SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-QSB

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

                  For the quarterly period ended April 4, 1998

                         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
May 15, 1998, is 2,909,735

         Transitional Small Business Disclosure Format (check One):
                                                     Yes      No   X



<PAGE>


                          PART I. FINANCIAL INFORMATION
                          ITEM I. FINANCIAL STATEMENTS
                          DATAKEY, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                           April 4,        December 31,
                                                             1998             1997
                                                         -----------       -----------
                                                         (UNAUDITED)
              ASSETS
<S>                                                      <C>               <C>
CURRENT ASSETS
  Cash and cash equivalents                              $   615,125       $ 1,305,392
  Trade receivables, less allowance for
    doubtful accounts of $31,160 and $30,000                 895,009           634,267
  Inventories                                              1,169,656         1,082,737
  Prepaid and other                                           74,487            53,360
                                                         -----------       -----------
              Total current assets                         2,754,277         3,075,756
                                                         -----------       -----------

OTHER ASSETS
  Prepaid licenses at cost less amortization                 992,175           996,611
   of $91,426 and $89,890
          Patents at cost, less amortization
    of $101,810 and $91,911                                  110,210           107,691
                                                         -----------       -----------
                                                           1,102,385         1,104,302
                                                         -----------       -----------

EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost
  Production tooling                                       1,205,249         1,215,012
  Equipment                                                2,984,730         2,956,269
  Furniture and fixtures                                     298,771           298,771
  Leasehold improvements                                     284,416           281,956
                                                         -----------       -----------
                                                           4,773,166         4,752,008
  Less accumulated depreciation                           (3,402,111)       (3,278,760)
                                                         -----------       -----------
                                                           1,371,055         1,473,248
                                                         -----------       -----------

                                                         $ 5,227,717       $ 5,653,306
                                                         ===========       ===========

                      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
  Accounts payable                                       $   310,232       $   184,103
  Accrued severance obligation                               118,900           185,672
  Accrued license fees                                       439,000           439,000
  Accrued expenses                                           313,801           316,157
                                                         -----------       -----------
              Total current liabilities                    1,181,933         1,124,932
                                                         -----------       -----------



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                                    144,361           144,361
  Additional paid-in capital                               4,089,283         4,089,283
  Retained earnings                                         (562,860)          (80,270)
                                                         -----------       -----------
                                                           4,045,784         4,528,374
                                                         -----------       -----------

                                                         $ 5,227,717       $ 5,653,306
                                                         ===========       ===========
</TABLE>


                 See Notes to Consolidated Financial Statements

                                        2



<PAGE>

                          DATAKEY, INC. AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)
<TABLE>
<CAPTION>


                                                     Three Months Ended
                                                 April 4,        March 29,
                                                  1998             1997
                                                  ----             ----

<S>                                            <C>               <C>
Revenue                                        $ 1,483,555       $ 1,409,801
Cost of goods sold                                 890,090           934,872
                                               -----------       -----------

                 Gross Profit                      593,465           474,929




Operating expenses:
  Research, development
   and engineering                                 399,123         1,016,352
  Marketing and sales                              476,157           394,375
  General and administrative                       212,316           211,556
                                               -----------       -----------


                 Total operating expenses        1,087,596         1,622,283
                                               -----------       -----------

                 Operating loss                   (494,131)       (1,147,354)

Interest income                                     11,541            75,617
                                               -----------       -----------

                 Loss before
                 income taxes                     (482,590)       (1,071,737)
Income tax expense                                       0                 0
                                               -----------       -----------

                 Net loss                      ($  482,590)      ($1,071,737)
                                               ===========       ===========



  Basic and diluted
  loss per share                               ($     0.17)      ($     0.37)
                                               ===========       ===========


Weighted average number of
  common shares outstanding                      2,887,235         2,884,769
                                               ===========       ===========

