SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                 FORM 10-KSB/A-1
                                  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, 1997

                           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: $5,977,464.

     The  aggregate  market  value of the voting  stock  (Common  Stock) held by
non-affiliates was approximately $6,529,018 based upon the closing sale price of
the Issuer's Common Stock on March 13, 1998.

     As of March 13, 1998,  there were 2,887,235  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, 1997 (the
"1997 Annual Report").

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



<PAGE>


                                    PART III

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

Directors

         The names of the  directors of the Company and other  information  with
respect to the directors are set forth below.

<TABLE>
<CAPTION>
                                                                               
NAME                              PRINCIPAL OCCUPATION                         DIRECTOR SINCE         AGE
<S>                               <S>                                               <C>               <C>
Carl P. Boecher                   President and Chief Executive Officer of          1997              55
                                  the Company
Gary R. Holland                   General Manager of Fargo Electronics              1995              56
John H. Underwood                 General Manager Professional Technologies         1983              58
Terrence W. Glarner               President of West Concord Ventures, Inc.          1992              55
Thomas R. King                    Shareholder of Fredrikson & Byron, P.A.,          1980              57
                                  Attorneys at Law
Eugene W. Courtney                President and Chief Executive Officer of          1995              62
                                  HEI, Inc.
</TABLE>

         Mr. Boecher has served as President and Chief Executive  Officer of the
Company since  December  1996. Mr. Boecher served as Vice President of Marketing
and Sales of the Company from January 1995 until December 1996. From May 1990 to
November  1994,  Mr.  Boecher  served as Senior  Vice  President  and  Executive
Director  of  Business  Development  of DRS  Military  Systems,  a  division  of
Diagnostic/Retrieval  Systems  in  Oakland,  New  Jersey,  a  supplier  of  high
technology    optical,    data    storage,    processing    and    display   and
simulation/stimulation  systems and  products.  From 1971 to 1990,  Mr.  Boecher
served in several  marketing  positions  with the  Defense  Systems  Division of
Unisys  Corporation,  a  supplier  of  data  processing  systems,  products  and
services,  in St.  Paul,  Minnesota,  most  recently  holding  the  position  of
Executive Director, Product Marketing.

         Mr.  Holland  has served as General  Manager  of Fargo  Electronics,  a
company that manufactures photo card equipment and products and provides related
services  since June 1997.  In addition,  Mr.  Holland has  provided  consulting
services as President of Decision  Processes  International  of Minnesota,  Inc.
since  February 1996 and as the Managing  Partner of Holland & Associates  since
June 1992.  From 1982 until 1992, Mr. Holland was President and Chief  Executive
Officer of  DataCard  Corporation,  a  manufacturer  of credit  card  equipment,
products and services. Mr. Holland also serves as a director of Check Technology
Corporation.

         Mr.   Underwood   has  served  as  General   Manager  of   Professional
Technologies,  which  provides  rapid  prototype  molding and injection  molding
services, since January 1998. Mr. Underwood served as Chief Executive Officer of
the Company from June 1983 until  December 1996 and as President  from June 1994
until December  1996.  From March 1983 to June 1983, he served as Executive Vice
President  and Chief  Operating  Officer of the  Company.  He also served as the
Company's President from July 1983 until his appointment as Chairman in December
1991,  serving as Chairman until November 1995.  Except for a few months when he
was employed by Transistor Electronics  Corporation,  Mr. Underwood was employed
for  18  years  in  various  capacities  by  Fabri-Tek,   Inc.,  an  electronics
manufacturer located in Minneapolis, Minnesota, serving most recently as general
manager of the systems division in the United States and Hong Kong.  Fabri-Tek's
systems  division  produces  core  memories  for  the  industrial  and  military
marketplace.

     Mr.  Glarner has served as  President  of West  Concord  Ventures,  Inc., a
venture  capital  firm,  since  February  1993.  Mr.  Glarner  also  serves as a
consultant to Norwest Venture  Capital  Management,  Inc., an entity  affiliated
with Norwest  Growth Fund,  Inc.  From 1976 to January  1993, he was employed by
North Star  Ventures,  Inc.,  serving as President from February 1988 to January
1993.  Prior to 1976,  Mr.  Glarner was Vice  President  of Dain  Bosworth.  Mr.
Glarner also serves as a director of FSI  International,  Inc.,  Aetrium,  Inc.,
CIMA Labs Inc. and Premis Corporation.

