agreements with a private investor that provided for three loans of $100,000
each, of which $200,000 was received in 1996 and $100,000 was received in 1997.
The three notes bore interest at a rate of 9% per annum, and were payable by
July 30, 1997. In consideration for these loans, three stock warrants were
awarded for the purchase of up to 1,400,000 common shares. On June 6, 1997, the
investor and his affiliate exercised the first warrant, purchasing 700,000
shares for the amount of $500,000, paid by $400,000 in cash and cancellation of
the first $100,000 note.

The second warrant was exercised on October 31, 1997, by the investor and two
other directors with the purchase of 200,000 shares for the amount of $150,000.
The exercising of the second warrant has validated the third warrant, that gives
the investor and his affiliates the right to purchase 500,000 shares at $1.25
per share. The third warrant expires October 31, 2001, and is exercisable during
the year preceding expiration. On July 30, 1997, the remaining notes totalling
$200,000 were amended and restated by a new note bearing interest at 9% per
annum, with quarterly payments of $25,000 plus accrued interest due on the last
business day of each calendar quarter, commencing December, 1997, with any
remaining balance being due July 30, 1999. The note is secured by the Company's
assets excluding its building.

During 1997 the investor was elected a director of the Company and Chairman of
the Board.

DEFERRED INCOME:
----------------

Deferred income represents advances received on maintenance agreements and
deposits from customers for equipment that will be shipped in the next fiscal
year.

INSTALLMENT NOTE PAYABLE:
-------------------------

Notes due on financing of insurance premiums bearing interest at 10.75% and
10.91% per annum, with the final payments due May, 1998 and June, 1997
respectively.

<PAGE>
                                                                           S-9

                      MEGADATA CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                OCTOBER 31, 1997

LONG-TERM DEBT:
---------------

On May 31, 1996, the Company refinanced the existing mortgage with the Roosevelt
Savings Bank on its building in Bohemia, New York. The loan matures on June 1,
2001 and requires annual payments based upon a 10 year amortization schedule.
Interest is at a fixed rate of 9.25%. Minimum annual principal repayments of
long-term debt is as follows:

                  October 31, 1998..........................  $   53,242
                  October 31, 1999..........................      58,382
                  October 31, 2000..........................      64,017
                  June 1, 2001..............................     498,637
                                                              ----------

                  Total.....................................  $  674,278
                                                              ==========


INCOME TAXES:
-------------

Components of the income tax expense are as follows:


                                               Year Ended October 31,
                                               ----------------------
                                        1997          1996           1995
                                        ----          ----           ----
      Current:
           Federal.................. $        -    $        -     $       -
           States and Local.........      1,023         2,378         5,659
                                     ----------    ----------     ---------

           Total....................      1,023         2,378         5,659
                                     ==========    ==========     =========

At October 31, 1997, the Company has available a federal net operating loss
carryforward of approximately $4,600,000 for tax reporting purposes to offset
future taxable income and which will expire in various amounts through 2012. The
Company has $25,000 general business tax credit carryforwards available which
expire in various amounts through 2008. The Company has provided a valuation
allowance in its entirety to offset potential benefit derived with the
utilization of the net operating loss carryforwards and tax credit available.

CASH FLOWS:
-----------

Supplemental cash flow information:

                                               Year Ended October 31,
                                               ----------------------
                                          1997          1996           1995
                                          ----          ----           ----

      Interest paid................... $   84,412    $   68,914     $  71,753
      Income taxes past and present...      2,360         1,196         2,705

<PAGE>
                                                                         S-10


                      MEGADATA CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                OCTOBER 31, 1997


CONCENTRATIONS OF CREDIT RISK:
------------------------------

The Company maintains cash balances at several financial institutions which are
insured by the Federal Deposit Insurance Corporation up to $100,000. The
Company's uninsured cash balance at October 31, 1997 and 1996 totals
approximately $214,000 and $116,000.

STOCK OPTIONS:
--------------

The Company's 1982 and 1988 stock option plans provide for the granting of stock
options for 100,000 shares of the Company's common stock for each plan. The 1982
plan provides that only 40,000 options can be granted during any one fiscal
year. The 1988 plan provides that no individual can receive in excess of
$100,000, as determined by the fair market value of options during any calendar
year. Under both plans, the option price per share is the fair market value at
date of grant, except on the issuance of non-qualified options pursuant to the
1988 plan in which the option price is not less than 85% of the fair market
value of the shares. Options granted may be exercised up to a maximum of ten
years from the date of grant; however, individuals who own more than 10% of the
Company's common stock must exercise their options within five years of the date
of the grant and these options are exercisable at 110% of the fair market value
of the shares. The following is a summary of stock option transactions relating
to such plans:

