SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB
                                  ANNUAL REPORT

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1999

                           Commission file No. 0-11447

                                  DATAKEY, INC.
                 (Name of small business issuer in its charter)

         MINNESOTA                                             41-1291472
(State of incorporation or organization)    (I.R.S. Employer Identification No.)

              407 West Travelers Trail, Burnsville, Minnesota 55337
                    (Address of principal executive offices)

Issuer's telephone number, including area code:  (612) 890-6850
Securities registered pursuant to Section 12(b) of the Act:   NONE
Securities registered pursuant to Section 12(g) of the Act:
            Common Stock, par value $.05 per share (Title of Class)

Check whether the Issuer (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 Issuer was required to file such
reports) and (2) has been subject to such filing requirements for the last 90
days. YES X   NO ____

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

Issuer's revenues for its most recent fiscal year: $5,866,035.

The aggregate market value of the voting stock (Common Stock) held by
non-affiliates was approximately $105,041,148 based upon the closing sale price
of the Issuer's Common Stock on March 16, 2000.

As of March 16, 2000, there were 8,007,879 shares of the Issuer's Common Stock
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Part II of this Annual Report on Form 10-KSB incorporates by reference
information (to the extent specific sections are referred to herein) from the
Issuer's Annual Report to Shareholders for the year ended December 31, 1999 (the
"1999 Annual Report"). Portions of the Company's definitive Proxy Statement for
its Annual Meeting of Shareholders to be held on May 31, 2000 are incorporated
by reference pursuant to Rule 12b-23 into Items 9, 10 and 11 of Part III.

Transitional Small Business Disclosure Format (check one)  YES  [ ]   NO  [ X ]



<PAGE>
                                     PART I


ITEM 1.  DESCRIPTION OF BUSINESS

General

         Datakey, Inc. (the "Company") was incorporated under the laws of the
State of Minnesota in 1976 under the name "The Systems Group, Inc." In 1980, the
Company changed its name to Datakey, Inc. The Company provides product,
subsystem and system solutions to record, store and transmit electronic
information. Datakey also manufactures and sells products and systems directed
to the information security market which enable user identification and
authentication, secure data exchange and information validation. It also
provides OEM products, consisting of proprietary memory keys, cards and other
custom-shaped tokens that serve as a convenient way to carry electronic
information and are packaged to survive in portable environments.

         The Company's first portable memory products, consisting of an
electronic key and support electronics, were introduced in 1981 for applications
requiring convenient storage, transportation and management of information. The
Company's current products utilize semiconductor technology to provide a storage
device more versatile than conventional portable information products such as
keys, badges and magnetic stripe cards. The Company's current product line of
portable memory devices and associated interface products provide up to
32,768,000 bits of data storage which are used in a wide range of applications
including communications security, computer security, facility security, vending
and process control.

         Each of the Company's portable memory systems consist of one or more
portable memory devices, access devices and, for certain models, interface
modules containing microprocessors. These components, together with the user's
processor-based equipment, function as an integrated system allowing
instantaneous processing of personalized data carried within a portable data
carrier. Through the incorporation of advanced semiconductor memory technology,
the Company's portable memory device is able to store and carry substantial
amounts of information. When the memory device is used in conjunction with the
other components of the Company's system, information can be selectively
altered, added to or erased, as required, to effectively and reliably manage or
control a particular activity or transaction.

         In 1997, the Company introduced information security systems that
utilize smart cards or smart keys and are designed to provide advanced
information security utilizing digital signatures and encryption. These systems
incorporate hardware and software to provide a higher level of security than is
obtainable with current software only solutions.

Current Products and Products Under Development

Electronic Products (EP)

         Portable Memory Devices. Portable memory devices are electronic devices
which store information. They have a plastic exterior, are in the forms of keys,
cards, or custom shaped tokens and encapsulate semiconductor memory. Certain
devices have been designed to store information which may be retrieved, altered,
erased or updated; while other devices have been designed to store one-time
programmable information which may be retrieved but not altered or updated. The

<PAGE>

storage capacities of the Company's portable memory devices range from 1,024
bits to 32,768,000 bits. The portable memory devices are priced generally
between $2 and $100 per unit, depending on capacities and quantities purchased.

