<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 June 28, 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 August 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>

                                                              June 28,         December 31,
                                                                   1997               1996
                                                            ------------        -----------
                                                             (UNAUDITED)
<S>                                                         <C>                 <C>
          ASSETS
          ------
CURRENT ASSETS
  Cash and cash equivalents                                  $1,324,361           $140,030 
  Investment in held-to-maturity securities                   1,589,644          5,993,228 
  Trade receivables, less allowance for
    doubtful accounts of $46,700 and $45,000                  1,215,295            634,538 
  Inventories                                                 1,799,969          1,128,907
  Prepaid and other                                              99,381             46,962
                                                            -----------         ----------
          Total current assets                                6,028,650          7,943,665
                                                            -----------         ----------
OTHER ASSETS
  Deferred taxes                                                325,000            325,000
  Prepaid licenses at cost,less amort of $21,580 in 1997      1,060,085            129,750
   Patents at cost, less amortization
    of $123,739 and $105,531                                    100,897             99,236
                                                            -----------         ----------
                                                              1,485,982            553,986
                                                            -----------         ----------

EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost                                    
  Production tooling                                          1,188,149          1,179,021
  Equipment                                                   2,965,463          2,561,659
  Furniture and fixtures                                        276,407            267,482
  Leasehold improvements                                        276,904            234,452
                                                            -----------         ----------
                                                              4,706,923          4,242,614
  Less accumulated depreciation                              (3,078,546)        (2,840,909)
                                                            -----------         ----------
                                                              1,628,377          1,401,705

                                                             $9,143,009         $9,899,356
                                                            ===========         ==========


          LIABILITIES AND SHAREHOLDERS' EQUITY
          ------------------------------------
CURRENT LIABILITIES
  Accounts payable                                             $925,222           $559,280
  Accrued severance obligation                                  243,400            332,000
  Accrued license fees-current portion                          439,000                  0
  Accrued expenses                                              552,689            315,549
          Total current liabilities                           2,160,311          1,206,829
                                                            -----------         ----------

  Accrued license fees, less current portion                    219,500                  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                                           2,154,553          4,102,609
                                                            -----------         ----------
                                                              6,763,198          8,692,527
                                                            -----------         ----------

                                                             $9,143,009         $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         Six Months Ended
                                           June 28,    June 29,       June 28,    June 29,
                                               1997        1996           1997        1996
                                             ------       -----          -----       -----
<S>                                     <C>            <C>            <C>         <C>
Revenue                                 $1,934,129     $1,912,123     $3,343,930  $3,647,840
Cost of goods sold                       1,195,375      1,203,841      2,130,247   2,241,176
                                        ----------     ----------     ----------  ----------
          Gross Profit                     738,754        708,282      1,213,683   1,406,664




Operating expenses:
  Research, development
   and engineering                       1,047,175        525,432      2,063,527     800,008
  Marketing and sales                      393,625        340,310        788,000     622,566
  General and administrative               217,810        233,953        429,366     442,928
                                        ----------     ----------     ----------  ----------


          Total operating expenses       1,658,610      1,099,695      3,280,893   1,865,502
                                        ----------     ----------     ----------  ----------

          Operating loss                  (919,856)      (391,413)    (2,067,210)   (458,838)

Interest income                             43,537         91,431        119,154     185,412
                                        ----------     ----------     ----------  ----------

          Loss before
          income taxes                    (876,319)      (299,982)    (1,948,056)   (273,426)
Income tax expense                               0       (107,600)             0     (97,600)
                                        ----------     ----------     ----------  ----------

          Net loss                       ($876,319)     ($192,382)   ($1,948,056)  ($175,826)
                                        ==========     ==========     ==========  ==========


Net loss  per common share                  ($0.30)        ($0.07)        ($0.67)     ($0.06)
                                        ==========     ==========     ==========  ==========



Weighted average number of
  common shares outstanding              2,887,235      2,879,087      2,886,023   2,841,788
                                        ==========     ==========     ==========  ==========
</TABLE>

