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, 2000 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: 
  (952) 890-6850Securities
  registered pursuant to Section 12(b) of the Act:
  NONESecurities
  registered pursuant to Section 12(g) of the Act:
  Common Stock, par
  value $.05 pershare(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: $7,407,000, which represents $3,608,000 for
continuing operations and $3,799,000 for discontinued operations. The aggregate market
value of the voting stock (Common Stock) held by non-affiliates was
approximately $19,233,000  based upon
the closing sale price of the Issuers Common Stock on March 20, 2001. As of March 20,
2001, there were 9,885,239 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, 2000 (the 2000 Annual Report).  Portions of the Companys definitive Proxy
Statement for its Annual Meeting of Shareholders to be held on May 31, 2001 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 ]   PART
I



ITEM 1.DESCRIPTION OF BUSINESS

General

Datakey, Inc. was incorporated under the laws of the State
of Minnesota in 1976 under the name The Systems Group, Inc.  In 1980, we changed our name to Datakey,
Inc.Datakey operates two business segments.  Our Information Security Solutions (ISS)
business segment provides products and systems for information security markets
that enable user authentication, secure data exchange and information
validation.  Our Electronic Products
(EP) business segment 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 rugged
environments.  As is explained further
in this report, we intend to divest EP in 2001 and that segment is, therefore,
reflected as discontinued operations in the financial statements contained in
this report.

From 1976 to 1995, Datakey was
primarily a supplier of electronic memory keys and custom tokens used for data
storage in a variety of small niche applications.  This business segment is known today as Electronic Products.  EP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.  EPs current
products utilize semiconductor technology to provide a storage device more
versatile and rugged than conventional portable information products.  EPs current product line of portable memory
devices and associated interface products provide up to 16,384,000 bits of data
storage which are used as OEM devices in a wide range of applications including
communications security, computer security, facility security, vending and
process control.  EP has recently
developed a line of Cashless Vending and Access Control products which we first
introduced to market in 2000.  On
February 22, 2001, we announced that we intend to strategically focus our
business on opportunities for the ISS business, and plan to divest our EP
business.  We have already begun to
significantly cut back EP operations. 
We also eliminated 11 positions in the EP business segment.

In 1996, Datakey made a strategic
decision to utilize its public key cryptographic smart card and reader
technology founded in 1991 to provide information systems that allow secure use
of intranets, extranets and the Internet for business-to-business electronic
commercea market with explosive growth potential.  In September 1997 we introduced a family of end-user systems
under the SignaSURE® trademark using smart cards or smart keys that provide
advanced information security utilizing public key digital signatures and
encryption.  These systems incorporate
both hardware and software to provide a higher level of security available from
software only solutions.

Datakey is located at 407
West Travelers Trail in Burnsville, Minnesota, a suburb of Minneapolis.  We also maintain regional sales offices in
the metropolitan areas of New York City, Washington, D.C. and Frankfurt,
Germany that support the information security business.



Product and Service Description

EP business segment(DISCONTINUED
OPERATIONS):

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.Access
Devices.Access devices
are elements 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.Interface
Modules and Subsystems.The interface is
the electronics control module between the access device and a customers
processor-based equipment.  This module
is used with our serial communication key and contains all the necessary
electronics to control information within the key and to coordinate the
information requests of the host equipmentISS business segment (CONTINUING OPERATIONS):

