CERTIFICATE OF
                      RESTATED ARTICLES OF INCORPORATION OF
                                  DATAKEY, INC.



         We the undersigned William P. Flies and Thomas R. King, respectively
the president and secretary of Datakey, Inc., a corporation subject to the
provisions of the Minnesota Business Corporations Act, do hereby certify that,
pursuant to action taken by the directors of the Corporation at a regularly
scheduled meeting thereof and a majority vote of the outstanding shares of the
Corporation present in person or by proxy at an annual meeting thereof, the
Corporation effective as of May 24, 1982 elected to become governed by Minnesota
Statutes Ch. 302A and, in addition, approved and adopted the following Restated
Articles of Incorporation to supercede and take place of the existing Articles
of Incorporation.

                                    ARTICLE I

         The name of the Corporation is Datakey, Inc.


                                   ARTICLE II

         The registered office of this Corporation is located at 12281 Nicollet
Avenue South, Burnsville, Minnesota, 55337.

                                   ARTICLE III

         3.01 The aggregate number of shares of stock which this Corporation
shall have the authority to issue is 5,000,000. All common stock issued by the
Corporation shall have a par value of $.05 per share.

         3.02. The board of directors may from time to time establish by
resolution different classes or series of shares and may fix the rights and
preferences of said shares in any class or series.

         3.03. No shareholder of the Corporation shall have any preemptive
rights.

         3.04. No shareholder shall be entitled to any cumulative voting rights.

         3.05. The shareholders shall take action by the affirmative vote of the
holders of a majority of the voting power of all voting shares outstanding,
except where a larger proportion is required by law, these articles or a
shareholder control agreement.

                                   ARTICLE IV

         The name and address of the original incorporator of this Corporation
is: William P. Flies, 12808 Woodview Lane, Burnsville, Minnesota, 55337.

                                    ARTICLE V

         The names and addresses of the present board of directors are:

         William P. Flies                            Richard A. Walter
         12281 Nicollet Avenue                       10101 E. Bren Road
         Burnsville, MN  55337                       Minnetonka, MN  55343

         Thomas R. King                              Timothy P. Stepanek
         600 Midwest Plaza Bldg.                     1730 Midwest Plaza Bldg.
         Minneapolis, MN  55402                      Minneapolis, MN  55402


         IN WITNESS WHEREOF, we have hereunto set our hands this 24th day of
May, 1982.

                                           /s/ William P. Flies
                                           William P. Flies, President

                                           /s/ Thomas R. King
                                           Thomas R. King, Secretary

STATE OF MINNESOTA         )
                           ) ss.
COUNTY OF HENNEPIN         )

         William P. Flies and Thomas R. King, being duly sworn on oath, depose
and say that they are, respectively, the president and secretary of Datakey,
Inc., the corporation named in the foregoing certificate; that said certificate
contains a true statement of the action of the shareholders and board of
directors of said corporation; that said certificate is executed on behalf of
said corporation by its express authority; and that they further acknowledge the
same to be their free act and deed and the free act, and deed of said
corporation.

                                            /s/ William Flies

                                            /s/ Thomas R. King

Subscribed and sworn to before me this 24th day of May, 1982.

                                            /s/ Elizabeth A. Forehand
                                            Notary Public - Minnesota
                                            Hennepin County
                                            My commission expires 3-13-87

<PAGE>



                            OFFICERS' CERTIFICATE OF
                                  DATAKEY, INC.

         We, the undersigned, John H. Underwood and Thomas R. King, the
respective President and Secretary of Datakey, Inc., a corporation subject to
the provisions of Minnesota Statutes, Chapter 302A, do hereby certify that the
Minutes of Action Without Meeting of the Board of Directors of the corporation
dated December 23, 1985, a copy of which is attached hereto and incorporated
herein by reference, in which the Board of Directors authorized the issuance of
Preferred Stock, were unanimously adopted and approved by such Board of
Directors.

         IN WITNESS WHEREOF, we have subscribed our names this 23rd day of
December, 1985.

                                              /s/ John H. Underwood
                                              John H. Underwood
                                              President


                                              /s/ Thomas R. King
                                              Thomas R. King
                                              Secretary

STATE OF MINNESOTA         )
                           ) ss.
COUNTY OF HENNEPIN         )

         On this 23rd day of December, 1985, before a Notary Public within and
for said County, personally appeared John H. Underwood and Thomas R. King, to me
personally known, being by me duly sworn, and did say that they are the
President and Secretary, respectively, of the corporation named above and that
the said instrument was signed on behalf of the corporation and the persons who
signed said instrument acknowledged it to be the free act and deed of said
corporation.

                                           /s/ Diane M. Dossetto
                                           Notary Public - Minnesota
                                           Ramsey County
                                           My commission expires 7-10-90


<PAGE>


                        MINUTES OF ACTION WITHOUT MEETING
                          OF THE BOARD OF DIRECTORS OF
                                  DATAKEY, INC.

         The undersigned, being all of the members of the Board of Directors of
Datakey, Inc., hereby adopt, by action without meeting, the following
resolutions to be effective as of December 23, 1985, to-wit:

         RESOLVED: That the Preferred Stock authorizing resolutions, which
         resolutions are attached hereto as Exhibit A and which resolutions
         establish a class of Convertible Preferred Stock be and they hereby are
         adopted.

         FURTHER RESOLVED: That the officers of the corporation be, and they
         hereby are, authorized and directed to take whatever action is
         necessary to effect the foregoing resolutions.


                                             /s/ John H. Underwood
                                             John H. Underwood


                                             /s/ William P. Flies
                                             William P. Flies


                                             /s/ Timothy A. Stepanek
                                             Timothy A. Stepanek


                                             /s/ Thomas R. King
                                             Thomas R. King



<PAGE>


                                    EXHIBIT A


                                MINUTES OF ACTION
                             WITHOUT MEETING OF THE
                       BOARD OF DIRECTORS OF DATAKEY, INC.



         The undersigned, being all of the members of the Board of Directors of
Datakey, Inc., hereby adopt, by action without meeting, the following resolution
to be effective as of December 23, 1985, to-wit:

         WHEREAS, the Articles of Incorporation of Datakey, Inc., a Minnesota
corporation, authorize the corporation to issue an aggregate of 5,000,000 shares
of capital stock and empower the corporation's Board of Directors to establish
from time to time by resolution different classes or series of shares and to fix
the rights and preferences of said shares in any class or series; and

         WHEREAS, there currently are outstanding 2,979,750 shares of Common
Stock, the remaining 2,020,250 authorized shares of capital stock being
undesignated; and

         WHEREAS, the corporation's Board of Directors deems it to be in the
best interests of the corporation and its shareholders to establish a second
class of capital stock, Convertible Preferred Stock, having certain rights and
preferences;

         NOW, THEREFORE, BE IT RESOLVED, that the 5,000,000 shares of capital
stock authorized by the Articles of Incorporation of this corporation be, and
they hereby are, designated as belonging to the following classes having the
relative rights and preferences set forth below:

Section 1.        Shares and Classes Authorized.

         Of the 5,000,000 shares which the corporation is authorized to issue,
4,000,000 shares shall be designated Common Stock, par value $.05, 400,000
shares shall be designated Convertible Preferred Stock and 600,000 shares shall
be undesignated capital stock.



<PAGE>


Section 2.        Right and Preferences of Convertible Preferred Stock.

         The rights and preferences of the 400,000 shares of Convertible
Preferred Stock shall be as set forth in Exhibit 1 which is attached hereto and
made a part hereof.


                                              /s/ William P. Flies
                                              William P. Flies


                                              /s/ John H. Underwood
                                              John H. Underwood


                                              /s/ Timothy A. Stepanek
                                              Timothy A. Stepanek


                                              /s/ Thomas R. King
                                              Thomas R. King





<PAGE>


                                                                       EXHIBIT 1


                      CERTIFICATE OF RIGHTS AND PREFERENCES
                                       OF
                           CONVERTIBLE PREFERRED STOCK
                                       OF
                                  DATAKEY, INC.


(A).     Classification of Undesignated Shares.

         Of the 1,000,000 undesignated shares which the corporation is
authorized to issue under its Articles of Incorporation, 400,000 of such shares
shall all be classified as shares of Convertible Preferred Stock of the
corporation (the "Preferred Stock"). Such shares of Preferred Stock, together
with the 4,000,000 authorized shares of Common Stock of the corporation (the
"Common Stock") and the balance of the undesignated shares of the corporation,
are sometimes hereinafter collectively referred to as the "capital stock".

