LEASE EXTENSION AND EXPANSION AGREEMENT


         THIS LEASE EXTENSION AND EXPANSION AGREEMENT, made and entered into
this 19th day of April, 1999, by and between Kraus-Anderson(R), Incorporated, a
Minnesota corporation (hereinafter referred to as "Landlord"), and Datakey,
Inc., a Minnesota corporation ( hereinafter referred to as "Tenant");

         WITNESSETH THAT WHEREAS:

A. Landlord is leasing to Tenant and Tenant is leasing from Landlord certain
premises commonly known as 401-409 West Travelers Trail, Burnsville, Minnesota
and located in Suite 201 through 205 of the Gateway Business Park, Phase II (the
"Complex"), pursuant to written Lease Agreement dated June 3, 1987, as amended
by First Amendment To Lease Agreement dated February 10, 1988, Second Amendment
To Lease Agreement dated December 23, 1988, Amendment No. 3 To Lease Agreement
dated February 13, 1992, Amendment No. 4 To Lease Agreement dated April 1, 1992
and by Lease Amendment No. 5 dated December 17, 1996 (collectively referred to
as the "Lease"); Said premises consist of approximately 11,093 square feet of
office space, approximately 6,000 square feet of technical space and
approximately 1,395 square feet of warehouse space, for a combined area of
approximately 18,488 square feet of floor space as shown crosshatched in blue on
Exhibit A attached hereto (the "Original Leased Premises"); and

B. WHEREAS, Landlord and Tenant desire to amend the Lease to provide that
Tenant's leased space will be increased by approximately an additional 4,589
square feet of office space and approximately an additional 2,295 square feet of
warehouse space, for a combined additional leased area of approximately 6,884
square feet of floor space located in Suite 206 and 207, located adjacent to the
Original Leased Premises, such total of additional leased area being shown
crosshatched in red on Exhibit A attached hereto (the "Expansion Area");

C. WHEREAS, the parties hereto also desires to extend the term of the Lease by a
period of five (5) years and to amend certain other provisions thereof;

         NOW THEREFORE, in consideration of the mutual agreements herein
contained, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereby amend the Lease
and agree as follows:

1.       ARTICLE 1, SECTION 2 - PREMISES AND TERM:

         In lieu of Tenant's existing Renewal Option set forth in Paragraph 10
         of Amendment No. 3 To Lease Agreement (the "Renewal Option"), the term
         of the Lease is hereby extended for an additional five (5) year period,
         to commence on July 1, 1999 and to expire on June 30, 2004.

         The Renewal Option is hereby deleted from the Lease as if it had never
         been a part thereof.

2. ARTICLE 1, SECTION 1 - PREMISES:

         Landlord shall continue to lease to Tenant and Tenant shall continue to
         lease from Landlord the Original Leased Premises, in accordance with
         the terms of the Lease. Beginning on July 1, 1999 ("Expansion Date")
         and continuing through the extended Lease expiration date of June 30,
         2004, the Landlord hereby also leases to Tenant and Tenant hereby
         leases from Landlord the Expansion Area. Except as otherwise
         specifically provided in this amendment, Tenant's lease of the Original
         Leased Premises and the Expansion Area, combined, shall be upon the
         same terms and conditions as set forth in the Lease, and from and after
         the Expansion Date of July 1, 1999, the term "Leased Premises" shall be
         defined to mean the Original Leased Premises together with the
         Expansion Area, said combined premises totaling approximately 25,372
         square feet of space.

3.       EARLY OCCUPANCY PERIOD:

         Tenant shall have the right to use and occupy the Expansion Area for
         the period from the date upon which this amendment is fully-executed
         between Landlord and Tenant and continuing until the Expansion Date of
         July 1, 1999 (the "Construction Period") for purposes of adapting the
         premises to Tenant's use under this Lease. Tenant's use and occupancy
         of the Expansion Area during the Construction Period shall be governed
         by all the terms and conditions of this Lease, including, but not
         limited to, the payment by Tenant of all charges for utility services
         furnished to the Expansion Area; provided, however, that Tenant shall
         not owe or pay Landlord any sums for base rent, real estate taxes,
         insurance, or operating costs associated with the Expansion Area during
         said Construction Period.