                            See Notes to Consolidated Financial Statements

                                           3

<PAGE>
<TABLE>
                                  DATAKEY, INC. AND SUBSIDIARY
                             CONSOLIDATED STATEMENTS OF CASH FLOWS
                                         (UNAUDITED)
<CAPTION>
                                        Three Months Ended            Six Months Ended
                                          June 28,     June 29,        June 28,     June 29,
                                              1997         1996            1997         1996
                                        ----------     ----------     ----------   ----------
<S>                                     <C>            <C>            <C>          <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
  Net loss                              ($  876,319)   ($  192,382)   ($1,948,056) ($  175,826)
  Adjustments to reconcile net loss to net cash
  provided by (used) in operating activities:
    Depreciation                            122,575        115,158        237,637      225,530
    Amortization                             30,827         35,226         39,788       69,793
    Change in assets and liabilities
    (Increase) decrease:
      Trade receivables                    (453,579)      (133,063)      (580,757)    (196,890)
      Inventories                          (166,338)        85,824       (671,062)      64,859
      Prepaid expenses and other              6,399         10,992        (52,419)     (31,697)
      Prepaid license fees                 (103,665)             0       (183,665)           0
      Refundable income taxes                     0         46,642              0       46,642
     Increase (decrease) in:
      Accounts payable                        4,887         91,714        365,942       27,220
      Accrued expenses                       (7,258)        90,436        237,140       44,977
      Accrued license fees                 (109,750)             0       (109,750)           0
      Accrued severance                     (47,100)             0        (88,600)           0
      Deferred taxes                              0        (68,531)             0      (68,531)
      Income taxes payable                        0         (9,586)             0            0
                                         ----------     ----------     ----------   ----------

         Net cash provided by (used in)
         operating activities            (1,599,321)        72,430     (2,753,802)       6,077
                                         ----------     ----------     ----------   ----------

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of tooling and equipment        (200,446)      (211,361)      (464,309)    (259,780)
  Purchase of held-to-maturity
    securities                              (41,192)    (1,335,029)      (113,999)  (2,592,125)
  Proceeds from maturity of
    held-to-maturity securities           2,502,421      2,091,000      4,517,583    3,269,000
  Patent  license costs                     (19,457)       (24,353)       (19,869)     (30,424)
                                         ----------     ----------     ----------   ----------

         Net cash provided by
         investing activities             2,241,326        520,257      3,919,406      386,671
                                         ----------     ----------     ----------   ----------

CASH FLOWS FROM FINANCING ACTIVITIES
  Net proceeds from issuance of
    common stock                                  0        164,918         18,727      166,730
                                         ----------     ----------     ----------   ----------
       Net cash provided by financing
        activities                                0        164,918         18,727      166,730
                                         ----------     ----------     ----------   ----------

         Increase in cash
         and cash equivalents               642,005        757,605      1,184,331      559,478

CASH AND CASH EQUIVALENTS
  Beginning                                 682,356        515,133        140,030      713,260
                                         ----------     ----------     ----------   ----------
  Ending                                 $1,324,361     $1,272,738     $1,324,361   $1,272,738
                                         ==========     ==========     ==========   ==========

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 June 28, 1997 and December 31,
1996 and results of its operations and cash flows for the three-
month and six-month periods ended June 28, 1997 and June 29, 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 $1,589,644 as of June 28, 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
$1,589,282.  The unrealized loss, therefore, is $362.

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 June 28,
1997 increased by $22,006, or 1%, compared to the comparable 1996
period, while net sales for the six-month period declined by
$303,910, or 8%, due to a reduction in shipments to OEM product
customers in the first quarter of 1997.  Revenue in the OEM
products business continues to be volatile from quarter to quarter and may
be soft again in the third 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 either currently available for
sale or will be available in the third quarter and, based upon
current expectations, are expected to result in additional revenue
during the second half 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.  If revenue from the new product
line meets the Company's present expectations, the total revenue in
1997 will exceed the 1996 level.

     GROSS PROFIT MARGINS - Gross profit as a percentage of revenue
increased to 38% in the three-month period ended June 28, 1997 from
37% in the comparable period but declined to 36% in the six-month
period compared to 39% in the 1996 period.  The increase in margin
percentage in the three-month period and decrease in the six-month
period are primarily related to absorption of fixed factory overhead 
which is favorable when sales increase and unfavorable when sales
decline.

     OPERATING EXPENSES - Operating expenses increased by $558,915 
and $1,415,391, or 51% and 76%, in the three-month and six-month
periods ended June 28, 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
sophisticated electronic token-based systems targeted at the rapidly 
emerging corporate information security marketplace.  Research and
development expenses are expected to decline during the second half
as compared to the first half but will exceed the amounts from the
second half of 1996.  Marketing and sales expenses are expected to
increase by 15 to 20 percent in the second half of 1997, compared
to the first half, to support new product introductions and the
expected increase in revenue.  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 quarter.