(B).     Voting Privileges.

                  (a) General. Each holder of Preferred Stock shall have that
number of votes on all matters submitted to the stockholders that is equal to
the number of shares of Common Stock into which such holder's shares of
Preferred Stock are then convertible, as hereinafter provided. Except as
otherwise provided in subparagraph (b) below, and except as otherwise required
by agreement or law, the shares of capital stock of the corporation shall vote
as a single class on all matters submitted to the stockholders.

                  (b) Without the affirmative vote of the holders (acting
together as a class) of at least a majority (with respect to (1) below) or at
least 90% (with respect to (2) below) of the shares of Preferred Stock at the
time outstanding, the corporation shall not:

         (1)      authorize or issue any shares of stock having a priority over
                  Preferred Stock or ranking on a parity therewith as to the
                  payment or distribution of assets upon the liquidation or
                  dissolution, voluntary or involuntary, of the corporation; or

         (2)      amend the Articles of Incorporation of the corporation so as
                  to alter any existing provision relating to Preferred Stock.

                  (c) No Cumulative Voting. No holder of shares of capital stock
shall have any cumulative voting rights.

(C).     No Preemptive Rights.

         No holder of shares of any class of capital stock shall be entitled as
such, as a matter of right, to subscribe for, purchase or receive any part of
any new or additional issue of stock of any class whatsoever, or of securities
convertible into or exchangeable for any stock of any class whatsoever, whether
now or hereafter authorized and whether issued for cash or other consideration
or by way of dividend.

(D).     Cash Dividends.

         Any dividend declared must be payable with respect to all outstanding
shares of capital stock of the corporation. In the event any dividend is
declared with respect to the capital stock, each holder of Preferred Stock shall
be paid such cash dividend on the basis of the number of shares of Common Stock
into which such holder's shares of Preferred Stock are then convertible, as
hereinafter provided.

(E).     Other Terms of the Preferred Stock.

                  (a) Liquidation Preference. In the event of either an
involuntary or a voluntary liquidation or dissolution of the corporation, the
holders of shares of Preferred Stock shall be entitled to receive out of the
assets of the corporation an amount equal to $2.50 per share. In the event of
either an involuntary or voluntary liquidation or dissolution of the
corporation, payment shall be made to the holders of the Preferred Stock in the
amounts herein fixed before any payment shall be made or any assets distributed
to the holders of the Common Stock or any other class of shares of the
corporation ranking junior to the Preferred Stock with respect to payment of
dividends or upon dissolution or liquidation of the corporation. If upon any
such liquidation or dissolution of the corporation the assets available for
distribution `shall be insufficient to pay the holders of all outstanding shares
of Preferred Stock the full amounts to which they respectively shall be
entitled, the holders of such shares shall share pro rata in any such
distribution.

                  The merger or consolidation of the corporation into or with
another corporation or the merger or consolidation of any other corporation into
or with the corporation (in which consolidation or merger the stockholders of
the corporation receive distribution of cash or securities or other property as
a result of such consolidation or merger), or the sale, transfer or other
disposition of all or substantially all of the assets of the corporation, shall
be deemed, for purposes of determining the amounts to be received by the holders
of the Preferred Stock in such merger, consolidation, sale, transfer or other
disposition, to be a liquidation or dissolution of the corporation for purposes
of this subparagraph (a) if the holders of a majority of the outstanding shares
of Preferred Stock so elect by giving written notice thereof to the corporation
at least two days before the effective date of such event. If no such notice is
given, the provisions of subparagraph (c)(7) hereof shall apply.

                  Nothing hereinabove set forth shall affect in any way the
right of each holder of shares of Preferred Stock to convert such shares at any
time and from time to time in accordance with subparagraph (c) below.

                  (b) Redemptions. Redemptions of shares of Preferred Stock by
the corporation without the consent of the holders thereof are not permitted.
Mandatory redemptions of shares of Preferred Stock by the corporation are not
required.

                  (c) Conversion Right; Mandatory Conversion. At the option of
the holders thereof, the shares of Preferred Stock shall be convertible, at the
office of the corporation (or at such other office or offices, if any, as the
Board of Directors may designate), into fully paid and nonassessable shares
(calculated as to each conversion to the nearest 1/100th of a share) of Common
Stock of the corporation, at the conversion price, determined as hereinafter
provided, in effect at the time of conversion, each share of the Preferred Stock
being taken at $2.50 for the purpose of such conversion. The price at which
shares of Common Stock shall be delivered upon conversion (herein called the
"conversion price") shall be initially $2.50 per share of Common Stock (i.e., at
an initial conversion rate of one share of Common Stock for each share of
Preferred Stock), provided, however, that such initial conversion price shall be
subject to adjustment from time to time in certain instances as hereinafter
provided. The following provisions shall govern such right of conversion:

         (1)      In order to convert shares of Preferred Stock into shares of
                  Common Stock of the corporation, the holder thereof shall
                  surrender at any office hereinabove mentioned the certificate
                  or certificates therefor, duly endorsed to the corporation or
                  in blank, and give written notice to the corporation at such
                  office that such holder elects to convert such shares. Shares
                  of Preferred Stock shall be deemed to have been converted
                  immediately prior to the close of business on the day of the
                  surrender of such shares for conversion as herein provided,
                  and the person entitled to receive the shares of Common Stock
                  of the corporation issuable upon such conversion shall be
                  treated for all purposes as the record holder of such shares
                  of Common Stock at such time. As promptly as practicable on or
                  after the conversion date, the corporation shall issue and
                  deliver or cause to be issued and delivered at such office a
                  certificate or certificates for the number of shares of Common
                  Stock of the corporation issuable upon such conversion.

         (2)      The conversion price shall be subject to adjustment from time
                  to time as hereinafter provided. Upon each adjustment of the
                  conversion price each holder of shares of Preferred Stock
                  shall thereafter be entitled to receive the number of shares
                  of Common Stock of the corporation obtained by multiplying the
                  conversion price in effect immediately prior to such
                  adjustment by the number of shares issuable pursuant to
                  conversion immediately prior to such adjustment and dividing
                  the product thereof by the conversion price resulting from
                  such adjustment.

         (3)      Except for the issuance of Conversion Stock and Warrant Stock
                  (as those terms are defined in the Preferred Stock Purchase
                  Agreement dated December 16, 1985 among the corporation and
                  the Purchasers named therein) (a) if and whenever on or prior
                  to June 30, 1987 the corporation shall issue or sell any
                  shares of its Common Stock for a consideration per share less
                  than the conversion price in effect immediately prior to the
                  time of such issue or sale, then forthwith upon such issue or
                  sale the conversion price shall be reduced to such lesser
                  price, and (b) if and whenever after June 30, 1987 the
                  corporation shall issue or sell any shares of its Common Stock
                  for a consideration per share less than the conversion price
                  in effect immediately prior to the time of such issue or sale,
                  and/or the corporation shall issue or sell any shares of
                  Common Stock for a consideration per share less than the
                  market price on the date of such issue or sale, then forthwith
                  upon such issue or sale the conversion price shall be reduced
                  to the price (calculated to the nearest cent) determined by
                  dividing (1) an amount equal to the sum of (aa) the number of
                  shares of Common Stock outstanding immediately prior to such
                  issue or sale multiplied by the then existing conversion
                  price, and (bb) the consideration, if any, received by the
                  corporation upon such issue or sale, by (2) an amount equal to
                  the sum of (aa) the number of shares of Common Stock
                  outstanding immediately prior to such issue or sale and (bb)
                  the number of shares of Common Stock thus issued or sold.