     Mr. King has been  engaged in the private  practice of law in  Minneapolis,
Minnesota since 1965. He is a shareholder of the law firm of Fredrikson & Byron,
P.A.,  which serves as general  counsel to the  Company.  Mr. King has served as
Secretary  to the  Company  since  1980.  Mr.  King also serves as a director of
Sunrise  Resources,  Inc., a company which provides lease  financing for capital
equipment.

         Mr.  Courtney has served as President  and Chief  Executive  Officer of
HEI,  Inc., a company which  designs and  manufactures  microelectronics,  since
1990,  and he served as HEI's  Executive  Vice  President  from 1988 to 1990. In
addition, Mr. Courtney serves as a director of HEI, Inc.


<PAGE>


Executive Officers

         The names and  positions of the executive  officers of the Company,  as
well as other information are set forth below.
<TABLE>
<CAPTION>

NAME                              POSITION WITH COMPANY                               AGE
<S>                               <S>                                                 <C>
Carl P. Boecher                   President and Chief Executive Officer               55
Alan G. Shuler                    Vice President and Chief Financial Officer          51
Michael J. Gallagher              Vice President of Software and Systems              34
                                  Engineering
Larry J. Haisting                 Vice President of Marketing and Customer            52
                                  Service
Michael L. Sorensen               Vice President and General Manager,                 52
                                  Electronic Products
</TABLE>

         See Carl P. Boecher's biography above under Directors.

         Alan G. Shuler has served as Vice President and Chief Financial Officer
of the Company since June 1992.  From August 1991 to May 1992, Mr. Shuler served
as Vice President and Chief  Financial  Officer of Astrocom  Corporation,  a St.
Paul, Minnesota manufacturer of data communication equipment.  From January 1988
through  December 1990, Mr. Shuler was Senior Vice President and Chief Financial
Officer  of  FSI  International,  Inc.,  a  Chaska,  Minnesota  manufacturer  of
semiconductor equipment.

     Michael J.  Gallagher  has served as Vice  President  of Software & Systems
Engineering  of the Company since  October  1997.  From February 1996 to October
1997, Mr.  Gallagher  served as Engineering  Manager of Custom  Applications  of
Secure Computing Corporation.  From January 1988 to February 1996, Mr. Gallagher
served as Engineering Manager of System products for Unisys Corporation.

         Larry J.  Haisting  has  served  as Vice  President  of  marketing  and
Customer  Service of the Company since October 1997, prior to which he served as
Vice President of Marketing and Sales, beginning in February 1997 when he joined
the Company.  From March 1992 to October 1996, Mr.  Haisting was employed by St.
Paul Software, Inc., a software distributor in St. Paul, Minnesota, serving most
recently as Vice President,  Marketing.  From 1990 to 1991, Mr. Haisting was the
Industry  Sales  Manager  of EDI  Solutions,  Inc.,  a software  distributor  in
Minneapolis,  Minnesota.  From  1975 to  1990,  Mr.  Haisting  was  involved  in
management and sales for several software and computer companies.

         Michael L. Sorensen  joined the Company in April 1997 as Vice President
of Operations and became Vice President and General Manager, Electronic Products
on November 1997.  From February 1995 to March 1997, Mr. Sorensen served as Vice
President  of  Operations  for  Despatch  Industries,  a custom oven and furnace
company,  prior to which he provided consulting services to Despatch,  beginning
in October 1994.  From April 1992 to September  1994, Mr. Sorensen was the Plant
Manager of J. B. Martin  Company,  Inc.,  a  manufacturer  of  three-dimensional
fabrics located in Leesville,  South Carolina. Prior to April 1992, Mr. Sorensen
served in various engineering and operations positions with United Engineers and
Constructors,  Inc.,  BASF Structural  Materials,  Inc.,  Celanese  Corporation,
Abbott Laboratories and Corning Glass Works.

