e10qsb

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

407 WEST TRAVELERS TRAIL, BURNSVILLE, MN 55337
(Address of Principal Executive Offices)

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 Issuer was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

The number of shares outstanding of the issuer’s common equity as of October 31, 2003 is 11,729,773.

PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
DATAKEY, INC.
BALANCE SHEETS


				September 30,			December 31,
				2003			2002

				(UNAUDITED)
ASSETS
CURRENT ASSETS
	Cash			$	397,384		$	2,562,611
	Trade receivables, less allowance for doubtful accounts of $30,000 and $55,000				1,139,648			1,700,434
	Inventories, less reserves for obsolescence of $181,000 and $164,000				495,440			996,532
	Prepaid expenses and other				81,118			65,259

			Total current assets		2,113,590			5,324,836

OTHER ASSETS
	Patents at cost less amortization				15,599			0
	Prepaid licenses at cost less amortization				373,141			236,817
		of $335,229 and $309,183
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost
	Production tooling				30,230			23,650
	Equipment				724,487			735,916
	Furniture and fixtures				166,520			166,520
	Leasehold improvements				310,912			310,912

					1,232,149			1,236,998
	Less accumulated depreciation				(1,042,738	)		(927,844	)

					189,411			309,154

				$	2,691,741		$	5,870,807

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
	Accounts payable			$	380,390		$	574,266
	Accrued compensation				296,241			287,718
	Accrued expenses-other				120,553			154,267
	Deferred revenue				422,726			355,338

			Total current liabilities		1,219,910			1,371,589

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 10,129,773 in 2003 and 10,082,750 in 2002				507,322			504,138
	Additional paid-in capital				18,982,012			18,921,150
	Accumulated deficit				(18,392,503	)		(15,301,070	)

					1,471,831			4,499,218

				$	2,691,741		$	5,870,807


			Three Months Ended						Nine Months Ended
			September 30,			September 28,			September 30,			September 28,
			2003			2002			2003			2002

Revenue			$	1,268,323		$	1,387,781		$	3,095,383		$	5,750,197
Cost of goods sold				601,874			558,606			1,775,625			2,885,358

		Gross Profit		666,449			829,175			1,319,758			2,864,839
Operating expenses:
	Research, development, technical support and engineering			468,231			578,427			1,534,035			1,750,556
	Marketing and sales			758,472			762,878			2,241,012			2,439,904
	General and administrative			111,110			223,625			646,482			619,052

		Total operating expenses		1,337,813			1,564,930			4,421,529			4,809,512

		Operating loss		(671,364	)		(735,755	)		(3,101,771	)		(1,944,673	)
Interest income				1,482			12,692			10,338			37,415

Loss from continuing operations
		before income taxes		(669,882	)		(723,063	)		(3,091,433	)		(1,907,258	)
Income tax expense				0			0			0			0

Net loss from continuing operations				($669,882	)		($723,063	)		($3,091,433	)		($1,907,258	)

Gain from disposal of discontinued segment				0			0			0			351,045

		Net loss		($669,882	)		($723,063	)		($3,091,433	)		($1,556,213	)

	Basic and diluted loss per share from continuing operations			($0.07	)		($0.07	)		($0.31	)		($0.19	)

	Basic and diluted income per share from discontinued operations		$	0.00		$	0.00		$	0.00		$	0.04
	Basic and diluted loss per share			($0.07	)		($0.07	)		($0.31	)		($0.15	)

Weighted average number of common shares outstanding-basic and diluted				10,128,820			10,082,750			10,122,936			10,072,138


					Three Months Ended						Nine Months Ended
					September 30,			September 28,			September 30,			September 28,
					2003			2002			2003			2002