                           For the purposes of this subparagraph (3), the
                  following provisions (i) to (vii), inclusive, shall also be
                  applicable:

                  (i)      In case at any time the corporation shall grant
                           (whether directly or by assumption in a merger or
                           otherwise) any rights to subscribe for or to
                           purchase, or any options for the purchase of, (a)
                           Common Stock or (b) any obligations or any shares of
                           stock of the corporation which are convertible into,
                           or exchangeable for, Common Stock (any of such
                           obligations or shares of stock being hereinafter
                           called "Convertible Securities") whether or not such
                           rights or options or the right to convert or exchange
                           any such Convertible Securities are immediately
                           exercisable, and the price per share for which Common
                           Stock is issuable upon the exercise of such rights or
                           options or upon conversion or exchange of such
                           Convertible Securities (determined by dividing (x)
                           the total amount, if any, received or receivable by
                           the corporation as consideration for the granting of
                           such rights or options, plus the minimum aggregate
                           amount of additional consideration payable to the,
                           corporation upon the exercise of such rights or
                           options, plus, in the case of such Convertible
                           Securities, the minimum aggregate amount of
                           additional consideration, if any, payable upon the
                           issue of such Convertible Securities and upon the
                           conversion or exchange thereof, by (y) the total
                           maximum number of shares of Common Stock issuable
                           upon the exercise of such rights or options or upon
                           the conversion or exchange of all such Convertible
                           Securities issuable upon the exercise of such rights
                           or options) shall be less than the conversion price
                           in effect immediately prior to the time of the
                           granting of such rights or options, then the total
                           maximum number of shares of Common Stock issuable
                           upon the exercise of such rights or options or upon
                           conversion or exchange of the total maximum amount of
                           such Convertible Securities issuable upon the
                           exercise of such rights or options shall (as of the
                           date of granting of such rights or options) be deemed
                           to have been issued for such price per share. Except
                           as provided in subparagraph (6) below, no further
                           adjustments of the conversion price shall be made
                           upon the actual issue of such Common Stock or of such
                           Convertible Securities upon exercise of such rights
                           or options or upon the actual issue of such Common
                           Stock upon conversion or exchange of such Convertible
                           Securities.

                  (ii)     In case the corporation shall issue or sell (whether
                           directly or by assumption in a merger or otherwise)
                           any Convertible Securities, whether or not the rights
                           to exchange or convert thereunder are immediately
                           exercisable, and the price per share for which Common
                           Stock is issuable upon such conversion or exchange
                           (determined by dividing (x) the total amount received
                           or receivable by the corporation as consideration for
                           the issue or sale of such Convertible Securities,
                           plus the minimum aggregate amount of additional
                           consideration, if any, payable to the corporation
                           upon the conversion or exchange thereof, by (y) the
                           total maximum number of shares of Common Stock
                           issuable upon the conversion or exchange of all such
                           Convertible Securities) shall be less than the
                           conversion price in effect immediately prior to the
                           time of such issue or sale, then the total maximum
                           number of shares of Common Stock issuable upon
                           conversion or exchange of all such Convertible
                           Securities shall (as of the date of the issue or sale
                           of such Convertible Securities) be deemed to be
                           outstanding and to have been issued for such price
                           per share, provided that (a) except as provided in
                           subparagraph (6) below, no further adjustments of the
                           conversion price shall be made upon the actual issue
                           of such Common Stock upon conversion or exchange of
                           such Convertible Securities, and (b) if any such
                           issue or sale of such Convertible Securities is made
                           upon exercise of any rights to subscribe for or to
                           purchase or any option to purchase any such
                           Convertible Securities for which adjustments of the
                           conversion price have been or are to be made pursuant
                           to other provisions of this subparagraph (3), no
                           further adjustment of the conversion price shall be
                           made by reason of such issue or sale.

                  (iii)    In case the corporation shall, after June 30, 1987,
                           declare a dividend or make any other distribution
                           upon any capital stock of the corporation payable in
                           Common Stock or Convertible Securities, or in any
                           rights or options to purchase any Common Stock or
                           Convertible Securities, any Common Stock or
                           Convertible Securities, or any such rights or
                           options, as the case may be, issuable in payment of
                           such dividend or distribution shall be deemed to have
                           been issued or sold without consideration.

                  (iv)     In case any shares of Common Stock or Convertible
                           Securities or any rights or options to purchase any
                           such Common Stock or Convertible Securities shall be
                           issued or sold for cash, the consideration received
                           therefor shall be deemed to be the amount received by
                           the corporation therefor, without deducting therefrom
                           any expenses incurred or any underwriting commissions
                           or concessions paid or allowed by the corporation in
                           connection therewith. In case any shares of Common
                           Stock or Convertible Securities or any rights or
                           options to purchase any such Common Stock or
                           Convertible Securities shall be issued or sold for a
                           consideration other than cash, the amount of the
                           consideration other than cash received by the
                           corporation shall be deemed to be the fair value of
                           such consideration as determined by the Board of
                           Directors of the corporation, without deducting
                           therefrom any expenses incurred or any underwriting
                           commissions or concessions paid or allowed by the
                           corporation in connection therewith. In case any
                           shares of Common Stock or Convertible Securities or
                           any rights or options to purchase such Common Stock
                           or Convertible Securities shall be issued in
                           connection with any merger or consolidation in which
                           the corporation is the surviving corporation, the
                           amount of consideration therefor shall be deemed to
                           be the fair value as determined by the Board of
                           Directors of the corporation of such portion of the
                           assets and business of the non-surviving corporation
                           or corporations as such Board shall determine to be
                           attributable to such Common Stock, Convertible
                           Securities, rights or options, as the case may be. In
                           the event of any consolidation or merger of the
                           corporation in which the corporation is not the
                           surviving corporation or in the event of any sale of
                           all or substantially all of the assets of the
                           corporation for stock or other securities of any
                           other corporation, the corporation shall be deemed to
                           have issued a number of shares of its Common Stock
                           for stock or securities of the other corporation
                           computed on the basis of the actual exchange ratio on
                           which the transaction was predicated and for a
                           consideration equal to the fair market value on the
                           date of such transaction of such stock or securities
                           of the other corporation, and if any such calculation
                           results in adjustment of the conversion price, the
                           determination of the number of shares of Common Stock
                           issuable upon conversion immediately prior to such
                           merger, conversion or sale, for purposes of
                           subparagraph (7) below, shall be made after giving
                           effect to such adjustment of the conversion price.

                  (v)      In case the corporation shall take a record of the
                           holders of its Common Stock for the purpose of
                           entitling them (a) to receive a dividend or other
                           distribution payable in Common Stock or in
                           Convertible Securities, or in any rights or options
                           to purchase any Common Stock or Convertible
                           Securities, or (b) to subscribe for or purchase
                           Common Stock or Convertible Securities, then the date
                           of such record shall be deemed to be the date of the
                           issue or sale of the shares of Common Stock deemed to
                           have been issued or sold upon the declaration of such
                           dividend or the making of such other distribution or
                           the date of the granting of such rights of
                           subscription or purchase, as the case may be.

                  (vi)     The number of shares of Common Stock outstanding at
                           any given time shall not include shares owned or held
                           by or for the account of the corporation, and the
                           disposition of any such shares shall be considered an
                           issue or sale of Common Stock for the purpose of this
                           subparagraph (3).

                  (vii)    "Market price" shall mean the average of the high and
                           low prices of the Common Stock sales on all exchanges
                           on which the Common Stock may at the time be listed,
                           or, if there shall have been no sales on any such
                           exchange on any such day, the average of the bid and
                           asked prices at the end of such day, or, if the
                           Common Stock shall not be so listed, the average of
                           the bid and asked prices at the end of the day in the
                           over-the-counter market, in each case averaged over a
                           period of 20 consecutive business days prior to the
                           date as of which "market price" is being determined.
                           If at any time the Common Stock is not listed on any
                           exchange or quoted in the over-the-counter market,
                           the "market price" shall be deemed to be the higher
                           of (i) the book value thereof as determined by any
                           firm of independent public accountants of recognized
                           standing selected by the Board of Directors of the
                           corporation as of the last day of any month ending
                           within 60 days preceding the date as of which the
                           determination is to be made, or (ii) the fair value
                           thereof determined in good faith by the Board of
                           Directors of the corporation as of a date which is
                           within 15 days of the date as of which the
                           determination is to be made.

         (4)      In case the corporation shall declare a dividend or make a
                  distribution upon the Common Stock payable otherwise than out
                  of earnings or earned surplus (including dividends or
                  distributions in Common Stock or Convertible Securities, or in
                  any rights or options to purchase any Common Stock or
                  Convertible Securities), then thereafter each holder of shares
                  of Preferred Stock upon the conversion thereof will be
                  entitled to receive the number of shares of Common Stock into
                  which such shares of Preferred Stock have been converted, and,
                  in addition and without payment therefor, the cash, stock or
                  other securities and other property which such holder would
                  have received by way of dividends (otherwise than out of such
                  earnings or surplus) if continuously since such holder became
                  the record holder of such shares of Preferred Stock such
                  holder (i) had been the record holder of the number of shares
                  of Common Stock then received, and (ii) had retained all
                  dividends or distributions in stock or securities (including
                  Common Stock or Convertible Securities, or in any rights or
                  options to purchase any Common Stock or Convertible
                  Securities) payable in respect of such Common Stock or in
                  respect of any stock or securities paid as dividends or
                  distributions and originating directly or indirectly from such
                  Common Stock. For the purposes of the foregoing a dividend or
                  distribution other than in cash shall be considered payable
                  out of earnings or earned surplus only to the extent that such
                  earnings or surplus are charged an amount equal to the fair
                  value of such dividend or distribution as determined by the
                  Board of Directors of the corporation.

