DATAKEY, INC.

                        INCENTIVE STOCK OPTION AGREEMENT


         THIS AGREEMENT, made effective as of this _____ day of _______________,
199___, by and between DATAKEY,  INC., a Minnesota  corporation (the "Company"),
and __________________ ("Optionee").

                                                W I T N E S S E T H:

         WHEREAS,  Optionee on the date hereof is a key  employee of the Company
or one of its Subsidiaries; and

         WHEREAS,  the  Company  wishes to grant an  incentive  stock  option to
Optionee  to  purchase  shares of the  Company's  Common  Stock  pursuant to the
Company's 1997 Stock Option Plan (the "Plan"); and

         WHEREAS,  the  Administrator of the Plan has authorized the grant of an
incentive stock option to Optionee and has determined  that, as of the effective
date of this Agreement,  the fair market value of the Company's  Common Stock is
$_______ per share;

         NOW,  THEREFORE,  in  consideration  of the  premises and of the mutual
covenants herein contained, the parties hereto agree as follows:

         1. Grant of Option.  The Company  hereby grants to Optionee on the date
set forth above (the "Date of Grant"),  the right and option (the  "Option")  to
purchase  all or  portions of an  aggregate  of  _____________________  (______)
shares  of  Common  Stock at a per  share  price of  $________  on the terms and
conditions set forth herein, subject to adjustment pursuant to Section 13 of the
Plan. Except as otherwise provided in Paragraph 2(c), this Option is intended to
be an incentive stock option within the meaning of Section 422, or any successor
provision,  of the Internal  Revenue Code of 1986, as amended (the "Code"),  and
the regulations thereunder.

         2. Duration and Exercisability.

                  a. The term during  which this Option may be  exercised  shall
terminate  at the close of  business on  ________,  20___,  except as  otherwise
provided in  Paragraphs  2(b)  through  2(e) below.  This  Option  shall  become
exercisable according to the following schedule:


Vesting Date                  Percentage/Number of Shares






<PAGE>

Once the Option becomes  exercisable to the extent of one hundred percent (100%)
of the  aggregate  number of shares  specified  in  Paragraph  1,  Optionee  may
continue  to  exercise  this  Option  under  the terms  and  conditions  of this
Agreement  until the termination of the Option as provided  herein.  If Optionee
does not  purchase  upon an  exercise  of this  Option the full number of shares
which  Optionee is then  entitled to purchase,  Optionee  may purchase  upon any
subsequent   exercise  prior  to  this  Option's   termination  such  previously
unpurchased  shares in  addition  to those  Optionee  is  otherwise  entitled to
purchase.

                  b.  Termination  of Employment  (other than Change of Control,
Disability  or  Death).  If  Optionee's  employment  with  the  Company  or  any
Subsidiary is terminated for any reason other than because of a "transaction" or
"change of control" as described in Paragraph  2(c) or because of  disability or
death, this Option shall completely terminate on the earlier of (i) the close of
business on the three-month  anniversary date of such termination of employment,
and (ii) the expiration date of this Option stated in Paragraph 2 above.

                      In such period following  the  termination  of  Optionee's
employment,  this Option shall be exercisable  only to the extent the Option was
exercisable  on the vesting  date  immediately  preceding  such  termination  of
employment but had not previously been exercised.  To the extent this Option was
not  exercisable  upon such  termination  of  employment or if Optionee does not
exercise the Option within the time specified in this Paragraph 2(b), all rights
of Optionee under this Option shall be forfeited.

                  c. Change of Control.  If (i) Optionee's  employment  with the
Company or any Subsidiary is terminated because of a "transaction" or "change of
control  transaction"  (as those  terms are  defined in Section 13 of the Plan),
(ii) such  transaction  is treated as a "pooling of interests"  under  generally
accepted  accounting  principles,  and (iii)  Optionee is an  "affiliate" of the
Company or Subsidiary  under applicable  legal and accounting  principles,  this
Option shall  completely  terminate on the later of (A) the close of business on
the three-month  anniversary  date of such  termination of employment or (B) the
close of business on the date that is 60 days after the date on which affiliates
are no longer  restricted from selling,  transferring or otherwise  disposing of
the shares of stock received in the change of control transaction.