ITEM 10. EXECUTIVE COMPENSATION

Summary Compensation Table

         The following table sets forth all cash compensation paid or to be paid
by the Company,  as well as certain other  compensation paid or accrued,  during
each of the  Company's  last three fiscal years to the Chief  Executive  Officer
during  fiscal 1997 and to the only other  executive  officer whose total annual
salary and bonus paid or accrued during fiscal year 1997 exceeded $100,000.
<TABLE>
<CAPTION>

                                                                            Long Term Compensation
                                                                      ------------------------------------
                                                                               Awards            Payouts
                                                                      ------------------------- ----------
                                                                      Restricted                  LTIP       All Other
Name and Principal     Fiscal                                         Stock Awards               Payouts    Compensation
                        Year           Annual Compensation                ($)      Options         ($)          ($)
Position                        Salary ($)   Bonus ($)  Other ($)                
                                            


<S>                     <C>     <C>          <C>         <C>              <C>       <C>           <C>        <C>     
Carl P. Boecher         1997    120,637         --       1,656(1)         --        15,000        --          2,698(2)
  President and Chief   1996     98,840       7,275      1,241            --        25,000        --          1,740
  Executive Officer     1995     90,721      21,889        996            --        50,000        --         13,931

Alan G. Shuler          1997    101,364         --       1,261(1)         --        10,000        --          2,586(2)
 Vice President and     1996     97,550        9,300     1,120            --          --          --          1,943
Chief                   1995     96,192          --        939            --        25,000        --            811
 Financial Officer
</TABLE>

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

(1)      Reimbursement for taxes on supplemental benefits.

(2)      Term  insurance  premium  paid by the Company and 401(K) plan  matching
         contribution.

Option Grants During 1997 Fiscal Year

         The  following  table  provides  information  regarding  stock  options
granted  during  fiscal  1997 to the named  executive  officers  in the  Summary
Compensation Table. The Company has not granted any stock appreciation rights.
<TABLE>
<CAPTION>

                                                         Percent of Total
                                Number of Shares        Options Granted to       Exercise or
                               Underlying Options           Employees            Base Price
Name                                 Granted              in Fiscal Year          Per Share       Expiration Date

<S>                                <C>                          <C>                 <C>              <C>   
Carl P. Boecher                    15,000 (1)                   6%                  $3.00            03/09/07
Alan G. Shuler                     10,000 (1)                   4%                  $3.00            03/09/07
------------------
</TABLE>



<PAGE>


(1)      The option was granted on March 10, 1997 and will become exercisable in
         full on March 10, 2002,  subject to acceleration if certain targets are
         met. The exercise price is equal to the fair market value of the common
         stock on the date of grant.

Option Exercises During 1997 Fiscal Year and Fiscal Year-End Option Values

         The following table provides information as to options exercised by the
named executive  officers in the Summary  Compensation  Table during fiscal 1997
and the number and value of options at  December  31,  1997.  The Company has no
outstanding stock appreciation rights.


<TABLE>
<CAPTION>

                                                                                                  Value of
                                                                    Number of                    Unexercised
                                                                   Unexercised                  In-the-Money
                                                                    Options at                   Options at
                                  Shares                        December 31, 1997             December 31, 1997
                                 Acquired        Value             Exercisable/                 Exercisable/
Name                           on Exercise     Realized           Unexercisable               Unexercisable(1)

<S>                                <C>            <C>         <C>                                 <C>    
Carl P. Boecher                     --             --          42,500 exercisable                 $10,625
                                                               52,500 unexercisable               $18,750

Alan G. Shuler                      --             --          56,667 exercisable                 $ 2,083
                                                               20,000 unexercisable               $ 8,750

</TABLE>


(1)      Value is calculated on the basis of the  difference  between the option
         exercise  price and $3.75,  the  closing  sale price for the  Company's
         common  stock at  December  31,  1997 as quoted on the Nasdaq  National
         Market, multiplied by the number of shares underlying the option.

Compensation of Directors

         Directors' Fees. The independent  Board members receive a $2,500 annual
retainer,  $1,000 for  attendance  at each meeting of the Board of Directors and
$500 for attendance at each committee meeting; provided,  however, that pursuant
to Mr. Holland's consulting  agreement with the Company,  such fees are not paid
to Mr. Holland during the term of such agreement. See "Related Transactions."