         (5)      In case the corporation shall at any time subdivide its
                  outstanding shares of Common Stock into a greater number of
                  shares, the conversion price in effect immediately prior to
                  such subdivision shall be proportionately reduced, and
                  conversely, in case the outstanding shares of Common Stock of
                  the corporation shall be combined into a smaller number of
                  shares, the conversion price in effect immediately prior to
                  such combination shall be proportionately increased.

         (6)      If (i) the purchase price provided for in any right or option
                  referred to in clause (i) of subparagraph (3), or (ii) the
                  additional consideration, if any, payable upon the conversion
                  or exchange of Convertible Securities referred to in clause
                  (i) or clause (ii) of subparagraph (3), or (iii) the rate at
                  which any Convertible Securities referred to in clause (i) or
                  clause (ii) of subparagraph (3) are convertible into or
                  exchangeable for Common Stock, shall change at any time (other
                  than under or by reason of provisions designed to protect
                  against dilution), the conversion price then in effect
                  hereunder shall forthwith be increased or decreased to such
                  conversion price as would have obtained had the adjustments
                  made upon the issuance of such rights, options or Convertible
                  Securities been made upon the basis of (a) the issuance of the
                  number of shares of Common Stock theretofore actually
                  delivered upon the exercise of such options or rights or upon
                  the conversion or exchange of such Convertible Securities, and
                  the total consideration received therefor, and (b) the
                  issuance at the time of such change of any such options,
                  rights, or Convertible Securities then still outstanding for
                  the consideration, if any, received by the corporation
                  therefor and to be received on the basis of such changed
                  price; and on the expiration of any such option or right or
                  the termination of any such right to convert or exchange such
                  Convertible Securities, the conversion price then in effect
                  hereunder shall forthwith be increased to such conversion
                  price as would have obtained had the adjustments made upon the
                  issuance of such rights or options or Convertible Securities
                  been made upon the basis of the issuance o the shares of
                  Common Stock theretofore actually delivered (and the total
                  consideration received therefor) upon the exercise of such
                  rights or options or upon the conversion or exchange of such
                  Convertible Securities. If the purchase price provided for in
                  any right or option referred to in clause (i) of subparagraph
                  (3), or the rate at which any Convertible Securities referred
                  to in clause (i) or clause (ii) of subparagraph (3) are
                  convertible into or exchangeable for Common Stock, shall
                  decrease at any time under or by reason of provisions with
                  respect thereto designed to protect against dilution, then in
                  case of the delivery of Common Stock upon the exercise of any
                  such right or option or upon conversion or exchange of any
                  such Convertible Security, the conversion price then in effect
                  hereunder shall forthwith be decreased to such conversion
                  price as would have obtained had the adjustments made upon the
                  issuance of such right, option or Convertible Security been
                  made upon the basis of the issuance of (and the total
                  consideration received for) the shares of Common Stock
                  delivered as aforesaid.

         (7)      If any capital reorganization or reclassification of the
                  capital stock of the corporation, or consolidation or merger
                  of the corporation with another corporation, or the sale of
                  all or substantially all of its assets to another corporation
                  shall be effected in such a way that holders of Common Stock
                  shall be entitled to receive stock, securities or assets with
                  respect to or in exchange for Common Stock, then, as a
                  condition of such reorganization, reclassification,
                  consolidation, merger or sale, and subject to subparagraph (a)
                  above, lawful and adequate provision shall be made whereby the
                  holders of Preferred Stock shall thereafter have the right to
                  receive upon the basis and upon the terms and conditions
                  specified herein and in lieu of the shares of the Common Stock
                  of the corporation immediately theretofore receivable upon the
                  conversion of Preferred Stock, such shares of stock,
                  securities or assets as may be issued or payable with respect
                  to or in exchange for a number of outstanding shares of such
                  Common Stock equal to the number of shares of such stock
                  immediately theretofore receivable upon the conversion of
                  Preferred Stock had such reorganization, reclassification,
                  consolidation, merger or sale not taken place, plus all
                  dividends unpaid and accumulated or accrued thereon to the
                  date of such reorganization, reclassification, consolidation,
                  merger or sale, and in any such case appropriate provision
                  shall be made with respect to the rights and interests of the
                  holders of Preferred Stock to the end that the provisions
                  hereof (including without limitation provisions for
                  adjustments of the conversion price and of the number of
                  shares receivable upon the conversion of Preferred Stock)
                  shall thereafter be applicable, as nearly as may be in
                  relation to any shares of stock, securities or assets
                  thereafter receivable upon the conversion of Preferred Stock.
                  The corporation shall not effect any such consolidation,
                  merger or sale, unless prior to the consummation thereof the
                  successor corporation (if other than the corporation)
                  resulting from such consolidation or merger or the corporation
                  purchasing such assets shall assume by written instrument
                  executed and mailed to the holders of Preferred Stock, at the
                  last addresses of such holders appearing on the books of the
                  corporation, the obligation to deliver to such holder such
                  shares of stock, securities or assets as, in accordance with
                  the foregoing provisions, such holder may be entitled to
                  receive.

         (8)      Upon any adjustment of the conversion price, then and in each
                  case the corporation shall give written notice thereof, by
                  first-class mail, postage prepaid, addressed to the holders of
                  Preferred Stock, at the addresses of such holders as shown on
                  the books of the corporation, which notice shall state the
                  conversion price resulting from such adjustment and the
                  increase or decrease, if any, in the number of shares
                  receivable at such price upon the conversion of Preferred
                  Stock, setting forth in reasonable detail the method of
                  calculation and the facts upon which such calculation is
                  based.

         (9)      In case at any time:

                  (i)      the corporation shall declare any cash dividend on
                           its Common Stock at a rate in excess of the rate of
                           the last cash dividend theretofore paid;

                  (ii)     the corporation shall pay any dividend payable in
                           stock upon its Common Stock or make any distribution
                           (other than regular cash dividends) to the holders of
                           its Common Stock;

                  (iii)    the corporation shall offer for subscription pro rata
                           to the holders of its Common Stock any additional
                           shares of stock of any class or other rights;

                  (iv)     there shall be any capital reorganization, or
                           reclassification of the capital stock of the
                           corporation, or consolidation or merger of the
                           corporation with, or sales of all or substantially
                           all of its assets to, another corporation; or

                  (v)      there shall be a voluntary or involuntary
                           dissolution, liquidation or winding up of the
                           corporation;

                  then, in any one or more of said cases, the corporation shall
                  give written notice, by first-class mail, postage prepaid,
                  addressed to the holders of Preferred Stock at the addresses
                  of such holders as shown on the books of the corporation, of
                  the date on which (a) the books of the corporation shall close
                  or a record shall be taken for such dividend, distribution or
                  subscription rights, or (b) such reorganization,
                  reclassification, consolidation, merger, sale, dissolution,
                  liquidation or winding up shall take place, as the case may
                  be. Such notice shall also specify the date as of which the
                  holders of Common Stock of record shall participate in such
                  dividend, distribution or subscription rights, or shall be
                  entitled to exchange their Common Stock for securities or
                  other property deliverable upon such reorganization,
                  reclassification, consolidation, merger, sale, dissolution,
                  liquidation, or winding up, as the case may be. Such written
                  notice shall be given at least 20 days prior to the action in
                  question and not less than 20 days prior to the record date or
                  the date on which the corporation's transfer books are closed
                  in respect thereto.

         (10)     If any event occurs as to which in the opinion of the Board of
                  Directors of the corporation the other provisions of this
                  paragraph (c) are not strictly applicable or if strictly
                  applicable would not fairly protect the rights of the holders
                  of Preferred Stock in accordance with the essential intent and
                  principles of such provisions, then the Board of Directors
                  shall make an adjustment in the application of such
                  provisions, in accordance with such essential intent and
                  principles, so as to protect such rights as aforesaid.

         (11)     As used in this paragraph (c) the term "Common Stock" shall
                  mean and include the corporation's presently authorized Common
                  Stock and shall also include any capital stock of any class of
                  the corporation hereafter authorized which shall not be
                  limited to a fixed sum or percentage in respect of the rights
                  of the holders thereof to participate in dividends or in the
                  distribution of assets upon the voluntary or involuntary
                  liquidation, dissolution or winding up of the corporation;
                  provided that the shares receivable pursuant to conversion of
                  shares of Preferred Stock shall include shares designated as
                  Common Stock of the corporation as of the date of issuance of
                  such shares of Preferred Stock, or, in case of any
                  reclassification of the outstanding shares thereof, the stock,
                  securities or assets provided for in subparagraph (7) above.

