Document:

<PAGE>   1
                              SAGE INSURANCE GROUP
                              RABBI TRUST AGREEMENT

                              Effective May 6, 1999
<PAGE>   2
TABLE OF CONTENTS
<TABLE>
<CAPTION>

Section                                                                                                              Page
<S>                                                                                                                   <C>
I Establishment Of Trust................................................................................................1

2. Payments to Plan Participants and their Beneficiaries................................................................2

3. Trustee Responsibility regarding payments to Trust Beneficiary When Company
   Is Insolvent.........................................................................................................2

4. Payments to Company..................................................................................................4

5. Investment Authority.................................................................................................4

6. Disposition of Income................................................................................................4

7. Accounting by Trustee................................................................................................5

8. Responsibility of Trustee............................................................................................5

9. Compensation and Expenses of Trustee.................................................................................5

10. Resignation and Removal of Trustee..................................................................................6

11. Appointment of Successor............................................................................................6

12. Amendment or Termination............................................................................................6

13. Miscellaneous.......................................................................................................7

14. Effective Date......................................................................................................7
</TABLE>
<PAGE>   3
                              SAGE INSURANCE GROUP

                              RABBI TRUST AGREEMENT

This Agreement, made and declared this 6th of May, 1999, by Sage Insurance
Group, Inc. ("Company"), a Delaware corporation with its office and principal
place of business in Stamford, Connecticut, and Central Bank & Trust Co., a
banking corporation with its office and principal place of business in
Lexington, Kentucky ("Trustee").

The Company has adopted the non-qualified deferred compensation Plan for the
benefit of eligible employees. Company has incurred or expects to incur
liability under the terms of such Plan with respect to the individuals
participating in such Plan. The Company wishes to establish a trust (hereinafter
called "Trust") and to contribute to the Trust assets that shall be held
therein, subject to the claims of Company's creditors in the event of Company's
Insolvency, as herein defined, until paid to Plan participants and their
beneficiaries in such manner and at such times as specified in the Plan.

It is the intention of the parties that this Trust shall constitute an unfunded
arrangement and shall not affect the status of the Plan as an unfunded plan
maintained for the purpose of providing deferred compensation for a select group
of management or highly compensated employees for purposes of Title I of the
Employee Retirement Income Security Act of 1974.

It is the intention of Company to make contributions to the Trust to provide
itself with a source of funds to assist it in the meeting of its liabilities
under the Plan.

NOW, THEREFORE, the parties do hereby establish the Trust and agree that the
Trust shall be comprised, held and disposed of as follows:

1. ESTABLISHMENT OF TRUST. The Company will make an initial deposit in trust,
which shall become the initial principal of the. Trust to be held, administered
and disposed of by Trustee as provided in this Trust Agreement.

(a) The Trust shall become irrevocable upon issuance of a favorable private
letter ruling regarding the Trust from the Internal Revenue Service.

(b) The Trust is intended to be a grantor trust, of which Company is the
grantor, within the meaning of subpart E, part 1, subchapter J, chapter 1,
subtitle A of the Internal Revenue Code of 1986, as amended, and shall be
construed accordingly.

(c) The principal of the Trust, and any earnings thereon shall be held separate
and apart from other funds of Company and shall be used exclusively for the uses
and purposes of Plan participants and general creditors as herein set forth.
Plan participants and their beneficiaries shall have no preferred claim on, or
any beneficial ownership interest in, any assets of the Trust. Any rights
created under the Plan and this Trust Agreement shall be mere unsecured
contractual rights of Plan participants and their beneficiaries against Company.
Any assets held by the Trust will be subject to the claims of Company's general
creditors under federal and state law in the event of Insolvency.
<PAGE>   4
(d) The Company, in its sole discretion, may at any time, or from time to time,
make additional deposits of cash or other property in trust with Trustee to
augment the principal to be held, administered and disposed of by Trustee as
provided in this Trust Agreement. Neither Trustee nor any Plan participant or
beneficiary shall have any right to compel such additional deposits.

2. PAYMENTS TO PLAN PARTICIPANTS AND THEIR BENEFICIARIES.

(a) Company shall deliver to Trustee a schedule (the "Payment Schedule") that
indicates the amounts payable in respect of each Plan participant (and his or
her beneficiaries), that provides a formula or other instructions acceptable to
Trustee for determining the amounts so payable, the form in which such amount is
to be paid (as provided for or available under the Plan, and the time
commencement for payment of such amounts. Except as otherwise provided herein,
Trustee shall make payments to the Plan participants and their beneficiaries in
accordance with such Payment Schedule. The Trustee shall make provision for the
reporting and withholding of any federal, state or local taxes that may be
required to be withheld with respect to the payment of benefits pursuant to the
terms of the Plan and shall pay amounts withheld to the appropriate taxing
authorities or determine that such amounts have been reported, withheld and paid
by Company.

(b) The entitlement of a Plan participant or his or her beneficiaries to
benefits under the Plan shall be determined by Company or such party as it shall
designate under the Plan, and any claim for such benefits shall be considered
and reviewed under the procedures set out in the Plan.

(c) Company may make payment of benefits directly to Plan participants or their
beneficiaries as they become due under the terms of the Plan. Company shall
notify Trustee of its decision to make payment of benefits directly prior to the
time amounts are payable to participants or their beneficiaries. In addition, if
the principal of the Trust, and any earnings thereon, are not sufficient to make
payments of benefits in accordance with the terms of the Plan, Company shall
make the balance of each such payment as it falls due. Trustee shall notify
Company where principal and earnings are not sufficient.

3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTS To TRUST BENEFICIARY WHEN COMPANY
IS INSOLVENT.

(a) Trustee shall cease payment of benefits to Plan participants and their
beneficiaries if the Company is Insolvent. Company shall be considered
"Insolvent" for purposes of this trust Agreement if Company is unable to pay its
debts as they become due, or Company is subject to a pending proceeding as a
debtor under the United States Bankruptcy Code.

(b) At all times during the continuance of this Trust, as provided in Section I
(d) hereof, the principal and income of the Trust shall be subject to claims of
general creditors of Company under federal and state law as set forth below.

