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                                      AGREEMENT


EFFECTIVE DATE:  November 1, 1995


PARTIES:

    Datakey, Inc.
    407 West Travelers Trail
    Burnsville, Minnesota  55337-2554                  ("Datakey" or "Company")

    Gary R. Holland
    6312 Indian Hills Road
    Edina, Minnesota  55439                                         ("Holland")


RECITALS:

    A.  Datakey is a public company engaged in the business of designing,
manufacturing and marketing portable-memory-based systems, subsystems and custom
designed components for security-driven markets;

    B.  Holland has unique experience, skill and expertise in the management of
public and private companies and in the development of business strategies; and

    C.  Datakey is desirous of appointing Holland to its Board of Directors as
its Chairman of the Board and having Holland provide certain consulting
services, and Holland is desirous of serving as Datakey's Chairman of the Board
and providing such consulting services to Datakey, subject to the terms and
conditions set forth herein.

AGREEMENT:

    In consideration of the mutual covenants contained herein, and for other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:

    1.   DIRECTORSHIP.  On the assumption that the terms and conditions of this
Agreement are acceptable to Holland and the Agreement has been signed by the
parties hereto, the Board of Directors will appoint Holland to serve on the
Board of Directors of Datakey as its Chairman of the Board and to serve on all
Board committees.  The Company will include Holland on its list of director
nominees in Datakey's 1996 Proxy and Proxy Statement for election at the annual
shareholders' meeting expected to be held in May 1996.  If elected by the
shareholders, Holland will serve as a director of the Company at least until

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the 1997 annual meeting.  Thereafter, Holland's service on the Board will depend
on the annual submission by Datakey of his name to the shareholders of Datakey
as a director nominee and his election by the shareholders.

    2.   CONSULTING.

    a.   SERVICES.  Holland shall use his best efforts to assist Datakey as
    follows:

              i.   analyze its current business and business opportunities;
              ii.  develop a 1996 plan;
              iii. analyze personnel needs;
              iv.  assess desirability of Datakey continuing to be a stand-
                   alone Company;
              v.   address strategic partnering issues; and
              vi.  as may be directed by the Board of Directors.

         In performing such services, Consultant will be responsible to and
    report to Datakey's Board of Directors.

         b.   TERM.  Subject to the termination provisions of Section 10 of
    this Agreement, Holland's consulting services shall commence as of November
    1, 1995, and shall continue through October 31, 1996.  The continuation of
    its consulting services after October 31, 1996 is subject to the mutual
    written agreement of both parties.  If either party should desire to renew
    this relationship, such party shall give the other party written notice of
    such desire at least thirty (30) days prior to the end of the term of this
    Agreement.

         c.   TIME.  Holland shall provide his consulting services to Datakey
    for a minimum of six (6) days per four (4) week period.  The four-week
    period shall begin on the effective date of this agreement and shall
    continue for thirteen (13) equal four week periods, or until the Agreement
    is terminated.  All time which Holland spends on company matters as a
    director will be accrued as a part of his consulting time commitment.

         d.   COMPANY POLICIES.  Holland shall abide by all policies of Datakey
    as such policies may be amended from time to time by Datakey.

         e.   USE OF DATAKEY'S NAME.  Holland shall not use the name of Datakey
    or any other similar name or any trademark, tradename or service mark of
    Datakey which may in any way result in confusion or lead a third party to
    believe that Datakey and Holland are not separate and distinct entities.

         f.   LAWS AND REGULATIONS.  Holland shall conform to all applicable
    laws and regulations and to the highest business ethics in performing his
    obligations in accordance with the terms of this Agreement.

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    3.   CASH COMPENSATION.

         a.   AS A DIRECTOR.  If Holland is receiving compensation as a
    director pursuant to Section 3b below, he will receive no directors' fees.
    If Holland's consulting services are discontinued and he continues to serve
    as a director, he will receive the fees then being paid to the other
    directors which is currently $1,000 for each directors' meeting attended,
    $500 for each committee meeting attended, and an annual retainer of $2,500.

         b.   FOR CONSULTING SERVICES.  Datakey will pay Holland $100,000 for
    the term of the Agreement, payable in twelve monthly installments beginning
    on December 1, 1995 and ending on December 1, 1996.  The Company shall have
    the right to withhold taxes from such payments if it believes it is legally
    obligated to do so.  The Company agrees to reimburse Holland for all
    reasonable expenses incurred by Holland in performing his services
    hereunder; provided that such expenses in excess of $500 in any given month
    are preapproved by the Company, all expenses incurred will be properly
    accounted for in accordance with the policies and procedures established by
    the Company.