         (12)     No fractional shares of Common Stock shall be issued upon
                  conversion, but, instead of any fraction of a share which
                  would otherwise be issuable, the corporation shall pay a cash
                  adjustment in respect of such fraction in an amount equal to
                  the same fraction of the market price per share of Common
                  Stock, determined pursuant to subparagraph (3)(vii) above, as
                  of the close of business on the day of conversion.

Mandatory Conversion. Preferred Stock shall automatically be converted into
shares of Common Stock of the corporation, without any act by the corporation or
the holders of Preferred Stock, concurrently with the closing of the first
public offering by the corporation of shares of Common Stock of the corporation
registered under the Securities Act of 1933, as amended, in which (1) the
offering is underwritten on a firm commitment basis by an underwriter, or a
group of underwriters represented by an underwriter or underwriters, and (2) the
aggregate public offering price of the securities sold for cash by the
corporation in the offering, net of expenses payable by the corporation in
connection with such offering, is at least $5,000,000, and (3) the public
offering price per share of Common Stock is at least $5 (as adjusted from time
to time to reflect stock splits, dividends, recapitalizations, combinations or
the like). As used herein, the term "closing" shall mean the delivery by the
corporation to the underwriters of certificates representing the shares of
Common Stock of the corporation offered to the public against delivery to the
corporation by such underwriters of payment therefor. The term "firm commitment
basis" with respect to the underwriting of such public offering shall mean a
commitment pursuant to a written underwriting agreement under which the nature
of the underwriters' commitment is such that all securities will be purchased by
such underwriters if any securities are purchased by such underwriters. Each
holder of a share of Preferred Stock so converted shall be entitled to receive
the full number of shares of Common Stock into which such share of Preferred
Stock held by such holder could be converted if such holder had exercised its
conversion right at the time of closing of such public offering. Upon such
conversion, each holder of a share of Preferred Stock shall immediately
surrender such share in exchange for appropriate stock certificates representing
a share or shares of Common Stock of the corporation.




<PAGE>


               ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION
                                       OF
                                  DATAKEY, INC.

         Pursuant to the provisions of Minnesota Statutes, Section 302A.135, the
following Amendment of Section 3.01 of the Articles of Incorporation of Datakey,
Inc. was adopted at a meeting of the shareholders of the corporation duly
convened and held on the 6th day of May, 1986, by a vote of 84% of the voting
power of all shares entitled to vote:

                  "3.01 The aggregate number of shares of stock which this
         corporation shall have authority to issue is 12,500,000 shares,
         consisting of 10,000,000 shares of Common Stock, par value $.05,
         400,000 shares of Preferred Stock and 2,100,000 undesignated shares." I
         swear that the foregoing is true and accurate and that I have the
         authority to sign this document on behalf of the corporation.

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

STATE OF MINNESOTA         )
                           )  SS.
COUNTY OF Dakota           )

         The foregoing instrument was acknowledged before me this 25th day of
June, 1986, by John H. Underwood, President of Datakey, Inc., a Minnesota
corporation, on behalf of the corporation.

                                            /s/ Bette F. Feahr
                                            Notary Public - Minnesota
                                            Dakota County
                                            My commission expires 8-20-91
(Notarial Seal)


<PAGE>


               ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORAT10N
                                       OF
                                  DATAKEY, INC.



         Pursuant to the provisions of Minnesota Statutes, Section 302A.135, the
following Amendment of the Articles of Incorporation of Datakey, Inc., adding
Article VI, was adopted at a meeting of the shareholders of the corporation duly
convened and held on the May 12, 1987, by a majority vote of the voting power of
all shares entitled to vote:

         "ARTICLE VI - LIMITATION OF DIRECTOR LIABILITY

                  6.1) To the fullest extent permitted by the Minnesota Business
         Corporation Act as the same exists or may hereafter be amended, a
         director of this corporation shall not be personally liable to the
         corporation or its shareholders for monetary damages for breach of
         fiduciary duty as a director."

         I swear that the foregoing is true and accurate and that I have the
authority to sign this document on behalf of the corporation.


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



STATE OF MINNESOTA    )
                      )  SS.
COUNTY OF DAKOTA      )

         The foregoing instrument was acknowledged before me this 27 day of May,
1987, by John H. Underwood, President of Datakey, Inc., a Minnesota corporation,
on behalf of the corporation.

                                           /s/ Bette F. Feahr
                                           Notary Public - Minnesota
                                           Dakota County
                                           My commission expires 8-20-91
(Notarial Seal)


<PAGE>


                      Notice of Change of Registered Office
                                       by
                                  DATAKEY, INC.

Pursuant to Minnesota Statutes, Section 302A.123, the undersigned hereby
certifies that the Board of Directors of the above named Minnesota Corporation
has resolved to change the corporation's registered office or agent:

FROM:             Datakey, Inc.
                  12281 Nicollet Avenue South
                  Burnsville, MN  55337

TO:               Datakey, Inc.
                  407 West Travelers Trail
                  Burnsville, MN  55337-2554

The new address may not be a post office box. It must be a street address,
pursuant to Minnesota Statutes, Section 302A.011, Subd. 3.

The effective date of the change will be the 1st day of July, 1987 or the day of
filing of this certificate with the Secretary of State, whichever is later.

I swear that the foregoing is true and accurate and that I have the authority to
sign this document on behalf of the corporation.


                                       /s/ George H. M. Rountree
                                       George H. M. Rountree
                                       Vice President Finance
July 11, 1988

State of Minnesota    )
                      ) ss.
County of Dakota      )

         The foregoing instrument was acknowledged before me on this 11th day of
July, 1988.

                                       /s/ Bette F. Feahr
                                       Notary Public - Minnesota
                                       Dakota County
                                       My commission expires 8-20-91

State of Minnesota
Department of State
Filed: August 10, 1988

<PAGE>


                       STATEMENT OF DESIGNATION OF SHARES
                                       OF
                                  DATAKEY, INC.



         The undersigned hereby certifies that the resolutions set forth on
Exhibit A attached hereto were duly adopted by the Board of Directors of
Datakey, Inc. on May 11, 1998.

         I swear that the foregoing is true and accurate and that I have the
authority to sign this document on behalf of the corporation.


May 14, 1998
                                  DATAKEY, INC.


                                 /s/ Alan G. Shuler
                                 Alan G. Shuler
                                 Vice President and Chief Financial Officer




<PAGE>





                                                                       EXHIBIT A


         DESIGNATION OF SERIES A CONVERTIBLE CUMULATIVE PREFERRED STOCK


         WHEREAS, pursuant to the Articles of Incorporation of this corporation,
the Board of Directors has authority to establish, from the 2,100,000
undesignated shares of capital stock, one or more classes or series of shares,
to designate each such class or series, and to fix the relative rights and
preferences of each such class or series; and

         WHEREAS, the Board of Directors deem it advisable to designate shares
of Series A Convertible Cumulative Preferred Stock;

         NOW, THEREFORE, RESOLVED, that of the 2,100,000 undesignated shares
currently authorized, 150,000 shares are hereby designated as shares of Series A
Convertible Cumulative Preferred Stock, which shares shall have the terms as set
forth on Exhibit A hereto.






<PAGE>


                                    EXHIBIT A


             RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK


         The rights, preferences, restrictions and other matters relating to the
Series A Convertible Cumulative Preferred Stock (the "Series A Preferred Stock")
are as follows:

         1. Dividend Provisions. Upon issuance, dividends shall accrue on each
share of outstanding Series A Preferred Stock at an annual rate equal to $1.264
per share per annum (8% of the Original Issue Price, as defined herein). Such
dividends shall be cumulative and shall be payable upon any conversion of the
Series A Preferred Stock pursuant to Section 3 hereof. Such dividends shall only
be paid out of legally available funds of the Company. Such dividends shall be
payable by the Company, in its sole discretion, all in cash or all by the
issuance of a number of shares of the Company's unrestricted, freely tradable
common stock equal to the dividends owing on the Series A Preferred Stock;
provided, however, that prior to the payment of any such dividend by the
issuance of shares of the Company's common stock, the Company shall deliver to
the Investors an opinion of its counsel stating that all such shares have been
validly registered, and that they are duly authorized, validly issued and
nonassessable. For the purposes hereof, the number of shares of the Company's
common stock issuable in lieu of any cash dividend payment shall equal the total
dividend payment then due divided by the per share price of such stock. The per
share price of the Company's common stock shall be determined based on the
average closing bid price of such stock quoted on The Nasdaq Stock Market for
the ten consecutive trading days prior to the payment of such dividends.
Dividends on shares of the Series A Preferred Stock shall accrue beginning on
the date of issuance of the shares of Series A Preferred Stock, shall compound
on an annual basis and shall be payable upon conversion of the Series A
Preferred Stock (a "Payment Date"). All accrued and unpaid dividends on the
Series A Preferred Stock must be paid before any dividends may be declared or
paid on any other junior series of preferred or common stock issued by the
Company.

