LTIP NOTES AND ASSUMPTIONS
                                February 27, 1997
                             Amended March 10, 1997

The  RONAEBIT  calculation  during  the two  year  period  is  determined  using
operating income after deducting the short-term bonus accrual expense. Since the
stock options will be granted at the fair market value on the date of grant with
a fixed number of options and fixed term, there is no compensation expense to be
recorded during the operating  periods.  The only accounting  transactions  that
will take place  during  the two year  period are the  footnote  disclosure  for
FAS123 and the common stock equivalent calculation that is taken into account in
determining primary and fully diluted shares for EPS calculations.

Each manager will be granted  three sets of options  equal to the one times LTIP
financial  performance.  If the  performance  qualifies for a 1 times payout the
first set of options will vest, if the performance  qualifies for 2 times payout
the second set will vest,  and if it qualifies  for 3 times payout the third set
of options will vest. In the event none of the performance  criteria are met all
the options will vest at the end of 5 years.

Since the  number of shares  and the price  must be  determined  at the time the
option is granted in order for  compensation  expense to be avoided  there is no
provision for interpolation of the shares. In other words, if the base number of
shares is 5,000  then the  individual  gets early  vesting  of 5,000,  10,000 or
15,000 shares and no intervals in between.  If the minimum level is not reached,
all 15,000 shares will vest at the end of five years.  To  accommodate  the same
result  as  interpolation  of shares  the  vesting  schedule  will  reflect  the
financial  performance level. For example,  at a performance level of .25 in the
enclosed LTIP table (50% revenue  growth and 15% RONAEBIT or 25% revenue  growth
and 25% RONAEBIT)  the number of shares in this example will be as follows:  (At
 .50 the  first  set is  vested  in 3.50  years and at .75 level the first set is
vested at 2.75 years).

                5,000 shares vested in 4.25 years first set 
                5,000 shares vested in 5.00 years  second set 
                5,000 shares  vested in 5.00 years  third set
               ------
               15,000 Total

At performance level of 1 the number of shares is as follows:

                5,000 shares vested in 2.00 years first set
                5,000 shares vested in 5.00 years  second set 
                5,000 shares  vested in 5.00 years  third set 
               ------  
               15,000 Total

At performance level of 2 the number of shares is as follows:

                5,000 shares vested in 2.00 years first set
                5,000 shares vested in 2.00 years  second set
                5,000 shares  vested in 5.00 years  third set
               ------
               15,000 Total

At performance level of 3 the number of shares is as follows:

                5,000 shares vested in 2.00 years first set
                5,000 shares vested in 2.00 years second set
                5,000 shares  vested in 2.00 years  third set
               ------
               15,000 Total

To determine the vesting if  performance  falls in between 1, 2 and 3 the number
of years vesting is determined by using the following  vesting  schedule for the
fractional performance and adding that to the shares with full performance:

               .25               4.25 years
               .50               3.50 years
               .75               2.75 years


<PAGE>

At a performance level of 2.25, for example, the vesting is as follows:

                5,000 shares vested in 2.00 years first set
                5,000 shares vested in 2.00 years  second set
                5,000 shares  vested in 4.25 years  third set
               ------
               15,000 Total


Part 1: Annual Incentive Plan (AIP)

1.       The AIP is applicable to the Management Team and other key contributors
         except sales (who have a separate plan).
 
2.       The AIP rewards  corporate  revenue growth and reduced operating losses
         before tax. (See table below)

3.       Participation   level  (target  bonus   percentage)  is  based  on  the
         individual's planned contribution to these metrics.
 
4.       The Individual  Performance  Coefficient is a numerical rating of 0.5 -
         1.0  recommended  by the  President  and  approved by the  Compensation
         Committee on the  individual's  actual  contribution to the measurement
         metrics.
  
5.       Plan formula is: Base compensation x financial performance  coefficient
         x target bonus percentage x individual performance coefficient.
  
6.       Pre-tax operating loss for calculation  purposes is defined as the loss
         before incentive payout.
<TABLE>
<CAPTION>

                     Financial Performance Coefficient Table

                           PRETAX OPERATING LOSS
      REVENUE      greater than     110% plan      plan to       75% plan to      less than
                     110% plan       to plan       75% plan        50%plan        50% plan
<S>                    <C>           <C>             <C>           <C>            <C>   
     less than
     90% plan           0              0                0             0              0

    90% plan to         0             .25               .5            .75            1
    100% plan
 100% plan to           0             .5                1            1.2           1.4
    120% plan
 120 % plan to          0             .75              1.2           1.5           1.8
    140% plan
   greater than         0              1               1.4           1.8           2.2
    140% plan    
</TABLE>

This table may not be interpolated for incentive payout calculation.


<PAGE>


Part 2: Long Term Incentive Plan (LTIP)

1.       The LTIP is  applicable to Management  team and other  recommended  key
         contributors including sales, and is reissued on an annual basis.
  
2.       The LTIP is based on corporate revenue growth and RONAEBIT. RONAEBIT is
         defined as:  Earnings  before  interest  and  taxes/average  net assets
         employed and is calculated for the second year of the period.
  
3.       The  individual's  target  participation  units  are  based on  his/her
         contribution to these metrics.

4.       Metrics are defined for a two (2) year period.

5.       LTIP payout, made after completion of the two year plan period, will be
         in the form of Datakey non-qualified stock options. Option quantity for
         each  participant will be defined at the beginning of the two year plan
         period. Option price will be determined by the average price of Datakey
         stock  for  the 15 day  period  immediately  prior  to  the  January  1
         beginning of each two year plan period.
  
6.       LTI Plan awards will be made based on the following formula: Individual
         target participation units x LTI performance factor (from table below)
    
7.       RONAEBIT is calculated after all incentives are paid.

                          LTI Performance Factor Table

                      Revenue Growth for 2 Year Period
                      less than                                      125% or 
      RONAEBIT          25%       25%      50%      75%      100%    greater

   less than 15%         0          0        0        0         0        0
        15%              0          0       0.25     0.5       .75       1
        25%              0        0.25      0.5       1       1.5        2
   35% or greater        0         .5       0.75     1.5      2.25       3

This table may be interpolated for incentive payout calculation.