         Stock Option Grants to  Non-Employee  Directors.  The 1997 Stock Option
Plan  provides  for  automatic  option  grants  to each  director  who is not an
employee of the Company (a "Non-Employee  Director").  Upon initial election,  a
Non-Employee  Director  receives an automatic grant of a nonqualified  option to
purchase 15,000 shares of the common stock at an option price per share equal to
100% of the fair market value of the common stock on the date of such  election,
which option becomes  exercisable to the extent of 3,000 shares  immediately and
on each of the first four  anniversaries of the date of grant. Each Non-Employee
Director who is  re-elected as a director of the Company or whose term of office
continues  after a meeting of shareholders at which directors are elected shall,
as of the date of such  re-election or  shareholder  meeting,  automatically  be
granted an immediately exercisable  nonqualified option to purchase 3,000 shares
of the  common  stock at an option  price  per  share  equal to 100% of the fair
market value of the common stock on the date of such  re-election or shareholder
meeting. No director shall receive more than one option to purchase 3,000 shares
pursuant  to the  formula  plan in any one  fiscal  year.  All  options  granted
pursuant to these  provisions  shall  expire on the earlier of (i) three  months
after the optionee  ceases to be a director  (except by death) and (ii) ten (10)
years after the date of grant.  Notwithstanding  the foregoing,  in the event of
the death of a Non-Employee  Director,  any option granted to such  Non-Employee
Director  pursuant to this  formula plan may be exercised at any time within six
months of the death of such  Non-Employee  Director  or on the date on which the
option, by its terms expires, whichever is earlier.

Employment Contracts and Termination of Employment Arrangements

         The Company entered into a one-year employment  agreement dated January
1, 1997,  with Carl P.  Boecher,  the Company's  President  and Chief  Executive
Officer,   which  replaced  his  January  9,  1995   agreement.   The  agreement
automatically  renews for successive  one-year terms unless terminated by either
party.  The agreement has been  automatically  renewed for another one-year term
with an annual base salary of $126,000.  The agreement  provides for the payment
of a monthly car allowance of $500.  The agreement does not provide for a bonus,
but Mr. Boecher is eligible to participate in the Company's Management Incentive
Plan.  The  agreement  may be  terminated  with or  without  cause by either the
Company or Mr. Boecher upon thirty days' notice. If Mr. Boecher's  employment is
terminated  (i) by the Company  without cause or by nonrenewal of the agreement,
(ii) by death or (iii) by  disability,  he is entitled  to a  severance  payment
equal to his base monthly salary for twelve  months.  Mr. Boecher has agreed not
to compete  with the Company for a period of one (1) year after  termination  of
his employment for any reason.

         The  Company  entered  into an  employment  agreement  effective  as of
January 1, 1995 with Alan G. Shuler,  the  Company's  Vice  President  and Chief
Financial  Officer,  which  agreement  has a one-year  term which  automatically
renews for  successive  one-year  terms if a termination  notice is not given by
either party. The agreement has been automatically  renewed for another one-year
term with a $103,480 annual base salary.  The agreement provides for the payment
of a monthly car allowance of $400.  The agreement does not provide for a bonus;
however,  Mr.  Shuler is eligible to  participate  in the  Company's  Management
Incentive  Plan. The agreement may be terminated with or without cause by either
the Company or Mr. Shuler upon sixty days' notice. If Mr. Shuler's employment is
terminated  by the Company  without  cause,  he is entitled to his monthly  base
salary for six months.  If Mr. Shuler's  employment is terminated  within twelve
months of a change of control, or if he resigns within twelve months of a change
of  control  because  of  diminution  of  either  position  responsibilities  or
remuneration,  Mr. Shuler shall receive a severance  payment equal to his annual
salary in effect at the time of the change of control, payable in twelve monthly
installments.  Mr. Shuler has agreed not to compete with the Company  during his
employment  and during the time in which he is paid  severance  pursuant  to the
agreement. Mr. Shuler also agreed that, during the one-year period following the
termination of his employment,  for whatever reason,  he will not solicit any of
the Company's  employees to leave the Company and will not solicit the Company's
customers for the purpose of selling a competing product.