<TABLE>
<CAPTION>
                                                Shares        Number          Exercise
                                               Available     of Shares          Price
                                               for Grant    Outstanding       Per Share
                                               ---------    -----------       ---------
           1982 Plan
           ---------
<S>                                           <C>           <C>             <C>
Balance, October 31, 1992....................     52,500        47,500      $2.25-$5.75
Options cancelled November 1992..............     12,500       (12,500)     $2.25-$5.75
                                              ----------    ----------

Balance, October 31, 1997....................     65,000        35,000
                                              ==========    ==========

           1988 Plan
           ---------

Balance, October 31, 1992....................     80,000        20,000      $ .38-$ .41
Options cancelled............................         -             -       $ .38-$ .41
                                              ----------    ----------

Balance October 31, 1997.....................     80,000        20,000      $ .38-$ .41
                                              ==========    ==========
</TABLE>

NET LOSS PER SHARE:
-------------------

Loss per Share - Loss per share is based on the average number of shares of
common stock outstanding each year after deducting treasury shares. Stock
options have not been considered in the calculations as their effect would be
anti-dilutive.

<PAGE>
                                                                          S-11


                      MEGADATA CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                OCTOBER 31, 1997


MAJOR CUSTOMERS:
----------------

During the fiscal year ended October 31, 1997 three customers accounted for
approximately 27%, 22% and 14% of revenues. During the fiscal year ended October
31, 1996 one customer accounted for approximately 25% of revenues. During the
fiscal year ended October 31, 1995 three customers accounted for approximately
26%, 20% and 16% of revenues. The Company had export sales of approximately
$172,607, $233,597 and $365,096 in fiscal 1997, 1996 and 1995, respectively.

RELATED PARTY TRANSACTIONS:
---------------------------

The Company had contracted with Data Probe, Inc., which is majority owned by the
Company's President, and is the owner of approximately 23% of the Company's
outstanding shares, to provide certain research and development and sales
support services through July, 1996. The Company has incurred approximately
$60,442 and $97,680 for the years ended October 31, 1996 and 1995, respectively,
in consideration for the aforementioned services.

On January 16, 1996, the Company signed a promissory note to an officer for a
$30,000 loan, which was secured by certain test equipment. The note bore
interest at 10% per annum, and was paid in full on July 16, 1997. Total
interest payments for the year ended October 31, 1996 were $2,265. In addition,
net loans of $6,883 were made by another officer which had no provision for
interest and was paid on demand.

FOURTH QUARTER INVENTORY ADJUSTMENT:
------------------------------------

Market conditions and technological changes have rendered certain items in the
inventory to be obsolete. The Company had determined and adjusted its inventory
during the fiscal year ended October 31, 1995 in the amount of $368,789 to
reflect the realizable value of the inventory.

<PAGE>
                                                                          S-12


                      MEGADATA CORPORATION AND SUBSIDIARIES

                   SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>

Column A                           Column B      Column C        Column D       Column E
--------                           --------      --------        --------       --------

                                                                   Sales
                                                                 disposals
                                  Balance at                        and          Balance
                                   beginning     Additions      abandonment      at end
Classification                      of year       at cost        of assets       of year
--------------                      -------       -------        ---------       -------
<S>                             <C>            <C>              <C>           <C> 
Year ended October 31, 1997:

 Factory Equipment.............. $  2,236,012   $    5,633      $         -   $  2,241,645
 Furniture and Fixtures.........      113,158            -                -        113,158
 Automobiles....................       31,395            -                -         31,395
 Building Improvements..........       65,420            -                -         65,420
 Land...........................      200,000            -                -        200,000
 Building.......................    1,793,805            -                -      1,793,805
                                 ------------   ----------      -----------   ------------

                                 $  4,439,790   $    5,633      $         -   $  4,445,423
                                 ============   ==========      ===========   ============

Year ended October 31, 1996:

 Factory Equipment.............. $  2,459,007   $    3,583      $  (226,578)   $ 2,236,012
 Furniture and Fixtures.........      345,919            -         (232,761)       113,158
 Automobiles....................       31,395            -                -         31,395
 Building Improvements..........       65,420            -                -         65,420
 Land...........................      200,000            -                -        200,000
 Building.......................    1,793,805            -                -      1,793,805
                                 ------------   ----------      -----------   ------------

                                 $  4,895,546   $    3,583      $  (459,339)    $4,439,790
                                 ============   ==========      ===========     ==========

Year ended October 31, 1995:

 Factory Equipment.............. $  2,459,007   $        -      $         -   $  2,459,007
 Furniture and Fixtures.........      345,919            -                -        345,919
 Automobiles....................       31,395            -                -         31,395
 Building Improvements..........       65,420            -                -         65,420
 Land...........................      200,000            -                -        200,000
 Building.......................    1,793,805            -                -      1,793,805
                                 ------------   ----------      -----------   ------------