CASH FLOWS FROM OPERATING ACTIVITIES
	Net loss					($669,882	)		($723,063	)		($3,091,433	)		($1,556,213	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation				46,390			56,701			136,840			119,436
		Amortization				10,690			21,799			26,046			75,457
		Change in assets and liabilities
		(Increase) decrease in assets:
				Trade receivables		(210,986	)		212,002			560,786			668,692
				Inventories		79,618			49,225			501,092			(93,267	)
				Prepaid expenses and other		5,413			(82,093	)		(15,859	)		(42,755	)
			Increase (decrease) in:
				Accounts payable		56,250			39,090			(193,876	)		(138,410	)
				Accrued expenses		34,793			171,168			(25,191	)		173,282
				Deferred revenue		3,814			(127,119	)		67,388			(242,565	)

				Net cash used in operating activities		(643,900	)		(382,290	)		(2,034,207	)		(1,036,343	)

CASH FLOWS FROM INVESTING ACTIVITIES
	Cash paid for patents and licenses					(35,379	)		(21,799	)		(177,969	)		(75,457	)
	Purchase of equipment and leasehold improvements					(373	)		(1,653	)		(17,097	)		(71,676	)

				Net cash used in investing activities		(35,752	)		(23,452	)		(195,066	)		(147,133	)

CASH FLOWS FROM FINANCING ACTIVITIES
	Net proceeds from issuance of common stock					13,079			0			64,046			346,298

				Net cash provided by financing activities		13,079			0			64,046			346,298

				Decrease in cash		(666,573	)		(405,742	)		(2,165,227	)		(837,178	)
CASH
	Beginning					1,063,957			3,680,828			2,562,611			4,112,264

	Ending				$	397,384		$	3,275,086		$	397,384		$	3,275,086

Note 1. NATURE OF BUSINESS
Datakey, Inc. provides products and systems directed to the information security market, which enables user identification and authentication, secure data exchange and information validation. In 2000 the Company discontinued a segment which provided electronic products, consisting of proprietary memory keys, cards and other custom-shaped tokens. Such products served as a convenient way to carry electronic information and were packaged to survive in portable environments.

Note 2. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary to present fairly Datakey’s financial position as of September 30, 2003, and December 31, 2002, and results of its operations and cash flows for the three-month and nine-month periods ended September 30, 2003, and September 28, 2002. 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 2002 Datakey, Inc. Annual Report and in Form 10-KSB for the year ended December 31, 2002.

Note 3. SOFTWARE DEVELOPMENT COSTS
The Company’s policy is to expense those costs of software development incurred until the point of technical feasibility is attained, at which time such costs are capitalized. No amounts have been capitalized due to uncertainties about the market acceptance of the underlying products.

Note 4. STOCK BASED COMPENSATION
The Company regularly grants options to its employees under various plans. As permitted under accounting principles generally accepted in the United States of America, these grants are accounted for following APB Opinion No. 25 and related interpretations. Accordingly, compensation cost has been recognized for those grants whose exercise price is less than the fair market value of the stock on the date of grant. No compensation expense recorded for employee grants for the quarters ended September 30, 2003 and September, 2002. Compensation expense recorded for employee grants for the nine-month periods ended September 30, 2003 and September 28, 2002 was $4,546 and $0, respectively. The Company also periodically grants options and warrants to non-employees for goods and services and in conjunction with certain agreements. These grants are accounted for under FASB Statement No. 123 based on the grant date fair values.

Had compensation cost for all of the stock-based compensation grants and warrants issued been determined based on the fair values at the grant date consistent with the provisions of Statement No. 123, the Company’s net loss and net loss per basic and diluted common share would have been as indicated below.


			September 30,			September 28,
Quarters Ended			2003			2002

Net loss, as reported				($669,882	)		($723,023	)
Deduct total stock-based employee compensation
	expense determined under the fair value- based method for all awards			(149,383	)		(192,196	)

		Net loss, pro forma		($819,265	)		($915,209	)
Basic and diluted loss per share, as reported				($.07	)		($.07	)
Basic and diluted loss per share, pro forma				($.08	)		($.09	)


			September 30,			September 28,
Nine Month Periods Ended			2003			2002

Net loss, as reported				($3,091,433	)		($1,556,213	)
Deduct total stock-based employee compensation
	expense determined under the fair value- based method for all awards			(498,103	)		(558,208	)

		Net loss, pro forma		($3,589,536	)		($2,114,421	)
Basic and diluted loss per share, as reported				($.31	)		($.15	)
Basic and diluted loss per share, pro forma				($.35	)		($.21	)

The above pro forma effects on net loss and net loss per basic and diluted common share are not likely to be representative of the effects on reported net loss or net loss per common share for future years because options vest over several years and additional awards generally are made each year.

