<PAGE>


                                 EMPLOYMENT AGREEMENT

    This Employment Agreement made and entered into effective as of the 1st day
of January 1996, by and between Datakey, Inc., a Minnesota corporation (the
"Company" or "Datakey") and James P. Foley ("Executive").

                                       RECITALS

    James P. Foley became the Vice President of Engineering as of the date
hereof.  The Company and the Executive are desirous that the Executive serves
the Company in this capacity under the following terms and conditions.

                                      AGREEMENT

1.  EMPLOYMENT

    a.   Datakey agrees to continue to employ Executive on a full-time basis as
the Vice President of Engineering of Datakey.

    b.   Executive agrees that he will, at all times, faithfully,
industriously, and, to the best of his abilities, experience and talents,
continue to perform all the duties and responsibilities that may be required of
him as an officer of Datakey.

2.  TERM OF EMPLOYMENT

    a.   Subject to the terms and conditions hereof, Executive shall be
employed for a term ("Employment Term") commencing on January 1, 1996 and
terminating on December 31, 1996, unless extended as set forth in Subsection 2b
below.

    b.   This Agreement will be renewed automatically after December 31, 1996
for additional one-year periods unless either party gives the other party
written notice 30 days before December 31, 1996 or 30 days before the end of any
one-year period thereafter of his or its intention to terminate the Agreement.  

3.  BASE MONTHLY COMPENSATION

    As compensation for his services to Datakey, Executive shall be paid a
monthly salary of $7,916.66, payable in accordance with Datakey's periodic
payment periods.

                                         -1-

<PAGE>


4.  BONUS

    Executive shall be entitled to a bonus for his initial Employment Term in
the amount of $10,000, which amount shall be payable as of December 31, 1996. 
Thereafter, bonuses will be paid pursuant to management incentive plans approved
by the Compensation Committee or at the discretion of the Compensation
Committee.

5.  OTHER BENEFITS

    a.   VACATION.  Executive will receive four weeks of vacation for every
twelve months of employment.  Unused vacation may not be carried over from one
year to the next.

    b.   AUTOMOBILE ALLOWANCE.  During the term of this Agreement, Datakey will
pay Executive $400 per month to be applied toward his automobile expenses.

    c.   MISCELLANEOUS.  During the term of this Agreement, Executive will be
eligible to receive the other benefits described in the attached Exhibit A,
subject to such changes as Datakey may adopt from time to time for salaried
employees generally.

6.  TERMINATION

    a.   Notwithstanding Section 2 above, the Employment Term or any extension
thereof shall terminate upon the happening of any of the following events:

         (i)  Mutual written agreement between the Board of Directors of
Datakey and Executive to terminate his employment;

         (ii) Executive's death;

         (iii)     Executive's disability defined as physically or mentally
unable to perform as Vice President of Engineering for a period of six
consecutive months; or

         (iv) For cause (as defined below) upon written notice from the Board
of Directors specifying the nature of the cause.

    b.   For purposes of this Agreement, "cause" shall include commission of
any felony, misdemeanor, any act of fraud or dishonesty in connection with the
affairs of Datakey.

7.  PAYMENT UPON TERMINATION OF EMPLOYMENT FOR CAUSE OR VOLUNTARY RESIGNATION

    If Executive is terminated for cause or voluntarily resigns, Executive
shall not be eligible to receive any severance benefits.  The date of
termination under this Section 7 shall be on the day the notice of termination
for cause is given or 30 days from the date the notice of resignation is given. 
Executive shall be entitled to no additional compensation past the date of a
notice of termination for cause or after 30 days from the notice of resignation.

                                         -2-

<PAGE>


8.  PAYMENT UPON TERMINATION OF EMPLOYMENT WITHOUT CAUSE

    a.   If during the term of this Agreement Executive is terminated without
cause, and without cause shall include death, disability or mutual agreement,
Executive shall not be entitled to receive his agreed compensation for the
balance of the term of this Agreement but shall instead receive a severance
payment equal to his base monthly compensation payable for six months in
accordance with Datakey's payment periods beginning on the 10th day of the first
month following the last month of his employment term.

    b.   Base compensation shall be deemed to be no less than $7,916.66 per
month.

    c.   The payments provided for under this Section 8 shall, in the event of
Executive's death, continue and shall be payable to his wife if she survives or,
if not, to his estate.      

    d.   The Company will continue to provide medical and health coverage,
under its plans as they currently exist or may hereafter be amended, at Company
subsidized rates during the six-month severance pay period.  Thereafter,
Executive and his covered dependents will be entitled to elect to continue
coverage under COBRA to the extent it is available.  Coverage by the Company or
under COBRA will end on the earlier of Executive's obtaining new employment,
which gives him the ability to provide medical and health insurance coverage for
himself and his family through his new employer, or the failure to pay any
premium when due.