                                   $4,895,546   $        -      $         -   $  4,895,546
                                 ============   ==========      ===========   ============

</TABLE>

<PAGE>
                                                                         S-13

                      MEGADATA CORPORATION AND SUBSIDIARIES

             SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION

<TABLE>
<CAPTION>
Column A                           Column B      Column C        Column D       Column E
--------                           --------      --------        --------       --------

                                                                   Sales
                                                                 disposals
                                  Balance at                        and          Balance
                                   beginning     Additions      abandonment      at end
Classification                      of year       at cost        of assets       of year
--------------                      -------       -------        ---------       -------
<S>                              <C>            <C>            <C>           <C>    
Year ended October 31, 1997:

 Factory Equipment.............. $  2,226,542   $    3,725      $         -   $  2,230,267
 Furniture and Fixtures.........      113,158            -                -        113,158
 Automobiles....................       27,061        2,660                -         29,721
 Building Improvements..........       65,420            -                -         65,420
 Building.......................      531,016       56,950                -        587,966
                                 ------------   ----------      -----------   ------------

                                 $  2,963,197   $   63,335      $         -   $  3,026,532
                                 ============   ==========      ===========   ============

Year ended October 31, 1996:

 Factory Equipment.............. $  2,449,558   $    3,562      $  (226,578)   $ 2,226,542
 Furniture and Fixtures.........      345,823           96         (232,761)       113,158
 Automobiles....................       24,401        2,660                -         27,061
 Building Improvements..........       65,420            -                -         65,420
 Building.......................      474,066       56,950                -        531,016
                                 ------------   ----------      -----------   ------------

                                 $  3,359,268   $   63,268      $  (459,339)    $2,963,197
                                 ============   ==========      ===========     ==========

Year ended October 31, 1995:

 Factory Equipment.............. $  2,447,110   $    2,448      $         -   $  2,449,558
 Furniture and Fixtures.........      345,051          772                -        345,823
 Automobiles....................       21,741        2,660                -         24,401
 Building Improvements..........       65,420            -                -         65,420
 Building.......................      416,984       57,082                -        474,066
                                 ------------   ----------      -----------   ------------

                                 $  3,296,306   $   62,962      $         -   $  3,359,268
                                 ============   ==========      ===========   ============

</TABLE>

<PAGE>


         Item 9.  Disagreements on Accounting and Financial Disclosure.
         --------------------------------------------------------------

                   None.





<PAGE>
                                     PART III


         Item 10.  Directors and Executive Officers of the Registrant.
         -------------------------------------------------------------

                         (a)  Identification  of  Directors.
                              ------------------------------

                                          Director Position and Offices
           Name                     Age   Since    With Registrant             
           ----                     ---   -----    ---------------      


         Yitzhak N. Bachana          64    1976    President, Chief Executive
                                                   Officer, Director
                                                   
         G.S. Beckwith Gilbert       55    1997    Chairman of the Board,
                                                   Director, and Member of the
                                                   Audit Committee
                                                   
         Richard R. Schilling, Jr.   72    1974    Director, Member of the Audit
                                                   Committee
                                                   
         John R. Keller              58    1997    Director
                                                   
         Bruce N. Whitman            64    1997    Director
                                                   
         Paul L. Graziani            40    1997    Director
                                                   
                                                 
         Each  director  is elected to serve until the succeeding  annual
         meeting of shareholders and until  his successor is duly elected
         and qualifies.

                         (b)  Identification  of  Executive  Officers.
                              ----------------------------------------

                                        Officer  Position and Offices
           Name                   Age   Since    With Registrant             
           ------                 ---   -----    ------------------------

         Yitzhak N. Bachana       64     1976    President, Chief Executive
                                                 Officer, Director
                                                
         Dr. James A. Cole        57     1988    Vice President of Research &
                                                 Development
                                                
         John R. Keller           58     1970    Vice President
                                                
                                             
         Each officer is elected to serve at the pleasure of the Board of
         Directors.

                         (c) Identification of Certain Significant Employees.
                             ------------------------------------------------

                         None.

                         (d)  Family  Relationship.
                              ---------------------

                         None.


                                      III-1
<PAGE>
                         (e)  Business  Experience.
                              ---------------------

                         The following sets forth the business experience
         during the  past  five  years  of  each  director  and executive
         officer;


         Yitzhak  N.  Bachana      Mr.   Bachana  has been President  and
                                   Chief   Executive   Officer   of   the
                                   Registrant  since 1980.  Mr.   Bachana
                                   has   also   been   President,   Chief
                                   Executive    Officer   and    majority
                                   shareholder of Data Probe, Inc., a New
                                   York  based  computer service  bureau.
                                   Mr.  Bachana has  also been an officer
                                   and a director of Datatab, Inc.  since
                                   1983.  Data Probe,  Inc.  and Datatab,
                                   Inc.  are publicly-held  corporations.
                                   Pursuant to an  agreement between Data
                                   Probe, Inc.  and the Registrant, dated
                                   May 7, 1976,  the  President  of  Data
                                   Probe,  Inc.  is to be nominated as  a
                                   management nominee for director.