ITEM 11.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  following  table sets forth the number of shares of the  Company's
common stock and  convertible  preferred  stock  beneficially  owned by (i) each
director and nominee for election to the Board of Directors of the Company; (ii)
each of the named executive  officers in the Summary  Compensation  Table; (iii)
all  directors and  executive  officers as a group;  and (iv) to the best of the
Company's  knowledge,  all beneficial  owners of more than 5% of the outstanding
shares  of each  class  of the  Company's  stock as of  April  8,  1998.  Unless
otherwise  indicated,  the shareholders listed in the table have sole voting and
investment power with respect to the shares indicated.

<TABLE>
<CAPTION>
                                                                                           Convertible
                                                                                            Preferred
                                               Common Shares                                  Shares
Name (and Address of 5%                        Beneficially               Percent of       Beneficially      Percent of
Holder) or Identity of Group(1)                  Owned(2)                   Class(2)          Owned             Class

<S>                                              <C>                        <C>             <C>              <C>      
Carl P. Boecher                                   52,500 (3)                 1.8%               --               --
Gary R. Holland                                   49,700 (4)                 1.7%               --               --
John H. Underwood                                101,369 (5)                 3.4%               --               --
Terrence W. Glarner                               19,600 (6)                   *                --               --
Thomas R. King                                    15,950 (7)                   *                --               --
Eugene W. Courtney                                14,000 (8)                   *                --               --
Alan G. Shuler                                    57,667 (9)                 2.0%               --               --
Norwest Corporation                              245,600 (10)                                   --               --
Norwest Equity Partners V                        640,516 (11)               21.1%           150,000           100.0%
 Okabena Partnership K                           242,600 (12)                8.4%               --               --
Timothy A. Stepanek                              276,500 (13)(14)            9.6%               --               --
David M. Winton and                              254,500 (13)                8.8%               --               --
  Sarah H. Winton
Nathaniel S. Thayer                              200,746                     7.0%               --               --
All Directors and Executive                      326,786 (15)               10.3%               --               --
 Officers as a Group (10
 persons)
---------------------------
</TABLE>
  *      Less than 1% of the outstanding shares of common stock.

(1)      The addresses of the more than 5% holders are: Norwest  Corporation and
         Norwest  Equity   Partners  V  Norwest   Center,   Sixth  &  Marquette,
         Minneapolis,  MN 55479; Okabena Partnership K - 5140 Norwest Center, 90
         South Seventh Street,  Minneapolis,  MN 55401;  Timothy A. Stepanek and
         David M. and Sarah H. Winton - 4422 IDS Center, 80 South Eighth Street,
         Minneapolis,  MN 55402; and Nathaniel S. Thayer, 150 Main Street,  P.O.
         Box 1325, Pawtucket, RI 02862.

(2)      Under the rules of the Securities and Exchange  Commission,  shares not
         actually  outstanding are nevertheless  deemed to be beneficially owned
         by a person if such person has the right to acquire  the shares  within
         60 days.  Pursuant to such SEC rules,  shares deemed beneficially owned
         by virtue of a  person's  right to  acquire  them are also  treated  as
         outstanding  when calculating the percent of class owned by such person
         and when determining the percentage owned by a group.

(3)      Represents  52,500  shares which may be  purchased by Mr.  Boecher upon
         exercise of currently exercisable options.

(4)      Includes  49,000  shares  which may be  purchased  by Mr.  Holland upon
         exercise of  currently  exercisable  options and 700 shares held by Mr.
         Holland's wife as custodian for their daughter.

(5)      Includes  94,166  shares which may be purchased by Mr.  Underwood  upon
         exercise of currently exercisable options.

(6)      Includes  15,000  shares  which may be  purchased  by Mr.  Glarner upon
         exercise of currently exercisable options.

(7)      Includes  5,000 shares which may be purchased by Mr. King upon exercise
         of a currently exercisable option.

(8)      Represents  14,000  shares which may be purchased by Mr.  Courtney upon
         exercise of currently exercisable options.

(9)      Includes  56,667  shares  which may be  purchased  by Mr.  Shuler  upon
         exercise of currently exercisable options.