(1) The Board of Directors and the Chief Executive Officer of the Company shall
have the duty to inform Trustee in writing of Company's Insolvency. If a person
claiming to be a creditor of Company alleges in writing to Trustee that Company
has become Insolvent, Trustee

-2
<PAGE>   5
shall determine whether Company is Insolvent and, pending such determination,
Trustee shall discontinue payment of benefits to Plan participants or their
beneficiaries.

(2) Unless Trustee has actual knowledge of Company's Insolvency, or has received
notice from Company or a person claiming to be a creditor alleging that Company
is Insolvent, Trustee shall have no duty to inquire whether Company is
Insolvent. Trustee may in all events rely on such evidence concerning Company's
solvency as may be furnished to Trustee and that provides Trustee with a
reasonable basis for making a determination concerning Company's solvency.

(3) If at any time Trustee has determined that Company is Insolvent, Trustee
shall discontinue payments to Plan participants or their beneficiaries and shall
hold the assets of the Trust for the benefit of Company's general creditors.
Nothing in this Trust Agreement shall in any way diminish any rights of Plan
participants or their beneficiaries to pursue their rights as general creditors
of Company with respect to benefits due under the Plan or otherwise.

(4) Trustee shall resume the payment of benefits to Plan participants or their
beneficiaries in accordance with Section 2 of this Trust Agreement only after
Trustee has determined that Company is not Insolvent (or is no longer
Insolvent).

(c) Provided that there are sufficient assets, if Trustee discontinues the
payment of benefits from the Trust pursuant to Section 3(b) hereof and
subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to Plan
participants or their beneficiaries under the terms of the Plan for the period
of such discontinuance, less the aggregate amount of any payments made to Plan
participants or their beneficiaries by Company in lieu of the payments provided
for hereunder during any such period of discontinuance.

4. PAYMENTS TO COMPANY. Except as provided in Section 3 hereof, after the Trust
has become irrevocable, Company shall have no right or power to direct Trustee
to return to Company or to divert to others any of the Trust assets before all
payment of benefits have been made to Plan participants and their beneficiaries
pursuant to the terms of the Plan.

5. INVESTMENT AUTHORITY.

(a) In no event may Trustee invest in securities (including stock or rights to
acquire stock) or obligations issued by Company, other than a de minimis amount
held in common investment vehicles in which Trustee invests. All rights
associated with assets of the Trust shall be exercised by Trustee or the person
designated by Trustee, and shall in no event be exercisable by or rest with Plan
participants.

(b) The Trustee shall invest and reinvest the principal and income of the Trust
Fund and keep the Trust Fund invested in accordance with the funding policy
established by the Company. In so investing the Trust Fund the Trustee shall
invest and reinvest, without distinction between principal and income, in such
securities or in such property, real or personal, wherever situated, as the
Trustee shall deem advisable, including, but not limited to, stocks (whether
common or

                                       -3
<PAGE>   6
preferred), bonds, debentures, mortgages and other evidences of indebtedness or
ownership, or common trust funds, or in a mutual fund or group annuities with
legal reserve life insurance companies.

(c) The Trustee shall be permitted to invest the Trust Fund in savings accounts,
passbook accounts, time deposit accounts or certificates of deposit which bear a
reasonable interest rate and are maintained, or issued, by it as a banking
organization to the extent it is prudent to do so or to the extent investments
of such nature are otherwise required under the Plan.

(d) The Trustee may sell or write options or calls on securities held in the
Trust Fund or sell or write other forms of options related to any such call
options outstanding and may enter into stand-by agreements for future
investments, either with or without stand-by fee, or otherwise dispose of any
securities or other property at any time held by it.

(e) No Investment in Assets Outside Jurisdiction of U. S. District Courts. No
investments shall be made in any assets the indicia of ownership of which is
outside the jurisdiction of the District Courts of the United States.

6. DISPOSITION OF INCOME. During the term of this Trust, all income received by
the Trust, net of expenses and taxes, shall be accumulated and reinvested.

7. ACCOUNTING By TRUSTEE. Trustee shall keep accurate and detailed records of
all investments, receipts, disbursements, and all other transactions required to
be made, including such specific records as shall be agreed upon in writing
between Company and Trustee. Within 120 days following the close of each
calendar year and within 30 days after the removal or resignation of Trustee,
Trustee shall deliver to Company a written account of its administration of the
Trust during such year or during the period from the close of the last preceding
year to the date of such removal or resignation, setting forth all investments,
receipts, disbursements and other transactions effected by it, including a
description of all securities and investments purchased and sold with the cost
or net proceeds of such purchases or sales (accrued interest paid or receivable
being shown separately), and showing all cash, securities and other property
held in the Trust at the end of such year or as of the date of such removal or
resignation, as the case may be.

8. RESPONSIBILITY OF TRUSTEE.

(a) Trustee shall act with the care, skill, prudence and diligence under the
circumstances then prevailing that a prudent person acting in like capacity and
familiar with such matters would use in the conduct of an enterprise of a like
character and with like aims, provided, however, that Trustee shall incur no
liability to any person for any action taken pursuant to a direction, request or
approval given by Company which is contemplated by, and in conformity with, the
terms of the Plan or this Trust and is given in writing by Company. In the event
of a dispute between Company and a party, Trustee may apply to a court of
competent jurisdiction to resolve the dispute.

(b) If Trustee undertakes or defends any litigation arising in connection with
this Trust, Company agrees to indemnify Trustee against Trustee's costs,
expenses and liabilities (including, without limitation, reasonable attorneys'
fees and expenses) relating thereto and to be primarily

                                       -4
<PAGE>   7
liable for such payments. If Company does not pay such costs, expenses and
liabilities in a reasonably timely manner, Trustee may obtain payment from the
Trust.

(c) Trustee may consult with legal counsel (who may also be counsel for Company)
with respect to any of its duties or obligations hereunder.

(d) Trustee shall have, without exclusion, all powers conferred on Trustees by
applicable law, unless expressly provided otherwise herein, provided, however,
that if an insurance policy is held as an asset of the Trust, Trustee shall have
no power to name a beneficiary of the policy other than the Trust, to assign the
policy (as distinct from conversion of the policy to a different form) other
than to a successor Trustee, or to loan to any person the proceeds of any
borrowing against such policy.