                      In such period following  the  termination  of  Optionee's
employment because of a "transaction" or "change of control",  this Option shall
become immediately  exercisable unless the acceleration of the exercisability of
this Option has been  prevented as provided in Section 13 of the Plan,  in which
case,  this  Option  shall be  exercisable  only to the  extent  the  Option was
exercisable  on the vesting  date  immediately  preceding  such  termination  of
employment, but had not previously been exercised. To the extent this Option was
not  exercisable  upon such  termination of employment,  or if Optionee does not
exercise the Option within the time specified in this Paragraph 2(c), all rights
of Optionee  under this Option shall be forfeited.  If Optionee  exercises  this
Option on a date that is after the three-month anniversary of the termination of
Optionee's  employment  or on a date that is more than ten years (or five years,
if applicable)  after the Date of Grant,  this Option shall not be treated as an
incentive stock option within the meaning of Code Section 422.


<PAGE>

                  d.  Disability.  If  Optionee  ceases to be an employee of the
Company or any  Subsidiary  due to  disability  (as such term is defined in Code
Section  22(e)(3),  or any successor  provision),  this Option shall  completely
terminate  on the  earlier  of (i) the  close of  business  on the  twelve-month
anniversary date of such termination of employment, and (ii) the expiration date
under this Option stated in Paragraph 2(a) above. In such period  following such
termination of employment,  this Option shall be exercisable  only to the extent
the Option was exercisable on the vesting date immediately preceding the date of
Optionee's  termination of employment.  If Optionee does not exercise the Option
within the time specified in this  Paragraph  2(d), all rights of Optionee under
this Option shall be forfeited.

                  e. Death. In the event of Optionee's  death, this Option shall
terminate  on the  earlier  of (i) the  close of  business  on the  twelve-month
anniversary  date of the date of Optionee's  death, and (ii) the expiration date
of this  Option  stated  in  Paragraph  2(a)  above.  In such  period  following
Optionee's  death,  this Option shall be exercisable by the person or persons to
whom Optionee's rights under this Option shall have passed by Optionee's will or
by the laws of  descent  and  distribution  only to the  extent  the  Option was
exercisable  on the vesting date  immediately  preceding  the date of Optionee's
death.  If such person or persons do not  exercise  this Option  within the time
specified  in this  Paragraph  2(e),  all  rights  under  this  Option  shall be
forfeited.

         3. Manner of Exercise.

                  a. General.  The Option may be exercised  only by Optionee (or
other  proper  party  in the  event  of death  or  incapacity),  subject  to the
conditions  of the Plan and  subject to such other  administrative  rules as the
Administrator may deem advisable, by delivering within the Option Period written
notice of exercise  to the Company at its  principal  office.  The notice  shall
state the number of shares as to which the Option is being  exercised  and shall
be accompanied by payment in full of the Option price for all shares  designated
in the notice. The exercise of the Option shall be deemed effective upon receipt
of such notice by the Company and upon payment that  complies  with the terms of
the Plan and this  Agreement.  The Option may be  exercised  with respect to any
number  or all of the  shares  as to  which  it can then be  exercised  and,  if
partially exercised, may be so exercised as to the unexercised shares any number
of times during the Option period as provided herein.

                  b. Form of  Payment.  Payment of the Option  price by Optionee
shall be in the form of cash,  personal  check,  certified  check or  previously
acquired shares of Common Stock of the Company, or any combination  thereof. Any
stock so  tendered  as part of such  payment  shall be valued at its Fair Market
Value as  provided in the Plan.  For  purposes  of this  Agreement,  "previously
acquired  shares of Common Stock" shall include  shares of Common Stock that are
already owned by Optionee at the time of exercise.

                  c. Stock Transfer  Records.  As soon as practicable  after the
effective exercise of all or any part of the Option,  Optionee shall be recorded
on the stock transfer books of the Company as the owner of the shares purchased,
and the  Company  shall  deliver  to  Optionee  one or more  duly  issued  stock
certificates evidencing such ownership. All requisite original issue or transfer
documentary stamp taxes shall be paid by the Company.


