<PAGE>
                SECURITIES AND EXCHANGE COMMISSION
                      Washington, D.C.  20549

                            FORM 10-QSB

(X)  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

               For the quarterly period ended September 27, 1997

               Commission File Number 0-11447


                           DATAKEY, INC.
 (Exact name of small business issuer as specified in its charter)

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

          407 WEST TRAVELERS TRAIL, BURNSVILLE, MN  55337

          Issuer's telephone number: (612) 890-6850

                                                                 
   -----------------------------------------------------------
       (Former name, former address and former fiscal year,
                   if changed since last report)

     Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
                             Yes /x/     No / /  


               APPLICABLE ONLY TO CORPORATE ISSUERS

     The number of shares outstanding of the issuer's common
equity, as of November 11, 1997, is 2,887,235.

     Transitional Small Business Disclosure Format (check one):
                             Yes / /      No /x/ 



                                 1

<PAGE>
<TABLE>
                                  PART I.  FINANCIAL INFORMATION
                                  ITEM I.  FINANCIAL STATEMENTS

                                  DATAKEY, INC. AND SUBSIDIARY
                                  CONSOLIDATED BALANCE SHEETS
<CAPTION>
                                                             September 27,      December 31,
                                                                   1997               1996
                                                            ---------------     -------------
                                                             (UNAUDITED)
<S>                                                         <C>                 <C>
          ASSETS
          ------
CURRENT ASSETS
  Cash and cash equivalents                                  $1,470,050           $  140,030
  Investment in held-to-maturity securities                     376,281            5,993,228
  Trade receivables, less allowance for
    doubtful accounts of $41,141 and $45,000                  1,153,125              634,538
  Inventories                                                 1,622,588            1,128,907
  Prepaid and other                                              59,947               46,962
                                                            ---------------     -------------
          Total current assets                                4,681,991            7,943,665
                                                            ---------------     -------------

OTHER ASSETS
  Deferred taxes                                                325,000              325,000
  Prepaid licenses at cost, less amortization 
     of $54,361 in 1997                                       1,027,139              129,750
   Patents at cost, less amortization
    of $133,348 and $105,531                                    112,340               99,236
                                                            ---------------     -------------
                                                              1,464,479              553,986
                                                            ---------------     -------------

EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost
  Production tooling                                          1,206,310            1,179,021
  Equipment                                                   2,929,407            2,561,659
  Furniture and fixtures                                        298,771              267,482
  Leasehold improvements                                        281,956              234,452
                                                            ---------------     -------------
                                                              4,716,444            4,242,614
  Less accumulated depreciation                              (3,135,177)          (2,840,909)
                                                            ---------------     -------------
                                                              1,581,267            1,401,705
                                                            ---------------     -------------

                                                             $7,727,737           $9,899,356
                                                            ===============     =============


          LIABILITIES AND SHAREHOLDERS' EQUITY
          ------------------------------------
CURRENT LIABILITIES
  Accounts payable                                             $471,998             $559,280
  Accrued severance obligation                                  201,900              332,000
  Accrued license fees-current portion                          439,000                    0
  Accrued expenses                                              474,977              315,549
                                                            ---------------     -------------
          Total current liabilities                           1,587,875            1,206,829
                                                            ---------------     -------------

  Accrued license fees, less current portion                    109,750                    0

SHAREHOLDERS' EQUITY
  Convertible preferred stock, voting, stated value 
    $2.50 per share; authorized 400,000 shares;
    issued and outstanding 150,000                              375,000              375,000
  Common stock, par value $.05 per share;
    authorized 10,000,000 shares; issued and
    outstanding 2,887,235 and 2,882,069                         144,362              144,103
  Additional paid-in capital                                  4,089,283            4,070,815
  Retained earnings                                           1,421,467            4,102,609
                                                            ---------------     -------------
                                                              6,030,112            8,692,527
                                                            ---------------     -------------

                                                             $7,727,737           $9,899,356
                                                            ===============     =============
</TABLE>

   See Notes to Consolidated Financial Statements

                                              2
<PAGE>
<TABLE>

                                  DATAKEY, INC. AND SUBSIDIARY
                                 CONSOLIDATED STATEMENTS OF INCOME
                                          (UNAUDITED)

<CAPTION>
                                               Three Months Ended          Nine Months Ended
                                        September 27,  September 28,  September 27,  September 28,
                                                1997          1996            1997          1996
                                        ------------   ------------   ------------   ------------
<S>                                     <C>            <C>            <C>            <C>