4. ARTICLE 3 - BASE RENT AND ADDITIONAL RENT:

         a) Additional rents under the Lease for the Expansion Area shall
         commence to be due and payable pursuant to the Lease from and after the
         Expansion Date of July 1, 1999.

         b) Tenant shall continue paying Base Rent for the Original Leased
         Premises at the existing fixed annual Base Rent amount until June 30,
         1999.

         c) Article 3 of the Lease is hereby amended to provide that the fixed
         annual Base Rent for the Original Leased Premises and the Expansion
         Area shall be blended for the combined premises beginning on July 1,
         1999, according to the adjusted schedule of fixed annual Base Rent as
         follows:

          Rental Period:           Annual Base Rent         Monthly Base Rent
          -------------            ----------------         -----------------
          07/01/99 -06/30/2000        $164,918.00                $13,743.17
          07/01/00 -06/30/2001        $171,261.00                $14,271.75
          07/01/01 -06/30/2002        $177,604.00                $14,800.33
          07/01/02 -06/30/2003        $183,947.00                $15,328.92
          07/01/03 -06/30/2004        $190,290.00                $15,857.50

         e) Paragraph 4 of Amendment No. 4 To Lease Agreement is hereby deleted
         in its entirety.

5.       ARTICLE 4, SECTION 4 - OPERATING COST ADJUSTMENT:

         From and after the Expansion Date, "Tenant's Proportionate Share" as
         that phrase is used in the Lease, according to Article 4, Section 4 of
         the Lease, shall be increased from 34.56% to 47.42% from the Expansion
         Date of July 1, 1999 through the extended Lease term, ending on June
         30, 2004.

6.       ADDITIONAL PROVISIONS - LEASEHOLD IMPROVEMENT ALLOWANCE:

         Landlord shall pay to Tenant an allowance ("Improvement Allowance") in
         an amount of One Hundred Sixty One Thousand and No/100 Dollars
         ($161,000.00) upon the following terms and conditions:

         a) The Improvement Allowance shall be applied to the cost of making
         improvements to the Original Leased Premises and Expansion Area in
         preparation for Tenant's lease thereof;

         b) Prior to commencing any construction at the Original Leased Premises
         and the Expansion Area, Tenant shall forward a copy of all construction
         drawings and specifications to the Landlord for the Landlord's prior
         written approval, which shall not be unreasonably withheld or delayed;

         c) All construction shall meet fire and safety standards and all other
         city codes.

         d) Landlord shall not be obligated to pay Tenant any part of the
         Improvement Allowance until such time as Tenant has furnished to
         Landlord signed lien waivers for all work and materials provided in
         connection with said improvements.

7.       ARTICLE 8 - HEATING, VENTILATING AND AIR CONDITIONING SYSTEM REPAIRS:

         a) Landlord shall continue to keep and maintain in good repair the
         heating, ventilating and air conditioning system ("HVAC") serving the
         Original Leased Premises and/or Expansion Area, in accordance with the
         terms of the Lease, as amended hereby. Landlord shall, at all times,
         have access to the HVAC units, and may enter upon the Original Leased
         Premises and/or the Expansion Area for the purpose of repairing and
         maintaining it.

         b) In the event the cost to repair any one particular HVAC unit serving
         the Original Leased Premises and/or the Expansion Area shall exceed 75%
         of the cost to replace such unit, then Landlord, at Landlord's option,
         shall replace said HVAC unit.

         c) Tenant's liability for the cost of replacing any one particular HVAC
         unit as provided herein shall be 50% of the actual cost incurred by
         Landlord.

8.       The expiration date of the term of the Lease, as set forth therein and
         as amended hereby, and all other conditions and covenants of the Lease
         shall apply with full force and effect to Tenant's lease of the
         Expansion Area. From and after the Expansion Date, the Phrase "Leased
         Premises", as used in the Lease, shall be construed to mean the
         Original Leased Premises crosshatched in blue on Exhibit A together
         with the Expansion Area crosshatched in red on Exhibit A, said combined
         premises totaling approximately 25,372 square feet of space.

9.       Except as herein specifically modified and amended, and as previously
         amended on February 10, 1988, December 23, 1988, February 13, 1992,
         April 1, 1992 and on December 17, 1996, the Lease shall remain in full
         force and effect.


         IN WITNESS WHEREOF, the parties hereto have executed this Lease
Extension and Expansion Agreement as of the day and year first above written.



KRAUS-ANDERSON, INCORPORATED             DATAKEY, INC.


By    /s/ Burton F. Dahlberg             By   /s/ Alan Shuler
         Burton F. Dahlberg                   Alan Shuler
   Its   President                          Its  Vice President & CFO
                    LANDLORD                                 TENANT