<PAGE>

         4. Miscellaneous.

                  a. Employment; Rights as Shareholder. This Agreement shall not
confer on Optionee any right with respect to  continuance  of  employment by the
Company or any of its  Subsidiaries,  nor will it  interfere in any way with the
right of the Company to terminate such employment. Optionee shall have no rights
as a shareholder with respect to shares subject to this Option until such shares
have been issued to Optionee upon exercise of this Option.  No adjustment  shall
be made for dividends (ordinary or extraordinary, whether in cash, securities or
other  property),  distributions  or other  rights for which the record  date is
prior to the date such  shares are  issued,  except as provided in Section 13 of
the Plan.

                  b. Securities Law Compliance. The exercise of all or any parts
of this Option  shall only be  effective  at such time as counsel to the Company
shall have determined that the issuance and delivery of Common Stock pursuant to
such  exercise  will not violate any state or federal  securities or other laws.
Optionee may be required by the Company,  as a condition of the effectiveness of
any  exercise of this  Option,  to agree in writing  that all Common Stock to be
acquired  pursuant  to such  exercise  shall be held,  until such time that such
Common  Stock is  registered  and freely  tradable  under  applicable  state and
federal  securities  laws,  for  Optionee's  own  account  without a view to any
further distribution  thereof,  that the certificates for such shares shall bear
an  appropriate  legend  to  that  effect  and  that  such  shares  will  not be
transferred  or  disposed  of except in  compliance  with  applicable  state and
federal securities laws.

                  c. Mergers, Recapitalizations, Stock Splits, Etc. Pursuant and
subject to Section 13 of the Plan, certain changes in the number or character of
the Common Stock of the Company (through sale, merger, consolidation,  exchange,
reorganization,     divestiture    (including    a    spin-off),    liquidation,
recapitalization,  stock split,  stock dividend or otherwise) shall result in an
adjustment,  reduction or enlargement, as appropriate, in Optionee's rights with
respect to any unexercised portion of the Option (i.e., Optionee shall have such
"anti-dilution"  rights under the Option with respect to such events,  but shall
not have "preemptive" rights).

                  d.  Withholding  Taxes on  Disqualifying  Disposition.  In the
event of a disqualifying disposition of the shares acquired through the exercise
of  this  Option,   Optionee  hereby  agrees  to  inform  the  Company  of  such
disposition.  Upon notice of a disqualifying  disposition,  the Company may take
such action as it deems  appropriate to insure that, if necessary to comply with
all applicable  federal or state income tax laws or regulations,  all applicable
federal and state  payroll,  income or other taxes are withheld from any amounts
payable by the Company to  Optionee.  If the Company is unable to withhold  such
federal and state taxes, for whatever  reason,  Optionee hereby agrees to pay to
the  Company an amount  equal to the  amount  the  Company  would  otherwise  be
required to withhold  under federal or state law.  Optionee may,  subject to the
approval and discretion of the Administrator or such administrative rules it may
deem  advisable,  elect  to  have  all or a  portion  of  such  tax  withholding
obligations  satisfied by delivering shares of the Company's Common Stock having
a fair market value equal to such obligations.


<PAGE>

                  e.  Nontransferability.  During the lifetime of Optionee,  the
accrued  Option  shall be  exercisable  only by  Optionee  or by the  Optionee's
guardian  or  other  legal  representative,  and  shall  not  be  assignable  or
transferable by Optionee, in whole or in part, other than by will or by the laws
of descent and distribution.

                  f. 1997  Stock  Option  Plan.  The  Option  evidenced  by this
Agreement  is granted  pursuant to the Plan,  a copy of which Plan has been made
available  to Optionee  and is hereby  incorporated  into this  Agreement.  This
Agreement is subject to and in all respects  limited and conditioned as provided
in the Plan.  The Plan governs this Option and, in the event of any questions as
to the  construction of this Agreement or in the event of a conflict between the
Plan and this  Agreement,  the Plan shall govern,  except as the Plan  otherwise
provides.

                  g. Lockup Period Limitation. Optionee agrees that in the event
the Company advises  Optionee that it plans an  underwritten  public offering of
its Common Stock in compliance with the Securities Act of 1933, as amended,  and
that  the  underwriter(s)  seek  to  impose  restrictions  under  which  certain
shareholders  may not sell or  contract  to sell or grant  any  option to buy or
otherwise  dispose  of  part  or all  of  their  stock  purchase  rights  of the
underlying Common Stock,  Optionee hereby agrees that for a period not to exceed
180 days from the date of the prospectus,  Optionee will not sell or contract to
sell or grant an option to buy or otherwise dispose of this option or any of the
underlying  shares of Common  Stock  without  the prior  written  consent of the
underwriter(s) or its representative(s).

