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                                                                    EXHIBIT 10.1

             SECURED CONVERTIBLE PROMISSORY NOTE PURCHASE AGREEMENT

         THIS SECURED CONVERTIBLE PROMISSORY NOTE PURCHASE AGREEMENT (the
"Agreement") is made as of the 17th day of October, 2003, by and among Datakey,
Inc., a Minnesota corporation (the "Company"), and the investors listed on
Exhibit A hereto (each, an "Investor" and collectively, the "Investors").

         A.       The Company is in need of working capital for the operations
of its business and for the marketing of the Company's "smart cards."

         B.       The Investors are willing to lend the Company an aggregate of
$2,000,000 in a bridge financing transaction pursuant to the terms and
conditions set forth below.

         NOW, THEREFORE, in consideration of the mutual promises set forth
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:

l.       Purchase and Sale of Notes.

         1.1      Authorization and Sale of Notes and Warrants.

                  (a)      The Company shall authorize the issuance and sale to
         Investors of Secured Convertible Promissory Notes in the form attached
         hereto as Exhibit B with aggregate proceeds to the Company of
         $2,000,000 (hereinafter collectively referred to as the "Notes" and
         individually as a "Note"). Investors shall receive, without further
         consideration, Warrants in the form attached hereto as Exhibit C,
         entitling the holders thereof to purchase, in the aggregate, 4,000,000
         shares of the Company's common stock, par value $0.05 per share
         (hereinafter collectively referred to as the "Warrants" and
         individually as a "Warrant").

                  (b)      Subject to the terms and conditions of this
         Agreement, each Investor agrees, severally and not jointly, to pay the
         Company at Closing the amount set forth opposite the Investor's name on
         Exhibit A. The Company agrees to sell and issue to each Investor at the
         Closing a Note in the original principal amount as set forth opposite
         the Investor's name on Exhibit A and a Warrant to purchase that number
         of shares of the Company's common stock set forth opposite the
         Investor's name on Exhibit A. The sale of the Notes and the issuance of
         the Warrants to each Investor shall constitute a separate sale
         hereunder and the Company's agreement with each of the Investors shall
         be a separate agreement.

                  (c)      The Company shall enter into a Registration Rights
         Agreement with each Investor, to be dated as of the date of Closing, in
         the form attached hereto as Exhibit D.

         1.2      Closing. The closing of the separate purchases and sales of
the Notes and Warrants shall take place at the offices of Robins, Kaplan, Miller
& Ciresi L.L.P., 2800 LaSalle

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Plaza, 800 LaSalle Avenue, Minneapolis, Minnesota 55402-2015, by an exchange of
executed counterpart copies of this Agreement and the other closing documents
via facsimile and overnight courier between counsel for the Company and the
Investors (the "Closing"). At the Closing, the Company shall deliver to each
Investor a Note and each such Investor will thereafter pay the principal amount
of the Note to the Company by check or wire transfer. If at the Closing any of
the conditions specified in Section 5 of this Agreement shall not have been
fulfilled, each Investor shall, at its election, be relieved of all of its
obligations under this Agreement without thereby waiving any other right such
Investor may have by reason of such failure or such non-fulfillment. The Company
agrees and acknowledges that a portion of the amount paid by the Investors under
Section 1.1(b) above will be in the form of a personal check from certain
Investors. The parties agree that the Closing shall be deemed to have occurred
on October 17, 2003; provided, however, that if (a) the Company has not received
at least $1,500,000 in immediately available funds on or before October 24,
2003, and (b) the Company gives the Agents, as defined in the Notes, notice by
electronic mail or facsimile prior to 5:30 on October 24, 2003, and (c) such
deficiency is not cured by 5:30 p.m. on October 29, 2003, then the Company shall
have the option to rescind the Closing.