</TABLE>

                 See Notes to Consolidated Financial Statements

                                        3




<PAGE>


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

                                                                         Three Months Ended
                                                                      April 4,         March 29,
                                                                        1998             1997
                                                                        ----             ----
<S>                                                                <C>               <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
  Net Income(loss)                                                 ($  482,590)      ($1,071,737)
  Adjustments to reconcile net income(loss)
  to net cash used in operating activities:
    Depreciation                                                       123,351           115,062
    Amortization                                                        11,435             8,961
    Change in assets and liabilities
    (Increase) decrease:
      Trade receivables                                               (260,742)         (127,178)
      Inventories                                                      (86,919)         (504,724)
      Prepaid expenses and other                                       (21,127)          (58,818)
      Prepaid license fees                                               2,900           (80,000)
     Increase (decrease) in:
      Accounts payable                                                 126,129           361,055
      Accrued expenses                                                  (2,356)          244,398
      Accrued severance                                                (66,772)          (41,500)
      Income taxes payable                                                   0                 0
                                                                   -----------       -----------

         Net cash used in
         operating activities                                         (656,691)       (1,154,481)
                                                                   -----------       -----------

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of tooling and equipment                                    (21,158)         (263,863)
  Purchase of held-to-maturity
    securities                                                               0           (72,807)
  Proceeds from maturity of
    held-to-maturity securities                                              0         2,015,162
  Patent  costs                                                        (12,418)             (412)
                                                                   -----------       -----------

         Net cash provided by(used in)
         investing activities                                          (33,576)        1,678,080
                                                                   -----------       -----------

CASH FLOWS FROM FINANCING ACTIVITIES
  Net proceeds from issuance of
    common stock                                                             0            18,727
                                                                   -----------       -----------
          Net cash provided by (used in) financing activities                0            18,727
                                                                   -----------       -----------

         Increase(decrease) in cash
         and cash equivalents                                         (690,267)          542,326

CASH AND CASH EQUIVALENTS
  Beginning                                                          1,305,392           140,030
                                                                   -----------       -----------
  Ending                                                           $   615,125       $   682,356
                                                                   ===========       ===========

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
  Obligation recorded in connection with prepaid
  license fees                                                     $         0       $   768,250
                                                                   ===========       ===========
</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 April 4, 1998,  and December 31, 1997,  and results of its  operations and
cash flows for the  three-month  period ended April 4, 1998, and March 29, 1997.
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 1997 Datakey,  Inc. Annual Report and in
Form 10-KSB for the year ended December 31, 1997.


<PAGE>


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

                          DATAKEY, INC. AND SUBSIDIARY
                 RESULTS OF OPERATIONS AND FIANANCIAL CONDITION


RESULTS OF OPERATIONS

         REVENUE - Revenue  for the  three-month  period  ended  April 4,  1998,
increased by $73,754, or 5 percent,  compared to the comparable 1997 period. The
increase  in revenue  is due to renewed  orders  from the  Company's  Electronic
Products  customers as well as pilot program  revenue from the  Company's  newly
introduced  information  security  systems.  The  newly  introduced  information
security  products are  currently in  evaluation  or pilot  program  stages with
several  companies.  If larger  quantity  orders  are  received  as the  Company
currently  anticipates,  revenue from the new products could exceed revenue from
the existing products and total 1998 revenue will exceed 1997 revenue.

         GROSS PROFIT MARGIN - Gross profit as a percentage of revenue increased
to 40 percent in the  three-month  period  ended  April 4, 1998,  compared to 34
percent in the comparable 1997 period. The 1998 improvement in margin percentage
is due to improved  factory direct labor  utilization,  a reduction in scrap and
yield loss,  and a favorable  product mix. The Company  expects the gross profit
margin as a percentage  of revenue to remain at the current  levels,  or improve
slightly, for the balance of 1998.