(e) Notwithstanding any powers granted to Trustee pursuant to this Trust
Agreement or to applicable law, Trustee shall not have any power that could give
this Trust the objective of carrying on a business and dividing the gains
therefrom, within the meaning of section 301.7701-2 of the Procedure and
Administrative Regulations promulgated pursuant to the Internal Revenue Code.

9. COMPENSATION AND EXPENSES OF TRUSTEE. Company shall pay all administrative
and Trustee's fees and expenses. if not so paid, the fees and expenses shall be
paid from the Trust.

10. RESIGNATION AND REMOVAL OF TRUSTEE.

(a) Trustee may resign at any time by written notice to Company, which shall be
effective 20 days after receipt of such notice unless Company and Trustee agree
otherwise.

(b) Trustee may be removed by Company on 10 days notice or upon shorter notice
acceptable by Trustee.

(c) Upon resignation or removal of Trustee and appointment of a successor
Trustee, all assets shall subsequently be transferred to the successor Trustee.
The transfer shall be completed with 30 days after receipt of notice of
resignation, removal or transfer, unless Company extends the time limit.

(d) If Trustee resigns or is removed, a successor shall be appointed, in
accordance with Section II hereof, by the effective date of resignation or
removal under paragraph(s) (a) [or (b)] of this section. If no such appointment
has been made, Trustee may apply to a court of competent jurisdiction for
appointment of a successor or for instructions. All expenses of Trustee in
connection with the proceeding shall be allowed as administrative expenses of
the Trust.

11. APPOINTMENT OF SUCCESSOR.

(a) If Trustee resigns or is removed in accordance with Section 10(a) or (b)
hereof, Company may appoint any third party, such as a bank trust department or
other party that may be granted corporate trustee powers under state law, as a
successor to replace Trustee upon resignation

                                       -5
<PAGE>   8
or removal. The appointment shall be effective when accepted in writing by the
new Trustee, who shall have all of the rights and powers of the former Trustee,
including ownership rights in the Trust Assets. The former Trustee shall execute
any instrument necessary or reasonably requested by Company or the successor
Trustee to evidence the transfer.

(b) If Trustee resigns or is removed pursuant to the provisions of Section I
O(e) hereof and selects a successor Trustee, Trustee may appoint any third party
such as a bank trust department or other party that may be granted corporate
trustee powers under state law. The appointment of a successor Trustee shall be
effective when accepted in writing by the new Trustee. The new Trustee shall
have all the rights and powers of the form Trustee, including ownership rights
in Trust assets. The former Trustee shall execute any instrument necessary or
reasonably requested by the successor or Trustee to evidence the transfer.

(c) The successor Trustee need not examine the records and acts of any prior
Trustee and may retain or dispose of existing Trust assets, subject to Sections
7 and 8 hereof. The successor Trustee shall not be responsible for and Company
shall indemnify and defend the successor Trustee from any claim or liability
resulting from any action or inaction of any prior Trustee or from any other
past event, or any condition existing at the time it becomes successor Trustee.

12. AMENDMENT OR TERMINATION.

(a) This Trust Agreement may be amended by a written instrument executed by
Trustee and Company. Notwithstanding the foregoing, so such amendment shall
conflict with the terms of the Plan or shall make the Trust revocable after it
has become irrevocable in accordance with Section I(b) hereof

(b) The Trust shall not terminate until the date on which Plan participants and
their beneficiaries are no longer entitled to benefits pursuant to the terms of
the Plan unless sooner revoked in accordance with Section I(b) hereof. Upon
termination of the Trust any assets remaining in the Trust shall be returned to
Company.

(c) Upon written approval of participants or beneficiaries entitled to payment
of benefits pursuant to the terms of the Plan, Company may terminate this Trust
prior to the time all benefit payments under the Plan have been made. All assets
in the Trust at termination shall be returned to Company.

13. MISCELLANEOUS.

(a) Any provision of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.

(b) Benefits payable to Plan participant and their beneficiaries under this
Trust Agreement may not be anticipated, assigned (either at law or in equity),
alienated, pledged, encumbered or subjected to attachment, garnishment, levy,
execution or other legal or equitable process.

                                       -6
<PAGE>   9
laws of Kentucky.

(c) This Trust Agreement shall be governed by and construed in accordance with
the

14. EFFECTIVE DATE. The effective date of this Trust Agreement shall be May 6,
1999.

IN TESTIMONY WHEREOF, witness the signatures of the undersigned as of the date
set forth below their signatures.

SAGE INSURANCE GROUP, INC

By:           ROBIN I. MARSDEN
              President and CEO

CENTRAL BANK & TRUST CO..

By:        DAVID B. TURNER
           Vice President Trust Officer

Date Signed:  May 6, 1999

                                       -7STOCK PURCHASE AGREEMENT

         This Agreement is made and entered into as of the 16th day of February,
2001, between Datakey, Inc., a Minnesota corporation (the "Company") and each of
the persons listed on Schedule 1 to this Agreement (the "Investors"). Reference
to any exhibits herein refers to the exhibits included in the Company's offering
materials dated February 16, 2001 (the "Offering Materials").

         For good and valuable consideration, the receipt and adequacy of which
are hereby acknowledged by the Company and each of the Investors, the Company
and the Investors agree as follows:

         1. Sale and Purchase of Securities. Subject to the terms and conditions
hereof, the Company agrees to sell to each Investor at the Closing (as defined
herein), and each Investor severally agrees to purchase from the Company at the
Closing, that number of shares of the Company's Common Stock (the "Shares") set
forth opposite each Investor's name on Schedule 1 at a purchase price of three
dollars ($3.00) per share, together with a five-year warrant in the form
attached hereto as Exhibit A (the "Warrant") to purchase that number of Shares
of the Company's Common Stock set forth on Schedule 1 at an exercise price per
share equal to 101% of the Market Value, with Market Value defined as the
average of the closing prices of the Company's Common Stock as reported by
Nasdaq over the five (5) business days preceding the date of this Agreement. The
Shares and the Warrants are referred to herein collectively as the "Securities."