    4.   STOCK OPTIONS.

         a.   AS A DIRECTOR.  Upon Holland's appointment to Datakey's Board of
    Directors In November 1995, he will receive a non-qualified stock option
    for 15,000 shares as evidenced by a stock option agreement in the form of
    agreement attached hereto as Exhibit A.  The Company has recently amended
    its Non-Qualified Stock Option Plan providing for automatic option grants
    to directors which is subject to approval by the shareholders at their 1996
    annual meeting.  If for any reason the Amendment is not approved and the
    option is invalidated, the Company will grant to Holland a new option for
    15,000 shares of the Company's Common Stock on the same terms, including an
    exercise price.  Beginning in 1997 at the annual shareholders' meeting,
    Holland will receive additional non-qualified options for 3,000 shares, at
    an exercise price equal to the fair market value on the date of grant, for
    each year of service as a director.

         b.   FOR CONSULTING SERVICES.  Upon the signing of this Agreement,
    Holland will be granted an additional non-qualified stock option for 35,000
    shares, at an exercise price equal to the closing price of Datakey's Common
    Stock as reported in the Over-the-Counter Market on the Nasdaq National
    Market System, to be evidenced by a stock option agreement in the form of
    the agreement attached hereto as Exhibit B.

    5.   NONCOMPETITION.  For so long as Holland is providing consulting
services or serving as a director of Datakey, Holland shall refrain from
directly or indirectly developing, selling, promoting or brokering any items
which are in competition with the products that Holland worked on pursuant to
the terms of this Agreement.  Without limiting the generality of the foregoing
sentence, this provision shall be deemed to be breached if Holland acts as an
employee, agent or consultant of, independent contract, distributor or broker
for, or

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shareholder, director, officer or owner of any capital interest in, any person
or entity developing, manufacturing or selling such competitive items.

    6.   NONDISCLOSURE OF CONFIDENTIAL INFORMATION.

         a.  DEFINITION.  For purposes of this Agreement "Confidential
    Information" means any information or compilation of information, not
    generally known, which is proprietary to Datakey and relates to Datakey's
    existing or reasonably foreseeable business which is not readily disclosed
    by inspection of Datakey's products, including, but not limited to, trade
    secrets, Inventions, (as hereinafter defined) and information contained in
    or relating to Datakey's product designs, tolerances, manufacturing
    methods, processes, techniques, treatment or chemical composition of
    material, plant layout, tooling, marketing plans or proposals, and customer
    information.  All information which Datakey identifies as being
    "confidential" or "trade secret" shall be presumed to be Confidential
    Information.  Confidential Information shall also include any information
    disclosed by a third party under contract with Datakey which contract
    requires such disclosed information be kept confidential.  Confidential
    Information shall not include information that (i) is in or enters the
    public domain other than through a breach of confidentiality owed to
    Datakey, (ii) was known to consult prior to disclosure by Datakey as
    demonstrated by Holland's written records or (iii) is disclosed to Holland
    by a third party other than through a breach of confidentiality owed to
    Datakey.

         b.  NONDISCLOSURE.  During the term of this Agreement and at all times
    thereafter, Holland shall hold in strictest of confidence and will never
    disclose, furnish, transfer, communicate, make assessable to any person or
    use in any way Confidential Information for Holland's own or another's
    benefit or permit the same to be used in competition with Datakey, nor will
    Holland accept any employment which would, by the nature of the position,
    inherently involve the use or disclosure by Holland of Confidential
    Information.  The term "any person" as used above includes any individual
    who does not have written authorization from Datakey to have access to
    Confidential Information, including Datakey employees and other Datakey
    consultants.  Holland will refrain from such acts and omissions which would
    reduce the value of the Confidential Information to Datakey.

    7.  INVENTIONS.

         a.  DEFINITION.  For purposes of this Agreement "Invention" means any
    invention, enhancement, alteration, modification, improvement, discovery,
    new idea, formula, process, design, trade secret or other useful technical
    information or know-how, whether or not shown or described in writing or
    whether or not copyrightable or patentable, relating to the existing or
    reasonably foreseeable business of Datakey.

         b.  DISCLOSURE AND ASSIGNMENT.  Holland agrees to promptly disclose to
    Datakey in writing complete information concerning all Inventions and
    Confidential Information made, generated, discovered, developed, conceived,
    perfected or first

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    reduced to practice by Holland alone or in conjunction with others, during
    the periods covered by this Agreement that:

              i.  Relate to any subject matter pertaining to projects assigned
         to Holland hereunder;

              ii.  Relate to or is directly or indirectly connected with the
         business, products, projects or Confidential Information of Datakey;
         or

              iii.  Involve the use of any time, material or facility of
         Datakey.