Note 5. PRODUCT WARRANTY
The Company provides a limited 90-day warranty for the replacement of defective products. The Company’s standard warranty policy requires the Company to repair or replace defective products at no cost to its customers. The Company estimates the costs that may be incurred under its basic limited warranty and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the Company’s warranty liability include the number of units sold, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. The Company utilizes historical trends and information received from its customers to assist in determining the appropriate loss reserve levels. The warranty accrual was reduced in late 2002 to reflect the occurrence of fewer warranty claims.

Note 6. LICENSES
Licenses are stated at cost. The costs of the license agreements are amortized to cost of goods sold as the products incorporating the licensed units are sold. Under these agreements, the Company generally agrees to purchase a minimum quantity of software units over a specified period of time.

The Company expects that the carrying amount of the license agreements will be charged to amortization in 2003 and 2004 based upon the expected sales of its products which incorporate the licenses. In 2002, the Company entered into a license agreement, and amended the agreement in 2003, under which it purchased licenses for $195,000 and agreed to minimum future purchase of licenses for $325,000 by March 2004. The Company presently expects to acquire and utilize the minimum number of licenses under the agreement by the end of 2004.

The Company reviews its license costs for impairment and records impairment charges if sales of products incorporating the licenses are less than expected. As a result, the Company recognized no impairment expense during the quarter ended September 30, 2003, $12,167 during the quarter ended September 28, 2002 and $48,667 for the year ended December 31, 2002 to reduce the carrying amount of certain license costs to the amount required based on sales levels. These impairment charges are included in the caption “cost of goods sold” in the accompanying income statement.

The Financial Accounting Standards Board (FASB) has issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. Statement No. 150 requires that certain freestanding financial instruments be reported as liabilities in the balance sheet. Depending on the type of financial instrument, it will be accounted for at either fair value or the present value of future cash flows determined at each balance sheet date with the change in that value reported as interest expense in the income statement. Prior to the application of Statement No. 150, either those financial instruments were not required to be recognized, or if recognized were reported in the balance sheet as equity and changes in the value of those instruments were normally not recognized in net income. The Company has applied Statement No. 150 for the quarter ended September 30, 2003.

Statement No. 150 had no effect on reported results in the quarter ended September 30, 2003 and the Company does not expect the application of Statement No. 150 to have a material effect on its future financial statements.

Note 8. SUBSEQUENT EVENTS-FINANCING OBTAINED
On October 17, 2003 the Company closed on a $2 million convertible secured loan with a group of accredited investors. The note has a term of 12 months, is secured by all assets of the Company and is convertible into common stock at a price of $1.25. In addition the investors were granted 4 million warrants with a term of seven years and an exercise price of $.77.

During September, 2003 the Company reduced the exercise price to $.70 on 1,600,000 warrants originally issued in February, 2001. Additionally, in October, 2003 offered new warrants at an exercise price of $.77 as an additional incentive for warrant holders to exercise their warrants. All warrant holders accepted either the September offer to exercise at $.70 or the October offer to exercise at $.70 and to receive new warrants with a term of five years and an exercise price of $.77 providing a total of $1,120,000 to the Company.