         2. Closing. The closing shall take place at the offices of Fredrikson &
Byron, P.A., Minneapolis, Minnesota 55402, at 1:00 p.m., Minneapolis time, on
Tuesday, February 20, 2001 (the "Closing") and/or at such other place or time as
may be mutually acceptable to the Investors and the Company. At the Closing,
subject to the satisfaction of the conditions in Section 6 below, the Company
will deliver to each Investor a certificate representing the Shares purchased by
such Investor, together with a Warrant representing the right to purchase that
number of shares of Common Stock of the Company set forth opposite each
Investor's name on Schedule 1, against payment of the purchase price therefor by
certified check or wire transfer to the Company in the amounts set forth after
their respective names in Schedule 1 hereto.

         3. Representations and Warranties by the Company. To induce each
Investor to enter into this Agreement and to purchase the number of Securities
set forth after his or its name on Schedule 1, the Company hereby represents and
warrants to each Investor that:

                  3.1 Organization, Standing, Etc. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Minnesota, and has the requisite corporate power and authority to own
its properties and to carry on its business in all material respects as it is
now being conducted. The Company is duly qualified to do business as a foreign
corporation and is in good standing in all states or jurisdictions in which the
ownership or lease of its property or the conduct of its business requires such
qualification and the failure to be so qualified would have a materially adverse
effect on the Company's business.

<PAGE>

                  3.2 Authorization and Enforceability. The Company has full
legal power, right and authority to enter into this Agreement and the
Registration Rights Agreement among the Company and the Investors, the form of
which is attached hereto as Exhibit B (the "Registration Rights Agreement") and
to issue the Securities. This Agreement, the Registration Rights Agreement and
the Securities, have been duly authorized, executed and delivered on behalf of
the Company and are the valid and binding obligations of the Company,
enforceable in accordance with their respective terms and subject, as to
enforcement, to applicable bankruptcy, insolvency, reorganization, moratorium
and other laws affecting the rights of creditors generally, to the exercise of
judicial discretion as to the availability of equitable remedies such as
specific performance in injunction and subject, as to enforcement of the
indemnification provisions, to limitations under applicable securities laws. The
Securities when delivered pursuant to the terms of this Agreement will be
validly issued, fully paid and nonassessable.

                  3.3 Subsidiaries. The Company has one wholly owned subsidiary,
Datakey FSC.

                  3.4 Financial Statements. Included in the Offering Materials
are (a) the Company's annual report on Form 10-KSB for the year ended December
31, 1999, (b) the Company's quarterly reports on Form 10-QSB for the quarters
ended April 1, 2000, July 1, 2000, and September 30, 2000 (c) the Company's
Proxy Statement for the Annual Meeting of Shareholders held in 2000, and (d) the
Company's 1999 Annual Report. The financial statements included in such reports
(i) are in accordance with the books and records of the Company, (ii) present
fairly the financial condition of the Company at the balance sheet dates and the
results of its operations for the periods therein specified, subject, in the
case of the April 1, 2000, July 1, 2000, and the September 30, 2000 financial
statements, to normal year-end adjustments, and (iii) have, in all material
respects, been prepared in accordance with generally accepted accounting
principles applied on a basis consistent with prior accounting periods. Without
limiting the generality of the foregoing, the balance sheets included in such
reports or notes thereto disclose all of the debts, liabilities and obligations
of any nature (whether absolute, accrued or contingent and whether due or to
become due) of the Company at December 31, 1999, April 1, 2000, July 1, 2000,
and September 30, 2000, which, individually, or in the aggregate, are material
or which in accordance with generally accepted accounting principles would be
required to be disclosed in such balance sheets, and includes appropriate
reserves for all taxes and other liabilities accrued as of such dates but not
yet payable.

                  3.5 Tax Returns and Audits. All required federal, state and
local tax returns and appropriate extension requests of the Company have been
filed, and all federal, state and local taxes required to be paid with respect
to such returns have been paid or due provision for the payment thereof has been
made. The Company is not delinquent in any material respect in the payment of
any such tax or in the payment of any assessment or governmental charge. The
Company has not received notice of any tax deficiency proposed or assessed
against it, and it has not executed any waiver of any statute of limitations on
the assessment or collection of any tax.

                  3.6 Changes, Dividends, Etc. Except for the transactions
contemplated by this Agreement, since September 30, 2000, the Company has not:
(i) incurred any debts, obligations or liabilities, absolute, accrued or

<PAGE>

contingent and whether due or to become due, except current liabilities incurred
in the ordinary course of business which (individually or in the aggregate) will
not materially and adversely affect the business, properties or prospects of the
Company; (ii) paid any obligation or liability other than, or discharged or
satisfied any liens or encumbrances other than those securing, current
liabilities, in each case in the ordinary course of business; (iii) declared or
made any payment to or distribution to its shareholders as such, or purchased or
redeemed any of its shares of capital stock, or obligated itself to do so; (iv)
mortgaged, pledged or subjected to lien, charge, security interest or other
encumbrance any of its assets, tangible or intangible, except in the ordinary
course of business; (v) sold, transferred or leased any of its assets except in
the ordinary course of business; (vi) suffered any physical damage, destruction
or loss (whether or not covered by insurance) materially and adversely affecting
the tangible properties, business or prospects of the Company; (vii) encountered
any labor difficulties or labor union organizing activities; (viii) issued or
sold any shares of capital stock or other securities or granted any options
(other than to employees), warrants, or other purchase rights with respect
thereto other than pursuant to this Agreement; (ix) made any acquisition or
disposition of any material assets or became involved in any other material
transaction, other than for fair value in the ordinary course of business; (x)
materially increased the compensation payable, or to become payable, to any of
its directors or employees, or made any bonus payment or similar arrangement
with any directors or employees or increased the scope or nature of any fringe
benefits provided of its employees or directors; or (xi) agreed to do any of the
foregoing other than pursuant hereto. Except as otherwise disclosed in the
Offering Materials, there has been no material adverse change in the financial
condition, operations, results of operations or business of the Company since
September 30, 2000.

