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If Megatron defends and I flip at least one orange battle icon, but Megatron is KO'd in the attack, will his ability still work and do 1 damage to the attacker?

Yes. Once Megatron's ability triggers, it will still work even if Megatron if KO'd.
Source: Wizards of the Coast (2020-05-09)    【Link to Ruling】
Tags: Megatron, Fallen Hero