         Access Device. The access device is the element into which a portable
memory device is inserted to provide the interconnection between the portable
memory device and the electronic interface circuitry or the host processor-based
equipment. It is through this physical interconnection that the data contained
in the portable memory device is transmitted to the electronic interface or to
the host interface. Several models of the access device have been developed to
handle the Company's different portable memory devices. The access devices are
priced generally between $15 and $120 per unit, depending on models and
quantities purchased.

         Interface. The interface is the electronics control module between the
access device and a customer's processor-based equipment. This module is used
with the Company's serial communication key and contains all the necessary
electronics to control information within the key and to coordinate the
information requests of the host equipment. This communication process is
managed by the system's firmware, which is a software program existing within
the interface. For some applications, this firmware structures, secures and
verifies the information within the portable device, and may allow separate
groups or files of data to reside in a single portable device and be secure from
access except by equipment authorized to manage a particular group or file of
data. The interface is priced between $70 and $120 per unit, depending on models
and quantities purchased.

         System Level Products. During 1999, the EP business began to develop
and market system level products that contain application software and utilize
the Company's access devices. If sales of such products succeed as the Company
expects, the Company expects such sales to represent an increasing percentage of
EP revenue in 2000 and later years.

Information Security Solutions (ISS)

         For the past four years, Datakey has been developing and marketing
"token-based" (smart card or smart key) products that provide advanced
information security solutions to the problems of organizations, worldwide. The
Company introduced the first release of these token-based information security
systems in September 1997 and additional versions were introduced in 1998 and
1999. The Company expects to offer additions and enhancements to its current
products and to launch new versions of SignaSURE CIP in 2000. The launch and
success of such products is dependent on further successful development efforts
and market acceptance, along with other risks.
See "Forward Looking Statements."

         SignaSURE CIP. Password-based software programs that implement
public-key cryptography technology for information security offer easier
operation and improved data integrity over symmetric cryptography software.
Password-based security, however, is insufficient for networks with connections,
such as the Internet, outside of the organization. The Company's SignaSURE CIP
(Cryptographic Interface Provider) is designed to solve this problem, allowing
the Internet to be used safely for electronic commerce.

         SignaSURE CIP allows users and value-added resellers to upgrade
software-only systems to token-based information security and gain the benefit
of secure Internet operation. Token-based information security implements a
two-level security scheme--something that is owned (a hardware token) and
something that is known (a password to activate the token)--for a much stronger
level of security than password-based software solutions. SignaSURE CIP provides
token add-ons to Cryptoki (PKCS-11) standard information security interface
applications and for applications that incorporate Microsoft's CryptoAPI (API).
These products offer "load, plug and play" convenience for strong information
security.


<PAGE>

         SignaSURE CIP products include a user-unique smart card or smart key
that holds the critical information to perform the cryptographic functions
necessary for information privacy and data integrity, a companion reader/writer
that plugs into a computer's serial port, PCMCIA port or floppy disk drive, and
software which is loaded into the workstation and interfaces to the application
program. The Company introduced, in September 1997, a version of SignaSURE CIP
that utilizes the standard PKCS #11 (Cryptoki) Interface and then in January
1998, it released a version that utilizes either the PKCS#11 interface or
Microsoft's CryptoAPI.

         SignaSURE DTK (Developers Tool Kit). SignaSURE DTK is a turnkey package
to allow software developers to integrate Datakey hardware tokens and a public
key Infrastructure (PKI) into their applications. DTK includes up to three main
components: hardware cryptographic tokens, interface and integration software
and security infrastructure products. DTK is available in several configurations
ranging from a token with a reader/writer and integration software, to the full
PKI configuration that issues and manages hardware tokens and digital
certificates. This product flexibility allows user-developers who utilize
SignaSURE DTK to integrate just what is needed for their application. Datakey
began selling SignaSURE DTK in 1997.