For the past five years, Datakey has been developing token-based
(smart card and other smart token) products that provide advanced information
security solutions for the problems of organizations, worldwide.  The first of a family of products known by
the SignaSUREâtrademark was introduced
in September 1997 and additional versions have been released on a regular
basis. In addition to the current versions, we
expect to launch new versions of SignaSURE in 2001 and beyond.SignaSURE Product
Components:Smart card-based Operating System and Security
Application Software.Datakey developed its own smart card operating system (OS) specifically
designed for information security.  It
manages all security functions performed in the smart card.  The OS, known as DKCCOS (Datakey chip card
operating system), including public key security application software, was
first released in 1998 as the OS for our SignaSURE Model 320 smart card.  The Model 320 was the first PKI smart card
in the world to use 1024 bit keys, to generate public key pairs on the card, the
first with 8K Bytes of storage for data and programs, and the first PKI card
with an extensible operating system.  In
1999, Datakey released its Model 330 smart card which increased key length to
2048 bits, increased storage to 32K Bytes, added applications for processing
DES and Elliptic Curve algorithm applications, and passed FIPS 140-1 level 2
certificationa requirement to operate in the government market and a desirable
for financial service customers.  This
card is a technology leader in the industry.Smart card readers.Although Datakey initially designed and
manufactured its own reader, todays readers are primarily purchased
components.Client based security interface software.Datakey
software, resident on the desktop or laptop, is the interface between the smart
card and security application program. 
It allows private and secret key functions previously performed in the
software application to be done much more securely in the smart card. The first
version, named SignaSURE CIP 1.0, was introduced in 1997. The current CIP 4.x
version is recognized as the leader in technology and stability today .  It features a multi-threaded application
interface and can operate with multiple applications in a single session.  It supports PC/SC compatible readers, both
PKCS #11 and Microsoft CAPI standard cryptographic interfaces and Windows 2000
security features.SignaSURE
Product Family:SignaSURE
CIP (Cryptographic Interface Provider).  Password-based software programs that implement public-key
cryptography technology for information security offer easier operation and
improved data integrity over older symmetric cryptography software.  Password-based security, however, is
insufficient for public networks with connections, such as extranets and the
Internet, outside of the organization. 
Datakeys SignaSURE CIP allows enterprise users to upgrade their
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 (CAPI). 
It offers load, plug and play convenience for strong information
security.  SignaSURE CIP includes three
elements:         A user-unique smart card
or smart key token that holds critical information and performs the
cryptographic functions necessary for information security         A companion reader/writer
that plugs into a computers serial port, PCMCIA port, USB port or floppy disk
drive         Software that is loaded
once into the workstation and interfaces to the application program.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
SCC (Security Control Center).Smart cards need to
be initialized and personalized with unique user and enterprise data before
they are issued.  In addition, many
enterprises want to hold a copy of the keys used for encryption so they can
recover encrypted data in an emergency. 
SignaSURE SCC provides these features and provides an audit trail for
these actions.The following chart
shows Datakeys SignaSURE products:



SignaSURE ProductAttribute
  
  CIP
  DTK
  SCCCustomer
  Organizational End-User
  X
  
  XSoftware Developer
  
  XSystem Type
  Integrated Solution
  
  
  XAdd-on Subsystem
  XComponent
  
  XApplication
  Information Security
  X
  
  XToken Integration
  X
  XHardware
  Datakey Smart Token
  X
  XDatakey Reader/Writer
  X
  XSoftware
  Security SolutionToken Interface
  X
  XOEM Private Label Products.  Datakey also provides its SignaSURE family
of information security products to OEMs under their own private label.

OEM
Technology Licensing.In
addition to selling products, Datakey licenses its Smart Card Operating System
and interface software to OEMs for incorporation into their products.  Current licensees include Rainbow
Technologies (iKey 2000, iKey 2032), and Certicom (SC 500).  Licenses are sold on a per seat basis with
revenue recognized at time of delivery to the customer, provided that Datakey
has no significant cost or obligation beyond the original authorization to the
silicon supplier.

Manufacturing

The Companys in-house manufacturing
capabilities include microelectronic assembly, plastic injection molding,
automated surface mount assembly, and general electronic assembly.  During 2001, while the EP business segment
is being divested, we intend to continue to manufacture the EP product line on
a limited basis, but we are beginning a transition to outsource the manufacture
of the ISS product line so that upon discontinuation of EP the manufacturing of
the ISS products will continue without interruption.

Sources of Supply

The Company purchases a
microprocessor, with its proprietary operating system masked into the chip,
from a single source supplier.  The
Company is currently qualifying a second supplier of the microprocessor to
reduce the dependency on one supplier.

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 its second supplier be inadequate, 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.

Significant
Customer



Sales to one of the
Companys ISS customers totaled approximately $1,437,000, or 19% of total sales
during the year ended December 31, 2000.

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 and 2000 they decreased to
$4,550,000 and 3,799,000, respectively

ISS products for the information
security marketplace were introduced in 1997 and resulted in revenue of
$629,000 during 1998, $1,316,000 during 1999 and $3,608,000 during 2000.  In 2001, 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, as well as other general business
and economic conditions.

Marketing Strategy.The
marketing of our information security products employs five key strategies:

   Seek recognition as a major player in the public key token-based
information security market. 
We participate in industry trade shows with exhibits and product
demonstrations.  Our Technical Services
personnel write white papers and articles for technical trade magazines and
other periodicals.  We hold regular
press conferences at conferences and trade shows that are intended to publicize
our products and organization.  Direct
mail is used as a follow-up method for trade shows so we keep our name and
products in front of customers and prospects. 
Our sales and marketing staff are members of key trade associations and
participate in meetings with product and technology presentations.  Our products are tested by independent
testing laboratories hosted by media publications and the results published. We
also maintain a significant web presence that describes Datakey and our
products.