                  h.  Blue  Sky  Limitation.  Notwithstanding  anything  in this
Agreement to the contrary, in the event the Company makes any public offering of
its  securities and  determines in its sole  discretion  that it is necessary to
reduce the  number of issued  but  unexercised  stock  purchase  rights so as to
comply  with any  state  securities  or Blue Sky law  limitations  with  respect
thereto,  the Board of  Directors  of the  Company  shall  have the right (i) to
accelerate the  exercisability  of this Option and the date on which this Option
must be  exercised,  provided  that the  Company  gives  Optionee 15 days' prior
written  notice of such  acceleration,  and (ii) to cancel  any  portion of this
Option or any other option granted to Optionee pursuant to the Plan which is not
exercised prior to or contemporaneously with such public offering.  Notice shall
be deemed given when delivered personally or when deposited in the United States
mail,  first class  postage  prepaid and addressed to Optionee at the address of
Optionee on file with the Company.

                  i. Accounting Compliance. Optionee agrees that, in the event a
"change of control  transaction" (as defined in Paragraph 2(c) above) is treated
as a "pooling of interests" under generally accepted  accounting  principles and
Optionee  is an  "affiliate"  of the  Company or any  Subsidiary  (as defined in
applicable  legal  and  accounting  principles)  at the time of such  change  of
control  transaction,  Optionee will comply with all requirements of Rule 145 of
the Securities Act of 1933, as amended, and the requirements of such other legal
or accounting  principles,  and will execute any  documents  necessary to ensure
such compliance.

                  j.  Stock  Legend.  If  applicable,  the  Company  may  put an
appropriate  legend on the certificates for any shares of Common Stock purchased
by Optionee  (or, in the case of death,  Optionee's  successors)  to reflect the
restrictions of Paragraphs 4(b), 4(g), 4(h) and 4(i) of this Agreement.


<PAGE>

                  k. Scope of Agreement.  This Agreement shall bind and inure to
the benefit of the Company and its  successors  and assigns and Optionee and any
successor or successors of Optionee permitted by Paragraph 4(e) above.

                  l. Arbitration. Any dispute arising out of or relating to this
Agreement  or the  alleged  breach  of it,  or the  making  of  this  Agreement,
including  claims of fraud in the  inducement,  shall be  discussed  between the
disputing parties in a good faith effort to arrive at a mutual settlement of any
such controversy.  If,  notwithstanding,  such dispute cannot be resolved,  such
dispute  shall be  settled  by  binding  arbitration.  Judgment  upon the  award
rendered  by the  arbitrator  may be  entered in any court  having  jurisdiction
thereof. The arbitrator shall be a retired state or federal judge or an attorney
who has practiced  securities or business  litigation for at least ten years. If
the parties cannot agree on an arbitrator  within 20 days, any party may request
that the chief  judge of the  District  Court for  Hennepin  County,  Minnesota,
select an arbitrator.  Arbitration will be conducted  pursuant to the provisions
of  this  Agreement,  and  the  commercial  arbitration  rules  of the  American
Arbitration Association,  unless such rules are inconsistent with the provisions
of this Agreement. Limited civil discovery shall be permitted for the production
of documents and taking of  depositions.  Unresolved  discovery  disputes may be
brought to the attention of the arbitrator who may dispose of such dispute.  The
arbitrator  shall have the  authority to award any remedy or relief that a court
of this  state  could  order or  grant;  provided,  however,  that  punitive  or
exemplary  damages  shall  not be  awarded.  The  arbitrator  may  award  to the
prevailing party, if any, as determined by the arbitrator,  all of its costs and
fees,  including the arbitrator's  fees,  administrative  fees, travel expenses,
out-of-pocket  expenses and reasonable  attorneys' fees. Unless otherwise agreed
by the  parties,  the place of any  arbitration  proceedings  shall be  Hennepin
County, Minnesota.

         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first above written.