         SignaSURE ESS (Enterprise Security Suite). Many organizations have made
the transition from large mainframe systems to more flexible, but much less
secure, client-server networks and intranets. Client-server networks and
intranets allow digital information to reside on networks, rather than at the
desktop so many authorized users can access the same information. Authorized
users may include company employees, suppliers and customers who can be
connected to the network via an extranet, or located remotely from the
enterprise. SignaSURE ESS offers a solution to manage a network, intranet and
Internet computing structure to allow only authorized users access to
information. Information can then be transmitted securely and stored safely on
both private and public networks without privacy and data integrity concerns.
SignaSURE ESS represents a family of modules that provide e-mail, browsing, file
encryption and other additional planned security functions in an integrated
"end-to-end" data security system that assures secure network access,
confidential information exchange, integrity of data and transaction
non-repudiation. Secure, personalized smart cards or keys are employed within a
public key infrastructure to provide a higher level of information security than
is provided by software-only solutions. Security functions are integrated into
applications like Microsoft Office(TM), thereby providing seamless security
operation to the user. SignaSURE ESS will operate over the Internet, and wide
and local area networks enabling secure information exchange for all users,
whether local or remote to the enterprise. SignaSURE ESS includes a
user-personalized smart card or smart key and companion reader/writer for
workstation or laptop to perform the functions necessary for information privacy
and data integrity. It also incorporates client software that manages secure
information and interfaces to applications, and server-based, enterprise
infrastructure hardware and software that initialize SignaSURE ESS and
continuously ensure that all users are authorized. ESS also includes an optional
secure stand-alone workstation to initialize cards and provide backup of private
keys for recovery purposes. Several ESS modules are currently in beta testing.
We plan to release SignaSURE ESS and start development of additional security
modules in 2000.

         SignaSURE PrivateAccess (SPA). Security concerns limit many companies
from making private information available on their web sites. Threats from
hackers and other unauthorized users stop many businesses from opening the lines
of digital communication between themselves and their business partners.
SignaSURE PrivateAccess provides a secure solution, using SSL technology and
Datakey's smart cards.

         PrivateAccess enables a completely secure extranet environment for
remote users to interact with a company through the World Wide Web. It provides
secure, real-time access to any special information available on a company's web
site. Smart cards allow for strong user authentication and guard against

<PAGE>

password guessing, unauthorized users, sniffing attacks and other hacking
techniques to offer the highest security available for online business
information.

         PrivateAccess is pre-configured and pre-installed, which the Company
believes distinguishes it as the first turnkey extranet solution using smart
card based security. It comes complete with the necessary hardware, server
software, smart cards/readers and client software to provide a total extranet
solution - all available in one package. SignaSURE PrivateAccess is currently in
beta testing and the Company intends to release it to production in the third
quarter of 2000.

         The following chart shows Datakey's SignaSURE products:

                                            SignaSURE Product
------------ ------------------------  -----  -----  -----  -----
Attribute                               CIP    DTK    ESS    SPA
------------ ------------------------  -----  -----  -----  -----
Customer     Organizational End-User     x             x      x
             ------------------------  -----  -----  -----  -----
             Software Developer                 x
------------ ------------------------  -----  -----  -----  -----
System Type  Integrated Solution                       x      x
             ------------------------  -----  -----  -----  -----
             Add-on Subsystem            x
             ------------------------  -----  -----  -----  -----
             Component                          x
------------ ------------------------  -----  -----  -----  -----
Application  Information Security        x             x      x
             ------------------------  -----  -----  -----  -----
             Token Integration           x      x
------------ ------------------------  -----  -----  -----  -----
Hardware     Datakey Smart Token         x      x      x      x
             ------------------------  -----  -----  -----  -----
             Datakey Reader/Writer       x      x      x      x
------------ ------------------------  -----  -----  -----  -----
Software     Security Solution                         x      x
             ------------------------  -----  -----  -----  -----
             Token Interface             x      x
------------ ------------------------  -----  -----  -----  -----

Research and Development

         During 1998 and 1999, the Company continued the development of portable
memory devices to expand its line of standard products as well as to introduce
solution-oriented products complete with application software. The Company also
continued its development of token-based information security products.

         As the need for computer security products continues to grow, the
Company has been expending significant effort into development and improvement
of token-based computer information security systems. The Company's SignaSURE
line of information security products, which were initially released for sale
during 1997, are designed to provide encryption and digital signatures required
for electronically generated documents on computer networks.

         The technology involved in information security systems is undergoing
rapid expansion and advancement which could result in the development of new
products and systems which may make the Company's present information security
products obsolete. The initial development effort for the Company's information
security products was completed in 1997 but the Company must continue to improve
its present information security products in order to remain competitive.


<PAGE>

         In 1999 and 1998, research and development expenses were $2,282,000 and
$1,673,000, respectively. The Company expects that research and development
expenses in 2000 will exceed $2,500,000.