                  3.7 Title to Properties and Encumbrances. The Company has good
and marketable title to all of its properties and assets, except for property
disposed of in the ordinary course of business since September 30, 2000, which
properties and assets are not subject to any mortgage, pledge, lease, lien,
charge, security interest, encumbrance or restriction, except (a) those which
are shown and described on the September 30, 2000, balance sheet or the notes
thereto, (b) liens for taxes and assessments or other governmental charges or
levies not at the time due or in respect of which the validity thereof shall
currently be contested in good faith by appropriate proceedings, (c) statutory
liens that have arisen in the ordinary course of business, or (d) those which do
not materially affect the value of or interfere with the use made of such
properties and assets.

                  3.8 Conditions. The plant, offices and equipment of the
Company have been kept in good condition and repair in the ordinary course of
business.

                  3.9 Litigation; Governmental Proceedings. There are no legal
actions, suits, arbitrations or other legal, administrative or governmental
proceedings or investigations pending or, to the knowledge of the Company,
threatened against the Company, or its properties or business, and the Company
is not aware of any facts which are likely to result in or form the basis for
any such action, suit or other proceeding. The Company is not in default with
respect to any judgment, order or decree of any court or any governmental agency
or instrumentality with respect to which it is a party or is named as an
affected person, nor to the best of its knowledge is the Company in default with
respect to any other judgment, order or decree. The Company has not been
threatened with any action or proceeding under any business or zoning ordinance,
law or regulation.

<PAGE>

                  3.10 Compliance With Applicable Laws or Other Instruments. To
the best of the Company's knowledge, the business and operations of the Company
have been and are being conducted in all material respects in accordance with
all applicable laws, rules and regulations of all governmental authorities.

                  3.11 Shares, Warrants and Warrant Shares. The Shares and
Warrants, when issued and paid for pursuant to the terms of this Agreement, will
be duly authorized, validly issued and outstanding, fully paid and nonassessable
and shall be free and clear of all pledges, liens, encumbrances and
restrictions, except securities restrictions as set forth in Section 4 hereof.
The Warrant Shares have been reserved for issuance and when issued upon exercise
of the Warrants, will be duly authorized, validly issued and outstanding, fully
paid, nonassessable and free and clear of all pledges, liens, encumbrances and
restrictions, except as set forth in Section 4.

                  3.12 Securities Laws. Based in part upon the representations
of the Investors, no consent, authorization, approval, permit or order of or
filing with any governmental or regulatory authority is required under current
laws and regulations in connection with the execution and delivery of this
Agreement or the offer, issuance, sale or delivery of the Shares, Warrants or
Warrant Shares, other than the qualification thereof, if required, under
applicable state securities laws, which qualification has been or will be
effected as a condition of these sales. The Company has not, directly or through
an agent, offered the Securities or any similar securities for sale to, or
solicited any offers to acquire such securities from, persons other than the
Investors and other accredited investors. Under the circumstances contemplated
by this Agreement, the offer, issuance, sale and delivery of the Shares,
Warrants or Warrant Shares will not, under current laws and regulations, require
compliance with the prospectus delivery or registration requirements of the
federal Securities Act of 1933, as amended (the "Securities Act"). The Company
has filed all reports or other documentation that it is required to file by the
federal Securities Exchange Act of 1934, as amended, any rules or regulations
promulgated thereunder, the applicable rules and regulations of the National
Association of Securities Dealers ("NASD") and all applicable state securities
laws, and the information contained in such reports or other documents did not
make any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading.

                  3.13 Patents and Other Intangible Rights. To the best of its
knowledge, the Company (a) owns or has the exclusive right to use, free and
clear of all material liens, claims and restrictions, all patents, trademarks,
service marks, trade names, copyrights, licenses and rights with respect to the
foregoing, used in the conduct of its business as now conducted without
infringing upon or otherwise acting adversely to the right or claimed right of
any person under or with respect to any of the foregoing, (b) is not obligated
or under any liability whatsoever to make any payments of a material nature by
way of royalties, fees or otherwise to any owner of, licensor of, or other
claimant to, any patent, trademark, trade name, copyright or other intangible
asset, with respect to the use thereof or in connection with the conduct of its

<PAGE>

business or otherwise, (c) owns or has the unrestricted right to use all trade
secrets, including know-how, customer lists, inventions, designs, processes,
computer programs and technical data necessary to the development, operation and
sale of all products and services sold or proposed to be sold by it, free and
clear of any rights, liens or claims of others, and (d) is not using any
confidential information or trade secrets of others.

                  3.14 Capital Stock. At the date hereof, the Company is
authorized by its articles of incorporation to issue 30,000,000 shares of
capital stock, which consists of the following: (a) 20,000,000 shares of common
stock, $.05 par value, of which there are outstanding 8,284,539 shares, (b)
400,000 shares of Convertible Preferred Stock, of which there are outstanding
150,000 shares, and (c) 9,600,000 undesignated shares. All of the outstanding
shares of the Company were duly authorized, validly issued and are fully paid
and nonassessable. Other than with regard to the outstanding Convertible
Preferred Stock, or as otherwise disclosed on Exhibit 3.14, there are no
outstanding subscriptions, options, warrants, calls, contracts, demands,
commitments, convertible securities or other agreements or arrangements of any
character or nature whatever, other than this Agreement, under which the Company
is obligated to issue any securities of any kind representing an ownership
interest in the Company. All outstanding securities of the Company have been
issued in full compliance with an exemption or exemptions from the registration
and prospectus delivery requirements of the Securities Act and from the
regulation and qualification requirements of all applicable state securities
laws.

                  3.15 License and Approvals. The Company has all licenses,
certificates, permits and other approvals from governmental and regulatory
authorities necessary for the conduct of its business as it is currently being
conducted and as proposed to be conducted except those which would not have a
material adverse effect or the Company if not obtained.

                  3.16 Defaults. The Company is not in breach, default or
violation of, and the execution of this Agreement and the Registration Rights
Agreement and the consummation of the transactions herein and therein
contemplated will not conflict with or result in any breach of, any of the terms
or conditions of, or constitute a default or violation under, (i) the Articles
of Incorporation, as amended, or Bylaws, as amended, of the Company, (ii) any
indenture, agreement or other instrument to which the Company is now a party, or
(iii) to the best of the Company's knowledge, any law or any order, rule or
regulation applicable to the Company of any court or of any federal or state
regulatory body or administrative agency having jurisdiction over the Company or
its property.