         G.S. Beckwith Gilbert     Mr.   Gilbert  has been President  and
                                   Chief Executive Officer of Field Point
                                   Capital Management Company, a merchant
                                   banking firm, since  1988.  He is also
                                   a partner of Wolsey & Co., a  merchant
                                   banking  firm.    In   addition,   Mr.
                                   Gilbert is a Director and Chairman  of
                                   the  Executive  Committee   of  DIANON
                                   Systems,  Inc., as well as a  Director
                                   of  Davidson  Hubeny  Brands,  Kionix,
                                   Inc., and Transgenomic, Inc.

         Richard R. Schilling, Jr. Mr.   Schilling has been a  member  of
                                   the  law  firm  of   Burns,   Kennedy,
                                   Schilling  &  O'Shea,  New  York,  New
                                   York.

         Bruce N. Whitman          Mr.   Whitman has been Executive  Vice
                                   President    and    a    Director   of
                                   FlightSafety International since 1962.
                                   He is also a  Director of FlightSafety
                                   Boeing     Training     International,
                                   Petroleum   Helicopters,   Inc.,   and
                                   Aviall, Inc.

         Paul L. Graziani          Mr.   Graziani has been the  President
                                   and   Chief   Executive   Officer   of
                                   Analytical  Graphics, Inc., a  leading
                                   producer   of    commercial   analysis
                                   software for the space industry.

         Dr. James A. Cole         Dr.    Cole   has  been  Director   of
                                   Research   and   Development   of  the
                                   Registrant.   Dr.  Cole earned a Ph.D.
                                   in   physics   from    Johns   Hopkins
                                   University in 1966.

         John R. Keller            Mr.  Keller has been a Vice  President
                                   of the Registrant.

                         (f) Involvement in Certain Legal Proceedings.
                             -----------------------------------------

                         The Registrant knows of  no event which occurred
         during the past five years and which is described in Item 401(f)
         of Regulation S-K relating to  any director or executive officer
         of the Registrant.

         Item 11.   Executive  Compensation.
         -----------------------------------

                         (a)  Cash and Deferred Compensation.
                              -------------------------------

                         The   following   table  sets  forth  all   cash
         compensation paid  to  each  of  the  Registrant's  most  highly
         compensated  executive officers to whom cash compensation during
         the fiscal year ended October 31,  1997, exceeded $60,000 and to
         all  executive  officers of the Registrant as a group  for  such
         fiscal year:

                                      III-2
<PAGE>
                       CASH AND DEFERRED COMPENSATION TABLE
         ------------------------------------------------------------------
              (A)                  (B)       (C)       (D)     (E)         
         ------------------------------------------------------------------
         Name and Principal                                  Other
         Position                  Year     Salary     Bonus Compensation
         ------------------------------------------------------------------

         Yitzhak N. Bachana -      1997 $ 100,000 (1)      - $ 26,923 (2)
         President
                                   1996    11,538 (3)      -        -
                                   1995    91,923          -        -

         John R. Keller - Vice     1997  $ 90,000          -        -
         President
                                   1996    93,462          -        -
                                   1995   105,000          -        -

         Dr. James Cole - Vice     1997  $ 96,346          -        -
         Pres. - R&D               1996    93,462          -        -
                                   1995   105,000          -        -

         ------------------------------------------------------------------

         (1)   Does  not  include  earned  but  unpaid  compensation  of
         $ 84,615 as of October 31, 1997.

         (2)  Represents  partial  repayment  of  earned  and previously
         accrued compensation.

         (3) Does not include earned but unpaid compensation of $111,538
         as of October 31, 1996.


                         (b) (1)  Compensation  pursuant  to  plans.
                                  ----------------------------------

                         The  current  base salary of  Messrs.   Bachana,
         Cole,  and   Keller   is   $100,000,   $120,000   and   $90,000,
         respectively.   All  of the officers are employed on an  at-will
         basis.

                         (2)  Pension  Table.
                              ---------------

                         Not applicable.


                         (3)  Alternative pension plan disclosure.
                              ------------------------------------

                         Not applicable.

                         (4)  Stock and stock appreciation right plans.
                              -----------------------------------------

                         The  Registrant's 1982 and 1988 incentive  stock
         option plans provide  for  the  granting  of  stock  options for
         100,000  shares of the Registrant's common stock for each  plan.