Manufacturing

         The Company's in-house manufacturing capabilities include
microelectronic assembly, plastic injection molding, automated surface mount
assembly, and general electronic assembly. The Company also utilizes independent
subcontractors from time to time to perform certain manufacturing functions. The
Company provides a 90-day warranty on domestic sales, a 180-day warranty on
sales to its international distributors to cover the longer shelf life of the
Company's products, and a 180-day warranty on sales to the government.

         In an effort to more efficiently produce products, to reduce product
costs, and to increase its manufacturing flexibility, the Company intends to
continue to improve certain manufacturing processes and add capital equipment to
its manufacturing operations. While the Company believes that these steps will
provide a greater level of control over, and flexibility in, its manufacturing
processes, there are no assurances that the Company's ability to produce
products and to meet required delivery schedules will be sufficiently improved
to meet the demands created by increased sales and more complex manufacturing
processes.

Sources of Supply

         The Company purchases a microprocessor, with its proprietary operating
system masked into the chip, from a single source supplier. The Company intends
to continue purchasing microprocessors from this supplier during 2000 but will
continue to evaluate alternative sources of supply.

         Due to the unique nature of these cryptographic microprocessors, there
are currently a limited number of alternative sources of supply and, due to
different operating systems and other characteristics, one supplier's
microprocessors are not easily interchanged with another. Should the present
source of supply become inadequate or inferior to other offerings in the future
or should it experience unforeseen issues, the Company will be required to incur
a significant cost and possibly experience a gap in supply to switch to a new
supplier.

         The Company has several qualified sources from which to purchase
printed circuit boards and electronic components for most of its standard
portable memory devices. The components for the Company's products are, in
general, available from multiple suppliers. Many of the plastic components are
molded on the Company's in-house molding equipment or suppliers' molding
equipment using Company-owned tooling.

         The Company purchases integrated circuits primarily through nationwide
multivendor distributors. If, for any reason, the Company would have to cancel
or reduce a particular integrated circuit order, it might thereafter have to pay
a higher price for the integrated circuits. Since general economic conditions
have an effect on the supply and cost of integrated circuits, there is no
guarantee that the Company will be able to obtain adequate quantities of
integrated circuits to meet all of its production needs during periods of short
supply.


<PAGE>

Significant Customer

         The Company sells its electronic products to a number of commercial
original equipment manufacturers and other customers, including governmental
entities. At this time, the Company is not dependent on any one customer or few
customers, except for the United States government, the loss of which would have
a material adverse effect on its business.

Marketing

         General. While there appears to be a broad range of applications and
potential customers for portable memory devices, no single application group has
evidenced strong, long-term growth potential. The diversity of potential
applications has made it difficult for the Company to focus its limited
marketing resources. In 1998, sales to EP customers decreased to $5,241,000, and
in 1999 they decreased to $4,550,000. As sales of the new system-level products
come on line, the Company believes that EP sales may increase in 2000.

         ISS products for the information security marketplace were introduced
in 1997 and resulted in revenue of $629,000 during 1998 and $1,316,000 during
1999. In 2000, the Company expects revenue from these products to increase
significantly as additional pilot programs are commenced, certain customers
convert into production mode and the Company signs additional licensing
agreements. As with any new product line, revenue will depend on customer
acceptance, the extent of which is difficult to assess at this time.

         Markets for Datakey Products. Datakey markets and sells its EP and ISS
products through a combination of direct sales representatives, dealers,
distributors and agents who are distinctly focused on selling either the EP
products or the ISS products but not both. In addition, both business units have
a number of business relationships and alliances with companies that integrate
Datakey's products into their own product offerings or act as a referral source
and/or reseller.

         Sales in the United States are generally conducted through direct sales
representatives. International sales are generally conducted through
distributors or agents. The Company currently has a number of distributors in
Europe, Asia, Australia, New Zealand, and South America and plans to add more
international distributors as appropriate to serve those markets. In 1999 and
1998, sales to domestic customers and the corresponding percentage of total
revenue, were approximately $4,216,000 (72%) and $4,279,000 (73%), respectively.
Sales to international customers, and the corresponding percentage of total
revenue, were approximately $1,630,000 (28%) and $1,591,000 (27%), respectively.

Backlog

         As of March 3, 2000, the Company had an order backlog totaling
approximately $2,015,000. Although the orders generally contain scheduled
shipment dates, they may be accelerated, delayed or canceled at the customer's
request. The Company does not believe that the current backlog is necessarily
indicative of future backlog levels.

