**EXHIBIT 10.18**

Datakey,Inc.407 West Travelers TrailBurnsville, MN  55337

Mr.Ray Lipkin

DearMr. Lipkin:

          Datakey andyou have recently arrived at an understanding under which you have agreed toloan Datakey up to $1,000,000.  Thisletter is intended to formalize this understanding as follows:

          1.       The maximum aggregate of any loans youwill make to Datakey under this Agreement will be $1,000,000.  The minimum loan amount will be $250,000.

          2.       The funding of a particular loan may beeffected by letter or fax, signed by Datakey’s CEO or CFO, requesting atransfer of funds to a depository of Datakey’s choosing.  The transfer of funds will be conditionalupon your receipt of a promissory note as described in Paragraph 4 below.

          3.       No new funds may be borrowed after March31, 2001, whether or not all of the $1,000,000 has been borrowed as of suchdate.

          4.       Each loan will be evidenced by a separatepromissory note in the form attached to this letter.  The promissory note will be payable on demand six months afterany transfer of funds to Datakey has been completed, as set forth in Paragraph2 above.  The promissory note may berepaid at any time, but any repayment must be made in full, including accruedinterest to the date of repayment.

          5.       Interest will accrue at the annual rateof 12% for the first three months during which any promissory note remainsoutstanding.  If a promissory noteremains unpaid for more than three months, interest will accrue at an annualrate of 15% until the promissory note is paid in full.

          6.       Any loan made pursuant to this letterAgreement will be unsecured.

          7.       Each promissory note will containcustomary default provisions.  Allreasonable collection costs will be assumed and paid for by Datakey.

          8.       You may have been provided and/or you mayin the future be provided with material non-public information relating toDatakey.  You should be aware that thereceipt of material non-public information may restrict your ability to tradein Datakey stock.

          Accompanyingthis letter is our written request to you to transfer $500,000 to thedepository described therein.  We arealso enclosing Datakey’s Promissory Note which incorporates those terms setforth above.  The Promissory Note isdated January 25, 2001, the anticipated date of the transfer.  Should the transfer not be effected onJanuary 25, we would ask that you destroy the Promissory Note and we willmessenger a new Promissory Note dated as of the date of the funds transfer.

          If theforegoing is acceptable, please sign two copies of this letter and forward asigned copy to me.

                                                                      Very trulyyours,

 

                                                                      /s/ Alan G.Shuler                                                                      Alan G.Shuler, Vice President and CFO

 

          I have readthe above letter and am agreeable to the terms set forth therein.

 

                                                                      /s/ RaymondA. Lipkin                                                                      Ray Lipkin

 

**UNSECUREDPROMISSORY NOTE**

| **$500,000** | January 26, 2001 |
|--------------|------------------|