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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, 2001

Commission file No. 0-11447

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

|                                                   |  |                                                
|-------------------------------------------------- |  | -----------------------------------------------
|MINNESOTA
(State of incorporation or organization) |  | 41-1291472
(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) 890-6850                                        
|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 IN BALLOT BOX NO OPEN BALLOT BOX

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. OPEN BALLOT BOX

Issuers revenues for its most recent fiscal year: $10,240,000, which
represents $7,815,000 for continuing operations and $2,425,000 for discontinued
operations.

The aggregate market value of the voting stock (Common Stock) held by
non-affiliates was approximately $43,867,942 based upon the closing sale price
of the Issuers Common Stock on March 19, 2002.

As of March 19, 2002, there were 10,082,750 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, 2001
(the 2001 Annual Report). Portions of the Companys definitive Proxy
Statement for its Annual Meeting of Shareholders to be held on May 22, 2002 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 OPEN BALLOT BOX NO X IN BALLOT BOX





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TABLE OF CONTENTS



|                                              |  |  |  |  |  |  |  | 
|--------------------------------------------- |  |  |  |  |  |  |  | 
|PART I                                       
|PART II                                      
|PART III                                     
|SIGNATURES                                   
|POWER OF ATTORNEY                            
|EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-KSB
|2002 Executive Incentive Plan                
|Portions of 2001 Annual Report               
|Consent of Independent Accountant            



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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. Through July 2001, Datakey operated 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, the assets of which were sold in August 2001, provided 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, the EP segment is 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
developed a line of Cashless Vending and Access Control products which we first
introduced in 2000.

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 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 than is available from software only solutions.

On February 22, 2001, we announced our intention to strategically focus
our business on opportunities for the ISS business, and our plan to phase down
or divest our EP business. On August 3, 2001, Datakey, Inc. completed the sale
of certain operating assets of its EP business segment pursuant to an Asset
Acquisition Agreement dated August 3, 2001 between Datakey and Datakey
Electronics, Inc., an Ohio corporation, f/k/a Jennings Acquisition, Inc.
(Buyer).

In the sale of assets transaction, Datakey sold certain EP assets,
including inventory, fixed assets, patents and certain other intellectual
property required to operate the EP business segment, as well as computer
systems and certain customer contracts relating to the EP business. Datakey
retained all the EP accounts receivable and certain key customer contracts that
are expected to ship during 2002. In exchange for the sale of such assets,
Datakey received cash in the amount of $550,000, and Datakey subleased the
former EP space to Buyer for 35 months, the remaining term under the Companys
lease. In connection with such sublease, Datakey agreed to make certain
improvements to the EP Space to allow Buyer to operate the EP Business separate
from the operations of Datakey.

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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., London, England and
Frankfurt, Germany that support the information security business.

Product and Service Description



| |                                              
| | ---------------------------------------------
| | ISS business segment (CONTINUING OPERATIONS):



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | For the past six 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 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 information
security products in 2002 and beyond.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Information Security 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.                                                                                                                                                                                                                                                                                                                                                    

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Information Security Product Family:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | Datakey 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 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.
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. 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 into the workstation and
interfaces to the application program.                                                                  



| |                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Datakey CIP Thin. During 2001, Datakey introduced a server-based
version of the client based CIP. CIP Thin contains all the
features and functionality of CIP but is installed on the server
instead of on each individual workstation.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Datakey DTK (Developers Tool Kit). 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 DTK to integrate
just what is needed for their application. Datakey began selling
DTK in 1997.



| |                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Datakey 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. SCC provides these features and
provides an audit trail for these actions.

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The following chart shows Datakeys products:

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

OEM Private Label Products.Datakey also provides its information
security 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

As a result of selling the Electronic Products business unit in August
2001, the Company no longer maintains an internal manufacturing capability. We
do, however, control the manufacturing process for our cards with several
outside assembly operations, and we buy our readers from several smart card
reader companies.

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 interchangeable 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 would be required to
incur a significant cost and possibly experience a gap in supply to switch to a
new supplier.

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The Company continues to offer a Smart Key version of the smart card
offering. Although this product has not received broad acceptance, several
customers have expressed interest in it as an alternative to the card. If we
receive orders for this product, the company that purchased our former EP
business will be our sole source of supply.

Significant Customer

Sales to one of the Companys ISS customers, an agency of the Canadian
government, totaled approximately $4,152,000, or 53% of net sales from
continuing operations during the year ended December 31, 2001.

Marketing

General.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, $3,608,000 during 2000 and $7,815,000 in 2001. In 2002, the
Company expects revenue from these products to reach $13-$15 million. 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, VPN 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

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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 2001 and 2000, sales to domestic customers and the
corresponding percentage of total revenue, were approximately $2,609,000 (33%)
and $2,015,000 (56%), respectively. ISS Sales to international customers,
including Canada, and the corresponding percentage of ISS revenue, were
approximately $5,206,000 (67%) and $1,593,000 (44%), respectively, in 2001 and
2000.

Backlog

As of March 11, 2002, the Company had an order backlog from continuing
operations totaling approximately $2,496,000. 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.

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Competition

Information Security Solutions.Datakey currently offers token-based
(smart card, smart key and iKey) information security solutions which are
primarily utilized in encryption for electronic mail privacy, remote network
authentication 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, smart key or iKey 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, Engineering and Technical Support

In 2001 and 2000, research and development, engineering and technical
support expenses (RDETS), in continuing operations were $2,325,000 and
$2,003,000, respectively. The Company expects that RDETS expenses in 2002 will
increase by about seven percent (7%) as the Company plans to continue new
product development and add to the technical support staff.