REVENUE
Revenue for the three-month period ended September 30, 2003 decreased by $119,000, or 9 percent, as compared to the same period in 2002. Revenue for the nine-month period ended September 30, 2003 decreased by $2,655,000, or 46 percent, as compared to the same period in 2002. The significant decrease in revenue in the three-month and nine-month periods, compared to the 2002 periods, resulted primarily from a reduction in demand for our products created by the slowdown in IT spending and budgetary issues. Revenue for the quarter ended September 30, 2003 increased by $235,000, or 23 percent, from the quarter ended June 30, 2003 as the Company’s customers continue to show more willingness to place orders for IT security. Although it is too early to determine if this trend will continue long-term, the Company believes that revenue in the 2003 fourth quarter will exceed the level attained in the 2003 third quarter.

GROSS PROFIT MARGIN
Gross profit, as a percentage of revenue, decreased to 53 percent and 43 percent in the three-month and nine-month periods, respectively, ended September 30, 2003, from 60 percent and 50 percent in the three-month and nine-month periods, respectively, ended September 28, 2002. The decrease in gross profit percentage in the three-month and nine-month periods related primarily to fixed overhead being spread over the reduced revenue.

OPERATING EXPENSES
Operating expenses decreased by $227,000 in the three-month period and $388,000 in the nine-month period ended September 30, 2003, primarily as the result of a reduction in personnel and discretionary expenditures offset by accruals, in the amount of $278,000, during the first quarter of 2003, for severance pay and other expenses related to a reduction in staff. Operating expenses during the fourth quarter of 2003 are expected to increase modestly from the third quarter.

INTEREST INCOME
Interest income, net of a minor amount of interest expense, decreased to $1,000 and $10,000 in the three-month and nine-month periods ended September 30, 2003 from $13,000 and $37,000 in the three-month and nine-month periods ended September 28, 2002, reflecting a lower rate of interest and a reduction in cash.

OUTLOOK
The worldwide slowdown in IT spending in the commercial market as well as in the government market continues. Although we are beginning to see a gradual improvement in orders as evidenced by the improved financial results in the third quarter and a slightly more positive attitude about future orders when communicating with customers, we are unable to determine when or if a measurable increase in orders will occur. Accordingly, we are not providing revenue guidance at this time.

LIQUIDITY AND FINANCIAL CONDITION
The Company experienced a decrease in cash of $667,000 in the three-month period ended September 30, 2003. The decrease in cash during the three-month period related to the operating loss, a $211,000 increase in accounts receivable and a $26,000 increase in prepaid license fees. The cash decrease was offset by a $80,000 decrease in inventory and a $95,000 increase in accounts payable, accrued expenses and deferred revenue. The statements of cash flows include discontinued operations as well as continuing operations in the 2002 periods.

Accounts receivable increased $211,000 during the three-month period ended September 30, 2003 primarily as a result of an increase in revenue in the quarter ended September 30, 2003 compared to the quarter ended June 30, 2003. Inventory decreased by $80,000 during the three-month period ended September 30, 2003 as the Company curtailed inventory purchases in light of cash limitations.

Datakey’s balance sheet reflects $894,000 in working capital as of September 30, 2003 and a current assets to current liabilities ratio of 1.7 to 1. The Company believes that its current level of cash, including $1,120,000 in cash from warrant exercises and $2,000,000 from a secured loan in early October, will provide sufficient liquidity to fund operations for at least one year.

In order to maintain the listing of its Common Stock on the Nasdaq Stock Market, the Company must meet certain financial tests (including, but not limited to, a minimum bid price of our Common Stock of $1.00 and a minimum net worth of $2,500,000). As of June 30, 2003, the Company no longer met such minimum net equity requirement or alternative requirements and was notified by Nasdaq Staff that the Company was subject to delisting. The Company appealed the staff determination and presented a plan to become compliant and to maintain compliance. Because the Company was unsuccessful in raising additional equity financing, under favorable terms, necessary to maintain listing compliance the Company withdrew its appeal and accepted delisting. The Company’s stock began trading on the OTC Bulletin Board on November 13, 2003.