Competition

         Electronic Products. The Company's primary competition for electronic
products sold to original equipment manufacturers is presently, and is expected
to remain, conventional portable information systems, such as keys and cards,
and more advanced portable information systems including those in the familiar
credit card format, such as "smart cards," Personal Computer Memory Card

<PAGE>

Industry Association (PCMCIA) cards, magnetic stripe cards, bar-code cards and
laser technology cards. The Company's products, when used as a portable data
base, may also compete with centralized data base systems. Many of the
manufacturers of these portable information devices and systems are large,
well-established companies.

         A number of European and Japanese firms continue to develop and refine
the smart card technologies. Some of these companies have established branch
offices in the United States to explore the United States market. To date, the
smart card has been used primarily in Europe, where it has been implemented
extensively in prepaid telephone systems and more recently in loyalty programs
and various cashless vending applications. In the United States, smart cards are
currently being used mainly in field trial environments. Although the Company
does not have complete information about the status of these trials, the Company
believes that, in time, the smart card will be successfully developed and could
become a competitor, especially in those markets which have a history of using a
card or a preference for card-type devices.

         Memory cards, such as PCMCIA standard cards, are functionally
equivalent to the Company's portable memory devices in that they utilize
semiconductor memory in card-shaped devices made of plastic. Memory cards
generally have larger memory capacities than the devices currently offered by
the Company and historically incorporated volatile, battery-backed memory
elements. More recently, nonvolatile (principally "Flash Memory") memory
elements which do not require battery backup have become more prominent. They
are used in such applications as laser printer fonts, instrumentation,
electronic lettering machines and fax/modems, and are also used as replacements
or "add ons" to diskettes and hard drives for data storage in certain desktop,
notebook and smaller portable computers.

         Magnetic stripe cards are relatively inexpensive and are used
extensively in the access control industry and in the banking and credit card
industries. These markets are not priority markets for the Company's portable
information devices. Magnetic stripe cards are not conveniently updated, have
limited storage capacity and generally have a useful life of one or two years.
As a result, the Company believes its products are technologically superior and
may be more cost-effective for applications requiring more complex technologies.

         Other portable memory devices, including one in a "button" form and
others in shapes similar to the Data Key, are becoming more common in the
marketplace. Many of these competing devices utilize similar semiconductor
components and electronic interfaces. The Company expects competition from these
alternative devices to continue in the future.

         Another technology utilizes a strip of reflective material which is
laminated into a card. Information is inscribed on this material through use of
a laser beam. Since these cards can contain several million bits of information,
the Company believes that this technology will be a competitor in portable
information markets where very large information storage capacities are required
and instantaneous management of information is not essential.

         The Company's ability to compete in the portable information market
will depend primarily on its ability to demonstrate superior product performance
at cost-effective prices and on the enhanced features of its system which make
it more effective than competing systems.

         Information Security Solutions. Datakey currently offers token-based
(smart card, smart key) information security solutions which are primarily
utilized in encryption for electronic mail privacy, private and secure file
transfer and digital signatures for electronic document authentication. The
Company is continuing a significant product development effort to expand the
applications and ease-of-use of its products and systems.
See "Products--Information Security Solutions."


<PAGE>

         Competition in the information security business is varied with
companies offering hardware solutions, software solutions and combinations of
hardware and software solutions. As awareness for security on the Internet,
company intranets and on other local area networks has increased over the past
few years, many companies have introduced software and/or hardware based
products to provide security. These products range from software-based password
only systems to firewalls, which may be very sophisticated. Other applications
are using hand held hardware devices, commonly referred to as tokens, to provide
access to networks and, in some cases, use encryption and digital signatures to
further secure networks.

         The Company's advanced information security products, some of which are
released and some of which are currently in development, are based upon a smart
card or smart key and utilize encryption and digital signatures. They also
include extensive software to make the system user-friendly and seamless with
common desktop software packages. The Company feels this will provide a unique
combination of advanced security features at a reasonable selling price. There
are several companies operating in this highly competitive and rapidly changing
marketplace, however, and many of such companies have strong name recognition
and vast financial resources. The Company believes it can compete on the basis
of its unique design and ease of use. The initial reception to the Company's
products in the marketplace, beginning in late 1997, has been encouraging and
sales of evaluation units and units for pilot programs have been progressing
very well. There are no assurances, however, that the existing and future
products will, in the long term, be accepted in the marketplace.