                  3.17 Insurance Coverage. There are in full force policies of
insurance issued by insurers of recognized responsibility insuring the Company
and its properties and business against such losses and risks, and in such
amounts, as in the Company's best judgment, after advice from its insurance
broker, are acceptable for the nature and extent of such business and its
resources.

                  3.18 No Brokers or Finders. Except for First Albany
Corporation, which is assisting the Company in the transactions contemplated by
this Agreement, no person, firm or corporation has or will have, as a result of
any act or omission of the Company, any right, interest or valid claim against
the Company or any Investor for any commission, fee or other compensation as a
finder or broker in connection with the transactions contemplated by this

<PAGE>

Agreement. The Company will indemnify and hold each of the Investors harmless
against any and all liability with respect to any such commission, fee or other
compensation which may be payable or determined to be payable in connection with
the transactions contemplated by this Agreement.

                  3.19 Disclosure. The Company has not knowingly withheld from
the Investors any material facts relating to the assets, business, operations,
financial condition or prospects of the Company. No representation or warranty
in this Agreement or in any certificate, schedule or other document furnished or
to be furnished to any Investor pursuant hereto or in connection with the
transactions contemplated hereby contains or will contain any untrue statement
of a material fact or omits or will omit to state any material fact required to
be stated herein or therein or necessary to make the statements herein or
therein not misleading.

                  3.20 Reporting. The Company is subject to the reporting
requirements of the Securities Act and the Exchange Act and (i) has timely filed
all reports and statements required to be filed thereunder in the 12-month
period prior to the date hereof, and (ii) each report and statement was true and
complete in all material respects when filed.

         4. Representations of the Investors. Each Investor represents for
itself that:

                  4.1 Investment Intent. The Securities being acquired by such
Investor are being purchased for investment for such Investor's own account and
not with the view to, or for resale in connection with, any distribution or
public offering thereof. Such Investor understands that the Securities have not
been registered under the Securities Act or any state securities laws by reason
of their contemplated issuance in transactions exempt from the registration
requirements of the Securities Act and applicable state securities laws, and
that the reliance of the Company and others upon these exemptions is predicated
in part upon this representation by each Investors. Such Investor further
understands that the Securities may not be transferred or resold without (i)
registration under the Securities Act and any applicable state securities laws,
or (ii) an exemption from the requirements of the Securities Act and applicable
state securities laws.

                  Such Investor understands that an exemption from such
registration is presently available pursuant to Rule 144 promulgated under the
Securities Act by the Securities and Exchange Commission (the "Commission") but
that in any event an Investor may not sell any securities pursuant to Rule 144
prior to the expiration of a one-year period after such Investor has acquired
such securities. Such Investor understands that any sales pursuant to Rule 144
can be made only in full compliance with the provisions of Rule 144.

                  4.2 Location of Principal Office, Qualification as an
Accredited Investor, Etc. The state in which such Investor's principal office
(or domicile, if such Investor is an individual) is located is the state set
forth in such Investor's address on Schedule 1. Unless otherwise indicated on
such Investor's signature page to this Agreement, such Investor qualifies as an
"accredited investor" for purposes of Regulation D promulgated under the
Securities Act for the reasons specified after such investor's name on such
signature page. Such Investor acknowledges that the Company has made available
to such Investor at a reasonable time prior to the execution of this Agreement
the opportunity to ask questions and receive answers concerning the business and

<PAGE>

affairs of the Company and the terms and conditions of the sale of securities
contemplated by this Agreement and to obtain any additional information (which
the Company possesses or can acquire without unreasonable effort or expense) as
may be necessary to verify the accuracy of information furnished to such
Investor. Such Investor (a) is able to bear the loss of its entire investment in
the Shares without any material adverse effect on its business, operations or
prospects, and (b) has such knowledge and experience in financial and business
matters that it is capable of evaluating the merits and risks of the investment
to be made by it pursuant to this Agreement.

                  4.3 Acts and Proceedings. This Agreement has been duly
authorized by all necessary action on the part of such Investor, has been duly
executed and delivered by such Investor, and is a valid and binding agreement of
such Investor.

                  4.4 No Brokers or Finders. Except for First Albany
Corporation, which is assisting the Company in the transactions contemplated by
this Agreement, no person, firm or corporation has or will have, as a result of
any act or omission by such Investor, any right, interest or valid claim against
the Company for any commission, fee or other compensation as a finder or broker,
or in any similar capacity, in connection with the transactions contemplated by
this Agreement. Such Investor will indemnify and hold the Company harmless
against any and all liability with respect to any such commission, fee or other
compensation which may be payable or determined to be payable as a result of the
actions of such Investor in connection with the transactions contemplated by
this Agreement.

                  4.5 Exculpation Among Investors. Such Investor acknowledges
that in making his or its decision to invest in the Company, he or it is not
relying on any other Investor or upon any person, firm or company, other than
the Company and its officers, employees and/or directors. Such Investor agrees
that no other Investor, nor the partners, employees, officers or controlling
persons of any other Investor shall be liable for any actions taken by such
Investor, or omitted to be taken by such Investor, in connection with such
investment.

                  4.6 Legends. It is understood that the certificates evidencing
the Shares may bear legends required by applicable federal and state securities
laws as well as the following legend:

                  THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
                  ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE
                  SECURITIES ACT OF 1933, AS AMENDED. THESE SECURITIES MAY NOT
                  BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR
                  AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF
                  1933 AND APPLICABLE STATE SECURITIES LAWS. ADDITIONALLY, THE
                  TRANSFER OF THESE SECURITIES IS SUBJECT TO THE CONDITIONS
                  SPECIFIED IN THE REGISTRATION RIGHTS AGREEMENT DATED FEBRUARY
                  16, 2001, AMONG DATAKEY, INC. AND CERTAIN OTHER SIGNATORIES
                  THERETO, AND NO TRANSFER OF THESE SECURITIES SHALL BE VALID OR
                  EFFECTIVE UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED.