2.       Board Observation Rights. Upon and after Closing, the Investors shall
be entitled to have two individuals selected by them attend and participate, on
a non-voting basis, all meetings of the Board of Directors of the Company, and
all meetings of the Executive Committee, Audit Committee, Compensation Committee
and such other committees of the Company's Board of Directors that may exist
until all of the Notes are paid in full or otherwise satisfied in full. The
attendance by such persons shall be conditioned upon their prior execution of
such confidentiality and non-disclosure restrictions as the Company deems
necessary and appropriate. The parties acknowledge and agree that such
representatives may be excluded from those portions of any meeting of the Board
in which such representatives' presence may jeopardize the attorney-client
privilege.

3.       Representations and Warranties of the Company. As a material inducement
to the Investors to enter into this Agreement and purchase the Notes hereunder,
the Company hereby represents and warrants to each Investor that:

         3.1      Organization, Good Standing and Qualification. The Company is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Minnesota. The Company is duly qualified to transact
business and is in good standing in each jurisdiction in which the failure so to
qualify would have a material adverse effect on its business or properties. The
Company has all required power and authority necessary to own and operate its
property, to carry on its business as now conducted and presently proposed to be
conducted and to carry out the transactions contemplated by this Agreement.

         3.2      Capitalization and Voting Rights. The authorized capital of
the Company consists, or will consist immediately prior to the Closing, of:

                  (a)      Preferred Stock. Four Hundred Thousand (400,000)
         shares of Convertible Preferred Stock, liquidation value $2.50 per
         share (the "Preferred Stock"), One Hundred Fifty Thousand (150,000) of
         which shares are issued and outstanding. The rights,

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         restrictions, privileges and preferences of the Preferred Stock are as
         stated in the Company's Restated Articles of Incorporation, as amended.

                  (b)      Common Stock. Twenty Million (20,000,000) shares of
         common stock, par value $0.05 ("Common Stock"), of which Ten Million
         Four Hundred Thirty-Three Thousand, Eight Hundred Forty (10,433,840)
         shares are issued and outstanding.

                  (c)      The outstanding shares of Preferred Stock and Common
         Stock are all duly and validly authorized and issued, fully paid and
         nonassessable and were issued in compliance with all applicable state
         and federal laws concerning the issuance of securities.

                  (d)      Except for (i) the conversion privileges of the
         Preferred Stock, (ii) the conversion privileges of the Notes and
         Warrants to be issued pursuant to this Agreement, and (iii) additional
         rights to acquire Common Stock of the Company set forth on Schedule
         3.2(d) to this Agreement, which is attached hereto and incorporated
         herein by reference, there are not outstanding any options, warrants,
         rights (including conversion or preemptive rights) or agreements for
         the purchase or acquisition from the Company of any shares of its
         capital stock.

                  (e)      The Company is not a party or subject to any
         agreement or understanding, and, to the Company's knowledge, there is
         no agreement or understanding, between any persons or entities that
         affects or relates to the voting or giving of written consents with
         respect to any security or by a director of the Company.

         3.3      Subsidiaries. The Company does not presently own or control,
directly or indirectly, or hold any rights to acquire, any interest in any other
corporation, association or other business entity. The Company is not a
participant in any joint venture, partnership or similar arrangement.

         3.4      Authorization. All corporate action necessary on the part of
the Company, its officers, directors and shareholders for the authorization,
execution and delivery of this Agreement, the Notes, the Warrants, the
Registration Rights Agreement, the Security Agreement in the form attached
hereto as Exhibit E, and the Intellectual Property Security Agreement attached
hereto as Exhibit F (collectively, the "Transaction Agreements") and all other
agreements contemplated hereby or thereby to which the Company is a party, the
performance of all obligations of the Company hereunder and thereunder has been
taken or will be taken prior to the Closing. The Transaction Agreements and all
other agreements contemplated thereby to which the Company is a party constitute
valid and legally binding obligations of the Company, enforceable in accordance
with their respective terms, except (a) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting enforcement of creditors' rights generally, (b) as limited by laws
relating to the availability of specific performance, injunctive relief or other
equitable remedies, and (c) to the extent the indemnification provisions may be
limited by applicable laws.