         2.       Liquidation Preference.

                  (a) In the event of any liquidation, dissolution or winding up
of the Company, either voluntary or involuntary, the holders of the previously
issued Convertible Preferred Stock (the "Convertible Preferred Stock") and the
Series A Preferred Stock shall be entitled to receive, prior and in preference
to any distribution of any of the assets of the Company to the holders of common
stock by reason of their ownership thereof, an amount per share equal to $2.50
for the Convertible Preferred Stock, and for the Series A Preferred Stock the
sum of (i) $15.80, as adjusted pursuant to Section 4(c) hereof (the "Original
Issue Price"), and (ii) an amount equal to cumulative unpaid dividends on such
shares (respectively, a "Liquidation Amount"). If upon the occurrence of such an
event, the assets and funds thus distributed among the holders of the
Convertible Preferred Stock and the Series A Preferred Stock shall be
insufficient to permit the payment to such holders of the full aforesaid
preferential amounts, then, the entire assets and funds of the Company legally
available for distribution shall be distributed ratably among the holders of the
Convertible Preferred Stock and the Series A Preferred Stock in proportion to
the amount of such stock owned by each such holder multiplied by the appropriate
Liquidation Amount.

                  (b) Upon the completion of the distribution required by
subparagraph (a) of this Section 2, if assets remain in the Company, the
remaining assets of the Company shall be distributed ratably among the holders
of the Company's common stock and the Series A Preferred Stock in proportion to
the number of shares of common stock held by each (assuming full conversion of
all shares of Series A Preferred Stock).

                  (c) (i) For purposes of this Section 2, a liquidation,
dissolution or winding up of the Company shall be deemed to be occasioned by, or
to include, (A) the acquisition of the Company by another entity by means of any
transaction or series of related transactions (including any reorganization,
merger or consolidation but excluding any merger effected exclusively for the
purpose of changing the domicile of the Company); or (B) a sale of all or
substantially all of the assets of the Company, unless the Company's
shareholders as constituted immediately prior to such acquisition or sale will,
immediately after such acquisition or sale (by virtue of securities issued as
consideration for the Company's acquisition or sale or otherwise) hold at least
50% of the voting power of the surviving or acquiring entity.

                      (ii) In any of such events, if the consideration received
by the Company is other than cash, its value will be deemed its fair market
value.

                      (iii) In the event the requirements of this Section 2
are not complied with, the Company shall forthwith either:

                            (A) cause such closing to be postponed until such
time  as  the requirements of this Section 2 have been complied with, or

                            (B) cancel such transaction, in which event the
rights, preferences and privileges of the holders of the Convertible Preferred
Stock and the Series A Preferred Stock shall revert to and be the same as such
rights, preferences and privileges existing immediately prior to the date of the
first notice referred to in subsection 2(c)(iv) hereof.

                       (iv) The Company shall give each holder of record of
Convertible Preferred Stock and the Series A Preferred Stock written notice of
such impending transaction not later than 20 days prior to the shareholders'
meeting called to approve such transaction, or 20 days prior to the closing of
such transaction, whichever is earlier, and shall also notify such holders in
writing of the final approval of such transaction; provided, however, that the
holder of any shares of then outstanding Convertible Preferred Stock or Series A
Preferred Stock shall have the right during such 20-day period to convert such
shares pursuant to Section 3 hereof. The first of such notices shall describe
the material terms and conditions of the impending transaction and the
provisions of this Section 2, and the Company shall thereafter give such holders
prompt notice of any material changes. The transaction shall in no event take
place sooner than 20 days after the Company has given the first notice provided
for herein or sooner than ten days after the Company has given notice of any
material changes provided for herein; provided, however, that such periods may
be shortened upon the written consent of the holders of the Convertible
Preferred Stock and the Series A Preferred Stock that are entitled to such
notice rights or similar notice rights and that represent at least a majority of
the voting power of all then outstanding shares of each of the classes of
preferred stock, voting separately as a class.

         3.       Conversion.

                  (a) Conversion Right. At the option of the holder thereof,
each share of Series A Preferred Stock shall be convertible at any time during
the period commencing on the day on which the Series A Preferred Stock is issued
and expiring on May 15, 2000 (the date which is the second anniversary of the
date of issuance of the Series A Preferred Stock); provided, however, that such
expiration date shall be extended for a number of days equal to the number of
days beyond the 90th day following the date of issuance of the Series A
Preferred Stock that the Registration Statement (as such term is defined in the
Registration Rights Agreement, of even date herewith, entered into by and
between the Company and the Investors set forth on Schedule A thereto) is not
effective (such date, including any extension thereof pursuant to the foregoing
proviso, being herein referred to as the "Second Anniversary"). The Series A
Preferred Stock shall be convertible at the office of the Company or any
transfer agent for such stock into such number of fully paid and nonassessable
shares of the Company's common stock as is determined by dividing the Original
Issue Price, subject to adjustment as provided in Section 4, by the Conversion
Price applicable to such shares, determined as hereafter provided, in effect on
the date the certificates representing such shares are surrendered for
conversion (the "Conversion Date"). The Conversion Price shall be equal to the
average closing bid price of one share of the Company's common stock as quoted
by the Nasdaq SmallCap Market, the Nasdaq National Market or the principal
exchange upon which shares of the Company's common stock may be listed, or, if
the Company's common stock shall not then be quoted on the Nasdaq SmallCap
Market or the Nasdaq National Market or listed on a national securities
exchange, but shall otherwise be traded in the over-the-counter market, on such
over-the-counter market for the ten-day period ending on the day prior to the
Conversion Date (the "Trading Period") multiplied by .8 (the "Conversion
Price"); provided, however, that in no event shall the Conversion Price exceed
$5.00 per share or be less than $2.75 (the "Maximum Price" and "Minimum Price,"
respectively) per share; and provided, further, that appropriate adjustments
shall be made in determining the average closing bid price if a recapitalization
or other event affecting the Company's common stock shall occur during the
Trading Period.

                  (b) Dividend Payment. Should the Company, pursuant to Section
1 hereof, not elect to pay all outstanding, cumulative, accrued and unpaid
dividends on the Series A Preferred Stock in shares of its common stock, the
Company shall pay, in immediately available funds, to the holder of any shares
of Series A Preferred Stock being converted, within two days, all such dividends
on the date that it receives notice of such holder's intent to convert such
shares pursuant to (d) below. Separately, should the Company elect to pay all
outstanding, cumulative, accrued and unpaid dividends on the Series A Preferred
Stock in shares of its common stock, it shall, within two business days of
receiving a holder's notice of intent to convert, deliver certificates
representing such shares to the holder of the Series A Preferred Stock.

                  (c) Automatic Conversion. Any shares of Series A Preferred
Stock remaining outstanding on the Second Anniversary shall be automatically
converted pursuant to the conversion terms of Section 3(a) above. The Conversion
Date with respect to such automatic conversion shall be the Second Anniversary.
In any event, the Company shall, within two business days after automatic
conversion of the Series A Preferred Stock, issue and deliver a certificate or
certificates for the number of shares of the Company's common stock to which
each former holder of Series A Preferred Stock is entitled. Notwithstanding the
foregoing, no automatic conversion of the Series A Preferred Stock shall occur
pursuant to this Section unless (i) all shares of the Company's common stock
underlying the shares of Series A Preferred Stock may be sold pursuant to an
effective registration statement under the Securities Act of 1933, as amended,
(ii) the Company's common stock is listed and trading on The Nasdaq Stock
Market, and (iii) the Company has reserved and available for issuance a number
of shares of its common stock sufficient to cover conversion of all outstanding
shares of Series A Preferred Stock.