<PAGE>

         5. Conditions of Each Investor's Obligation. The obligation to purchase
and pay for the Securities which each Investor has agreed to purchase on the
closing date is subject to the fulfillment prior to or on the closing date of
the conditions set forth in this Article 5.

                  5.1 Representations and Warranties. The representations and
warranties of the Company under this Agreement shall be true in all material
respects as of the closing date with the same effect as though made on and as of
the closing date.

                  5.2 Compliance with Agreement. The Company shall have
performed and complied with all agreements or conditions required by this
Agreement to be performed and complied with prior to or as of the closing date.

                  5.3 Certificate of Officers. The Company shall have delivered
to First Albany Corporation, as representative of the Investors, a certificate,
dated the closing date, executed by the President and the senior financial
officers of the Company and certifying to the satisfaction of the conditions
specified in Sections 5.1 and 5.2.

                  5.4 Opinion of the Company's Counsel. The Company shall have
delivered to First Albany Corporation, as representative of the Investors, an
opinion of Fredrikson & Byron, P.A., counsel for the Company, dated the closing
date, to the effect that:

                           (a) The Company is a corporation duly organized and
                  validly existing in good standing under the laws of the state
                  of its incorporation, and has the corporate power and
                  authority to own and hold the properties owned and leased by
                  it and to carry on the business in which it is engaged. The
                  Company has the corporate power and authority to enter into
                  this Agreement, to issue and sell the Shares, Warrants and the
                  Warrant Shares and to carry out the provisions of this
                  Agreement.

                           (b) This Agreement has been duly authorized, executed
                  and delivered by the Company, and is the legal, valid and
                  binding agreement of the Company and is enforceable against
                  the Company in accordance with its terms, subject, as to the
                  enforcement of remedies, to limitations under applicable
                  bankruptcy, insolvency, moratorium, reorganization, and other
                  laws affecting the rights of creditors generally and to
                  judicial limitations on the enforcement of the remedy of
                  specific performance and other equitable remedies.

                           (c) The Securities being purchased on the closing
                  date have been duly authorized, validly issued and delivered
                  by the Company, are fully paid and nonassessable, and are
                  entitled to the rights, preferences and provisions of the
                  Company's articles of incorporation and the benefits of the
                  provisions of this Agreement applicable thereto. The
                  certificates evidencing the Shares and the Warrants are in
                  valid and sufficient form.

<PAGE>

                           (d) All corporate proceedings required by law or by
                  the provisions of this Agreement to be taken by the Board of
                  Directors and shareholders of the Company on or prior to such
                  closing date in connection with the execution and delivery of
                  this Agreement, the offer, issuance and sale of the Securities
                  and the consummation of the transactions contemplated by this
                  Agreement, have been duly and validly taken.

                           (e) The Company is authorized by its articles of
                  incorporation to issue 30,000,000 shares of capital stock,
                  which consists of the following: (a) 20,000,000 shares of
                  common stock, $.05 par value, of which there are outstanding
                  8,284,539 shares, (b) 400,000 shares of convertible preferred
                  stock, of which there are outstanding 150,000 shares, and (c)
                  9,600,000 undesignated shares. All shares outstanding
                  immediately prior to the closing date have been duly
                  authorized and validly issued. Except for the Common Stock,
                  and the convertible preferred stock, the Company has no other
                  authorized series or class of capital stock and, to the best
                  of such counsel's knowledge and without any special inquiry
                  into this matter, has no outstanding options, warrants or
                  other rights to acquire securities of the Company, other than
                  as disclosed in Exhibit 3.14.

                           (f) The requisite number of Warrant Shares have been
                  validly authorized and reserved for issuance upon exercise of
                  the Warrants, and when issued upon such exercise, will be
                  authorized, validly issued and outstanding, fully paid and
                  nonassessable. To the best of such counsel's knowledge, except
                  for with regard to the outstanding shares of Stock, no
                  security holder of the Company is entitled to preemptive or
                  similar rights as a result of the execution or delivery of
                  this Agreement or the issuance of the Shares, Warrants, or
                  Warrant Shares.

                           (g) Assuming the accuracy of the representations made
                  by the Investors in their Acceptances and Section 4 hereof,
                  the offer, sale, issuance and delivery of the Securities to
                  the Investors under the circumstances contemplated by this
                  Agreement are exempt from the registration and prospectus
                  delivery requirements of the Securities Act and all applicable
                  state securities laws.

                           (h) Except for matters disclosed as part of Exhibit
                  B, such counsel has no knowledge of any litigation, proceeding
                  or governmental investigation pending or threatened against
                  the Company or its properties or business.

                           (i) Nothing has come to the attention of counsel
                  which would lead counsel to reasonably believe that the
                  Company's business and operations are not being conducted in
                  all material respects in compliance with applicable laws,
                  rules, and regulations.

                  5.5 Supporting Documents. First Albany Corporation, as
representative for each investor, shall have received the following:

<PAGE>

                           (a) A copy of resolutions of the Board of Directors
                  of the Company certified by the Secretary of the Company
                  authorizing and approving the execution, delivery and
                  performance of this Agreement and issuance of the Securities;

                           (b) A certificate of incumbency executed by the
                  Secretary of the Company certifying the names, titles and
                  signatures of the officers authorized to execute this
                  Agreement and further certifying that the articles of
                  incorporation and bylaws of the Company delivered to legal
                  counsel for the Investors at the time of the execution of this
                  Agreement have been validly adopted and have not been amended
                  or modified;

                           (c) The certificates contemplated by Section 5.3
                  above; and

                           (d) Such additional supporting documentation and
                  other information with respect to the transactions
                  contemplated hereby as legal counsel for the Investors may
                  reasonably request.

                  5.6 Qualification Under State Securities Laws. All
registrations, qualifications, permits and approvals required under applicable
state securities laws for the lawful execution and delivery of this Agreement
and the offer, sale, issuance and delivery of the Securities to the Investors at
the closing shall have been obtained.

                  5.7 Proceeding and Documents. All corporate and other
proceedings and actions taken in connection with the transactions contemplated
hereby and all certificates, opinions, agreements, instruments and documents
mentioned herein or incident to any such transaction shall be satisfactory in
form and substance to legal counsel for the Investors.

