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 July 1, 2000

                  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 15, 2000, is 8,204,379.

         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>
                                                                 July 1,         December 31,
                                                                  2000              1999
                                                              ------------       ------------
                                                               (UNAUDITED)
              ASSETS
<S>                                                           <C>                <C>
CURRENT ASSETS
  Cash and cash equivalents                                   $  3,516,208       $    344,922
  Trade receivables, less allowance for
    doubtful accounts of $26,000                                 1,642,495          1,474,480
  Inventories                                                    1,903,532          1,328,991
  Prepaid and other                                                 95,612             29,981
                                                              ------------       ------------
              Total current assets                               7,157,847          3,178,374
                                                              ------------       ------------

OTHER ASSETS
  Prepaid licenses and patents at cost less amortization           520,420            668,036
   of $519,603 and $364,832

EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost
  Production tooling                                             1,299,313          1,306,260
  Equipment                                                      2,851,142          2,768,214
  Furniture and fixtures                                           317,102            317,103
  Leasehold improvements                                           278,371            278,371
                                                              ------------       ------------
                                                                 4,745,928          4,669,948
  Less accumulated depreciation                                 (4,099,760)        (3,917,996)
                                                              ------------       ------------
                                                                   646,168            751,952
                                                              ------------       ------------

                                                              $  8,324,435       $  4,598,362
                                                              ============       ============

              LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
  Accounts payable                                            $    639,043       $    803,887
  Accrued compensation                                             312,878            197,335
  Accrued expenses-other                                            38,802             97,144
                                                              ------------       ------------
              Total current liabilities                            990,723          1,098,366
                                                              ------------       ------------
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 20,000,000 shares; issued and outstanding
    8,204,379 in 2000 and 6,322,285 in 1999                        410,219            316,114
  Additional paid-in capital                                    13,674,445          8,501,543
  Accumulated deficit                                           (7,125,952)        (5,692,661)
                                                              ------------       ------------
                                                                 7,333,712          3,499,996
                                                              ------------       ------------

                                                              $  8,324,435       $  4,598,362
                                                              ============       ============
</TABLE>
                 See Notes to Consolidated Financial Statements

                                        2
<PAGE>

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

<TABLE>
<CAPTION>
                                                        Three Months Ended                   Six Months Ended
                                                     July 1,           July 3,            July 1,          July 3,
                                                      2000              1999               2000             1999
                                                   -----------       -----------       -----------       -----------
<S>                                                <C>               <C>               <C>               <C>
Revenue                                            $ 1,836,700       $ 1,154,008       $ 3,610,077       $ 2,513,990
Cost of goods sold                                     895,749           708,203         1,983,429         1,502,192
                                                   -----------       -----------       -----------       -----------
               Gross Profit                            940,951           445,805         1,626,648         1,011,798


Operating expenses:
  Research, development
   and engineering                                     635,494           563,775         1,269,343         1,040,957
  Marketing and sales                                  775,604           546,543         1,315,788         1,135,952
  General and administrative                           315,602           238,329           572,659           468,810
                                                   -----------       -----------       -----------       -----------

               Total operating expenses              1,726,700         1,348,647         3,157,790         2,645,719
                                                   -----------       -----------       -----------       -----------

               Operating loss                         (785,749)         (902,842)       (1,531,142)       (1,633,921)

Interest income (expense)                               60,727            (4,277)           97,857               342
                                                   -----------       -----------       -----------       -----------

               Loss before
               income taxes                           (725,022)         (907,119)       (1,433,285)       (1,633,579)
Income tax expense                                           0                 0                 0                 0
                                                   -----------       -----------       -----------       -----------

               Net loss                            ($  725,022)      ($  907,119)      ($1,433,285)      ($1,633,579)
                                                   ===========       ===========       ===========       ===========

Net loss attributable to common stockholders:
               Net loss                               (725,022)         (907,119)       (1,433,285)       (1,633,579)
               Preferred stock dividends                     0           (23,436)                0           (47,786)
                                                   -----------       -----------       -----------       -----------
               Net loss attributable to
                  common stockholders              ($  725,022)      ($  930,555)      ($1,433,285)      ($1,681,365)
                                                   ===========       ===========       ===========       ===========