                                  DATAKEY, INC.


                                  By:__________________________________________
                                    Its:
                                                                        COMPANY




                                  _____________________________________________
                                                                        OPTIONEE



<PAGE>


                                  DATAKEY, INC.

                       NONQUALIFIED STOCK OPTION AGREEMENT


         THIS AGREEMENT,  made effective as of this _____ day of ______________,
199__, by and between  DATAKEY,  INC., a Minnesota  corporation (the "Company"),
and _____________________________ ("Optionee").


                                                W I T N E S S E T H:

         WHEREAS,  Optionee  on the  date  hereof  is a key  employee,  officer,
director, consultant or advisor of the Company or one of its Subsidiaries; and

         WHEREAS,  the Company  wishes to grant a  nonqualified  stock option to
Optionee  to  purchase  shares of the  Company's  Common  Stock  pursuant to the
Company's 1997 Stock Option Plan (the "Plan"); and

         WHEREAS,  the  Administrator has authorized the grant of a nonqualified
stock option to Optionee and has  determined  that, as of the effective  date of
this  Agreement,  the fair market value of the  Company's  Common Stock is $ per
share;

         NOW,  THEREFORE,  in  consideration  of the  premises and of the mutual
covenants herein contained, the parties hereto agree as follows:

         1. Grant of Option.  The Company  hereby grants to Optionee on the date
set forth above (the "Date of Grant"),  the right and option (the  "Option")  to
purchase all or portions of an aggregate of ____________ (____) shares of Common
Stock at a per share  price of  $______  on the terms and  conditions  set forth
herein, subject to adjustment pursuant to Section 13 of the Plan. This Option is
a  nonqualified  stock  option  and will not be treated  as an  incentive  stock
option,  as defined  under  Section  422,  or any  successor  provision,  of the
Internal  Revenue Code of 1986,  as amended (the  "Code"),  and the  regulations
thereunder.

         2. Duration and Exercisability.

                  a. The term during  which this Option may be  exercised  shall
terminate on  _______________,  20__, except as otherwise provided in Paragraphs
2(b) through 2(e) below. This Option shall become  exercisable  according to the
following schedule:

         Vesting Date                                Percentage/Number of Shares





<PAGE>

Once the Option becomes  exercisable to the extent of one hundred percent (100%)
of the  aggregate  number of shares  specified  in  Paragraph  1,  Optionee  may
continue  to  exercise  this  Option  under  the terms  and  conditions  of this
Agreement  until the termination of the Option as provided  herein.  If Optionee
does not  purchase  upon an  exercise  of this  Option the full number of shares
which  Optionee is then  entitled to purchase,  Optionee  may purchase  upon any
subsequent   exercise  prior  to  this  Option's   termination  such  previously
unpurchased  shares in  addition  to those  Optionee  is  otherwise  entitled to
purchase.

                  b. Termination of Relationship  (other than Change of Control,
Disability or Death). If Optionee ceases to be an employee, director, consultant
or an advisor of the Company or any Subsidiary for any reason other than because
of a "transaction" or "change of control  transaction" as described in Paragraph
2(c) or because of disability or death,  this Option shall completely  terminate
on the earlier of (i) the close of business on the three-month  anniversary date
of the  termination of all such  relationships,  and (ii) the expiration date of
this Option  stated in  Paragraph  2(a) above.  In such  period  following  such
termination,  this Option shall be exercisable only to the extent the Option was
exercisable on the vesting date  immediately  preceding the date on which all of
Optionee's relationships with the Company or Subsidiary have terminated, but had
not previously  been  exercised.  To the extent this Option was not  exercisable
upon the termination of such relationship,  or if Optionee does not exercise the
Option within the time specified in this Paragraph  2(b), all rights of Optionee
under this Option shall be forfeited.