         3.5      Valid Issuance of Preferred and Common Stock. The Notes and
Warrants that are being purchased by the Investors hereunder, when issued, sold
and delivered in accordance with

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the terms of this Agreement for the consideration expressed herein, will be duly
and validly issued, fully paid and nonassessable and will be free of
restrictions on transfer, other than restrictions on transfer under the
applicable state and federal securities laws. The common stock issuable upon
conversion of the Notes and exercise of the Warrants purchased under this
Agreement has been duly and validly reserved for issuance and, upon issuance,
will be duly and validly issued, fully paid and nonassessable and will be free
of restrictions on transfer, other than restrictions on transfer under
applicable state and federal securities laws. Any capital stock of the Company
with rights senior to the common stock of the Company, when issued, sold and
delivered in accordance with the terms of this Agreement and in accordance with
the terms of the Notes or the Warrants, as applicable, will be duly and validly
issued, fully paid and nonassessable and will be free of restrictions on
transfer, other than restrictions on transfer under the applicable state and
federal securities laws.

         3.6      Governmental Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the consummation of the transactions
contemplated by this Agreement other than a Form D to be filed with the
Securities and Exchange Commission and the filings required by applicable blue
sky laws.

         3.7      Offering. Subject in part to the truth and accuracy of each
Investor's representations set forth in Section 4 of this Agreement, the offer,
sale and issuance of the Notes and Warrants as contemplated by this Agreement
are exempt from the registration requirements of the Securities Act of 1933, as
amended (the "Act"), and the qualification or registration requirements of the
applicable blue sky laws. Neither the Company nor any authorized agent acting on
its behalf will take any action hereafter that would cause the loss of such
exemptions.

         3.8      Litigation. There is no action, suit, proceeding or
investigation pending or, to the Company's knowledge, currently threatened
against the Company that questions the validity of the Transaction Agreements or
the right of the Company to enter into such agreements or to consummate the
transactions contemplated thereby, or that might result, either individually or
in the aggregate, in any material adverse changes in the business, assets or
condition of the Company, financially or otherwise, or any change in the current
equity ownership of the Company. The foregoing includes, without limitation,
actions, suits, proceedings or investigations pending or, to the Company's
knowledge, threatened involving the prior employment of any of the Company's
employees or their obligations under any agreements with prior employers. The
Company is not aware that it is a party or subject to the provisions of any
order, writ, injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by the
Company currently pending or that the Company intends to initiate.

         3.9      Patents and Trademarks.

                  (a)      Schedule 3.9(a) to this Agreement contains a complete
         and accurate list of all (i) patented or registered Intellectual
         Property Rights (as defined below) owned or used by the Company, (ii)
         pending patent applications and applications for registrations of other
         Intellectual Property Rights filed by the Company, (iii) registered
         trade names

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         and corporate names owned or used by the Company, and (iv) all licenses
         and other rights granted by the Company to any third party with respect
         to any patented or registered Intellectual Property Rights. The Company
         owns all right, title and interest in and to all of the patented or
         registered Intellectual Property Rights listed, free and clear of all
         liens, encumbrances or claims of others except for licenses made in the
         ordinary course of business to resellers, Original Equipment
         Manufacturers, and end users. To the best of its knowledge the Company
         owns sufficient right, title and interest to, or has the right to use
         pursuant to a valid license, all patented or registered Intellectual
         Property Rights necessary for the operation of the business of the
         Company as presently conducted and as presently proposed to be
         conducted, free and clear of all liens, encumbrances or claims of
         others. The Company has taken all necessary actions to maintain and
         protect the Intellectual Property Rights that it owns. To the Company's
         knowledge, there have been no claims made against the Company asserting
         the invalidity, misuse or unenforceability of any of such Intellectual
         Property Rights, and to the Company's knowledge, there are no valid
         grounds for the same. The Company has not received any notices of, and
         is not aware of any facts which indicate a likelihood of, any
         infringement or misappropriation by, or conflict with, any third party
         with respect to such Intellectual Property Rights (including, without
         limitation, any demand or request that the Company license any rights
         from a third party). To best of the Company's knowledge, none of its
         employees is obligated under any contract (including licenses,
         covenants or commitments of any nature) or other agreement, or subject
         to any judgment, decree or order of any court or administrative agency,
         that would interfere with the use of his or her best efforts to promote
         the interests of the Company or that would conflict with the Company's
         business as presently conducted and as presently proposed to be
         conducted. The Company does not believe it is or will be necessary to
         utilize any inventions of any of its employees (or people it currently
         intends to hire) made prior to their employment by the Company, except
         for inventions that have been assigned or licensed to the Company as of
         the date hereof.