   Develop products in concert with customer needs.  Before development is started, the product
description is discussed with our current customer base and prospects to
determine its future acceptability in the marketplace.  We also host customer feedback sessions to
better determine their needs and our product enhancements.

   Emphasize Datakeys advanced technology, service and
support discriminators.  Our
customer presentations, product literature and proposal responses are designed
to highlight those functions and features that distinguish Datakey from our
competitors.  Our technology white
papers, useful for those prospects in the early stages of product selection,
also emphasize those capabilities unique to our products.  We also use satisfied customers and their
testimonials as references for new prospects.

   Partner with PKI suppliers and larger system integrators as additional
delivery channels.

   Offer Datakey technology through licenses to non-competitive security
solution providers

Pricing
Strategy.Datakey
token-based information security products are priced competitively with
software information security products providing our customers with high
security at little additional price.  As
we expand our product line with additional software application modules that
work with our smart cards and keys, we expect to improve our gross margins over
time.  As we become better known in the
information security marketplace, we intend to charge our customers for
pre-sales consultation which today is offered free.  We offer service subscriptions and upgrades that represent a
substantial profit potential to Datakey.

Promotion
Strategy.  Datakey uses a variety of
promotional vehicles to reach new customers. 
A summary of our promotional strategy follows:

1. Sales Literature  Datakey generates a variety of
product and corporate literature pieces, each written for an intended audience.
Our literature is distributed at events, sent as follow up to product
information requests, sent to interested investors and posted on our web site.2. Direct Mail  Datakey implements direct mail programs
around events throughout the year as well as focused mailings to our target
markets.3. Trade Shows and Seminars  - Industry events are an effective way for Datakey to generate
sales leads.  Information security and
target market trade shows, as well as joint seminars with our technology
partners provide our sales force with highly qualified leads.4. Public Relations
Datakey relies on professional public relations firms with experience in the
networking and information security markets to work with the press and industry
analysts to build brand awareness for Datakey products.5. Web Site  the Datakey web site is becoming a strong
vehicle for quickly disseminating product information to prospects as well as a
lead generation tool by utilizing various methods to capture information about
our web visitors.Worldwide
Distribution Strategy.Datakey
uses a combination of a direct sales force and indirect sales channels to
distribute its ISS products.  Our direct
sales force currently consists of four sales professionals covering the North
American market, a European office that sells direct and manages our European
reseller channel, and a channel sales manager that establishes worldwide
product representation through resellers and distributors specializing in
information security technologies, and manages our strategic partner
relationships.  We are in the process of
hiring additional sales personnel for North America and the Asia/Pacific
markets.

Sales in North
America are generally conducted through direct sales representatives.  The Company has a number of distributors in
Europe, Australia and New Zealand and plans to add more international
distributors as appropriate to serve those markets.  In 2000 and 1999, sales to domestic customers and the
corresponding percentage of total revenue, were approximately $5,814,000 (78%)
and $4,236,000 (72%), respectively. 
Sales to international customers, and the corresponding percentage of
total revenue, were approximately $1,593,000 (22%) and $1,630,000 (28%),
respectively.

Backlog

As of March 2, 2001, the
Company had an order backlog totaling approximately $2,042,000.  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 has been
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 Industry
Association (PCMCIA) cards, magnetic stripe cards, bar-code cards and laser
technology cards.  The Companys
products, when used as a portable database, may also compete with centralized
database systems.  Many of the
manufacturers of these portable information devices and systems are large,
well-established companies.

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.

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.  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.

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.

Research and Development

In 2000 and 1999, research and
development expenses in continuing operations were $2,003,000 and $1,632,000,
respectively.  The Company expects that
research and development expenses in 2001 will increase by about 40% as the
Company plans to hire 6 new engineers in the software development and technical
support areas.

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 15, 2001, the Company
employs 53 full-time employees, 12 of whom are involved in manufacturing, three
in materials handling, one 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:

         The expectations that in 2001 Datakey will release
new versions of SignaSURE CIP are subject to the risk of unanticipated problems
or delays in development and depend 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.

         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 including approximately
16,000 square feet that is currently occupied by the EP business segment that
is being discontinued.  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 2000.

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 2000 and 1999.