                  c.  Change  of  Control.  If  (i)  Optionee  ceases  to  be an
employee,  director,  consultant  or  advisor of the  Company or any  Subsidiary
because of a "transaction"  or "change of control  transaction"  (as those terms
are defined in Section 13 of the Plan),  (ii) such  transaction  is treated as a
"pooling of interests" under generally accepted accounting principles, and (iii)
Optionee is an "affiliate" of the Company or Subsidiary  under  applicable legal
and accounting  principles,  this Option shall completely terminate on the later
of (A)  the  close  of  business  on the  three-month  anniversary  date  of the
termination of all such  relationships  with the Company or any Subsidiary,  and
(B) the close of  business  on the date that is 60 days  after the date on which
affiliates  are no longer  restricted  from selling,  transferring  or otherwise
disposing of the shares of stock received in the change of control  transaction.
In such period following such termination,  this Option shall become immediately
exercisable  unless the  acceleration of the  exercisability  of this Option has
been prevented as provided in Section 13 of the Plan, in which case, this Option
shall be  exercisable  only to the  extent the  Option  was  exercisable  on the
vesting date immediately preceding such termination of Optionee's  relationships
with the Company or Subsidiary,  but had not previously been  exercised.  To the
extent  this  Option  was  not  exercisable   upon  such   termination  of  such
relationships,  or if  Optionee  does not  exercise  the Option  within the time
specified in this Paragraph 2(c), all rights of Optionee under this Option shall
be forfeited.

                  d. Disability. If Optionee ceases to be an employee, director,
consultant or advisor of the Company or any Subsidiary because of disability (as
such term is defined in Code Section 22(e)(3), or any successor provision), this
Option shall completely terminate on the earlier of (i) the close of business on
the twelve-month  anniversary date of the termination of all such  relationships
with the  Company or any  Subsidiary,  and (ii) the  expiration  date under this
Option  stated  in  Paragraph  2(a)  above.   In  such  period   following  such
termination,  this Option shall be exercisable only to the extent the Option was
exercisable on the vesting date immediately  preceding the termination of all of
Optionee's  relationships.  If Optionee  does not exercise the Option within the
time specified in this Paragraph  2(d), all rights of Optionee under this Option
shall be forfeited.


<PAGE>


                  e. Death. In the event of Optionee's  death, this Option shall
terminate  on the  earlier  of (i) the  close of  business  on the  twelve-month
anniversary  date of the date of Optionee's  death, and (ii) the expiration date
of this  Option  stated  in  Paragraph  2(a)  above.  In such  period  following
Optionee's  death, this Option may be exercised by the person or persons to whom
Optionee's  rights under this Option shall have passed by Optionee's  will or by
the  laws  of  descent  and  distribution  only to the  extent  the  Option  was
exercisable  on the vesting date  immediately  preceding  the date of Optionee's
death.  If such person or persons fail to exercise  this Option  within the time
specified  in this  Paragraph  2(e),  all  rights  under  this  Option  shall be
forfeited.

         3. Manner of Exercise.

                  a. General.  The Option may be exercised  only by Optionee (or
other  proper  party  in the  event  of death  or  incapacity),  subject  to the
conditions  of the Plan and  subject to such other  administrative  rules as the
Administrator may deem advisable, by delivering within the option period written
notice of exercise  to the Company at its  principal  office.  The notice  shall
state the number of shares as to which the Option is being  exercised  and shall
be accompanied by payment in full of the option price for all shares  designated
in the notice. The exercise of the Option shall be deemed effective upon receipt
of such notice by the Company and upon payment that  complies  with the terms of
the Plan and this  Agreement.  The Option may be  exercised  with respect to any
number  or all of the  shares  as to  which  it can then be  exercised  and,  if
partially exercised, may be exercised as to the unexercised shares any number of
times during the option period as provided herein.

                  b. Form of  Payment.  Payment of the option  price by Optionee
shall be in the form of cash,  personal  check,  certified  check or  previously
acquired shares of Common Stock of the Company, or any combination  thereof. Any
stock so  tendered  as part of such  payment  shall be valued at its Fair Market
Value as  provided in the Plan.  For  purposes  of this  Agreement,  "previously
acquired  shares of Common Stock" shall include  shares of Common Stock that are
already owned by Optionee at the time of exercise.

                  c. Stock Transfer  Records.  As soon as practicable  after the
effective exercise of all or any part of the Option,  Optionee shall be recorded
on the stock transfer books of the Company as the owner of the shares purchased,
and the  Company  shall  deliver  to  Optionee  one or more  duly  issued  stock
certificates evidencing such ownership. All requisite original issue or transfer
documentary stamp taxes shall be paid by the Company.