                         (i)  1982 Stock Option Plan.
                              -----------------------

                         The   Registrant's   1982  Stock   Option   Plan
         authorizes the granting of  "incentive  stock options" ("ISOs" -
         as  defined under Section 422A of the Internal Revenue  Code  of
         1986, as amended) in respect of  a  maximum of 100,000 shares to
         executives and key employees of the Registrant.  Pursuant to the
         terms of the  1982  Stock  Option  Plan,  ISOs  in  respect of a
         maximum  of 40,000 shares can be granted during any  one  fiscal
         year.  The 1982 Stock Option  Plan  is administered by the Stock
         Option  Committee  of the Board of Directors  (the  "Committee")
         which may grant non-assignable options to executive officers and
         key employees in such manner, and at such times, and in amounts,
         subject to a  $100,000  limit,  as  the  Committee  may,  in its
         absolute  discretion, determine.  The members of  the  Committee
         are Paul P. Alessandrini, Richard R.  Schilling, Jr., and Ronald
         S.   Goldstein.   The option price per share is the fair  market
         value of the shares on the date  the  option is granted and such
         option must be exercised by the optionee within ten years of the
         date of grant.  However,  options granted to individuals who own
         more  than 10% of the shares of the Registrant must be exercised
         within five years of the date  of  the grant and are exercisable
         at 100% of the fair market value of the shares.

                                      III-3
<PAGE>
                         No options were granted or exercised pursuant to
         the 1982 Stock Option Plan  during  the Registrant's fiscal year
         ended  October  31, 1997.  No options can be granted after  1992
         under this plan.

                         (ii)  1988 Stock Option Plan.
                               -----------------------

                         The  1988  Stock Option Plan  provides  for  the
         grant to employees of  the  Registrant  and  its subsidiaries of
         either  (x)  ISOs  or (y) non-qualified options.   A  total  of
         100,000 common shares have been reserved  for issuance under the
         1988  Stock Option Plan.  The 1988 Stock Option Plan  terminates
         in 1998.

                         The  1988  Stock Option Plan  is administered by
         the  Committee  which determines the grantees and  the  exercise
         price, designates the exercise  periods,  not to exceed 10 years
         (5  years  in the event that the grantee holds more than 10%  of
         the Registrant's equity), the time,  manner, and form of payment
         upon  exercise of an option, designates whether the options  are
         intended to be ISOs, and determines  other terms and conditions.
         The  1988  Stock Option Plan provides that, in  determining  the
         participants to whom options shall  be granted and the number of
         shares to be covered by each option, the Committee may take into
         account the nature of the services  rendered by the participant,
         his  or  her  own present and  potential  contributions  to  the
         Registrant's success, and such other factors as the Committee
         may deem relevant.

                         The aggregate  fair  market  value of shares for
         which  ISOs are granted to any employee and exercisable for  the
         first time by such employee  during any calendar year (under all
         stock  option plans of the Registrant and its subsidiaries)  may
         not exceed $100,000.  ISOs  granted  under the 1988 Stock Option
         Plan  may  not be granted at a price less than the  fair  market
         value of the common shares on the date of grant (or 110% of fair
         market value in the case of employees holding 10% or more of the
         shares of the Registrant).   Non-qualified  options  will not be
         granted  at  exercise prices less than 85% of  the  fair  market
         value of the common shares on the date of grant.

                         An option  granted  under  the 1988 Stock Option
         Plan is exercisable, during the optionholder's lifetime, only by
         the optionholder and is  not  transferable  by  the optionholder
         except  by will or the laws of descent and distribution.  If  an
         ISO  optionholder  retires,  the   optionholder's  ISOs  may  be
         exercised  to the extent they were exercisable upon  retirement,
         until the earlier of the ISOs specified expiration date or three
         months  from the date of the optionholder's retirement.  In  the
         case of an ISO optionholder's cessation  of employment by reason
         of disability or death, the applicable carryover periods are one
         year and two years, respectively.

                         Upon  the occurrence of a Change in Control  (as
         defined   below),   outstanding   options   become   immediately
         exercisable.   During the six months after a Change in  Control,
         in lieu of exercising  an  option,  a  holder may surrender such
         options  to  the Registrant in whole or in part and,  upon  such
         surrender, the Registrant  must  pay  to  the holder in exchange
         therefor  an amount of cash per share equal to the aggregate  of
         the excess of (i) the greater of (x) the average price per share
         paid  or  to be paid for shares actually acquired in  connection
         with such Change in  Control,  (y)  the  price per share paid or
         payable in connection with any tender offer for the Registrant's
         common shares leading to the  Change in Control, or (z) the mean
         between  the  high and low selling prices of such shares on  the
         date of the Change of Control, over  (ii) the exercise prices of
         the shares subject to such surrendered options.  Officers of the
         Company may receive such a cash payment only during a restricted
         period  immediately following the public release of  information
         concerning the Registrant's earnings  (but not within six months
         of the grant of such option).  During all other periods they may
         only receive shares.  A Change in Control means (i) consummation
         by  any  Person (as defined in the Securities  Exchange  Act  of
         1934, as amended [the "1934  Act"]) other than the Registrant of
         (or the first purchase by any Person [other than the Registrant]
         of any common shares under)  a  tender  offer or exchange offer;
         (ii)  the acquisition by any Person (other than the  Registrant)
         which theretofore legally  or  beneficially  (as  defined in SEC
         Rule  13d-3) owned less than 20% of the then outstanding  common
         shares  of  the  Registrant  in   a  transaction  or  series  of
         transactions  that results in such Person directly or indirectly
         owning  legally  or  beneficially   20%  or  more  of  the  then