         OPERATING  EXPENSES - Operating  expense  decreased by $534,687,  or 33
percent,  in the  three-month  period  ended  April  4,  1998,  compared  to the
comparable 1997 period. The decrease is attributable to a substantial  reduction
in research,  development,  and engineering (R&D) expense,  offset in part by an
increase in marketing  and sales  expense.  R&D expense  declined  substantially
because the initial  major new product  development  phase was completed in late
1997,  and the Company is now able to concentrate  on product  enhancements  and
upgrades  during  1998.  Consequently,  the Company  expects to invest  about 45
percent less on R&D in 1998 than in 1997.  Marketing and sales expense increased
$81,782 or 21 percent in the three-month period ended April 4, 1998, compared to
the  comparable  1997  period  as the  Company  increased  its  advertising  and
promotional  activities for the newly introduced  information security products.
Marketing  and sales  expenses  are  expected  to continue at about a 40 percent
higher level than was incurred in 1997.

         INTEREST INCOME - Interest income declined $64,076,  or 85 percent,  in
the  three-month  period ended April 4, 1998,  compared to the  comparable  1997
period as proceeds  from  interest  bearing  accounts  were utilized to fund new
product  development  and  product  promotion  activities.  Interest  income  is
expected to decline  further in the second  quarter of 1998, and the Company may
incur  interest  expense from borrowing on the $1 million bank line of credit or
from a private placement of convertible  preferred stock which is expected to be
completed in May, 1998.


<PAGE>

         FINANCIAL  CONDITION  - During the  three-month  period  ended April 4,
1998, the Company had a net decrease of $690,267 in cash and cash equivalents as
compared to an increase of $542,326  in the  comparable  1997  period.  The 1997
increase  was  primarily  due to  realization  of  $2,015,162  in proceeds  from
maturing  marketable  debt  securities  during  the  period.  Net  cash  used in
operating activities decreased to $656,691 in the three-month period ended April
4, 1998,  compared to $1,154,481 in the comparable 1997 period.  The reduced use
of cash  is  directly  attributable  to a  reduction  in the  operating  loss to
$482,590 in 1998, from $1,071,737 in 1997.

         Datakey's  balance sheet reflects  $1,572,344 in working  capital as of
April 4, 1998, and a current assets to current  liabilities  ratio of 2.33 to 1.
The Company expects to continue spending on R&D, at a reduced amount compared to
1997, and on marketing and sales  activities at an increased  amount compared to
1997.  Inventory and accounts  receivable levels are expected to increase during
the  balance  of 1998 to  support  the  expected  ramp-up  in  revenue  from the
Company's new information  security products.  The Company believes that it will
have adequate  financial  resources to fund its operations and R&D and marketing
activities during 1998 through utilization of its bank line of credit,  proceeds
from the  private  financing  described  above,  and  positive  cash  flow  from
operations  later in the year if the  Company  returns  to  profitability  as it
currently  expects.  If  the  market  acceptance  of the  Company's  information
security  products  is  slow  to  develop  or  does  not  develop  as  currently
anticipated,  the  Company  may need funds in  addition to its bank line and the
financing expected to be completed in May 1998. In such circumstances,  there is
no assurance  that the  necessary  funding  would be available  upon  acceptable
terms.


                              CAUTIONARY STATEMENTS

The  Management's  Discussion  and Analysis  contains  certain  forward  looking
statements  relating primarily to the introduction of the Company's  information
security  products and the  anticipated  generation of significant  revenue from
such products.  The  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;   (iii)  the  potential  introduction  of
competitive  products  by  companies  with  greater  resources  than that of the
Company, and (iv) market acceptance of the new products.


<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 April 4, 1998.


<PAGE>



                                    SIGNATUES


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 May 18, 1998                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)



<PAGE>


                                  Datakey, Inc.
                          EXHIBIT INDEX TO FORM 10-QSB
                         FOR QUARTER ENDED APRIL 4, 1998


EXHIBIT NO.                                 DESCRIPTION
       27                                   Financial Data Schedule