Revenue                                  $1,603,846     $1,765,812     $4,947,776     $5,413,652
Cost of goods sold                        1,096,332      1,166,843      3,226,579      3,408,019
                                        ------------   ------------   ------------   ------------

          Gross Profit                      507,514        598,969      1,721,197      2,005,633




Operating expenses:
  Research, development
   and engineering                          653,137       613,980       2,716,664      1,413,988
  Marketing and sales                       431,124       324,571       1,219,124        947,137
  General and administrative                184,713       214,990         614,079        657,918
                                        ------------   ------------   ------------   ------------


          Total operating expenses        1,268,974     1,153,541       4,549,867      3,019,043
                                        ------------   ------------   ------------   ------------

          Operating loss                   (761,460)     (554,572)     (2,828,670)    (1,013,410)

Interest income                              28,374        89,546         147,528        274,958
                                        ------------   ------------   ------------   ------------

          Loss before
          income taxes                     (733,086)     (465,026)     (2,681,142)      (738,452)
Income tax benefit                                0      (167,000)              0       (264,600)
                                        ------------   ------------   ------------   ------------

          Net loss                        ($733,086)    ($298,026)    ($2,681,142)     ($473,852)
                                        ============   ============   ============   ============


Net loss  per common share                   ($0.25)      ($0.10)          ($0.93)        ($0.17)
                                        ============   ============   ============   ============



Weighted average number of
  common shares outstanding               2,887,235      2,880,403       2,886,431     2,854,707
                                        ============   ============   ============   ============
</TABLE>

       See Notes to Consolidated Financial Statements

                                           3

<PAGE>
<TABLE>
                                            DATAKEY, INC. AND SUBSIDIARY
                                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                           (UNAUDITED)

<CAPTION>
                                            Three Months Ended             Nine Months Ended
                                        September 27,  September 28,  September 27,  September 28,
                                              1997         1996            1997         1996
                                        ------------   ------------   ------------   ------------
<S>                                     <C>            <C>           <C>             <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
  Net loss                               ($733,086)     ($298,026)    ($2,681,142)    ($473,852)
  Adjustments to reconcile net loss to 
    net cash (used in) operating activities:
    Depreciation                           131,642        115,973         369,279       341,503
    Amortization                            42,390         15,320          82,178        85,113
    Change in assets and liabilities                                                
    (Increase) decrease:                                                            
      Trade receivables                     62,170        107,706        (518,587)      (89,184)
      Inventories                          177,381        225,995        (493,681)      290,854
      Prepaid expenses and other            39,434         30,477         (12,985)       (1,220)
      Prepaid license fees                     165              0        (183,500)            0
      Refundable income taxes                    0              0               0        46,642
     Increase (decrease) in:
      Accounts payable                    (453,224)      (116,950)        (87,282)      (89,730)
      Accrued expenses                     (77,712)        74,186         159,428       147,732
      Accrued license fees                (109,750)             0        (219,500)            0
      Accrued severance                    (41,500)             0        (130,100)            0
      Deferred taxes                             0       (167,500)              0      (264,600)
      Income taxes payable                       0              0               0             0
                                        ------------   ------------   ------------   ------------

         Net cash  (used in)
         operating activities             (962,090)       (12,819)     (3,715,892)       (6,742)
                                        ------------   ------------   ------------   ------------

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of tooling and equipment        (84,532)       (32,030)       (548,841)     (291,810)
  Purchase of held-to-maturity
    securities                             (13,637)    (2,751,368)       (127,636)   (5,343,464)
  Proceeds from maturity of
    held-to-maturity securities          1,227,000      2,060,000       5,744,583     5,329,000
  Patent costs                             (21,052)          (904)        (40,921)      (31,327)
                                        ------------   ------------   ------------   ------------

         Net cash provided by (used in)
         investing activities            1,107,779       (724,302)      5,027,185      (337,601)
                                        ------------   ------------   ------------   ------------

CASH FLOWS FROM FINANCING ACTIVITIES
  Net proceeds from issuance of
    common stock                                 0         14,500          18,727       181,230
                                        ------------   ------------   ------------   ------------
          Net cash provided by financing
           activities                            0         14,500          18,727       181,230
                                        ------------   ------------   ------------   ------------

         Increase (decrease) in cash
         and cash equivalents              145,689       (722,621)      1,330,020      (163,113)

CASH AND CASH EQUIVALENTS
  Beginning                              1,324,361      1,272,738         140,030       713,230
                                        ------------   ------------   ------------   ------------
  Ending                                $1,470,050       $550,117      $1,470,050      $550,117
                                        ============   ============   ============   ============

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
  Obligation recorded in connection with
  prepaid license fees                          $0             $0        $768,250            $0
                                        ============   ============   ============   ============
</TABLE>

          See Notes to Consolidated Financial Statements

                                          4


<PAGE>
                  DATAKEY, INC. AND SUBSIDIARY
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


GENERAL

In the opinion of management, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly
Datakey's financial position as of September 27, 1997 and December
31, 1996 and results of its operations and cash flows for the
three-month and nine-month periods ended September 27, 1997 and
September 28, 1996.  The adjustments that have been made are of a
normal recurring nature.