                  (b)      For purposes of this Agreement, "Intellectual
         Property Rights" means all (i) patents, patent applications, patent
         disclosures and inventions, (ii) trademarks, service marks, trade
         dress, trade names, logos and corporate names and registrations and
         applications for registration thereof together with all of the goodwill
         associated therewith, (iii) copyrights (registered and unregistered)
         and copyrightable works and registrations and applications for
         registration thereof, (iv) mask works and registrations and
         applications for registration thereof, (v) computer software, data,
         data bases and documentation thereof, (vi) trade secrets and other
         confidential information (including, without limitation, ideas,
         formulas, compositions, inventions (whether patentable or unpatentable
         and whether or not reduced to practice), know-how, manufacturing and
         production processes and techniques, research and development
         information, drawings, specifications, designs, plans, proposals,
         technical data, financial and marketing plans and customer and supplier
         lists and information), (vii) other intellectual property rights and
         (viii) copies and tangible embodiments thereof (in whatever form or
         medium).

         3.10     Compliance with Other Instruments. The Company is not in
violation of or default under any provision of its Restated Articles of
Incorporation, as amended, or bylaws or in any material respect of any
instrument, judgment, order, writ, decree or contract to which it is a

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party or by which it is bound, including without limitation, any agreements with
suppliers or any licensing agreements or, to its knowledge, of any provision of
any federal or state statute, rule or regulation applicable to the Company. The
execution, delivery and performance of the Transaction Agreements and the
consummation of the transactions contemplated thereby will not result in any
such violation, or be in material conflict with or constitute, with or without
the passage of time and giving of notice, either a material default under any
such provision, instrument, judgment, order, writ, decree or contract or an
event that results in the creation of any lien, charge or encumbrance upon any
assets of the Company or the suspension, revocation, impairment, forfeiture or
nonrenewal of any permit, license, authorization or approval applicable to the
Company, its business or operations or any of its assets or properties. Neither
will the execution, delivery and performance of the Transaction Agreements and
the consummation of the transactions contemplated thereby cause any "change of
control" under any agreements to which the Company is a party, including but not
limited to (a) any employment agreements to which the Company is a party; (b)
any incentive or bonus plans, including but not limited to the Company's 2003
Executive Incentive Plan; (c) the Company's 1987 Stock Option Plan, the
Company's 1994 Consultant Stock Option Plan, the Company's 1997 Stock Option
Plan or the Company's 1998 Employee Stock Purchase Plan; or (d) the Company's
Shareholder Rights Plan.

         3.11     Agreements; Action.

                  (a)      Except as disclosed in filings the Company has made
         with the Securities and Exchange Commission on or before the date
         hereof, including periodic reports on Form 10-KSB, Form 10-QSB, on Form
         8-K and proxy statements and registration statements ("SEC Filings"),
         there are no agreements, understandings or proposed transactions
         between the Company and any of its officers, directors, affiliates or
         any affiliate thereof.