9.  PAYMENT UPON TERMINATION OF AGREEMENT BY THE COMPANY ON DECEMBER 31, 1996
OR AT THE END OF ANY ONE-YEAR EXTENSION

    a.   If the Company decides to terminate the Employment Agreement on
December 31, 1996 or as of the end of any one-year extension, Executive shall
receive his base monthly compensation for six (6) months beginning on the 10th
of the first month following the last month of the Employment Term in accordance
with Datakey's payment periods.

    b.   The payments provided for under this Section 9 shall, in the event of
Executive's death, continue and shall be payable to his wife if she survives or,
if not, to his estate.

    c.   The Company will continue to provide medical and health coverage,
under its plans as they currently exist or may hereafter be amended, at Company
subsidized rates during the six-month severance pay period.  Thereafter,
Executive and his covered dependents will be entitled to elect to continue
coverage under COBRA to the extent it is available.  Coverage by the Company or
under COBRA will end on the earlier of Executive's obtaining new employment,
which gives him the ability to provide medical and health insurance coverage for
himself and his family through his new employer, or the failure to pay any
premium when due.

                                         -3-

<PAGE>


10. TERMINATION OF EMPLOYMENT OR RESIGNATION WITHIN SIX MONTHS OF A CHANGE IN
CONTROL

    a.   If Employee's employment is terminated within six months of a Change
of Control, or if Employee resigns within six months of a Change of Control
because of a diminution of either position responsibilities or remuneration,
notwithstanding such termination or resignation, Employee shall receive his base
monthly compensation for a period of six months.  The severance payments shall
be made in six monthly installments beginning on the 10th day of the first month
following Employee's termination or resignation in accordance with the Company's
payroll periods.

    b.   A Change in Control shall be deemed to have occurred if:  (a) any
person or entity becomes the beneficial owner of thirty-five percent (35%) or
more of the Company's outstanding securities other than any institution,
individual, individuals acting in concert, or entity owning thirty-five percent
(35%) or more of the Company's outstanding securities as of the date of this
Agreement; (b) the consummation of a merger or consolidation of the Company into
or with any other corporation; (c) the consummation of a plan of complete
liquidation of the Company; or (d) the consummation of the sale of substantially
all of the Company's assets.

    c.   The payments provided for under this Section 10 shall, in the event of
Employee's death, continue and be payable to his wife if she survives or, if
not, to his estate.

11. NONDISCLOSURE

    Except by written permission from Datakey, Executive shall never disclose
or use any trade secrets, sales projections, formulations, customer lists or
information, product specifications or information, credit information,
production know-how, research and development plans or other information not
generally known to the public ("Confidential Information") acquired or learned
by Executive during the course, and on account, of his employment, whether or
not developed by Executive, except as such disclosure or use may be required by
his duties to Datakey, and then only in strict accordance with his obligations
of service and loyalty thereto.  Upon termination of employment, Executive
agrees to deliver to Datakey all Confidential Information.

12. INVENTIONS

    Any invention, discovery, improvement, or idea, whether patentable or
copyrightable or not, and whether or not shown or described in writing or
reduced to practice ("Invention") shall be promptly and fully disclosed by
Executive to the Company, and the Company will hold in trust for its sole right
and benefit, any Invention that Executive, during the period of employment, and
for one year thereafter, make, conceive, or reduce to practice or cause to be
made, conceived, or reduced to practice, either alone or in conjunction with
others, that:

         a.   Relates to any subject matter pertaining to Executive's
    employment with the Company;

                                         -4-

<PAGE>


         b.   Relates to or is directly or indirectly connected with the
    Company's business, products, projects, or Confidential Information; or

         c.   Involves the use of any time, material, or facility of the
    Company's.