<PAGE>

         4. Miscellaneous.

                  a. Rights as  Shareholder.  This Agreement shall not confer on
Optionee any right with respect to the continuance of any relationship  with the
Company or any of its  Subsidiaries,  nor will it  interfere in any way with the
right of the Company to terminate any such relationship.  Optionee shall have no
rights as a shareholder with respect to shares subject to this Option until such
shares have been issued to Optionee upon exercise of this Option.  No adjustment
shall  be made  for  dividends  (ordinary  or  extraordinary,  whether  in cash,
securities  or other  property),  distributions  or other  rights  for which the
record date is prior to the date such  shares are issued,  except as provided in
Section 13 of the Plan.

                  b. Securities Law Compliance. The exercise of all or any parts
of this Option  shall only be  effective  at such time as counsel to the Company
shall have determined that the issuance and delivery of Common Stock pursuant to
such  exercise  will not violate any state or federal  securities or other laws.
Optionee may be required by the Company,  as a condition of the effectiveness of
any  exercise of this  Option,  to agree in writing  that all Common Stock to be
acquired  pursuant  to such  exercise  shall be held,  until such time that such
Common  Stock is  registered  and freely  tradable  under  applicable  state and
federal  securities  laws,  for  Optionee's  own  account  without a view to any
further  distribution  thereof and that such shares will be not  transferred  or
disposed of except in compliance  with applicable  state and federal  securities
laws.

                  c. Mergers, Recapitalizations, Stock Splits, Etc. Pursuant and
subject to Section 13 of the Plan, certain changes in the number or character of
the Common Stock of the Company (through sale, merger, consolidation,  exchange,
reorganization,     divestiture    (including    a    spin-off),    liquidation,
recapitalization,  stock split,  stock dividend or otherwise) shall result in an
adjustment,  reduction or enlargement, as appropriate, in Optionee's rights with
respect to any unexercised portion of the Option (i.e., Optionee shall have such
"anti-dilution"  rights under the Option with respect to such events,  but shall
not have "preemptive" rights).

                  d. Withholding Taxes. In order to permit the Company to comply
with all applicable federal or state income tax laws or regulations, the Company
may take such action as it deems  appropriate to insure that, if necessary,  all
applicable federal or state payroll, income or other taxes are withheld from any
amounts payable by the Company to Optionee. If the Company is unable to withhold
such federal and state taxes, for whatever reason, Optionee hereby agrees to pay
to the Company an amount  equal to the amount the  Company  would  otherwise  be
required to withhold  under federal or state law.  Optionee may,  subject to the
approval and discretion of the Administrator or such administrative rules it may
deem  advisable,  elect  to  have  all or a  portion  of  such  tax  withholding
obligations  satisfied by delivering shares of the Company's Common Stock having
a fair market value equal to such obligations.

                  e.  Nontransferability.  During the lifetime of Optionee,  the
accrued  Option  shall be  exercisable  only by  Optionee  or by the  Optionee's
guardian  or  other  legal  representative,  and  shall  not  be  assignable  or
transferable by Optionee, in whole or in part, other than by will or by the laws
of descent and distribution.


<PAGE>

                  f. 1997  Stock  Option  Plan.  The  Option  evidenced  by this
Agreement  is granted  pursuant to the Plan,  a copy of which Plan has been made
available  to Optionee  and is hereby  incorporated  into this  Agreement.  This
Agreement is subject to and in all respects  limited and conditioned as provided
in the Plan.  The Plan governs this Option and, in the event of any questions as
to the  construction of this Agreement or in the event of a conflict between the
Plan and this  Agreement,  the Plan shall govern,  except as the Plan  otherwise
provides.

                  g. Lockup Period Limitation. Optionee agrees that in the event
the Company advises  Optionee that it plans an  underwritten  public offering of
its Common Stock in compliance with the Securities Act of 1933, as amended,  and
that  the  underwriter(s)  seek  to  impose  restrictions  under  which  certain
shareholders  may not sell or  contract  to sell or grant  any  option to buy or
otherwise  dispose  of  part  or all  of  their  stock  purchase  rights  of the
underlying Common Stock,  Optionee hereby agrees that for a period not to exceed
180 days from the date of prospectus, Optionee will not sell or contract to sell
or grant an  option to buy or  otherwise  dispose  of this  option or any of the
underlying  shares of Common  Stock  without  the prior  written  consent of the
underwriter(s) or its representative(s).