    Holland hereby acknowledges that all said Inventions and Confidential
    Information shall be "work made for hire" as defined in 17 U.S.C. Section
    101 (1976), as amended, and as such, shall be the exclusive property of
    Datakey.  Holland hereby assigns to Datakey all of his/her right, title and
    interest in such Inventions and Confidential Information.

         c.  LIMITATION OF SECTION 7.B.  The provisions of Section 6.b. above
    shall not apply to any Invention meeting all of the following conditions:

              i.  Such Invention was developed entirely on Holland's own time;
         and

              ii.  Such Invention was made without the use of any of Datakey's
         equipment, supplies, facility or trade secret information; and

              iii.  Such Invention does not relate (A) directly to the business
         of Datakey or (B) to Datakey's actual or demonstrably anticipated
         research and development; and

              iv.  Such Invention does not result from any work performed by
         Holland for Datakey.

         d.  ASSISTANCE OF HOLLAND.  Holland agrees, at Datakey's expense, to
    give Datakey all assistance it reasonably requires to perfect, protect, and
    use its rights to Inventions and Confidential Information.  In particular,
    but without limitation, Holland agrees to sign all documents, do all
    things, and supply all information that Datakey may deem necessary or
    desirable to (i) transfer or record the transfer of Holland's entire right,
    title, and interest in Inventions and Confidential Information; and (ii)
    enable Datakey to obtain patent, copyright, or trademark protection for
    Inventions anywhere in the world.

         e.  CONTINUING OBLIGATION AFTER TERMINATION OF AGREEMENT.  The
    obligations of this Section 7 shall continue beyond the termination of this
    Agreement with respect to Inventions conceived or made by Holland during
    the term hereof and shall be binding upon Holland's assigns, executors,
    administrators, and other legal representatives.  In the event Holland is
    called upon to render assistance to Datakey pursuant to Section 7.d. after
    termination of this Agreement, Datakey shall pay Holland the compensation

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    set forth in Section 3 above and shall call upon Holland for assistance at
    such reasonable times so as not to interfere with Holland's employment or
    business.  For purposes of this Agreement, any Invention or discovery
    relating to the business of Datakey upon which Holland files a patent
    application within one (1) year after termination of this Agreement shall
    be presumed to have been made during the term of this Agreement, subject to
    proof to the contrary by good faith, written and duly corroborated records
    establishing that such Invention or discovery was conceived and made by
    Holland following termination of this Agreement.

         f.  RECORDS.  Holland shall keep complete, accurate and authentic
    accounts, notes, data and records of all Inventions in the manner and form
    requested by Datakey.  Such accounts, notes, data and records shall be the
    property of Datakey, and upon its request Holland shall promptly surrender
    the same to Datakey.

    8.  DOCUMENTS AND TANGIBLE PROPERTY.  All tangible evidence of Confidential
Information or Inventions, including, without limitation, working models,
records, drawings, manuals, books, blank forms, documents, letters, memoranda,
notes, notebooks, reports, data, tables, calculations or copies thereof which
are conceived or generated by Holland or come into Holland's possession during
the term of this Agreement shall be and remain the exclusive property of
Datakey, and Holland agrees to return all such tangible evidence of Confidential
Information and Inventions to Datakey upon termination of this Agreement or at
such earlier time as Datakey may request.

    9.   INDEPENDENT CONTRACTOR.  Holland acknowledges that in the performance
of his consulting services he is an independent contractor and is not and shall
not be deemed to be an employee, joint venturer, partner, franchisee or legal
representative of Datakey for any purpose whatsoever.  Accordingly, Holland
shall be exclusively responsible for the manner in which he performs, and for
the profitability or lack thereof of, his activities under this Agreement.
Holland does not have, and shall not represent himself as having, any right or
authority to obligate or bind Datakey in any manner whatsoever.