                  (d) Mechanics of Conversion. Before any holder of Series A
Preferred Stock shall be entitled to convert the same into shares of the
Company's common stock, he, she or it shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Company or of any
transfer agent for the Series A Preferred Stock, and shall give written notice,
via facsimile, to the Company, at its principal corporate office, of the
election to convert the same and shall state therein the name or names in which
the certificate or certificates for shares of the Company's common stock are to
be issued. The Company shall, immediately thereafter (and in any event no more
than two business days thereafter), issue and deliver to such holder of Series A
Preferred Stock at the address shown on the Company's records or at such other
address as such party may designate by written notice to the Company, or to the
nominee or nominees of such holder, a certificate or certificates for the number
of shares of the Company's common stock to which such holder shall be entitled
pursuant to Section 3(a) and a certificate representing shares of Series A
Preferred Stock not so converted by the holder. Such conversion shall be deemed
to have been made immediately prior to the close of business on the Conversion
Date, and the person or persons entitled to receive the shares of the Company's
common stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such shares of the Company's common stock as of
such date.

                  (e) Mechanics of Automatic Conversion. On the Conversion Date
with respect to the automatic conversion pursuant to subsection 3(c) above, the
certificates representing shares of Series A Preferred Stock shall immediately
represent that number of shares of the Company's common stock into which such
shares are convertible. Holders of Series A Preferred Stock shall deliver their
certificates, duly endorsed in blank, to the principal office of the Company,
together with a notice setting out the name or names (with addresses) and
denominations in which the certificates representing such shares of common stock
issuable upon conversion are to be issued and including instructions for
delivery thereof. The person entitled to receive the shares of the Company's
common stock issuable upon such conversion shall be treated for all purposes as
the record holder of such shares of common stock at and on the Conversion Date,
and the rights of such person as a holder of shares of Series A Preferred Stock
shall cease and terminate at and on the Conversion Date, in any case without
regard to any failure by such holder to deliver the certificates or the notice
required by this subsection 3(e). On the Conversion Date with respect to
automatic conversion, the Company shall pay all outstanding, cumulative, accrued
and unpaid dividends, either by the issuance of shares of its common stock or in
cash, pursuant to the provisions set forth in (a) above; provided, however, that
should the Company elect to pay such dividends by the issuance of additional
shares of its common stock, the person entitled to receive such shares of the
Company's common stock issuable upon such conversion shall be treated for all
purposes as the record holder of such additional shares on the Conversion Date

                  (f) No Impairment. The Company will not, by amendment of its
Articles of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Company, but will at all times in good faith assist in the carrying out of all
the provisions of this Section 3 and in the taking of all such action as may be
necessary or appropriate in order to protect the conversion rights of the
holders of the Series A Preferred Stock against impairment.

                  (g) No Fractional Shares. No fractional shares shall be issued
upon the conversion of any share or shares of the Series A Preferred Stock, and
the number of shares of the Company's common stock to be issued shall be rounded
to the nearest whole share. Whether or not fractional shares are issuable upon
such conversion shall be determined on the basis of the total number of shares
of Series A Preferred Stock the holder is at the time converting into shares of
the Company's common stock and the number of shares of such common stock
issuable upon such aggregate conversion.

                  (h) Notices of Record Date. In the event of any taking by the
Company of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, any right to subscribe for, purchase or otherwise acquire
any shares of stock of any class or any other securities or property, or to
receive any other right, the Company shall mail to each holder of Series A
Preferred Stock, at least 20 days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the purpose of
such dividend, distribution or right, and the amount and character of such
dividend, distribution or right.

                  (i) Reservation of Stock Issuable Upon Conversion. The Company
shall at all times reserve and keep available out of its authorized but unissued
shares of common stock, solely for the purpose of effecting the conversion of
the shares of the Series A Preferred Stock, such number of its shares of its
common stock as shall from time to time be sufficient to effect the conversion
of all outstanding shares of the Series A Preferred Stock; and if at any time
the number of authorized but unissued shares of the Company's common stock shall
not be sufficient to effect the conversion of all then outstanding shares of the
Series A Preferred Stock, in addition to such other remedies as shall be
available to the holder of such Series A Preferred Stock, the Company will take
such corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of common stock to such number of
shares as shall be sufficient for such purposes, including engaging in best
efforts to obtain the requisite shareholder approval of any necessary amendment
to the Company's Articles of Incorporation.

                  (j) Notices. Any notice required by the provisions of this
Section 3 to be given to the holders of shares of Series A Preferred Stock shall
be deemed given if deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his, her or its address appearing on the
books of the Company.

         4.       Anti-Dilution Provisions.

                  The Original Issue Price shall be subject to adjustment from
time to time upon the happening of any of the following events: (a) In the event
the Company shall issue or sell any shares of its common stock (except as
provided in paragraph (e) hereof) for a consideration per share less than the
greater of (A) $5.00, or (B) 80% of the Market Price (as defined below) on the
date of such issue or sale, then the Original Issue Price shall be increased to
such greater price (calculated to the nearest cent) as shall be determined by
multiplying the Original Issue Price by a fraction, the numerator of which shall
be the number of shares of the Company's common stock outstanding immediately
after the issuance or sale of such additional shares, and the denominator of
which shall be the sum of (i) the number of shares of the Company's common stock
outstanding immediately prior to the issuance or sale of such additional shares,
and (ii) the number of shares of the Company's common stock which the aggregate
consideration received for the issuance or sale of such additional shares would
purchase at the greater of $5.00, or if such shares of the Company's common
stock shall have been issued for a consideration per share less than 80% of the
Market Price on the date of issuance or sale, the current Market Price. For
purposes of this paragraph, all shares of the Company's common stock issuable
upon exercise of outstanding options and warrants shall be deemed to be
outstanding.

                  (b) For the purposes of paragraph 4(a) above, the following
subparagraphs (i) to (vii), inclusive, shall be applicable:

                      (i) If at any time the Company shall issue or sell any
rights to subscribe for, or any rights or options to purchase, shares of its
common stock or any stock or other securities convertible into or exchangeable
for such common stock (such convertible or exchangeable stock or securities
being hereinafter called "Convertible Securities"), whether or not such rights
or options or the right to convert or exchange any such Convertible Securities
shall be immediately exercisable, and the price per share for which shares of
the Company's common stock shall be issuable upon the exercise of such rights or
options or upon conversion or exchange of such Convertible Securities
(determined by dividing (1) the total amount, if any, received or receivable by
the Company as consideration for the granting of such rights or options, plus
the minimum aggregate amount of additional consideration payable to the Company
upon the exercise of such rights or options, plus, in the case of any such
rights or options which shall relate to Convertible Securities, the minimum
aggregate amount of additional consideration, if any, payable upon the issue or
sale of such Convertible Securities and upon the conversion or exchange thereof,
by (2) the total number of shares of the Company's common stock issuable upon
the exercise of such rights or options or upon the conversion or exchange of all
such Convertible Securities issuable upon the exercise of such rights or
options) shall be less than the greater of (x) the $5.00, or (y) 80% of the
Market Price at the time of such issue or sale, then the total number of shares
of the Company's common stock issuable upon the exercise of such rights or
options or upon conversion or exchange of the total amount of such Convertible
Securities issuable upon the exercise of such rights or options shall (as of the
date of granting of such rights or options) be deemed to be outstanding and to
have been issued for such price per share, and except as provided in paragraph
4(d), no further adjustments of the Original Issue Price shall be made upon the
actual issue of such shares of common stock or of such Convertible Securities,
upon the exercise of such rights or options or upon the actual issue of such
common stock upon conversion or exchange of such Convertible Securities.

                        (ii) If at any time the Company shall issue or sell
any Convertible Securities, whether or not the rights to exchange or convert
thereunder shall be immediately exercisable, and the price per share for which
shares of the Company's common stock shall be issuable upon such conversion or
exchange (determined by dividing (1) the total amount received or receivable by
the Company as consideration for the issue or sale of such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Company upon the conversion or exchange thereof, by (2) the
total number of shares of the Company's common stock issuable upon the
conversion or exchange of all such Convertible Securities) shall be less than
the greater of (x) $5.00, or (y) 80% of the Market Price at the time of such
issue or sale, then the total number of shares of the Company's common stock
issuable upon conversion or exchange of all such Convertible Securities shall
(as of the date of the issue or sale of such Convertible Securities) be deemed
to be outstanding and to have been issued for such price per share, and, except
as provided in paragraph 4(d), no further adjustments of the Original Issue
Price shall be made upon the actual issue of such shares of common stock upon
conversion or exchange of such Convertible Securities. In addition, if any issue
or sale of such Convertible Securities shall be made upon exercise of any rights
to subscribe for or to purchase or any option to purchase any such Convertible
Securities for which adjustments of the Original Issue Price shall have been or
shall be made pursuant to other provisions of this paragraph 4(b)(ii), no
further adjustment of the Original Issue Price shall be made by reason of such
issue or sale.