Patents and Trademarks

         The Company has been granted several patents by the United States
Patent and Trademark Office relative to the Data Key, its key interface and its
overall portable information device technology. The Company has sought and will,
when appropriate, continue to seek patent protection in several foreign
countries. The federal registration of the Datakey trademark was approved in
1985. In an industry characterized by rapid technological change, the Company
believes that the knowledge, experience and creativity of its employees will
prove to be more important than patent protection.

Employees

         As of March 1, 2000, the Company employs 53 full-time employees, 12 of
whom are involved in manufacturing, 3 in materials handling, 1 in quality
assurance, 15 in engineering, 13 in marketing/sales and 9 in general and
administrative areas. In addition, the Company uses contract labor during peak
production times and for major projects. The Company's employees are not subject
to a collective bargaining agreement, and the Company believes that its employee
relations are good.

Forward Looking Statements

Certain statements made in this Form 10-KSB, which are summarized here, are
forward-looking statements that involve risk and uncertainties, and actual
results may be materially different. Factors that could cause actual results to
differ include, but are not limited to, those identified:

o    The expectations that Datakey in 2000 will release SignaSURE ESS, SignaSURE
     Private Access, new versions of SignaSURE CIP and new system-level
     electronic products are subject to the risk of unanticipated problems or
     delays in development and depends upon market acceptance and demand, as
     well as other general market conditions and competitive conditions within
     this market, including the introduction of products by competitors.

<PAGE>

o    The expectation that commercial EP sales may increase in 2000 depends on
     acceptance by new customers identified by the Company's sales
     representatives, as well as other general market conditions and competitive
     conditions.
o    The expectation that revenues from ISS products will increase significantly
     depends on the ability of the Company's sales force to commence additional
     pilot programs with new customers, the success of current and future pilot
     programs and the resulting customer interest in converting to production
     mode, as well as the Company's success in securing additional licensing
     agreements.

ITEM 2.  DESCRIPTION OF PROPERTY

         The Company's corporate offices and manufacturing facility, located at
407 West Travelers Trail, Burnsville, Minnesota, consists of approximately
25,000 square feet. Approximately one-half of the space is used for
manufacturing and warehousing, and the balance for present and future office
space. All of this space is rented under a lease which extends through June
2004. The annualized rent expense for the space currently occupied is $170,000,
plus a portion of the operating expenses and real estate taxes.

ITEM 3.  LEGAL PROCEEDINGS

         There are no material legal proceedings pending to which the Company is
a party or of which any of its property is the subject.

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

         There were no matters submitted to a vote of security holders during
the fourth quarter of fiscal year 1999.



<PAGE>


                                     PART II

ITEM 5.           MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The Company's common stock is currently traded on the Nasdaq SmallCap
Market under the symbol DKEY. Prior to May 11, 1999, it was traded on the Nasdaq
National Market. The high and low sale prices for the common stock by quarter as
reported by Nasdaq are set forth in the following table for 1999 and 1998.

         On March 15, 2000, the Company had approximately 1,500 shareholders,
including approximately 1,200 beneficial owners. The Company has never paid
dividends on its common stock and does not plan to in the foreseeable future.

                                                       Sale Prices
                                                    High      Low
1999
   1st Quarter.................................     $5 5/8    $2
   2nd Quarter.................................     $4 3/8    $2 1/8
   3rd Quarter.................................     $3 1/2    $1 9/32
   4th Quarter.................................     $3 7/8    $1

1998
   1st Quarter.................................     $4        $2 3/4
   2nd Quarter.................................     $7 1/2    $2 5/8
   3rd Quarter.................................     $6 7/8    $2 7/8
   4th Quarter.................................     $3 3/4    $1 15/16

         On February 15, 2000, the Company completed a $4,000,000 financing. All
investors were accredited and the Company relied on Rule 506 of Regulation D for
an exemption from registration requirements. In connection with the financing,
the Company issued 800,000 shares of common stock and five-year warrants to
purchase an aggregate of 800,000 shares of the Company's common stock with an
exercise price of $5.00 per share (the "Warrants"). As part of the financing,
the parties also entered into a Registration Rights Agreement, pursuant to which
the Company agreed to file a registration statement on Form S-1 or Form S-3 by
March 27, 2000 covering the resale of shares of the Company's common stock
issued on February 11, 2000 and February 15, 2000 and issuable upon exercise of
the Warrants. The Company also paid a placement agent, Miller, Johnson & Kuehn,
Incorporated $372,100 in commissions plus accountable expenses, and issued to
such agent a warrant to purchase 80,000 shares of Company common stock at an
exercise price of $5.50 per share.