                  h.  Blue  Sky  Limitation.  Notwithstanding  anything  in this
Agreement to the contrary, in the event the Company makes any public offering of
its  securities and  determines in its sole  discretion  that it is necessary to
reduce the  number of issued  but  unexercised  stock  purchase  rights so as to
comply  with any  state  securities  or Blue Sky law  limitations  with  respect
thereto,  the Board of  Directors  of the  Company  shall  have the right (i) to
accelerate the  exercisability  of this Option and the date on which this Option
must be  exercised,  provided  that the  Company  gives  Optionee 15 days' prior
written  notice of such  acceleration,  and (ii) to cancel  any  portion of this
Option or any other option granted to Optionee pursuant to the Plan which is not
exercised prior to or contemporaneously with such public offering.  Notice shall
be deemed given when delivered personally or when deposited in the United States
mail,  first class  postage  prepaid and addressed to Optionee at the address of
Optionee on file with the Company.

                  i. Accounting Compliance. Optionee agrees that, in the event a
"change of control  transaction" (as defined in Paragraph 2(c) above) is treated
as a "pooling of interests" under generally accepted  accounting  principles and
Optionee  is an  "affiliate"  of the  Company or any  Subsidiary  (as defined in
applicable  legal  and  accounting  principles)  at the time of such  change  of
control  transaction,  Optionee will comply with all requirements of Rule 145 of
the Securities Act of 1933, as amended, and the requirements of such other legal
or accounting  principles,  and will execute any  documents  necessary to ensure
such compliance.

                  j.  Stock  Legend.  If  applicable,  the  Company  may  put an
appropriate  legend on the certificates for any shares of Common Stock purchased
by Optionee  (or, in the case of death,  Optionee's  successors)  to reflect the
restrictions of Paragraphs 4(b), 4(h), 4(i) and 4(j) of this Agreement.


<PAGE>

                  k. Scope of Agreement.  This Agreement shall bind and inure to
the benefit of the Company and its  successors  and assigns and Optionee and any
successor or successors of Optionee permitted by Paragraph 4(e) above.

                  l. Arbitration. Any dispute arising out of or relating to this
Agreement  or the  alleged  breach  of it,  or the  making  of  this  Agreement,
including  claims of fraud in the  inducement,  shall be  discussed  between the
disputing parties in a good faith effort to arrive at a mutual settlement of any
such controversy.  If,  notwithstanding,  such dispute cannot be resolved,  such
dispute  shall be  settled  by  binding  arbitration.  Judgment  upon the  award
rendered  by the  arbitrator  may be  entered in any court  having  jurisdiction
thereof. The arbitrator shall be a retired state or federal judge or an attorney
who has practiced  securities or business  litigation for at least ten years. If
the parties cannot agree on an arbitrator  within 20 days, any party may request
that the chief  judge of the  District  Court for  Hennepin  County,  Minnesota,
select an arbitrator.  Arbitration will be conducted  pursuant to the provisions
of  this  Agreement,  and  the  commercial  arbitration  rules  of the  American
Arbitration Association,  unless such rules are inconsistent with the provisions
of this Agreement. Limited civil discovery shall be permitted for the production
of documents and taking of  depositions.  Unresolved  discovery  disputes may be
brought to the attention of the arbitrator who may dispose of such dispute.  The
arbitrator  shall have the  authority to award any remedy or relief that a court
of this  state  could  order or  grant;  provided,  however,  that  punitive  or
exemplary  damages  shall  not be  awarded.  The  arbitrator  may  award  to the
prevailing party, if any, as determined by the arbitrator,  all of its costs and
fees,  including the arbitrator's  fees,  administrative  fees, travel expenses,
out-of-pocket  expenses and reasonable  attorneys' fees. Unless otherwise agreed
by the  parties,  the place of any  arbitration  proceedings  shall be  Hennepin
County, Minnesota.

         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first above written.

                                  DATAKEY, INC.



                                  By:__________________________________________
                                    Its:
                                                                        COMPANY




                                  _____________________________________________
                                                                       OPTIONEE