                  (b)      There are no agreements, understandings, instruments,
         contracts, proposed transactions, judgments, orders, writs or decrees
         to which the Company is a party or by which it is bound that may
         involve indemnification by the Company with respect to infringements of
         proprietary rights, other than indemnification obligations arising from
         purchase or sale agreements or license agreements entered into in the
         ordinary course of business.

                  (c)      Except as disclosed in SEC Filings, the Company has
         not (i) declared or paid any dividends or authorized or made any
         distribution upon or with respect to any class or series of its capital
         stock, (ii) incurred any indebtedness for money borrowed or any other
         liabilities in excess of $1,000,000 in the aggregate, (iii) made any
         loans or advances to any person, other than in the ordinary course of
         business, or (iv) sold, exchanged or otherwise disposed of any of its
         assets or rights, other than the sale of its inventory in the ordinary
         course of business.

         3.12     Related-Party Transactions. Except as disclosed in SEC
Filings, no employee, shareholder, officer or director of the Company or member
of his or her immediate family is indebted to the Company, nor is the Company
indebted (or committed to make loans or extend or guarantee credit) to any of
them. To the Company's knowledge and except as disclosed in SEC Filings, none of
such persons has any direct or indirect ownership interest in any firm or

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corporation with which the Company is affiliated or with which the Company has a
business relationship, or any firm or corporation that competes with the
Company, except that employees, shareholders, officers or directors of the
Company and members of their immediate families may own stock in publicly traded
companies that may compete with the Company.

         3.13     Financial Statements. The Company has delivered or made
available to each Investor its audited financial statements as contained in its
annual report on Form 10-KSB for the period ending December 31, 2002 and the
unaudited financial statements as contained in its quarterly report on Form
10-QSB for the period ending June 30, 2003 (the "Financial Statements"). The
foregoing Financial Statements are accurate and complete in all material
respects, are consistent with the books and records of the Company (which, in
turn, are accurate and complete in all material respects) and have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis throughout the periods indicated and with each other, except
that the unaudited Financial Statements may not contain all footnotes required
by generally accepted accounting principles. The Company does not have any
liabilities (whether accrued, absolute, unliquidated, contingent or otherwise,
whether or not known to the Company, whether due or to become due and regardless
of when asserted) arising out of transactions entered into at or prior to
December 31, 2002, or any action or inaction at or prior to December 31, 2002 or
any state of facts existing at or prior to December 31, 2002 other than (a)
liabilities and obligations incurred in the ordinary course of business after
December 31, 2002 (none of which is a liability resulting from breach of
contract, breach of warranty, tort, infringement, claim or lawsuit), and (b)
other liabilities and obligations expressly disclosed in the Financial
Statements. The Company is not a guarantor or indemnitor of any indebtedness of
any other person, firm or corporation.

         3.14     Changes. Except as disclosed in SEC Filings, since June 30,
2003, there has not been:

                  (a)      any material adverse change in the assets,
         liabilities, financial condition or operating results of the Company;

                  (b)      any damage, destruction or loss, whether or not
         covered by insurance, materially and adversely affecting the assets,
         properties, financial condition, operating results or business of the
         Company;

                  (c)      any waiver by the Company of a valuable right or of a
         debt owed to it;

                  (d)      any satisfaction or discharge of any lien (except the
         lien held by Fidelity Bank), claim or encumbrance or payment of any
         obligation by the Company, except in the ordinary course of business
         and that is not material to the assets, properties, financial
         condition, operating results or business of the Company;

                  (e)      any change or amendment to a material contract or
         arrangement by which the Company or any of its assets or properties is
         bound or subject;

                  (f)      any change in any compensation arrangement or
         agreement with any key employee,

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                  (g)      any sale, assignment or transfer of any patents or
         patent applications, trademarks or trademark applications, service
         marks, trade names, corporate names, copyrights or copyright
         registrations, trade secrets or other intangible assets, or the
         disclosure of any proprietary confidential information to any person
         not under a duty to keep such information confidential;

                  (h)      any resignation or termination of employment of any
         key officer of the Company; and the Company is not aware of the
         impending resignation or termination of employment of any such officer;
         or

                  (i)      any agreement or commitment by the Company to do any
         of the things described in this Section 3.14.