                       (iii) If at any time the Company shall declare and
pay a dividend or make any other distribution upon the shares of its common
stock payable in such stock or Convertible Securities, any such stock or
Convertible Securities, as the case may be, issuable in payment of such dividend
or distribution shall be deemed to have been issued or sold without
consideration.

                       (iv) If at any time any shares of the Company's common
stock or Convertible Securities or any rights or options to purchase shares of
any such stock or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received by the
Company therefor, without deduction therefrom of any expenses incurred or any
underwriting commissions or concessions or discounts paid or allowed by the
Company in connection therewith. In case any shares of the Company's common
stock or Convertible Securities or any rights or options to purchase any such
common stock or Convertible Securities shall be issued or sold for a
consideration other than cash, the amount of the consideration other than cash
received by the Company shall be deemed to be the fair value of such
consideration as determined by the Company's Board of Directors, without
deduction therefrom of any expenses incurred or any underwriting commissions or
concessions or discounts paid or allowed by the Company in connection therewith.
In case any shares of the Company's common stock or Convertible Securities or
any rights or options to purchase any such common stock or Convertible
Securities shall be issued in connection with any merger of another corporation
into the Company, the amount of consideration therefor shall be deemed to be the
fair value of the net assets of such merged corporation as determined by the
Company's Board of Directors after deducting therefrom all cash and other
consideration (if any) paid by the Company in connection with such merger.

                        (v) If at any time the Company shall take a record of
the holders of its common stock for the purpose of entitling them (1) to receive
a dividend or other distribution payable in shares of the Company's common stock
or in Convertible Securities, or (2) to subscribe for or purchase shares of the
Company's common stock or Convertible Securities, then such record date shall be
deemed to be the date of the issue or sale of the shares of the Company's common
stock deemed to have been issued or sold upon the declaration of such dividend
or the making of such other distribution or the date of the granting of such
right of subscription or purchase, as the case may be.

                        (vi) The number of shares of the Company's common
stock outstanding at any given time shall not include shares owned or held by or
for the account of the Company, provided that such shares are neither issued,
sold or otherwise distributed by the Company.

                        (vii) For purposes hereof, the "Market Price" shall
mean the average closing bid price of the Company's common stock on the Nasdaq
SmallCap Market, the Nasdaq National Market or the principal exchange upon which
shares of the Company's common stock may be listed, or, if the Company's common
stock shall not then be quoted on the Nasdaq SmallCap Market or the Nasdaq
National Market or listed on a national securities exchange, but shall otherwise
be traded in the over-the-counter market, on such over-the-counter market, in
each case for the ten day period immediately preceding any determination of such
"Market Price" (subject to appropriate adjustments which shall be made in
determining the average closing bid price if a recapitalization or other event
affecting the Company's common stock shall occur during such 10-day period). If
at any time shares of the Company's common stock shall not be quoted on the
Nasdaq SmallCap Market or the Nasdaq National Market, listed on a national
securities exchange, or otherwise traded in the over-the-counter market, the
"Market Price" of a share of the Company's common stock shall be deemed to be
the higher of (x) the book value thereof (as determined by any firm of
independent public accountants of nationally recognized standing selected by the
Company's Board of Directors) as of the last day of any month ending within 60
days preceding the date of determination, or (y) the fair value thereof (as
determined in good faith by the Company's Board of Directors) as of a date which
shall be within 15 days of the date of determination.

                    (c) In case at any time the Company shall subdivide its
outstanding shares of common stock into a greater number of shares, the Original
Issue Price in effect immediately prior to such subdivision, the Maximum Price
and the Minimum Price shall be proportionately reduced, and the Company shall
subdivide the Series A Preferred Stock in the same proportion. In case at any
time the outstanding shares of the Company's common stock shall be combined into
a smaller number of shares, the Original Issue Price in effect immediately prior
to such combination, the Maximum Price and the Minimum Price shall be
proportionately increased, and the Company shall combine the Series A Preferred
Stock in the same proportion. Any adjustment under this paragraph 4(c) shall
become effective at the close of business on the date the subdivision or
combination shall become effective. The Company will take such corporate action
as may, in the opinion of its counsel, be necessary to increase its authorized
but unissued shares of Series A Preferred Stock to such number of shares as
shall be sufficient for any such purposes, including engaging in best efforts to
obtain the requisite shareholder approval of any necessary amendment to the
Company's Articles of Incorporation.

                  (d) If the purchase or exercise price provided for in any
right or option referred to in paragraph 4(b)(i), or the rate at which any
Convertible Securities referred to in paragraph 4(b)(i) or (ii) shall be
convertible into or exchangeable for shares of the Company's common stock, shall
change or a different purchase or exercise price or rate shall become effective
at any time or from time to time (including any change resulting from
termination of such right, option or convertible security), then, upon such
change becoming effective, the Original Issue Price then in effect hereunder
shall forthwith be increased or decreased to such Original Issue Price as would
have been obtained had the adjustments made upon the granting or issuance of
such rights or options or Convertible Securities been made upon the basis of (A)
the issuance of the number of shares of the Company's common stock theretofore
actually delivered upon the exercise of such options or rights or upon the
conversion or exchange of such Convertible Securities, and (B) the granting or
issuance at the time of such change of any such options, rights or Convertible
Securities then still outstanding for the consideration, if any, received by the
Company therefor and to be received on the basis of such changed price.

                  (e) The Company shall not be required to make any adjustment
to the Original Issue Price in the case of:

                      (i) the granting, after the date hereof, by the Company of
stock options under the Company's 1997 Stock Option Plan, so long as the shares
of the Company's common stock underlying such options are covered by the 800,000
shares currently reserved for issuance under such plan as of the date hereof,
assuming approval by the Company's shareholders of the 300,000 share increase at
the Company's 1998 Annual Meeting of Shareholders;

                      (ii) the issuance of shares of the Company's common stock,
pursuant to the exercise of the options referred to in paragraph 4(e)(i) above
or the exercise of any other options or warrants outstanding as of the date
hereof; or

                      (iii) the issuance of shares of the Series A Preferred
Stock hereunder or of shares of the Company's common stock upon the conversion
of any shares of the Series A Preferred Stock or upon the exercise of the
Warrant or the Warrant issued to Miller, Johnson & Kuehn, Incorporated on the
same date as the Preferred Stock Purchase Agreement to which this certificate of
Designation is an Exhibit.

         5. Voting Rights. The holder of each share of Series A Preferred Stock
shall have the right to the number of votes on all matters submitted to the
Company's shareholders that shall be equal to the number of shares of the
Company's common stock into which such holder's shares of Series A Preferred
Stock shall then be convertible (assuming a conversion as of the record date set
for the vote).

         6. Status of Converted Stock. In the event any shares of Series A
Preferred Stock shall be converted pursuant to Section 3 hereof, the shares of
Series A Preferred Stock so converted shall be canceled and shall not be
issuable by the Company. The Articles of Incorporation of the Company shall be
appropriately amended to effect the corresponding reduction in the Company's
authorized capital stock.

         7. Notice of Adjustment. The Company shall provide all holders of
shares of Series A Preferred Stock five business days prior written notice of
any adjustments in the Original Issue Price, the Maximum Price, the Minimum
Price or any other adjustments made pursuant to the provisions hereof.


<PAGE>


                            STATEMENT OF DESIGNATION
                              OF ADDITIONAL SHARES
                                       OF
                                  DATAKEY, INC.



         The undersigned hereby certifies that the resolutions set forth below
were duly adopted by the Board of Directors of Datakey, Inc., a Minnesota
corporation, on January 25, 2000:


                  WHEREAS, pursuant to the Articles of Incorporation of this
         corporation, the Board of Directors has authority to establish, from
         the 1,950,000 undesignated shares of capital stock, one or more classes
         or series of shares and to fix the relative rights and preferences of
         each such class of or series; and

                  WHEREAS, the Board of Directors deems it advisable to
         designate additional common shares;

                  NOW, THEREFORE, RESOLVED, that, of the 1,950,000 undesignated
         shares, currently authorized, 1,000,000 shares are designated as
         additional common shares.


         I swear that the foregoing is true and accurate and that I have the
authority to sign this document on behalf of the corporation.


Dated:  February 10, 2000


                                        /s/ Carl P. Boecher
                                        Carl P. Boecher, President and
                                        Chief Executive Officer of Datakey, Inc.