(10)     Represents  shares held by a Norwest  Bank  Minnesota,  N.A.  ("Norwest
         Bank"),  a  subsidiary  of Norwest  Corporation  ("Norwest"),  of which
         242,600  shares  are held by  Norwest  Bank as  custodian  for  Okabena
         Partnership  K  ("Okabena").  Norwest  Bank  has  voting  power  but no
         investment power over the shares it holds (see footnote (12) below with
         respect  to shares  held for  Okabena).  Norwest  disclaims  beneficial
         ownership of the shares held by Norwest Bank.  All shares are held in a
         fiduciary capacity.  The Company has relied on information contained in
         a  Schedule  13G  Amendment  filed  with the  Securities  and  Exchange
         Commission on January 30, 1998.

(11)     Includes  150,000  shares  which may be  purchased  by  Norwest  Equity
         Partners V ("Norwest Equity"), a limited  partnership,  upon conversion
         of preferred stock. Norwest Equity has sole voting and investment power
         over the shares it holds;  Itasca  Partners V, L.L.P.  is the  managing
         partner of Norwest Equity, and Daniel J. Haggerty,  John E. Lindahl and
         George J. Still Jr. are the three sole managing partners of Itasca. The
         Company has relied on  information  contained  in a Schedule  13D filed
         with the Securities and Exchange Commission on April 11, 1997.

(12)     The shares are held by  Norwest  Bank as  custodian  for  Okabena  (see
         footnote (10) above),  but Okabena has investment power over the shares
         and it has the right to intercede  and vote the shares  itself.  Kohler
         Capital Management,  Inc., a Minnesota  corporation has been engaged to
         provide portfolio management services and investment advice to Okabena,
         but it does not have  voting  power of the shares.  Okabena  Investment
         Services,  Inc. is the  Managing  Partner of  Okabena.  The Company has
         relied on information  contained in a Schedule 13D Amendment filed with
         the Securities and Exchange Commission on November 21, 1997.

(13)     Includes  104,500  shares  held by  Parsnip  River  Company,  a limited
         Partnership,  and 150,000 shares held by Bond  Investment  Partners,  a
         Limited  Partnership.  Mr. and Mrs. Winton and Mr. Stepanek are general
         partners of the limited  partnerships  and share voting and  investment
         control over the shares.

(14)     Includes  15,000  shares held by Mr.  Stepanek's  wife and children and
         7,000 shares held in a family trust.

(15)     Includes  302,333  shares  which  may be  purchased  by  the  executive
         officers and directors upon exercise of currently exercisable options.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Pursuant to a consulting  agreement  dated November 1, 1995 between the
Company  and Gary R.  Holland,  Chairman of the  Company,  which  agreement  was
terminated  on June 30, 1997,  Mr.  Holland  received an annual fee of $100,000,
payable in monthly  installments,  for providing  services to  management  for a
minimum  of six  days  during  each  four-week  period  during  the  term of the
agreement.  In  connection  with  entering the  agreement in 1995,  Mr.  Holland
received an option to purchase  35,000 shares of the  Company's  common stock at
$3.625,  the fair market  value on the date of grant,  which  option was granted
under  the  Company's  Consultant  Stock  Option  Plan.  As long as Mr.  Holland
received  compensation  pursuant  to the  terms  of the  agreement,  he was  not
eligible to receive the retainer and meeting fees paid to directors as set forth
in  "Compensation  of Directors;"  however,  he was eligible to receive  options
under the formula  plans  described  in such  section.  In  accordance  with the
agreement,  Mr.  Holland was elected as a director and  appointed as Chairman of
the Board on November  10,  1995.  Mr.  Holland  agreed not to compete  with the
Company as long as he was  providing  the Company  with  consulting  services or
serving  as  a  director  of  the  Company.  In  addition,   Decision  Processes
International  of  Minnesota,  Inc.,  a  corporation  of which Mr.  Holland is a
principal, provided consulting services to the Company for approximately $50,000
in fiscal year 1997.

