EMPLOYMENT AGREEMENT


         This  Employment  Agreement  made and entered into  effective as of the
16th day of April 1997, by and between  Datakey,  Inc., a Minnesota  corporation
(the "Company" or "Datakey") and Michael L. Sorensen ("Executive").


                                    RECITALS

         Michael L. Sorensen  became the Vice  President of Operations as of the
date  hereof.  The Company and the  Executive  are desirous  that the  Executive
serves the Company in this capacity under the following terms and conditions.


                                    AGREEMENT

1.       Employment

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

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

2.       Term of Employment

         a.  Subject  to the terms and  conditions  hereof,  Executive  shall be
employed  for a term  ("Employment  Term")  commencing  on  April  16,  1997 and
terminating  on April 15, 1998,  unless  extended as set forth in  Subsection 2b
below.

         b. This  Agreement will be renewed  automatically  after April 15, 1998
for  additional  one-year  periods  unless  either  party  gives the other party
written  notice 30 days  before  April 15, 1998 or 30 days before the end of any
one-year period thereafter of his or its intention to terminate the Agreement.

3.       Base Monthly Compensation

         As compensation for his services to Datakey,  Executive shall be paid a
monthly salary of $7,500,  payable in accordance with Datakey's periodic payment
periods.


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4.       Bonus

         Executive shall be eligible to participate in both the Annual Incentive
Plan (AIP) and the Long-Term Incentive Plan or any other approved bonus plan.

5.       Other Benefits

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

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

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

6.       Termination

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

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

                  (ii)     Executive's death;

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

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

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

7.       Payment Upon Termination of Employment for Cause or Voluntary 
         Resignation

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


<PAGE>

8.       Payment Upon Termination of Employment Without Cause

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

         b. Base  compensation  shall be deemed to be no less than $7,500.00 per
month.

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

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

9.       Payment Upon  Termination of Agreement by the Company on April 15, 1998
         or at the End of Any One-Year Extension

         a. If the Company  decides to  terminate  the  Employment  Agreement on
April  15,  1998 or as of the end of any  one-year  extension,  Executive  shall
receive his base monthly  compensation  for six (6) months beginning on the 10th
of the first month following the last month of the Employment Term in accordance
with Datakey's payment periods.

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

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


<PAGE>

10.      Termination of Employment or Resignation  Within Six Months of a Change
         in Control

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

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

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

11.      Nondisclosure

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

12.      Inventions

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

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


<PAGE>

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

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

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

13.      Specific Performance

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

14.      Noncompetition

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

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

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


<PAGE>

         d. To the extent any  provision  of this Section 14 shall be invalid or
unenforceable, it shall be considered deleted herefrom and the remainder of such
provision  and this Section 14 shall be  unaffected  and shall  continue in full
force and effect.  In  furtherance  to and not in limitation  of the  foregoing,
should the duration or geographical  extent of, or business  activities  covered
by,  any  provision  of this  Section 14 be in excess of that which is valid and
enforceable  under  applicable  law, then such  provision  shall be construed to
cover only that duration, extent or activities which are validly and enforceably
covered.  Executive  acknowledges the uncertainty of the law in this respect and
expressly  stipulates  that  this  Section  14 be given the  construction  which
renders  its  provisions  valid  and  enforceable  to the  maximum  extent  (not
exceeding its expressed terms) possible under applicable laws.

15.      Miscellaneous

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

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

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

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


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


                                  DATAKEY, INC.



                                  By
                                    Carl P. Boecher, President



                                    Michael L. Sorensen, Executive




<PAGE>

                                    EXHIBIT A
                                       TO
                    EMPLOYMENT AGREEMENT DATED APRIL 16, 1997


                               EXECUTIVE BENEFITS


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

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

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

--       Auto allowance of $400 per month

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

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