                  5.8 Registration Rights Agreement. The Company, each Investor
and each of the parties listed on the signature page of Exhibit 5.8 shall enter
into the Registration Rights Agreement dated as of the Closing in the form
attached as Exhibit 5.8.

         6. Conditions of the Company's Obligations at Closing. The obligations
of the Company to each Investor under this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions by that
Investor.

                  6.1 Representations and Warranties. The representations and
warranties of the Investor contained in Section 4 shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the Closing.

                  6.2 Payment of Purchase Price. The Investors shall have
delivered the purchase  price as specified in Section 1.

         7. Affirmative Covenants of the Company. The Company covenants and
agrees as follows:

<PAGE>

                  7.1 Corporate Existence. The Company will maintain its
corporate existence in good standing and comply with all applicable laws and
regulations of the United States or of any state or political subdivision
thereof and of any government authority where failure to so comply would have a
material adverse impact on the Company or its business or operations.

                  7.2 Books of Accounts and Reserves. The Company will keep
books of record and account in which full, true and correct entries are made of
all of its respective dealings, business and affairs, in accordance with
generally accepted accounting principles. The Company will employ certified
public accountants who are "independent" within the meaning of the accounting
regulations of the Commission.

                  7.3 Application of Proceeds. Unless otherwise approved by the
Investors, the net proceeds received by the Company from the sale of the Shares
on the closing date shall be used for the purposes set forth in the Use of
Proceeds section of the Offering Materials.

                  7.4 Filing of Reports. The Company will make timely filings of
such reports as are required to be filed by it with the Commission so that Rule
144 under the Securities Act or any successor provision thereto will be
available to the security holders of the Company who were otherwise able to take
advantage of the provisions of such Rule.

                  7.5 Patents and Other Intangible Rights. The Company will
apply for, or obtain assignments of, or licenses to use, all patents,
trademarks, trade names and copyrights which in the opinion of a prudent and
experienced businessperson operating in the industry in which the Company is
operating are desirable or necessary for the conduct and protection of the
business of the Company.

         8.       Miscellaneous.

                  8.1 Notices. All notices, requests, consents and other
communications required or permitted hereunder shall be in writing and shall be
delivered, or mailed first-class postage prepaid, registered or certified mail:

                  (a) if to any holder of any Shares addressed to such holder at
         its address as shown on the books of the Company, or at such other
         address as such holder may specify by written notice to the Company, or

                  (b) if to the Company at 407 West Travelers Trail, Burnsville,
         MN 55337, Attention: President; or at such other address as the Company
         may specify by written notice to the Investors;

and such notices and other communications shall for all purposes of this
Agreement be treated as being effective or having been given if delivered
personally, or, if sent by mail, when received.

                  8.2 Survival of Representations and Warranties, Etc. All
representations and warranties contained herein shall survive the execution and
delivery of this Agreement, any investigation at any time made by the Investors
or on their behalf, and the sale and purchase of the Shares and payment

<PAGE>

therefor. All statements contained in any certificate, instrument or other
writing delivered by or on behalf of the Company pursuant to this Agreement
(other than legal opinions) at the closing shall constitute representations and
warranties by the Company hereunder.

                  8.3 Parties in Interest. All the terms and provisions of this
Agreement shall be binding upon and inure to the benefit of and be enforceable
by the respective successors and assigns of the parties hereto, whether so
expressed or not, and, in particular, shall inure to the benefit of and be
enforceable by the holder or holders from time to time of any of the Shares;
provided, however, that a successor or assign of an Investor shall not be
regarded as an "Investor."

                  8.4 Headings. The headings of the articles and sections of
this Agreement have been inserted for convenience of reference only and do not
constitute a part of this Agreement.

                  8.5 Choice of Law. The laws of New York shall govern the
validity of this Agreement, the construction of its terms and the interpretation
of the rights and duties of the parties hereunder.

                  8.6 Counterparts. This Agreement may be executed at different
times by different Investors and in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument. Notwithstanding any other section of this Agreement, the
execution of this Agreement on different dates by different Investors shall not
be deemed an amendment to this Agreement.

         IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized representative and each of the Investors has an
executed a signature page as well as an acceptance form attached to this
Agreement.

                                  DATAKEY, INC.

                                  By:
                                         Alan G. Shuler, Vice President and
                                         Chief Financial Officer

                                  INVESTOR

                                  By:
                                      Its:

<PAGE>

                                   SCHEDULE I

Investor                                         Shares            Warrants

Special Situations Private Equity Fund, L.P.    300,000             300,000
Special Situations Cayman Fund                  166,666             166,666
Special Situations Fund III, L.P.               650,000             650,000
Special Situations Technology Fund, L.P.        216,667             216,667
Helmut Muehl-Kuehner                             16,667              16,667
Robert G. Allison                                16,000              16,000
Elizabeth M. Cramer                              10,000              10,000
Christopher T. Dah                               10,000              10,000
Dennis D. Gonyea                                 10,000              10,000
Sandra J. Hale                                   10,000              10,000
USB Piper Jaffray as Custodian                   10,000              10,000
  FBO Mark Halsten IRA
Dorothy J. Hoel                                  18,000              18,000
USB Piper Jaffray As Custodian                   16,000              16,000
  FBO Raymond R. Johnson IRA
USB Piper Jaffray as Custodian                   10,000              10,000
  FBO William R. Kennedy IRA #2
James F. Lyons                                   10,000              10,000
MB Partnership                                   10,000              10,000
Daniel S. Perkins and                            16,000              16,000
  Patrice M. Perkins JTWROS
USB Piper Jaffray as Custodian                   32,000              32,000
  FBO Richard C. Perkins IRA
Richard C. Perkins                               35,000              35,000
USB Piper Jaffray as Custodian                    7,000               7,000
  FBO James G. Peters IRA
USB Piper Jaffray as Custodian                   10,000              10,000
  FBO David H. Potter IRA
John T. Potter                                   10,000              10,000
John F. Rooney                                   10,000              10,000
                                              ---------           ---------
         TOTALS                               1,600,000           1,600,000

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00024-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00024-of-00352.parquet"}]]