Executive hereby assigns to the Company all of his right, title, and interest in
and to all such Inventions and, upon the Company's request, shall execute,
verify, and deliver to the Company such documents including, without limitation,
assignments and applications for Letters Patent, and shall perform such other
acts, including, without limitation, appearing as a witness in any action
brought in connection with this Employment Agreement that is necessary to enable
the Company to obtain the sole right, title, and benefit to all such Inventions.

13. SPECIFIC PERFORMANCE

    Executive acknowledges that a breach of this Employment Agreement would
cause Datakey irreparable injury and damage which could not be remedied or
adequately compensated by damages at law; therefore, Executive expressly agrees
that Datakey shall be entitled, in addition to any other remedies legally
available, to injunctive and/or other equitable relief to prevent a breach of
this Employment Agreement.

14. NONCOMPETITION

    a.   For a period of six months from and after the end of the Employment
Term or any extension thereof or after termination of employment, Executive will
not, directly or indirectly, alone or in any capacity with another legal entity,
(i) engage in any activity that competes in any respect with Datakey, (ii)
contact or in any way interfere or attempt to interfere with the relationship of
Datakey with any current or potential customers of Datakey, or (iii) employ or
attempt to employ any employee of Datakey (other than a former employee thereof
after such employee has terminated employment with the Datakey), and

    b.   Executive acknowledges that Datakey markets products throughout the
United States and that Datakey would be harmed if Executive conducted any of the
activities described in this Section 14 anywhere in the United States. 
Therefore, Executive agrees that the covenants contained in this Section 14
shall apply to all portions of, and throughout, the United States.

    c.   Executive acknowledges that if he fails to fulfill his obligations
under this Section 14, the damages to Datakey would be very difficult to
determine.  Therefore, in addition to any other rights or remedies available to
Datakey at law, in equity, or by statute, Executive hereby consents to the
specific enforcement of the provisions of this Section 14 by Datakey through an
injunction or restraining order issued by the appropriate court.

    d.   To the extent any provision of this Section 14 shall be invalid or
unenforceable, it shall be considered deleted herefrom and the remainder of such
provision and this Section 14 shall be unaffected and shall continue in full
force and effect.  In furtherance to and not in limitation of the foregoing,
should the duration or geographical

                                         -5-

<PAGE>


extent of, or business activities covered by, any provision of this Section 14
be in excess of that which is valid and enforceable under applicable law, then
such provision shall be construed to cover only that duration, extent or
activities which are validly and enforceably covered.  Executive acknowledges
the uncertainty of the law in this respect and expressly stipulates that this
Section 14 be given the construction which renders its provisions valid and
enforceable to the maximum extent (not exceeding its expressed terms) possible
under applicable laws.

15. MISCELLANEOUS

    a.   Waiver by Datakey of a breach of any provision of this Agreement by
Executive shall not operate or be construed as a waiver of any subsequent breach
by Executive.

    b.   This Agreement shall be binding upon and inure to the benefit of
Datakey, its successors and assigns, and as to Executive, his heirs, personal
representatives, estate, legatees, and assigns.

    c.   This Agreement constitutes the entire agreement between the parties
hereto with respect to the subject matter hereof and supersedes all prior
agreements whether written or oral relating hereto.

    d.   This Agreement shall be governed by and construed under the laws of
the State of Minnesota.


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


                                       DATAKEY, INC.

                             

                                       By  /s/ John H. Underwood
                                         John H. Underwood, President

                                       /s/ James P. Foley
                                       James P. Foley, Executive

515679

                                         -6-

<PAGE>


                                      EXHIBIT A
                                          TO
                      EMPLOYMENT AGREEMENT DATED JANUARY 1, 1996

                                  EXECUTIVE BENEFITS


--  Group health, dental, life and disability insurance, 401K plan, 125 plan
and other benefits as provided to all employees

--  Supplemental life insurance in the amount of $200,000 paid 100% by the
Company

--  Supplemental long-term disability insurance paying $4,000 per month paid
90% by the Company

--  Auto allowance of $400 per month

--  Four weeks of annual vacation, unused vacation cannot be carried over

--  Sick leave as needed, up to 90 days at the discretion of the CEO

515679