         The Company and John H. Underwood,  the Company's  former President and
Chief  Executive  Officer,  entered  into a  Separation  Agreement  and  Release
("Separation  Agreement")  effective January 1, 1997. Pursuant to the Separation
Agreement, Mr. Underwood agrees that, through December 31, 1998, he will not (i)
compete with the Company,  (ii) solicit any of the Company's  employees to leave
the Company or (iii)  interfere  with the Company's  customers.  The  Separation
Agreement  provides that,  through  December 1998, Mr.  Underwood  shall receive
$12,500 each month,  the amount of his monthly base salary on December 31, 1996,
and he shall be entitled to certain other benefits,  including  participation in
the Company's health coverage plans and outplacement  fees not to exceed $6,000.
The termination dates of Mr. Underwood's stock options to purchase 16,666 shares
at $3.625 and 75,000  shares at $5.75 were  extended to February 28,  1999.  Mr.
Underwood  agreed to release  the  Company  from any and all rights and  claims,
except as provided  for in the  Separation  Agreement,  in  connection  with his
employment and/or resignation.

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/A-1.

         (b)      Reports on Form 8-K

                  No reports on Form 8-K were  filed by the  Company  during the
quarter ended December 31, 1997.



<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:  April 27, 1998             DATAKEY, INC.

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

         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:


SIGNATURES              TITLES                              DATE

/s/ Carl P. Boecher     Chief Executive Officer and         April 27, 1998
Carl P. Boecher         Director (Principal Executive
                        Officer)

/s/ Alan G. Shuler      Vice President and Chief            April 27, 1998
Alan G. Shuler          Financial Officer (Principal
                        Financial and Accounting Officer)

         *              Director and Secretary              April 27, 1998
Thomas R. King

         *              Director                            April 27, 1998
Terrence W. Glarner

         *              Chairman of the Board of            April 27, 1998
Gary R. Holland         Directors

         *              Director                            April 27, 1998
Eugene W. Courtney

         *              Director                            April 27, 1998
John H. Underwood

*/s/ Alan G. Shuler                                         April 27, 1998
Alan G. Shulter as Attorney-in-Fact
pursuant to Power of Attorney filed
with Form 10-KSB for year ended
December 31, 1997


<PAGE>




                                  DATAKEY, INC.

                         EXHIBIT INDEX TO ANNUAL REPORT
                                 ON FORM 10-KSB
                   For the Fiscal Year Ended December 31, 1997

Exhibit No.        Description

3.1      Restated  Articles  of  Incorporation,   as  amended  (Incorporated  by
         reference  to Exhibit 3.1 to Form 10-K for fiscal  year ended  December
         31, 1987)

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  Alan G.  Shuler and the  Company  dated
         January 1, 1995 (Incorporated by reference to Exhibit 10 to Form 10-QSB
         for fiscal year ended July 1, 1995)*

10.8     Consulting  Agreement  between  Gary R.  Holland and the Company  dated
         November 1, 1995  (Incorporated  by reference to Exhibit  10.19 to Form
         10-KSB for fiscal year ended December 31, 1995)*

10.9     Amendment dated February 11, 1997 to Consulting  Agreement between Gary
         R.  Holland and the Company  dated  November 1, 1995  (Incorporated  by
         reference  to  Exhibit  10.18 to Form  10-KSB  for  fiscal  year  ended
         December 31, 1996)*

10.10    Employment  Agreement  between  Carl P.  Boecher and the Company  dated
         January 1, 1997  (Incorporated  by reference  to Exhibit  10.19 to Form
         10-KSB for fiscal year ended December 31, 1996)*

10.11    Separation  Agreement  and Release  between John H.  Underwood  and the
         Company  dated  January 1, 1997  (Incorporated  by reference to Exhibit
         10.20 to Form 10-KSB for fiscal year ended December 31, 1996)*

10.12    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)*

10.13    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)

10.14**  Employment  Agreement between Michael L. Sorensen and the Company dated
         April 16, 1997*

10.15**  1997 Stock Option Plan*

10.16**  Forms of Incentive and Nonqualified  Stock Option Agreements under 1997
         Stock Option Plan*

13.1     Portions of 1997 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 Auditors' 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 and John H.
         Underwood (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.
** Previously filed with original Form 10-KSB for year ended December 31, 1997.