Employees

As of March 15, 2002, the Company employs 35 full-time employees, 3 in
procurement and materials handling, 4 in technical support, 11 in engineering,
11 in marketing/sales and 6 in general and administrative areas. The Companys
employees are not subject to a collective bargaining agreement, and the Company
believes that its employee relations are good.

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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:

ITEM 2. DESCRIPTION OF PROPERTY

The Companys corporate offices and manufacturing facility, located at 407
West Travelers Trail, Burnsville, Minnesota, consist of approximately 25,000
square feet including approximately 13,000 square feet that is currently
occupied by Datakey Electronics under a sublease between the Company and the
Buyer. Of the space not subleased, approximately one-third of the space is
used for shipping 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
$178,000, plus a portion of the operating expenses and real estate taxes.
Sublease payments are approximately $100,000 per year.

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 2001.




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 2001 and
2000.

On March 19, 2002, 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.

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|     |             |  |             |       |  |     |   |      | 
|---- | ----------- |  | ----------- | ----- |  | --- | - | ---- | 
|     |             |  | Sale Prices |      
|     |             |  |             |      
|     |             |  | High        |       |  | Low |  
|     |             |  |             |       |  |     |  
|2001 |             |  |             |       |  |     |   |     
|     | 1st Quarter |  | $           | 4.75  |  |     | $ | 2.00 | 
|     | 2nd Quarter |  | $           | 3.77  |  |     | $ | 1.63 | 
|     | 3rd Quarter |  | $           | 3.46  |  |     | $ | 1.58 | 
|     | 4th Quarter |  | $           | 6.35  |  |     | $ | 2.90 | 
|2000 |             |  |             |       |  |     |   |     
|     | 1st Quarter |  | $           | 18.00 |  |     | $ | 3.28 | 
|     | 2nd Quarter |  | $           | 9.50  |  |     | $ | 2.69 | 
|     | 3rd Quarter |  | $           | 10.25 |  |     | $ | 4.75 | 
|     | 4th Quarter |  | $           | 8.50  |  |     | $ | 2.00 | 

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 2001 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, 2001 and 2000
Statements of Operations for Years Ended December 31, 2001
and 2000
|
| | Statements of Stockholders Equity for Years Ended December
31, 2001 and 2000                                      
|
| | Statements of Cash Flows for Years Ended December 31, 2001
and 2000                                                
|
| | Notes to 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 2002 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.

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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 2002
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 2002 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 2002 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 2001.

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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 26, 2002 |  | 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
Carl P. Boecher         |  | Chief Executive Officer and
Director (Principal Executive
Officer)                      |  | March 26, 2002
|                                           
|/s/ Alan G. Shuler
Alan G. Shuler           |  | Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer) |  | March 26, 2002
|                                           
|/s/ Thomas R. King
Thomas R. King           |  | Director and Secretary                                                                  |  | March 26, 2002
|                                           
|/s/ Terrence W. Glarner
Terrence W. Glarner |  | Director                                                                                |  | March 26, 2002
|                                           
|/s/ Gary R. Holland
Gary R. Holland         |  | Chairman of the Board of
Directors                                                      |  | March 26, 2002
|                                           
|/s/ Eugene W. Courtney
Eugene W. Courtney   |  | Director                                                                                |  | March 26, 2002

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DATAKEY, INC.

EXHIBIT INDEX TO ANNUAL REPORT
ON FORM 10-KSB
For the Fiscal Year Ended December 31, 2001

|            |  |                                                                                                                                                                                                                                                                 
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                 
|3.1         |  | Restated Articles of Incorporation, as amended (Incorporated
by reference to Exhibit 3.1 to Form 10-KSB for fiscal year
ended December 31,2000)                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                 
|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        |  | 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        |  | 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)**                                                                                                     
|            |  |                                                                                                                                                                                                                                                                 
|10.9        |  | 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)                                      
|            |  |                                                                                                                                                                                                                                                                 
|10.10       |  | 1997 Stock Option Plan (Incorporated by reference to Exhibit
10.15 to Form 10-KSB for fiscal year ended December 31,
1997)**                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                 
|10.11       |  | 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)**                                                                  
|            |  |                                                                                                                                                                                                                                                                 
|10.12       |  | 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)                                           





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|            |  |                                                                                                                                                                                                                                                         
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                         
|10.13       |  | 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)**                                                                
|            |  |                                                                                                                                                                                                                                                         
|10.14       |  | 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)**                                                                
|            |  |                                                                                                                                                                                                                                                         
|10.15       |  | 2001 Executive Incentive Plan (Incorporated by reference to
Exhibit 10.17 to Form 10-KSB for the year ended December 31,
2000)**                                                                                                                        
|            |  |                                                                                                                                                                                                                                                         
|10.16       |  | Loan Agreement dated January 23, 2001 between the Company and
Ray Lipkin and Unsecured Promissory Note dated January 26,
2001 in the amount of $500,000 (Incorporated by reference to
Exhibit 10.18 to Form 10-KSB for the year ended December 31,
2001)
|            |  |                                                                                                                                                                                                                                                         
|10.17       |  | Asset Acquisition Agreement dated August 3, 2001 between
Datakey, Inc. and Datakey Electronics, Inc. (Incorporated by
reference to Exhibit 2.1 of Form 8-K dated August 3, 2001)                                                                        
|            |  |                                                                                                                                                                                                                                                         
|10.18*      |  | 2002 Executive Incentive Plan**                                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                         
|13.1*       |  | Portions of 2001 Annual Report                                                                                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                         
|23.1*       |  | Consent of Independent Accountant                                                                                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                         
|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)                                                                    

*     Filed herewith.

**     Designates a management contract or compensatory plan or arrangement.

2602707