On March 15, 2001, the Company had
approximately 4,500 shareholders, including approximately 4,200 beneficial
owners.  The Company has never paid
dividends on its common stock and does not plan to in the foreseeable future.

Sale PricesHigh
  Low20001st Quarter
  $18
  $3 9/322nd Quarter
  $9 1/2
  $2 11/163rd Quarter
  $10 1/4
  $4 3/44th Quarter
  $8 1/2
  $219991st Quarter
  $5 5/8
  $22nd Quarter
  $4 3/8
  $2 1/83rd Quarter
  $3 1/2
  $1 9/324th Quarter
  $3 7/8
  $1

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 2000 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
Balance Sheets as of December 31, 2000 and 1999
Statements of Operations for Years Ended December 31,  2000 and 1999
Statements of Stockholders Equity for Years Ended December 31, 2000 and 1999
Statements of Cash Flows for Years Ended December 31, 2000 and 1999
Notes to Financial StatementsITEM 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 2001 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 2001 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 2001 Annual
Meeting of Shareholders under the caption Executive Compensation.

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 2001 Annual Meeting of Shareholders under the caption Security Ownership
of Management and Certain Beneficial Owners.

ITEM
12.CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS

The
information required by Item 11 is incorporated by reference to the Companys
proxy statement for its 2001 Annual Meeting of Shareholders under the caption
Certain Relationships and Related Transactions.

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

Datakey filed no reports on Form 8-K
during the fourth quarter of 2000, but it did file a Form 8-K dated February
20, 2001 announcing (i) completion of a $4,800,000 private placement financing;
(ii) its strategic focus on ISS and divestiture of EP and (iii) fourth quarter
and year 2000 financial results.



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
  29, 2001
  DATAKEY, INC.BY:
  /s/ Carl P. BoecherCarl P. BoecherChief 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 29, 2001Carl P. Boecher
  Director (Principal ExecutiveOfficer)/s/ Alan G. Shuler
  Vice President and Chief
  March 29, 2001Alan G. Shuler
  Financial Officer (PrincipalFinancial and Accounting Officer)/s/ Thomas R. King
  Director and Secretary
  March 29, 2001Thomas R. King/s/ Terrence W. Glarner
  Director
  March 29, 2001Terrence W. Glarner/s/ Gary R. Holland
  Chairman of the Board of
  March 29, 2001Gary R. Holland
  Directors/s/ Eugene W. Courtney
  Director
  March 29, 2001Eugene W. Courtney


DATAKEY, INC. EXHIBIT INDEX TO ANNUAL REPORT
ON FORM 10-KSB
For the Fiscal Year Ended December 31, 2000  Exhibit No.
  Description3.1
  Restated Articles of
  Incorporation, as amended3.2
  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
  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)10.5
  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)10.6
  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)*10.7
  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)*10.8
  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)*10.9
  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)*10.10
  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)10.11
  1997 Stock Option Plan
  (Incorporated by reference to Exhibit 10.15 to Form 10-KSB for fiscal year
  ended December 31, 1997)*10.12
  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)*10.13
  Lease Extension and
  Expansion Agreement between the Company and Kraus-Anderson, Incorporated
  dated April 19, 1999 (Incorporated by reference to Exhibit 10.14 to Form
  10-KSB for fiscal year ended December 31, 1999)10.14
  Employment Agreement
  between Timothy Russell and the Company dated August 16, 1999 (Incorporated
  by reference to Exhibit 10.15 to Form 10-KSB for fiscal year ended December
  31, 1999)*10.15
  Employment Agreement
  between Colleen M. Kulhanek and the Company dated April 1, 2000 (Incorporated
  by reference to Exhibit 10.1 to Form 10-QSB for fiscal quarter ended April 1,
  2000)*10.16
  Management Incentive
  Bonus Plan for 2000 (Incorporated by reference to Exhibit 10.2 to Form 10-QSB
  for fiscal quarter ended April 1, 2000)*10.17
  2001 Executive Incentive
  Plan*10.18
  Loan Agreement dated
  January 23, 2001 between the Company and Ray Lipkin and Unsecured Promissory
  Note dated January 26, 2001 in the amount of $500,00013.1
  Portions of 2000 Annual
  Report21.1
  Subsidiaries of the
  Company (Incorporated by reference to Exhibit 21.1 to Form 10-KSB for fiscal
  year ended December 31, 1994)23.1
  Consent of Independent
  Accountant24.1
  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) * Designates a management contract or compensatory plan
or arrangement.