  Basic and diluted
  loss per share                                   ($     0.09)      ($     0.29)      ($     0.19)      ($     0.53)
                                                   ===========       ===========       ===========       ===========


Weighted average number of
  common shares outstanding                          8,110,533         3,188,299         7,705,281         3,138,137
                                                   ===========       ===========       ===========       ===========

</TABLE>

                 See Notes to Consolidated Financial Statements


                                        3

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

<TABLE>
<CAPTION>
                                                                  Three Months Ended                 Six Months Ended
                                                              July 1,          July 3,            July 1,          July 3,
                                                               2000              1999              2000             1999
                                                          -----------       -----------       -----------       -----------
CASH FLOWS FROM
OPERATING ACTIVITIES
<S>                                                       <C>               <C>               <C>               <C>
  Net loss                                                ($  725,022)      ($  907,119)      ($1,433,285)      ($1,633,579)
  Adjustments to reconcile net loss
  to net cash used in operating activities:
    Depreciation                                              100,154           114,169           181,764           221,382
    Amortization                                               99,220            13,350           154,771            34,493
    Change in assets and liabilities
    (Increase) decrease:
      Trade receivables                                      (468,737)           (7,092)         (168,015)          187,094
      Inventories                                            (521,858)         (333,168)         (574,541)         (439,197)
      Prepaid expenses and other                              (90,752)           58,783           (65,631)           12,275
      Prepaid license fees and patent                          (2,167)           (5,557)           (7,155)          (12,977)
     Increase (decrease) in:
      Accounts payable                                        (36,548)          243,200          (164,844)          228,838
      Accrued expenses                                         17,448           (62,430)           57,201            42,113
      Accrued severance                                             0           (32,550)                0           (10,687)
                                                          -----------       -----------       -----------       -----------
         Net cash used in
         operating activities                              (1,628,262)         (918,414)       (2,019,735)       (1,370,245)
                                                          -----------       -----------       -----------       -----------

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of  equipment                                      (10,564)          (71,501)          (75,980)         (107,030)
                                                          -----------       -----------       -----------       -----------
         Net cash used in
         investing activities                                 (10,564)          (71,501)          (75,980)         (107,030)
                                                          -----------       -----------       -----------       -----------

CASH FLOWS FROM FINANCING ACTIVITIES
  Net proceeds from issuance of
    common stock                                              238,993         1,218,823         5,267,001         1,247,823
                                                          -----------       -----------       -----------       -----------
          Net cash provided by financing activities           238,993         1,218,823         5,267,001         1,247,823
                                                          -----------       -----------       -----------       -----------
         Increase (decrease) in cash and
         cash equivalents                                  (1,399,833)          228,908         3,171,286          (229,452)

CASH AND CASH EQUIVALENTS
  Beginning                                                 4,916,041           395,467           344,922           853,827
                                                          -----------       -----------       -----------       -----------
  Ending                                                    3,516,208           624,375         3,516,208           624,375
                                                          ===========       ===========       ===========       ===========

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
  Preferred stock dividend accrual                                  0            23,436                 0            39,596
  Preferred stock dividend converted to common stock                0                 0                 0             8,190
  Conversion of preferred stock to common                           0                 0                 0           151,520
                                                          -----------       -----------       -----------       -----------
                                                                    0            23,436                 0           191,116
                                                          ===========       ===========       ===========       ===========
</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 July 1, 2000, and December 31, 1999, and results of its operations and
cash flows for the three-month and six-month periods ended July 1, 2000, and
July 3, 1999. 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 2000 Datakey, Inc. Annual Report and in
Form 10-KSB for the year ended December 31, 1999.


OPERATING SEGMENTS

The Company adopted SFAS No. 131, Disclosures About Segments of an Enterprise
and Related Information, for the year ended December 31, 1998. This statement
requires public enterprises to report selected information about operating
segments in annual and interim reports issued to shareholders. The adoption of
this statement had no impact on the Company's financial condition or results of
operations.