                                      III-4
<PAGE>
         outstanding   common   shares  of  the  Registrant;  (iii)   the
         consummation of any merger or consolidation with, or the sale of
         substantially  all the assets of the Registrant to, any  Person;
         or (iv) any other  transaction   pursuant  to  which  any Person
         shall have the right to elect a majority of the directors of the
         Registrant or which would be required to be reported pursuant to
         Item  6(e) of Schedule 14A of Regulation 14A  promulgated  under
         the 1934 Act.

                         No options were granted or exercised pursuant to
         the  1988 Stock Option Plan during the Registrant's fiscal  year
         ended October 31, 1997.


                         (c)  Other  Compensation.
                              --------------------

                         None.

                         (d)  Compensation  of  Directors.
                              ----------------------------

                         1.  Standard  Arrangements.
                             -----------------------

                         Non-officer  directors  are  compensated  by the
         Registrant for services rendered to the Registrant in connection
         with their directorial duties  by the payment of $1,000 for each
         Board  of  Directors'  meeting  or  Committee  meeting  actually
         attended.

                         2.  Other  Arrangements.
                             --------------------

                         None.

                         (e) Termination of employment and change of
                         control arrangement.
                         -------------------------------------------  

                          None.

         Item 12.  Security Ownership of Certain Beneficial Owners and
         Management.
         -------------------------------------------------------------

                         (a) Security Ownership of Certain Beneficial
                             Owners.
                             -----------------------------------------

                         The  following  chart  set forth  the  name  and
         addresses of  the  persons  known  to  the  Registrant to be the
         beneficial  owners of more than 5% of the Registrant's $0.01 par
         value common shares as at January 20, 1998:


                     Name and Address      Amount and Nature      Percent of
                     of Beneficial Owner   of Ownership (1)(2)(3) Class
                     -------------------------------------------------------

                     G.S. Beckwith Gilbert   846,000             33.68
                     104 Field Point Road
                     Greenwich, CT 06830

                     Data Probe, Inc.        579,400             23.07
                     49 East 21 Street
                     New York, NY 10010

                     John R. Keller          129,500              5.09
                     9 Lynbrook Court
                     Huntington, NY 11743

         -----------------------------------

         (1) All shares are owned of record and beneficially.

         (2) Yitzhak N.  Bachana, President of Registrant, owns 57.22% of
         the  outstanding  shares  of  Data Probe, Inc.   and  by  virtue
         thereof may be deemed to be the beneficial owner of more than 5%
         of the Registrant's outstanding shares.

         (3)  Includes Mr.  Keller's options to purchase an aggregate  of
         32,500 shares, all of which options are immediately exercisable.


                                      III-5
<PAGE>
                         (b)  Security  Ownership  of  Management.
                              ------------------------------------

                         The following chart sets forth the number of the
         Registrant's common shares, $0.01  par value, beneficially owned
         by  all of the directors of the Registrant and by the  directors
         and officers of  the  Registrant  as  a  group as at January 20,
         1998:


          Name of                     Amount and Nature of        Percent of
          Beneficial Owner            Beneficial Ownership (1)    Class
          ------------------------------------------------------------------

          G.S. Beckwith Gilbert              846,000             33.68
          Yitzhak N. Bachana                  10,000 (2)           .40
          John R. Keller                     129,500 (3)          5.09
          Richard R. Schilling, Jr.            3,000              0.12
          James A. Cole                       29,000 (4)          1.15
          Bruce N. Whitman                    93,000              3.70
          Paul L. Graziani                     7,000               .28

          Officers and Directors
           as a Group (7 persons)          1,117,500             44.49
          ------------------------------------------------------------------
          (1) All shares are owned of record and beneficially.

          (2) Mr.   Bachana  is  President,  Chairman  of  the Board, and
          majority  shareholder  of Data Probe, Inc.  which owns  579,400
          common shares of the Registrant,  (or 23.07% of all outstanding
          shares) which are excluded from the foregoing table.

          (3) Includes Mr.  Keller's options to purchase an aggregate  of
          32,500  shares,   all   of   which   options   are  immediately
          exercisable.