The accounting policies followed by the Company are set forth in
Note 1 to the Company's financial statements in the 1996 Datakey,
Inc. Annual Report and in Form 10-KSB for the year ended December
31, 1996.


INVESTMENT IN HELD-TO-MATURITY SECURITIES

The Company held marketable debt securities with an amortized cost
of $376,281 as of September 27, 1997.  As it is the intention of
the Company to hold these securities to maturity, they are
accounted for as "Held-to-Maturity Securities" as defined in FASB
Statement No. 115.  The market value of these U.S. Treasury Bill
securities is $376,337.  The unrealized gain, therefore, is $56.

All of the Securities have a maturity date of less than twelve
months.  The Company has no marketable debt securities which are
classified as Available-For-Sale Securities or Trading Securities.


RECENT ACCOUNTING PRONOUNCEMENT

In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128,
Earnings Per Share, which is effective for interim and annual
reporting periods ending after December 15, 1997. The
implementation of SFAS No. 128 is expected to change earnings per
share by an immaterial amount.

SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15,
Earnings Per Share, and replaces the presentation of primary
earnings per share with a presentation of basic earnings per share. 
It also requires dual presentation for all entities with complex
capital structures and provides guidance on other computational
changes.



                                5

<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
                  DATAKEY, INC. AND SUBSIDIARY
          RESULTS OF OPERATIONS AND FINANCIAL CONDITION


RESULTS OF OPERATIONS


     REVENUE - Net sales for the three-month period ended September
27, 1997 decreased by $161,966, or 9%, compared to the comparable
1996 period, while net sales for the nine-month period declined by
$465,876, or 9%, due to a reduction in shipments to OEM product
customers in the first and third quarters of 1997.  Revenue in the
OEM products business continues to be volatile from quarter to
quarter and is likely to be soft again in the fourth quarter.  The
Company is continuing its development of advanced system-level
products for the information security market.  The initial versions
of end-user products for the information security marketplace are
currently available for sale and, based upon current expectations,
are expected to result in limited revenue during the fourth quarter
of 1997.  As with any new product line, revenue will depend on
customer acceptance, the extent of which is difficult to assess at
this time.  Based upon the Company's current expectations, the
revenue for 1997 will not exceed the 1996 level.

     GROSS PROFIT MARGINS - Gross profit as a percentage of revenue
decreased to 32% in the three-month period ended September 27, 1997
from 34% in the comparable period and declined to 35% in the
nine-month period compared to 37% in the 1996 period.  The decline
in margin percentage in the three-month period and in the
nine-month period is due to the lower level of sales as well as
product costs related to introduction of the new products.

     OPERATING EXPENSES - Operating expenses increased by $115,433 
and $1,530,824, or 10% and 51%, in the three-month and nine-month
periods ended September 27, 1997, as compared to the same periods
in 1996.  The increased expenses are primarily attributable to a
substantial increase in research and development and marketing
expenses necessary to accelerate the market introduction of
electronic token-based systems targeted at the corporate
information security marketplace.  Research and development
expenses are expected to decline during the fourth quarter as
compared to the first three quarters and will be below the amounts
from the fourth quarter of 1996.  Marketing and sales expenses are
expected to increase by 15 to 20 percent in the fourth quarter of
1997, compared to the first three quarters, to support new product
introductions.  General and administrative expenses in 1997 are
expected to decrease slightly from the 1996 level and will remain
at approximately the quarterly rate reflected in the second and
third quarters.


                                6

<PAGE>
     INTEREST INCOME - Interest income during the three-month and
nine-month periods ended September 27, 1997, decreased $61,172 and
$127,430, or 68% and 46% respectively, from the comparable periods
in 1996.  The lower level of interest income is a direct result of
a reduced level of investment in held-to-maturity securities and
interest bearing cash and cash equivalents.  Interest income is
expected to remain lower in the fourth quarter of 1997 as the
Company intends to continue using the proceeds from maturing
investments to fund continuing product development and marketing
activities to support the Company's advanced information security
products.