                                 6
<PAGE>
     INTEREST INCOME - Interest income during the three-month and
six-month periods ended June 28, 1997, decreased $47,894 and
$66,258, or 52% and 36% 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 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 six-month period ended June
28, 1997, the Company had a net increase in cash and cash
equivalents of $1,184,331, compared to an increase of $559,478 in
the comparable 1996 period.  Investment in held-to-maturity
securities decreased $4,403,584 in the 1997 period compared to a
decrease of $676,905 in the 1996 period.  Cash, cash equivalents
and investment in held-to-maturity securities were $2,914,005 at June
28, 1997, compared to $6,133,258 at December 31, 1996.  The decrease 
of $3,219,253 is primarily the result of funding operating losses 
and other operating activities equal to $2,753,802 and $464,309
in purchases of tooling and equipment for the six months ended June
28, 1997.

Datakey's balance sheet continues to reflect a strong financial
position, with $3,868,339 in working capital and a current assets
to current liabilities ratio of 2.8 to 1 as of June 28, 1997.  The
Company plans to continue new product development and marketing
activities during the remainder of 1997 and expects to spend about
$2.0 to $2.2 million on these activities in the second half. 
Inventory levels increased $670,000 in the first half primarily as
a result of acquiring components to support sales of newly
developed products which have not yet sold in material quantities.  
Trade receivables increased by $580,000 in the six-month period ended
June 28, 1997, due to a substantial increase in revenue in June, 1997,
compared to December, 1996.
                                 7
<PAGE>
The inventory levels are expected to level out in the second half
of 1997 as the new products are sold.  Investments in equipment and
maintenance of licenses and patents in the second half of 1997 are
expected to be about $250,000 primarily related to prepaid license
fees for client and server software to be bundled with the
Company's information security products.  This spending has been and 
will continue to be funded by a reduction in the Company's marketable
debt securities.  

The Company's working capital and investments are sufficient to
fund its planned operations and continued development and promotional
activities in 1997.  The Company's ability to fund its business in
1998 with its own cash resources will depend primarily on the
successful introduction and marketing of its end-user products.  In
the event that the Company's end-user products do not receive the
market acceptance currently projected, or such market acceptance is
slow to develop, the Company will require debt or equity financing
to fund its business.  Such financing may or may not be available
depending on the success of its new product line.

     EXPECTED LOSS - The Company expects to report a loss in 1997.
Although the Company expects to have several end-user products
available for sale in the second half of 1997, the marketability of
these products will not be known until at least late 1997.  The 
extent of the Company's loss will depend directly on product
availability and market acceptance.  

                       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; (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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY SHAREHOLDERS
                   DATAKEY, INC. AND SUBSIDIARY


The Company held its Annual Meeting on Wednesday, June 4, 1997.

Proxies for the Annual Meeting were solicited pursuant to
Regulation 14 under the Securities Exchange Act of 1934.  There was no
solicitation in opposition to management's nominees as listed in
the Company's proxy statement, and all nominees were elected.

By a vote of 2,583,265 shares in favor, with 163,825 shares opposed
and 3,185 shares abstaining, the shareholders set the number of
directors to be elected at six (6).

The following persons were elected to serve as directors of the
Company, by the votes indicated, until the next annual meeting of
shareholders:


                    NUMBER OF      NUMBER OF
NOMINEE             VOTES FOR      VOTES WITHHELD
__________________  ___________    ________________

John H. Underwood   2,579,572      170,703
Terrence W. Glarner 2,587,972      162,303
Thomas R. King      2,587,972      162,303
Gary R. Holland     2,587,972      162,303
Eugene W. Courtney  2,587,972      162,303
Carl P. Boecher     2,587,972      162,303


The shareholders approved, by a vote of 1,360,839 for, 646,356
against, 8,200 abstaining and 734,880 broker non-votes, the
Company's 1997 Stock Option Plan.  

The shareholders also ratified the appointment of McGladrey &
Pullen, LLP, as independent auditors for the Company for the fiscal
year ending December 31, 1997, by a vote of 2,737,700 shares in
favor, 7,000 shares opposing and 5,575 shares abstaining.



                                 9


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



(A)  Exhibits

     Exhibit 10     Amended 1997 Management Incentive Plan
     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 June 28, 1997.



                                10
<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 August 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)


                                11
<PAGE>

                           DATAKEY, INC.
                   EXHIBIT INDEX TO FORM 10-QSB
                  FOR QUARTER ENDED JUNE 28, 1997


     EXHIBIT NO.              DESCRIPTION
     ___________              ________________________________

          10                  Amended 1997 Management Incentive
                              Plan
          27                  Financial Data Schedule