The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. The Company has
two reportable segments: Electronic Products (EP) and Integrated Systems
Solutions (ISS). The Electronic Products segment produces and markets
proprietary memory keys, cards, and custom-shaped tokens and systems that
utilize these products that serve as a convenient way to carry electronic
information. The Integrated Systems Solutions segment produces and markets
products for the information security market, which enable user identification
and authentication, secure data exchange, and information validation.

The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. There are no intersegment
transactions. The Company evaluates performance based on operating earnings of
the respective segments.




<TABLE>
<CAPTION>


                              Three Months Ended July 1, 2000                 Six Months Ended July 1, 2000
                        --------------------------------------------- ----------------------------------------------
                            EP         ISS    UNALLOCATED    TOTAL        EP         ISS     UNALLOCATED    TOTAL
                        ----------  ---------  --------   ----------  ----------  ----------  --------   -----------
<S>                     <C>         <C>        <C>        <C>         <C>         <C>         <C>        <C>
Revenue...............  $  897,188  $ 939,512  $    -     $1,836,700  $2,211,770  $1,398,307  $    -     $ 3,610,077
Interest income                -          -      60,727       60,727         -           -      97,857        97,857
(expense).............
Depreciation and            72,303    127,071       -        199,374     126,503     210,032       -         336,535
amortization..........
Segment profit (loss).     (72,320)  (713,429)   60,727     (725,022)    (29,949) (1,501,193)   97,857    (1,433,285)
                        -------- ---------- ------------- ----------- --------- -------- ------------- -------------
<CAPTION>
                              Three Months Ended July 3, 1999                 Six Months Ended July 3, 1999
                        --------------------------------------------- ----------------------------------------------
                            EP         ISS    UNALLOCATED    TOTAL        EP         ISS     UNALLOCATED    TOTAL
                        ----------  ---------  --------   ----------  ----------  ----------  --------   -----------
<S>                     <C>         <C>        <C>        <C>         <C>         <C>         <C>        <C>
Revenue...............  $1,051,462  $ 102,546  $    -     $1,154,008  $2,268,171  $  245,819  $    -     $ 2,513,990
Interest                       -          -      (4,277)      (4,277)        -           -         342           342
income(expense).......
Depreciation and           100,205     27,314       -        127,519     193,177      62,698       -         255,875
amortization..........
Segment profit (loss).     (51,666)  (855,453)   (4,277)    (907,119)    104,089  (1,737,668)      342    (1,633,579)
                        ----------  ---------  --------   ----------  ----------  ----------  --------   -----------
</TABLE>

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 - Revenue for the three-month period ended July 1, 2000,
increased by $683,000, or 59 percent, and increased by $1,096,000 or 44% in the
six-month period ended July 1, 2000 as compared to the same periods in 1999. The
increase in revenue is due to a significant increase in revenue in the Company's
ISS business unit as customers and licensees are increasingly accepting the
Company's product offering.
         Revenue in the EP business segment is somewhat soft with a reduction of
$154,000 in the three-month period and $56,000 in the six-month period ending
July 1, 2000 as compared to the same periods in 1999. The decline in revenue is
due to a reduction in component orders from a few of the Company's major
customers. The Company has introduced system level products for the EP unit
which management expects to revitalize revenue growth.


         GROSS PROFIT MARGIN - Gross profit as a percentage of revenue increased
to 51 percent in the three-month period ended July 1, 2000, and 45 percent in
the six-month period ended July 1, 2000. The increase in margin is due to
favorable factory utilization at the higher revenue levels and also a large
element of license fee revenue that contains high gross margins.


         OPERATING EXPENSES - Operating expenses increased by $378,000 or 28
percent, and $512,000 or 19 percent in the three-month and six-month periods,
respectively, ended July 1, 2000, when compared to those periods of 1999. The
increases are principally related to an increase of $229,000 in the three-month
period and $180,000 in the six-month period in sales and marketing expense to
continue advertising and promoting the Company's ISS product line. Research and
development expense also increased $72,000 in the three-month period and
$228,000 in the six-month period, as the Company continued to develop more
features and enhancements to its information security products. Other expense
increases are primarily increases in rent, corporate insurance, and salaries.

