**Exhibit 10.1**
**EMPLOYMENT AGREEMENT**
     This Employment Agreement made and entered into effective as of August 1,2004, by and between **Datakey, Inc**., a Minnesota corporation (the “Company” or“Datakey”), and **David A. Feste**(“Executive”).
**RECITALS**
     Executive has been named Vice President and Chief Financial Officer ofDatakey. The Company and the Executive desire that the Executive continue toserve the Company in this capacity under the following terms and conditions.
**AGREEMENT**
1. Employment
     a. Datakey agrees to employ Executive on a full-time basis as its VicePresident and Chief Financial Officer.
     b. Executive agrees that he will, at all times, faithfully, industriously,and, to the best of his abilities, experience and talents, continue to performall the duties and responsibilities that may be required of him as an officerof Datakey.
2. Term of Employment
     a. Subject to the terms and conditions hereof, Executive shall be employedfor a term (“Employment Term”) commencing on August 1, 2004 and terminating onJuly 31, 2005 unless extended as set forth in Subsection 2b below.
     b. This Agreement will be renewed automatically after July 31, 2005 foradditional one-year periods unless either party gives the other party writtennotice 30 days before July 31, 2005, or 30 days before the end of any one-yearperiod 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 amonthly salary of $11,250, plus salary increases, if any, approved by the Boardof Directors and documented in the Executive’s personnel and/or payrollrecords, payable in accordance with Datakey’s periodic payment periods andwithholding practices.
4. Bonus
     Executive shall be eligible to participate in the Annual Incentive Plan,the Long-Term Incentive Plan or any other approved bonus plan.
5. Other Benefits
     During the term of this Agreement, Executive will be eligible to receivecertain other benefits described in the attached Exhibit A, subject to suchchanges as Datakey may adopt from time to time for officers of the Company andsalaried employees generally.
 

 

**Exhibit 10.1**
6. Termination
     a. Notwithstanding Section 2 above, the Employment Term, and or anyextension thereof, shall terminate upon the happening of any of the followingevents:
(i) Mutual written agreement between the Board of Directors ofDatakey and Executive to terminate his employment;
(ii) Executive’s death;
(iii) Executive’s disability, defined as physically or mentallyunable to perform his duties as an officer of the Company for aperiod of six consecutive months, as determined by a mutuallyagreeable physician; or
(iv) For cause (as defined below) upon written notice from theBoard of Directors specifying the nature of the cause.
     b. For purposes of this Agreement, “cause” shall include the commission ofany felony, gross misdemeanor, or any act of fraud in connection with theaffairs of Datakey.
7. Payment Upon Termination of Employment for Cause or Voluntary Resignation
     If Executive is terminated for cause or voluntarily resigns, Executiveshall not be eligible to receive any severance benefits except as specificallyagreed to at time of termination. The date of termination under this Section 7shall be on the day the notice of termination for cause is given or 30 daysfrom the date the notice of resignation is given. Executive shall be entitledto no additional compensation past the date of a notice of termination forcause or after 30 days from the notice of resignation.
8. Payment Upon Termination of Employment Without Cause or Termination UponFailure to Renew
     a. If, during the term of this Agreement Executive is terminated withoutcause, and without cause shall include death, disability or mutual agreement,or if the Company fails to renew the Agreement as of July 31, 2005, or at theend of any one-year extension, Executive shall not be entitled to receive hisagreed compensation for the balance of the term of this Agreement but shallinstead receive a severance payment equal to his base monthly compensationpayable for six months in accordance with Datakey’s payroll periods beginningthe first month following the last month of his employment term, plus quarterlycash bonus payments for two quarters, payments equal to the average quarterlybonus paid to Executive during the prior four quarters.
     b. Base compensation shall be deemed to be the amount of currentcompensation on the date of termination reflected in the Company’s personnelfiles, but, in any event, no less than $11,250 per month.
     c. The payments provided for under this Section 8 shall, in the event ofExecutive’s death, continue and shall be payable to his wife if she survivesor, if not, to his estate.
     d. The Company will continue to provide medical and health coverage, underits plans as they currently exist or may hereafter be amended, at Companysubsidized rates during the six-month severance pay period provided Executiveelects to continue coverage under COBRA. Thereafter, Executive and his covereddependents will be entitled to elect to continue coverage under COBRA to theextent it is available. Coverage by the Company or under COBRA will end on theearlier of Executive’s obtaining new employment, which gives him the ability toprovide medical and health insurance coverage for himself and his familythrough his new employer, or the failure to pay any premium when due. Inaddition, the supplemental life and disability insurance as listed on Exhibit Awill continue for six months at Company expense.
 

 