    10.  TERMINATION.  This Agreement to provide consulting services may be
terminated pursuant to any of the following provisions:

         a.   NOTICE.  By either party, effective thirty (30) days after
    delivery of written notice to the other party, with or without cause.

         b.   HOLLAND CEASES TO BE A DIRECTOR.  At Datakey's option, upon
    thirty (30) days written notice to Holland, if for any reason Holland
    ceases to be a director of Datakey.

         c.   MUTUAL AGREEMENT.  By mutual written agreement executed by both
    parties.

         d.   DEFAULT.  By either party, effective immediately upon delivery of
    written notice to the other party, if the other party breaches any of its
    obligations under this Agreement; provided that if such breach is curable,
    such notice shall not be

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    effective until the breaching party fails to correct such breach or default
    within a period of thirty (30) days after delivery of such written notice.
    If such breach is not curable, the Agreement shall terminate immediately
    upon delivery of such notice of breach.

         e.   ADVERSE ACTIVITY.  By Datakey effective immediately upon delivery
    of written notice if (i) Holland is convicted of or enters a plea of guilty
    or no contest to a charge of violating any law relating to Holland's
    business, or (ii) Holland takes any action which impairs the goodwill
    associated with Datakey's trademark, trade name or service mark, or makes
    any unauthorized use or disclosure of any Confidential Information.

    11.  OBLIGATIONS UPON TERMINATION.  In the event of the termination of
Holland as consultant to Datakey or his services as a director of Datakey, the
following provisions shall apply:

         a.   DOCUMENTS AND TANGIBLE PROPERTY.  All documents containing any
    Confidential Information or copies thereof which are conceived or generated
    by Holland or which come into Holland's possession during the term of this
    Agreement shall be returned to Datakey.

         b.   PAYMENT OF COMPENSATION.  Datakey's sole obligation to Holland
    upon expiration or proper termination of this Agreement shall be to pay
    compensation  determined in accordance with the provisions of Section 3
    hereof for services rendered prior to the expiration or termination of this
    Agreement.  Holland hereby acknowledges that he has no right to and waives
    any such implied rights to any reimbursement for lost profits or income or
    any other loss, cost or expense resulting from expiration or termination of
    this Agreement in accordance with its terms.

         c.   CONTINUING OBLIGATIONS.  The obligations of Holland under
    Sections 5, 6 and 7 herein shall survive the termination of this Agreement
    and shall continue in full force and effect.

    12.  GENERAL PROVISIONS.

         a.   SEVERABILITY AND INTERPRETATION.  In the event that a provision
    of this Agreement is held invalid, the remaining provisions shall
    nonetheless be enforced in accordance with their terms.  Further, in the
    event that any provision is held to be overbroad as written, such provision
    shall be deemed amended to narrow its application to the extent necessary
    to make the provision enforceable according to applicable law and shall be
    enforced as amended.

         b.   NOTICES.  Any notice required or permitted to be given under this
    Agreement shall be deemed effective when received if delivered by hand,
    telecopy, telex or telegram or three (3) days after depositing if placed in
    the U.S. mails for delivery by registered or certified mail, return receipt
    requested, postage prepaid and addressed to the appropriate party at the
    address set forth on the first page of this

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    Agreement.  Such addresses may be changed by giving written notice to the
    other party of such different address pursuant to the provisions of this
    section.

         c.   NONASSIGNMENT.  Holland shall not assign, transfer or sell all or
    any part of his/her rights or obligations hereunder without the prior
    written consent of Datakey.  This Agreement shall be binding upon and inure
    to the benefit of any successor or assignee of Datakey and of any permitted
    successors and assigns of Holland as provided above.

         d.   CONTROLLING LAW AND ARBITRATION.  This Agreement shall be deemed
    to have been made in the State of Minnesota and shall be governed by and
    construed in accordance with the laws of the State of Minnesota.  All
    disputes, controversies or differences arising out of or in connection with
    this Agreement which cannot be settled by mutual agreement shall be finally
    settled by binding arbitration pursuant to the Rules of Commercial
    Arbitration of the American Arbitration Association then in effect.  Any
    arbitration hereunder shall be held in Minneapolis, Minnesota.

         e.   ENTIRE AGREEMENT.  This Agreement, together with the exhibits
    hereto, constitutes the entire Agreement between the parties and supersedes
    any and all prior and contemporaneous oral or written understandings
    between the parties relating to the subject matter hereof.


    The parties have executed this Agreement in the manner appropriate to each
to be effective the day and year entered on the first page hereof.



                                       /s/ Gary R. Holland
                                       Gary R. Holland



                                       DATAKEY, INC.



                                       By:  /s/ John H. Underwood
                                       John H. Underwood
                                       President and Chief Executive Officer


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