         INTEREST INCOME - Interest income increased to $61,000 in the
three-month periods and $98,000 in the six-month period, ended July 1, 2000, as
the Company invested the proceeds from the sale of securities in late 1999 and
early 2000 in interest bearing accounts. Interest income is expected to trend
down over the balance of 2000 as a portion of the interest bearing accounts will
be used to fund the continuing investment in product development and product
promotion activities.


         FINANCIAL CONDITION - The Company experienced a decrease in cash and
cash equivalents of $1,400,000 in the three-month period and an increase of
$3,171,000 for the six-month period ended July 1, 2000, compared to an increase
of $229,000 in the three-month period and a decrease of $229,000 for the
six-month period in 1999. The additional increase in cash in the six month
period is primarily attributable to the sale of common stock in a private
placement during February 2000 and from the sale of securities upon exercise of
warrants and stock options during the first and second quarters of 2000. The
additional decrease in cash in the second quarter of 2000 was due to a
significant increase in accounts receivable related to the ISS business unit and
an increase in inventory in anticipation of higher sales in the EP business
unit.

         Datakey's balance sheet reflects $6,167,000 in working capital as of
July 1, 2000 and a current assets to current liabilities ratio of 7.22 to 1. The
Company believes that its current cash and cash equivalents in addition to its
$1 million bank line of credit, renewed in May 2000 will provide sufficient
funding for the balance of 2000.

<PAGE>
                              CAUTIONARY STATEMENTS

The Management's Discussion and Analysis contains certain forward-looking
statements relating to the continued acceptance of the Company's ISS products,
the implication that the ISS product revenue will continue to increase
significantly, and its ability to fund its operations. These statements are
subject to certain risks and uncertainties which may cause actual results to
differ materially from those projected. These risks and uncertainties include:
(i) a reduction in the market acceptance and demand for the Company's ISS
products; (ii) the success of current pilot programs and customer demand to
convert to production programs; (iii) the introduction of competitive
information security products; and (iv) the ability of the Company to attain
profitability and positive cash flows by significantly increasing ISS product
revenues while controlling expenses.



<PAGE>



                           PART II. OTHER INFORMATION


ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

On June 8, 2000, the Company sold 80,000 shares of common stock for $100,000
upon the exercise of a warrant held by an investor who acquired the warrant in
connection with a private placement completed on October 29, 1999. The Company
relied upon Section 4(2) of the Securities Act, which provides an exemption for
transactions not involving a public offering.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY SHAREHOLDERS

The Company held its Annual Meeting on Wednesday, May 31, 2000.

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 6,710,030 votes in favor, with 14,103 votes opposed, and 23,005 votes
abstaining, the shareholders set the number of directors to be elected at five
(5).


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 VOTES
      NOMINEE                     VOTES FOR                  WITHHELD

Terrence W. Glarner               6,726,813                   20,325
Thomas R. King                    6,725,413                   21,725
Gary R. Holland                   6,724,313                   22,825
Eugene W. Courtney                6,726,813                   20,325
Carl P. Boecher                   6,727,913                   19,225

The shareholders approved, by 3,421,414 votes for, 578,893 against, 15,235
abstaining, and 2,731,596 broker non-votes, an amendment to the Articles of
Incorporation, including an increase of authorized shares from 12,500,000 to
30,000,000 consisting of 20,000,000 common shares, 400,000 preferred shares and
9,600,000 undesignated shares..

The shareholders approved, by 6,081,792 votes for, 638,996 against, 26,350
abstaining, and no broker non-votes, an increase in the shares under the 1997
Stock Option Plan from 800,000 to 1,100,000

The shareholders also ratified the appointment of McGladrey and Pullen, LLP, as
independent auditors for the Company for the fiscal year ending December 31,
2000, by 6,705,939 votes in favor, 28,819 opposing and 12,380 abstaining.

<PAGE>


                           PART II. OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         Exhibits

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


(b)      Reports on Form 8-K
         None





<PAGE>




                                   SIGNATURES


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

Dated August 15, 2000                       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 JULY 1, 2000


EXHIBIT NO.           DESCRIPTION

   27                 Financial Data Schedule