     INCOME TAXES - As of December 31, 1996, the Company recorded
an income tax asset of $325,000 related to its net operating loss
carryforwards.  Management believes it is more likely than not that
the Company will realize income in the future from its existing OEM
products business, as well as income from its new advanced
information security products business that will allow the Company
to utilize a portion of the net operating loss carryforward to
reduce future taxable income.  However, the net deferred tax asset
could be increased or reduced in the future if management's
estimates of taxable income during the carryforward period change. 
The Company has not recorded a tax benefit in the current quarter,
related to current operating losses, and does not plan to record a
tax benefit in future quarters until such time as the profitability
outlook in future periods justifies the resumption of income tax
benefits.


     FINANCIAL CONDITION - During the nine-month period ended
September 27, 1997, the Company had a net increase in cash and cash
equivalents of $1,330,020, compared to a decrease of $163,113 in
the comparable 1996 period.  Investment in held-to-maturity
securities decreased $5,616,947 in the 1997 period compared to an
increase of $14,464 in the 1996 period.  Cash, cash equivalents and
investment in held-to-maturity securities were $1,846,331 at
September 27, 1997, compared to $6,133,258 at December 31, 1996. 
The decrease of $4,286,927 is primarily the result of funding 
operating losses and other operating activities equal to $3,715,892
and in purchases of tooling and equipment equal to $548,841 for the
nine months ended September 27, 1997.

Datakey's balance sheet continues to reflect a strong financial
position, with $3,094,116 in working capital and a current assets
to current liabilities ratio of 2.9 to 1 as of September 27, 1997. 
The Company plans to continue new product development and marketing
activities during the remainder of 1997 and expects to spend about
$925,000 on these activities in the fourth quarter.  Trade
receivables increased by $519,000 in the nine-month period ended
September 27, 1997, due to a substantial increase in revenue in
September, 1997.  Inventory levels increased $494,000 in the
nine-month period primarily as a result of acquiring components to
support sales of newly developed products which have not yet sold
in material quantities.  
                                   7
<PAGE>
The inventory levels are expected to level out or decline slightly
in the fourth quarter of 1997 as the new products are sold. 
Payments on the accrued license fees will be approximately $110,000
in the fourth quarter of 1997.  The Company intends to continue to
fund such spending by a reduction in the Company's marketable debt
securities.  

The Company will be able to fund its planned operations and
continued development and promotional activities related to its new
products in 1997.  While it is too early to predict with certainty,
the Company may need additional capital to fund its operations in
1998 even if the Company's end-user products receive the market
acceptance currently projected.  The Company is beginning to
explore certain funding sources and is hopeful of consummating a
private financing in the first quarter of 1998.  If the market
acceptance of the Company's end-user products is significantly less
than the Company currently projects, or such market acceptance is
slow to develop, the Company may need funds in addition to those
which it hopes to raise in such private financing.  In such
circumstances, there is no assurance that the necessary funding
would be available upon acceptable terms.


                      CAUTIONARY STATEMENTS

This Management's Discussion and Analysis contains certain forward
looking statements relating primarily to the introduction of the
Company's information security end-user products and the
anticipated generation of revenue from such products.  These
statements are subject to certain risks and uncertainties which
could cause results to differ from those projected.  These risks
and uncertainties, in addition to those discussed above, include:
(i) the ability of the Company to successfully develop all of the
new products under development and to control costs as necessary;
(ii) the capability of the new products to function as currently
anticipated; and (iii) market acceptance of the new products.













                                8


<PAGE>
                   PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



(A)  Exhibits

     Exhibit 27     Financial Data Schedule (only filed with
                    electronic copy)

(b)  The Company was not required to and did not file a Form 8-K
during the quarter ended September 27, 1997.




                                9

<PAGE>
                           SIGNATURES


In accordance with the requirements of the Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

Dated November 11, 1997            DATAKEY, INC.


                                   BY: /s/ Carl P. Boecher        
                                        Carl P. Boecher
                                        President & Chief Executive
                                        Officer
                                       (Principal Executive
                                        Officer)  
     
                                   BY: /s/ Alan G. Shuler         
                                        Alan G. Shuler
                                        Vice President & Chief
                                        Financial Officer
                                       (Principal Financial and   
                                        Accounting Officer)



                               10

<PAGE>
                          DATAKEY, INC.
                  EXHIBIT INDEX TO FORM 10-QSB
              FOR QUARTER ENDED SEPTEMBER 27, 1997


     EXHIBIT NO.              DESCRIPTION

          27                  Financial Data Schedule