          (4) Includes Dr.  Cole's  options  to  purchase an aggregate of
          10,000 shares, all of which options are immediately
          exercisable.


         Item 13.   Certain Relationships and Related Transactions.
         ----------------------------------------------------------

                         (a)  Transactions with management and others.
                              ----------------------------------------

                         None.


                         (b)  Certain  business  relationships.
                              ---------------------------------

                         None.

                         (c)  Indebtedness  of  management.
                              -----------------------------

                         None.

                         (d)  Transactions  with  promoters.
                              ------------------------------

                         Not applicable.


                                      III-6
<PAGE>
                                    PART IV


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


                     (a) 1. Financial  Statements                Page
                            ---------------------                -----

                            Included in Part II of this report:

                            Independent Auditors' Reports        S-1

                            Consolidated balance sheets as at
                            October 31, 1997 and 1996            S-2

                            Consolidated statements of
                            operations and retained earnings for
                            the years ended October 31, 1997,
                            1996 and 1995                        S-3

                            Consolidated statements of cash
                            flows for the years
                            ended October 31, 1997, 1996 and     S-4
                            1995

                            Notes to consolidated financial
                            statements                           S-5



                         2. Financial  Statement  Schedules
                            -------------------------------

                            Schedule V - Property, plant
                            and equipment                        S-12

                            Schedule VI - Accumulated
                            depreciation and amortization        S-13


          Schedules  not listed above have been omitted because they  are
          either not applicable or  the  required  information  has  been
          given elsewhere in the financial statements or notes thereto.


                     (b)  Reports Filed On Form 8-K
                          -------------------------

                          None

                     (c)  Exhibits
                          --------

              Exhibits No.                                       Page 
              ----------------------------------------------------------

                3 - 1    Certificates of Incorporation filed     *
                         January 3, 1967

                3 - 2    Certificate of Amendment filed August   *
                         4, 1969

                3 - 3    Certificate of Amendment filed          *
                         September 30, 1969

                3 - 4    Certificate of Amendment filed July 17, *
                         1970

                3 - 5    Certificate of Amendment filed          *
                         September 27, 1972

                                      IV-1
<PAGE>
                     (c)  Exhibits (Contd)
                          ---------------------------------------------------
              
              Exhibits No.                                       Page 
              --------------------------------------------------------------

                3 - 6    Certificate of Amendment filed          *
                         September 27, 1972

                3 - 7    Certificate of Amendment filed April    *
                         22, 1974

                3 - 8    Certificate of Amendment filed November *
                         23, 1976

                3 - 9    Certificate of Amendment filed April    *
                         18, 1977

                3 - 10   Certificate of Amendment filed July 11, *
                         1979

                3 - 11   Certificate of Amendment filed on       **
                         November 12, 1981

                3 - 12   Composite of Certificate of
                         Incorporation of the Registrant         **

                3 - 13   Certificate of Amendment filed          ****
                         September 14, 1988

                3 - 14   By-Laws                                 ****

                3 - 15   Certificate of Amendment filed          *****
                         August 16, 1983

                3 - 16   Certificate of Change filed             *****
                         January 24, 1990

                3 - 17   Composite Certificate of Incorporation  *****
                         through January 24, 1990

                10 - 1   1988 Bonus Pool Plan                    ****

                10 - 2   The Registrant's 1982 Stock Option Plan ***

                10 - 3   The Registrant's 1988 Stock Option Plan ****

                10 - 4   Employment Agreement with David T.      ****
                         Zeiter dated August 29, 1988

               22(a)     List of Subsidiaries                    **

               27        Financial Data Schedule

          (*) Document filed with the  Registrant's  Form  S-1 filed with
          the Securities and Exchange Commission on January 30, 1981  and
          incorporated herein by reference.

          (**) Document filed with  the  Registrant's  Form  10-K for the
          fiscal  year ended October 31, 1981 and incorporated herein  by
          reference.

          (***)  Document filed as Exhibit A to the Registrant's  Notice
          of Annual Meeting  of  Shareholders  and  Proxy Statement dated
          November 2, 1982, and incorporated herein by reference.

          (****)  Document filed with the Registrant's Form 10-K for  the
          fiscal year ended October 31,  1988  and incorporated herein by
          reference.

          (*****)  Document filed with the Registrant's Form 10-K for the
          fiscal year ended October 31,  1989  and incorporated herein by
          reference.


                                      IV-2
<PAGE>
              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.