CONTRACTUAL CASH OBLIGATIONS
At September 30, 2003 the Company had no long-term debt outstanding and its contractual cash obligations are those from minimum payments under a software license agreement and operating lease obligations. As discussed in Note 8 to the financial statements, on October 17, 2003 the Company closed on a $2,000,000 convertible note with a term of 12 months. Repayment of this note is included in the 2004 obligations in the table below:

OPERATING SEGMENTS
Through July 31, 2001, the Company had two reportable segments: Electronic Products (EP) and Information Security Solutions (ISS). As discussed in the following notes, the EP segment has been shown as discontinued operations beginning in December 2000. The Electronic Products segment produced and marketed 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 assets related to the ongoing business of the EP business segment were sold in August 2001 and the final EP contract was fulfilled in 2002. The Information Security 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 described in our Form 10-KSB. There are no inter-segment transactions. The Company evaluates performance based on operating earnings of the respective segments.


	Three Months Ended September 30, 2003										Nine Months Ended September 30, 2003

	EP		ISS			UNALLOCATED		TOTAL			EP		ISS			UNALLOCATED		TOTAL

Revenue	$	0	$	1,268,323				$	1,268,323		$	0	$	3,095,383		$		$	3,095,383
Interest income (expense)							1,482		1,482								10,338		10,338
Depreciation and amortization		0		57,080					57,080			0		162,886					162,886
Segment profit (loss)		0		(671,364)	)		1,482		(669,882	)		0		(3,091,433	)		10,338		(3,091,433	)


	Three Months Ended September 28, 2002										Nine Months Ended September 28, 2002

	EP		ISS			UNALLOCATED		TOTAL			EP		ISS			UNALLOCATED		TOTAL

Revenue	$	0	$	1,387,781				$	1,387,781		$	870,051	$	5,750,197		$		$	6,620,248
Interest income (expense)							12,692		12,692								37,415		37,415
Depreciation and amortization		0		63,422					63,422			0		194,893					194,893
Segment profit (loss)	$	0		(735,755	)		12,692		(723,063	)		351,045		(1,944,673	)		37,415		(1,556,213	)

DISCONTINUED OPERATIONS
In February 2001 the Company’s Board of Directors approved management’s plan to discontinue the operations of the EP segment. The plan anticipated the phase down of the operations through December 31, 2001, although the Company continued to pursue the possibility of selling the operations.

The estimated loss, taken in 2000, on the phase down of the EP segment included the write-off of inventory, patents, and equipment anticipated to remain at the date of closedown and expenses associated with the phase down, net of estimated operating income through that date. The phase down of the segment was accounted for as discontinued operations and, accordingly, its net assets and net liabilities have been segregated from continuing operations in the balance sheets and the results of operations have been excluded from continuing operations for all periods presented. There were no net assets of the EP segment as of June 30, 2003 and December 31, 2002.

SALE OF DISCONTINUED BUSINESS SEGMENT
On August 3, 2001, the Company completed the sale of the EP business segment fixed assets, inventory, patents and prepaid expense along with customer lists, assignment of certain customer contracts and all intellectual property required to operate the EP business segment. The Company retained certain customer contracts, and all EP accounts receivable, accounts payable and accrued expense as of July 31, 2001

Under terms of the primary contract retained upon sale of the EP segment, the customer was required to provide certain components that were necessary to complete the manufacture and shipment of the final product, provide necessary test fixtures and also was required to approve the final test results prior to shipping the product. Due to a delay in delivery of the customer provided materials and a delay in providing the necessary test fixtures, the completion date of the contract extended beyond the date that was initially expected at the time the EP segment was sold.

During the second quarter of 2002, the Company completed the final delivery under the contract retained at the time of sale of the EP segment and realized a profit of $361,767. This amount was reflected on the Income Statement as gain on disposition of discontinued operation. This completed the sale of the EP segment and no further gain or loss from discontinued operations is expected.