         3.15     Tax Returns. The Company has timely filed all tax returns
(federal, state and local) required to be filed by it and all Taxes (as defined
below), assessments and other government charges imposed upon the Company, or
upon any of the assets, income or franchises of the Company, have been timely
paid or, if not yet payable, are adequately accrued on the Company's books and
records. There are no actual or proposed Tax deficiencies, assessments or
adjustments with respect to the Company or any assets or operations of the
Company, and there are no ongoing or pending Tax audits by any taxing authority
against the Company. "Tax" or "Taxes" means any federal, state, local or foreign
income, gross receipts, license, payroll, employment, excise, severance, stamp,
occupation, premium, property, windfall, profits, environmental, customs,
capital stock, franchise, employees' income withholding, foreign or domestic
withholding, social security, unemployment, disability, real property, personal
property, sales, use, transfer, value added, alternative or add-on minimum or
other similar tax, governmental fee, governmental assessment or governmental
charge of any kind whatsoever, including any interest, penalties or additions to
Tax or additional amounts with respect to the foregoing.

         3.16     Permits. To the best of its knowledge, the Company has all
franchises, permits, licenses and any similar authority necessary for the
conduct of its business, and the Company believes it can obtain, without undue
burden or expense, any similar authority for the conduct of its business as
planned to be conducted. The Company is not in default in any material respect
under any of such franchises, permits, licenses or other similar authority.

         3.17     Environmental and Safety Laws. To the best of the Company's
knowledge, the Company, the operation of its business and any real property that
the Company owns or has owned, leases or has leased or otherwise occupies or
uses or has occupied or used (the "Premises") are in compliance with all
applicable Environmental Laws (as defined below) and orders or directives of any
governmental authorities having jurisdiction under such Environmental Laws. The
Company has not received any citation, directive, letter or other communication,
written or oral, or any notice of any proceeding, claim or lawsuit, from any
person arising out of the Company's ownership or occupation of the Premises, or
the conduct of its operations. For purposes of this Agreement, the term
"Environmental Laws" shall mean any Federal, state, local or foreign law,
ordinance, rule, regulation, permit and authorization pertaining to the
protection of human health or the environment.

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         3.18     Disclosure. In addition to SEC Filings publicly available, the
Company has provided each Investor with all the information available to the
Company that such Investor has requested for deciding whether to purchase the
Notes and Warrants and all information that the Company believes is reasonably
necessary to enable such Investor to make such decision. To the best of its
knowledge, neither this Agreement (including all the exhibits attached hereto)
nor any certificates delivered in connection herewith contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements herein or therein not misleading in light of the circumstances
under which they were made.

         3.19     Registration Rights. Except as provided in the Registration
Rights Agreement, or otherwise disclosed in SEC Filings, the Company has not
granted or agreed to grant any registration rights, including piggyback rights,
to any person or entity. The registration rights granted by the Company which
are still in effect are listed on Schedule 3.19 attached to this Agreement and
incorporated herein by reference.

         3.20     Corporate Documents; Minute Books. The Company has made the
Restated Articles of Incorporation and bylaws of the Company available to the
Investors. In addition, the minute books of the Company available for review by
the Investors contain a complete summary of all meetings of directors and
shareholders since the time of incorporation and reflect all transactions
referred to in such minutes accurately in all material respects.

         3.21     Title to Property and Assets. The property and assets the
Company owns are owned by the Company free and clear of all mortgages, liens,
loans and encumbrances, except (a) as reflected in the Financial Statements, (b)
for statutory liens for the payment of current taxes that are not yet
delinquent, and (c) for liens, encumbrances and security interests that arise in
the ordinary course of business and minor defects in title, none of which,
individually or in the aggregate, materially impair the Company's ownership or
use of such property or assets. With respect to the property and assets it
leases, the Company is in compliance with such leases in all material respects
and, to the best of the Company's knowledge, holds a valid leasehold interest
free of any liens, claims or encumbrances, subject to clauses (a), (b) and (c)
above.