                                             MEGADATA CORPORATION



          Dated:  January 29, 1998.     By:   /s/ Yitzhak N. Bachana   
                                            ---------------------------
                                             Yitzhak N. Bachana,
                                             President



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



          Dated:  January 29, 1998.      /s/ Yitzhak N. Bachana        
                                        -------------------------------
                                        Yitzhak N. Bachana, President,
                                        Treasurer, Chief Executive Officer,
                                        Principal Financial Officer, Director,
                                        Principal Executive Officer




          Dated:  January 29, 1998.      /s/ G.S. Beckwith Gilbert     
                                        -------------------------------
                                        G.S. Beckwith Gilbert,
                                        Chairman of the Board, Director


          Dated:  January 29, 1998.      /s/ Richard R. Schilling, Jr. 
                                        -------------------------------
                                        Richard R. Schilling, Jr., Director


          Dated:  January 29, 1998.      /s/ John R. Keller            
                                        -------------------------------
                                        John R. Keller, Vice President
                                        and Director


          Dated:  January 29, 1998.      /s/ Bruce N. Whitman          
                                        -------------------------------
                                        Bruce N. Whitman, Director



          Dated:  January 29, 1998.      /s/ Paul L. Graziani          
                                        -------------------------------
                                        Paul L. Graziani, Director



          Dated:  January 29, 1998.      /s/ Herbert E. Shaver         
                                        -------------------------------
                                        Herbert E. Shaver, Controller


                                      IV-3
<PAGE>
                                 EXHIBIT INDEX


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


                     (a) 1. Financial  Statements                Page
                            ---------------------                -----

                            Included in Part II of this report:

                            Independent Auditors' Reports        S-1

                            Consolidated balance sheets as at
                            October 31, 1997 and 1996            S-2

                            Consolidated statements of
                            operations and retained earnings for
                            the years ended October 31, 1997,
                            1996 and 1995                        S-3

                            Consolidated statements of cash
                            flows for the years
                            ended October 31, 1997, 1996 and     S-4
                            1995

                            Notes to consolidated financial
                            statements                           S-5



                         2. Financial  Statement  Schedules
                            -------------------------------

                            Schedule V - Property, plant
                            and equipment                        S-12

                            Schedule VI - Accumulated
                            depreciation and amortization        S-13


          Schedules  not listed above have been omitted because they  are
          either not applicable or  the  required  information  has  been
          given elsewhere in the financial statements or notes thereto.


                     (b)  Reports Filed On Form 8-K
                          -------------------------

                          None

                     (c)  Exhibits
                          --------

              Exhibits No.                                       Page 
              ----------------------------------------------------------

                3 - 1    Certificates of Incorporation filed     *
                         January 3, 1967

                3 - 2    Certificate of Amendment filed August   *
                         4, 1969

                3 - 3    Certificate of Amendment filed          *
                         September 30, 1969

                3 - 4    Certificate of Amendment filed July 17, *
                         1970

                3 - 5    Certificate of Amendment filed          *
                         September 27, 1972

<PAGE>
                     (c)  Exhibits (Contd)
                          ---------------------------------------------------
              
              Exhibits No.                                       Page 
              --------------------------------------------------------------

                3 - 6    Certificate of Amendment filed          *
                         September 27, 1972

                3 - 7    Certificate of Amendment filed April    *
                         22, 1974

                3 - 8    Certificate of Amendment filed November *
                         23, 1976

                3 - 9    Certificate of Amendment filed April    *
                         18, 1977

                3 - 10   Certificate of Amendment filed July 11, *
                         1979

                3 - 11   Certificate of Amendment filed on       **
                         November 12, 1981

                3 - 12   Composite of Certificate of
                         Incorporation of the Registrant         **

                3 - 13   Certificate of Amendment filed          ****
                         September 14, 1988

                3 - 14   By-Laws                                 ****

                3 - 15   Certificate of Amendment filed          *****
                         August 16, 1983

                3 - 16   Certificate of Change filed             *****
                         January 24, 1990

                3 - 17   Composite Certificate of Incorporation  *****
                         through January 24, 1990

                10 - 1   1988 Bonus Pool Plan                    ****

                10 - 2   The Registrant's 1982 Stock Option Plan ***

                10 - 3   The Registrant's 1988 Stock Option Plan ****

                10 - 4   Employment Agreement with David T.      ****
                         Zeiter dated August 29, 1988

               22(a)     List of Subsidiaries                    **

               27        Financial Data Schedule

          (*) Document filed with the  Registrant's  Form  S-1 filed with
          the Securities and Exchange Commission on January 30, 1981  and
          incorporated herein by reference.

          (**) Document filed with  the  Registrant's  Form  10-K for the
          fiscal  year ended October 31, 1981 and incorporated herein  by
          reference.

          (***)  Document filed as Exhibit A to the Registrant's  Notice
          of Annual Meeting  of  Shareholders  and  Proxy Statement dated
          November 2, 1982, and incorporated herein by reference.

          (****)  Document filed with the Registrant's Form 10-K for  the
          fiscal year ended October 31,  1988  and incorporated herein by
          reference.

          (*****)  Document filed with the Registrant's Form 10-K for the
          fiscal year ended October 31,  1989  and incorporated herein by
          reference.