**Exhibit 10.1**
9. Termination of Employment or Resignation Within Twelve Months of a Change inControl
     a. If Employee’s employment is terminated within twelve months of a Changeof Control, or if Employee resigns within twelve months of a Change of Controlbecause of a material diminution of position responsibilities or remunerationor relocation of 50 miles or more in work location, notwithstanding suchtermination or resignation, Employee shall receive his base monthlycompensation for a period of twelve months in accordance with Datakey’s payrollperiods beginning the first month following Employee’s termination orresignation in accordance with the Company’s payroll periods, plus quarterlybonus payments for four quarters, each quarterly payment equal to the averagequarterly bonus paid during the prior four quarters.
     b. The Company will continue to provide medical and dental coverage, underits plans as they currently exist or may hereafter be amended, at Companysubsidized rates during the twelve-month severance pay period, providedExecutive elects to extend such medical and dental coverage under COBRA.Thereafter, Executive and his covered dependents will be entitled to elect tocontinue coverage under COBRA, at his own expense, to the extent and for aslong as it is available. Coverage by the Company or under COBRA will end onthe earlier of Executive’s obtaining new employment, which gives him theability to provide medical and health insurance coverage for himself and hisfamily through his new employer, or the failure to pay any premium when due.In addition, the supplemental life and disability insurance as listed onExhibit A will continue for twelve months at Company expense.
     c. A Change in Control shall be deemed to have occurred if: (a) anyperson or entity not currently a shareholder of the Company becomes thebeneficial owner of thirty-five percent (35%) or more of the Company’soutstanding securities other than any institution, individual, individualsacting in concert, or entity owning thirty-five percent (35%) or more of theCompany’s outstanding securities as of the date of this Agreement; (b) theconsummation of a merger or consolidation of the Company into or with any othercorporation; (c) the consummation of a plan of complete liquidation of theCompany; or (d) the consummation of the sale of substantially all of theCompany’s assets.
     d. The payments provided for under this Section 9 shall, in the event ofEmployee’s death, continue and be payable to his wife if she survives or, ifnot, to his estate.
10. Nondisclosure
     Except by written permission from Datakey, Executive shall never discloseor use any trade secrets, sales projections, formulations, customer lists orinformation, product specifications or information, credit information,production know-how, research and development plans or other information notgenerally known to the public (“Confidential Information”) acquired or learnedby Executive during the course, and on account, of his employment, whether ornot developed by Executive, except as such disclosure or use may be required byhis duties to Datakey, and then only in strict accordance with his obligationsof service and loyalty thereto. Upon termination of employment, Executiveagrees to deliver to Datakey all Confidential Information.
11. Inventions
     Any invention, discovery, improvement, or idea, whether patentable orcopyrightable or not, and whether or not shown or described in writing orreduced to practice (“Invention”) shall be promptly and fully disclosed byExecutive to the Company, and the Company will hold in trust for its sole rightand benefit, any Invention that Executive, during the period of employment, andfor one year thereafter, make, conceive, or reduce to practice or cause to bemade, conceived, or reduced to practice, either alone or in conjunction withothers, that:
     a. Relates to any subject matter pertaining to Executive’s employment withthe Company;
 

 

**Exhibit 10.1**
     b. Relates to or is directly or indirectly connected with the Company’sbusiness, 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, andinterest in and to all such Inventions and, upon the Company’s request, shallexecute, verify, and deliver to the Company such documents including, withoutlimitation, assignments and applications for Letters Patent, and shall performsuch other acts, including, without limitation, appearing as a witness in anyaction brought in connection with this Employment Agreement that is necessaryto enable the Company to obtain the sole right, title, and benefit to all suchInventions.
12. Specific Performance
     Executive acknowledges that a breach of this Employment Agreement wouldcause Datakey irreparable injury and damage which could not be remedied oradequately compensated by damages at law; therefore, Executive expressly agreesthat Datakey shall be entitled, in addition to any other remedies legallyavailable, to injunctive and/or other equitable relief to prevent a breach ofthis Employment Agreement.
13. Noncompetition
     a. Executive will not, directly or indirectly, alone or in any capacitywith another legal entity, (i) engage in any activity that competes in anyrespect with Datakey, (ii) contact or in any way interfere or attempt tointerfere with the relationship of Datakey with any current or potentialcustomers of Datakey, or (iii) employ or attempt to employ any employee ofDatakey (other than a former employee thereof after such employee hasterminated employment with the Datakey), for twelve months after terminationfor any termination under Paragraphs 7, 8 or 9.
     b. Executive acknowledges that Datakey markets products throughout theWorld and that Datakey would be harmed if Executive conducted any of theactivities described in this Section 13 anywhere in the World. Therefore,Executive agrees that the covenants contained in this Section 13 shall apply toall portions of, and throughout, the World.
     c. Executive acknowledges that if he fails to fulfill his obligationsunder this Section 13, the damages to Datakey would be very difficult todetermine. Therefore, in addition to any other rights or remedies available toDatakey at law, in equity, or by statute, Executive hereby consents to thespecific enforcement of the provisions of this Section 13 by Datakey through aninjunction or restraining order issued by the appropriate court.
     d. To the extent any provision of this Section 13 shall be invalid orunenforceable, it shall be considered deleted herefrom and the remainder ofsuch provision and this Section 13 shall be unaffected and shall continue infull force and effect. In furtherance to and not in limitation of theforegoing, should the duration or geographical extent of, or businessactivities covered by, any provision of this Section 13 be in excess of thatwhich is valid and enforceable under applicable law, then such provision shallbe construed to cover only that duration, extent or activities which arevalidly and enforceably covered. Executive acknowledges the uncertainty of thelaw in this respect and expressly stipulates that this Section 13 be given theconstruction which renders its provisions valid and enforceable to the maximumextent (not exceeding its expressed terms) possible under applicable laws.
14 Miscellaneous
     a. Waiver by Datakey of a breach of any provision of this Agreement byExecutive shall not operate or be construed as a waiver of any subsequentbreach by Executive.
     b. This Agreement shall be binding upon and inure to the benefit ofDatakey, its successors and assigns, and as to Executive, his heirs, personalrepresentatives, estate, legatees, and assigns.
 

 

**Exhibit 10.1**
     c. This Agreement constitutes the entire agreement between the partieshereto with respect to the subject matter hereof and supersedes all prioragreements whether written or oral relating hereto.
     d. This Agreement shall be governed by and construed under the laws of theState of Minnesota.
     IN WITNESS WHEREOF, the parties have hereto executed this EmploymentAgreement effective as of the day and year first above written.         DATAKEY, INC.        By /s/ Timothy L. Russell           Timothy L. Russell, President & CEO           /s/ David A. Feste     David A. Feste, Executive
 

 

**Exhibit 10.1**
EXHIBIT A