Certain statements in the Management’s Discussion and Analysis are forward-looking statements that involve a number of risks and uncertainties that may cause the Company’s future operations and results of operations to differ materially from those anticipated in this report. Specifically, these include statements relating to the sufficiency of capital for at least one year and the expected increase in revenue in the fourth quarter versus the third quarter of 2003, both of which depend on the ultimate demand for Company products given the overall

slowdown in the IT security industry, the extent to which the IT security market recovers, the success of the Company’s new product, Axis, the Company’s ability to continue to control expenses, as well as general competitive, market and economic conditions.

As of the end of the period covered by this report, the Company conducted an evaluation under the supervision and with the participation of the company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rules 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information that is required to be disclosed by the Company in reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the rules of the Securities Exchange Commission.

There were no changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

A Form 8-K dated July 31, 2003 was filed announcing the financial results for the quarter ended July 31, 2003 and announcing that the Company had received a notice of potential delisting from Nasdaq for failure to meet the $1 minimum bid price rule. A Form 8-K was filed on September 26, 2003 to announce that the Company had received a Nasdaq Staff Determination Letter regarding delisting from the Nasdaq SmallCap Market, both due to the failure to meet the minimum bid price and minimum net worth requirements. Subsequently, the Company requested an oral hearing with respect to such delisting, and such hearing was held on October 23, 2003. On November 11, 2003, the Company withdrew its appeal of the delisting and began to trade on the OTC Bulletin Board on November 13, 2003.

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.


Exhibit No.		Description

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer under §906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer under §906 of the Sarbanes-Oxley Act of 2002

14 EX-31.1 3 c81016exv31w1.htm EX-31.1 CERTIFICATION OF CEO - SECTION 302 exv31w1

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

The small business issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

The small business issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. §1350, AS ADOPTED PURSUANT TO
§906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Datakey, Inc. (the “Company”) on Form 10-QSB for the quarter ended September 30, 2003 as filed with the Securities and Exchange Commission (the “Report”), I, Timothy L. Russell, Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. §1350, AS ADOPTED PURSUANT TO
§906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Datakey, Inc. (the “Company”) on Form 10-QSB for the quarter ended September 30, 2003 as filed with the Securities and Exchange Commission (the “Report”), I, Alan G. Shuler, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


BALANCE SHEETS
STATEMENTS OF INCOME
STATEMENTS OF CASH FLOWS
NOTES TO FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
PART II. OTHER INFORMATION
SIGNATURES
EXHIBIT INDEX TO FORM 10-QSB
EX-31.1 Certification of CEO - Section 302
EX-31.2 Certification of CFO - Section 302
EX-32.1 Certification of CEO - Section 906
EX-32.2 Certification of CFO - Section 906


		Three Months Ended Sep. 30,				Nine Months Ended Sep 30,
		2003		2002		2003		2002

Balances, Beginning of period		$	3,425	$	25,641	$	4,175	$	26,894
	Accruals for products sold		0		0		0		0
	Payments made		681		220		1,431		1,473
Balances, End of period		$	2,744	$	25,421	$	2,744	$	25,421


Licenses:	September 30, 2003			December 31, 2002

Gross carrying amount	$	708,370		$	546,000
Accumulated amortization		(335,229	)		(309,183	)

Net carrying amount	$	373,141		$	236,817


Quarter ended September 30, 2003	$	10,690
Quarter ended September, 2002	$	21,799
Nine months ended September 30, 2003	$	26,046
Nine months ended September 28, 2002	$	75,457
Year ended December 31, 2002	$	182,847


2003	$	154,000	(remaining three months)
2004*		2,237,000
2005		22,000
thereafter		10,000

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


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


Dated: November 14, 2003	Datakey, Inc.

	By:	/s/ Timothy L. Russell Timothy L. Russell Chief Executive Officer (Principal Executive Officer)

	By:	/s/ Alan G. Shuler Alan G. Shuler Vice President & Chief Financial Officer (Principal Financial and Accounting Officer)


For the fiscal quarter ended September 30, 2003		Commission File No. 0-11447


		Signature:		/s/ Timothy L. Russell Timothy L. Russell Chief Executive Officer


		Signature:		/s/ Alan G. Shuler Alan G. Shuler Chief Financial Officer