         Between January 11, 2000 and March 21, 2000, the Company sold an
aggregate of 657,000 shares of common stock for $821,250 upon the exercise of
warrants by investors who acquired the warrants in connection with a private
placement completed on June 21, 1999. On March 16, 2000, the Company sold an
aggregate of 54,052 shares of common stock for $145,940 upon the exercise of
warrants originally issued to the placement agent in connection with the private
placement completed on June 21, 1999. On March 16, 1999, the Company also sold
97,000 shares of common stock for $133,375 upon the exercise of warrants
originally issued to the placement agent in connection with a private placement
completed on October 29, 1999. For each of these issuances, the Company relied
upon Section 4(2) of the Securities Act, which provides an exemption for
transactions not involving a public offering.



<PAGE>

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

         The information required by Item 6 is incorporated by reference from
the Company's 1999 Annual Report, a portion of which is included herewith in
Exhibit 13.1 to this Report.

ITEM 7.  FINANCIAL STATEMENTS

         The following financial statements of the Company are included as part
of Exhibit 13.1 to this Report:


               Independent Auditor's Report
               Consolidated Balance Sheets as of December 31, 1999 and 1998
               Consolidated Statements of Operations for Years Ended December
                      31, 1999 and 1998
               Consolidated Statements of Stockholders' Equity for Years Ended
                      December 31, 1999 and 1998
               Consolidated Statements of Cash Flows for Years Ended December
                      31, 1999 and 1998
               Notes to Consolidated Financial Statements


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

         None.

                                    PART III

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

         The information required by Item 9 regarding the Company's directors
and executive officers is incorporated by reference to the Company's proxy
statement for its 2000 Annual Meeting of Shareholders under the captions
"Determination of Number and Election of Directors" and "Executive Officers of
the Company." The Company's proxy statement will be filed pursuant to Rule 14a-3
within 120 days after the close of the fiscal year for which this report is
filed.

         The information relating to compliance with Section 16(a) of the
Exchange Act is incorporated by reference to the Company's proxy statement for
its 2000 Annual Meeting of Shareholders under the caption "Section 16(a)
Beneficial Ownership Compliance."

ITEM 10. EXECUTIVE COMPENSATION

         The information required by Item 10 is incorporated by reference to the
Company's proxy statement for its 2000 Annual Meeting of Shareholders under the
caption "Executive Compensation."


<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required by Item 11 is incorporated by reference to the
Company's proxy statement for its 2000 Annual Meeting of Shareholders under the
caption "Security Ownership of Management and Certain Beneficial Owners."

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         None.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits

         The following exhibits are included in this report: See "Exhibit Index"
immediately following the financial statements following the signature page of
this Form 10-KSB.

         (b)      Reports on Form 8-K

         The Company filed two reports on Form 8-K, one dated October 25, 1999
announcing its financial results for the quarter ended October 2, 1999 and one
dated October 29, 1999 relating to a $1,500,000 financing and additional
issuances of securities.




<PAGE>


                                   SIGNATURES

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

Dated:  March 24, 2000                DATAKEY, INC.


                                      BY:  /s/ Carl P. Boecher
                                           Carl P. Boecher
                                           Chief Executive Officer and Director
                                           (Principal Executive Officer)

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

                                POWER OF ATTORNEY

         Each person whose signature appears below constitutes and appoints Carl
P. Boecher and Alan G. Shuler as his true and lawful attorneys-in-fact and
agents, each acting alone, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to this Annual Report on Form 10-KSB and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, acting alone, full power and authority to do and perform each and every
act and thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming said attorneys-in-fact and agents, acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.

SIGNATURES                TITLES                                   DATE

/s/ Carl P. Boecher       Chief Executive Officer and         March 24, 2000
Carl P. Boecher           Director (Principal Executive
                          Officer)

/s/ Alan G. Shuler        Vice President and Chief            March 24, 2000
Alan G. Shuler            Financial Officer (Principal
                          Financial and Accounting Officer)

/s/ Thomas R. King        Director and Secretary              March 24, 2000
Thomas R. King

/s/ Terrence W. Glarner   Director                            March 24, 2000
Terrence W. Glarner

/s/ Gary R. Holland       Chairman of the Board of            March 24, 2000
Gary R. Holland           Directors

/s/ Eugene W. Courtney    Director                            March 24, 2000
Eugene W. Courtney




<PAGE>
                                  DATAKEY, INC.

                         EXHIBIT INDEX TO ANNUAL REPORT
                                 ON FORM 10-KSB
                   For the Fiscal Year Ended December 31, 1999

Exhibit No.         Description

3.1      Restated Articles of Incorporation, as amended

3.2      Bylaws, as Amended (Incorporated by reference to Exhibit 3.2 to Form
         10-K for fiscal year ended December 31, 1988)

10.1     1987 Datakey, Inc. Stock Option Plan (Incorporated by reference to
         Exhibit 10.7 to Form 10-K for fiscal year ended December 31, 1987)*

10.2     Amendment dated March 15, 1991 to 1987 Datakey, Inc. Stock Option Plan
         (Incorporated by reference to Exhibit 10.5 to Form 10-K for fiscal year
         ended December 31, 1991)*

10.3     Amendments dated July 1, 1995 and March 19, 1996 to 1987 Datakey, Inc.
         Stock Option Plan (Incorporated by reference to Exhibit 10.5 to Form
         10-KSB for fiscal year ended December 31, 1996)*

10.4     License Agreement between CTS Corporation and the Company dated March
         9, 1988 (Incorporated by reference to Exhibit 10.8 to Form 10-K for
         fiscal year ended December 31, 1987)

10.5     Lease between the Company and Kraus-Anderson, Inc. dated June 3, 1987,
         as amended on February 10, 1988, December 23, 1988, February 13, 1992
         and April 1, 1992 (Incorporated by reference to Exhibit 10.12 to Form
         10-K for fiscal year ended December 31, 1991)

10.6     Manufacturing Agreement between Duncan Industries and the Company dated
         August 27, 1993 (Incorporated by reference to Exhibit 10.16 to Form
         10-KSB for fiscal year ended December 31, 1993)

10.7     Employment Agreement between Carl P. Boecher and the Company dated
         January 1, 1999 (Incorporated by reference to Exhibit 10.1 to Form
         10-QSB for fiscal quarter ended April 3, 1999)*

10.8     Employment Agreement between Alan G. Shuler and the Company dated
         January 1, 1999 (Incorporated by reference to Exhibit 10.2 to Form
         10-QSB for fiscal quarter ended April 3, 1999)*

10.9     Employment Agreement between Michael L. Sorensen and the Company dated
         January 1, 1999 (Incorporated by reference to Exhibit 10.3 to Form
         10-QSB for fiscal quarter ended April 3, 1999)*

10.10    1997 Management Incentive Plan, as amended March 10, 1997 (Incorporated
         by reference to Exhibit 10 to Form 10-QSB for fiscal quarter ended June
         28, 1997)*

10.11    Lease Amendment No. 5 dated December 17, 1996 to Lease between the
         Company and Kraus-Anderson, Inc. dated June 3, 1987 (Incorporated by
         reference to Exhibit 10.22 to Form 10-KSB for fiscal year ended
         December 31, 1996)


<PAGE>

10.12    1997 Stock Option Plan (Incorporated by reference to Exhibit 10.15 to
         Form 10-KSB for fiscal year ended December 31, 1997)*

10.13    Forms of Incentive and Nonqualified Stock Option Agreements under 1997
         Stock Option Plan (Incorporated by reference to Exhibit 10.16 to Form
         10-KSB for fiscal year ended December 31, 1997)*

10.14    Lease Extension and Expansion Agreement between the Company and
         Kraus-Anderson, Incorporated dated April 19, 1999.

10.15    Employment Agreement between Timothy Russell and the Company dated
         August 16, 1999*

13.1     Portions of 1999 Annual Report

21.1     Subsidiaries of the Company (Incorporated by reference to Exhibit 21.1
         to Form 10-KSB for fiscal year ended December 31, 1994)

23.1     Independent Accountant's Consent

24.1     Power of attorney for Carl P. Boecher, Alan G. Shuler, Thomas R. King,
         Terrence W. Glarner, Gary R. Holland, Eugene W. Courtney (included on
         the signature page of this Form 10-KSB)

27       Financial Data Schedule (filed with electronic version only)

* Designates a management contract or compensatory plan or arrangement.