         3.22     Labor Agreements and Actions. The Company is not aware that
any officer or key employee, or that any group of employees of the Company,
intends to terminate their employment with the Company, nor does the Company
have a present intention to terminate the employment of any of the foregoing.
The employment of each officer and employee of the Company is terminable at the
will of the Company. Except as disclosed in SEC Filings or as disclosed to the
Investors, the Company is not a party to or bound by any currently effective
employment contract, deferred compensation agreement, bonus plan, incentive
plan, profit sharing plan, retirement agreement or other employee compensation
agreement. The Company has complied in all material respects with all applicable
state and federal equal employment opportunity and other laws related to
employment (including without limitation, provisions thereof relating to wages,
hours, equal opportunity, collective bargaining and the payment of social
security and other taxes), and the Company is not aware that it has any labor
relations problems (including without limitation, any union organization
activities, threatened or actual strikes or work stoppages or material
grievances). The Company is not bound by or subject to (and none of its assets
or properties is bound by or subject to) any written or oral, express or
implied, contract, commitment or arrangement with any labor union.

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4.       Representations and Warranties of the Investors. Each Investor,
severally and not jointly with any other Investor, hereby represents, warrants
and covenants to the Company that:

         4.1      Authorization. Such Investor has full power and authority to
enter into the Transaction Agreements, and each such agreement constitutes its
valid and legally binding obligation, enforceable in accordance with its terms,
except (a) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium and other laws of general application affecting enforcement of
creditors' rights generally, (b) as limited by laws relating to the availability
of specific performance, injunctive relief or other equitable remedies, and (c)
to the extent the indemnification provisions may be limited by applicable laws.

         4.2      Purchase Entirely for Own Account. This Agreement is made with
such Investor in reliance upon such Investor's representation to the Company,
which by such Investor's execution of this Agreement such Investor hereby
confirms, that the Notes to be received by such Investor, the capital stock
issuable upon conversion thereof, the Warrants and the capital stock to be
issued upon exercise thereof (collectively, the "Securities") will be acquired
for investment for such Investor's own account, not as a nominee or agent, and
not with a view to the resale or distribution of any part thereof, and that such
Investor has no present intention of selling, granting any participation in or
otherwise distributing the same. By executing this Agreement, such Investor
further represents that such Investor does not have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of the
Securities.

         4.3      State of Residence. Each Investor represents that such
Investor is a resident of the state listed opposite such Investor's name on
Exhibit A attached hereto and incorporated herein by reference.

         4.4      No Agreement Among the Investors. As of the date hereof, each
Investor represents that such Investor has not entered into an agreement with
one or more other Investors to act together for the purpose of acquiring,
holding, disposing or voting of securities or otherwise exercising control over
the Company. Each Investor represents that such Investor has no obligation to or
agreement with another Investor with respect to any equity securities or rights
to acquire equity securities of the Company. Each Investor represents that such
Investor will not own more than twenty (20%) of the issued and outstanding stock
of the Company as a result of the consummation of the transactions contemplated
by this Agreement, the Notes and the Warrants.

         4.5      Disclosure of Information. Each Investor represents that it
has had an opportunity to ask questions and receive answers from the Company
regarding the terms and conditions of the offering of the Notes and Warrants and
the business, properties, prospects and financial condition of the Company. The
foregoing, however, does not limit or modify the representations and warranties
of the Company in Section 3 of this Agreement or the right of the Investors to
rely thereon.

         4.6      Investment Experience. Each Investor acknowledges that it is
able to fend for itself, can bear the economic risk of its investment, and has
such knowledge and experience in financial or business matters that it is
capable of evaluating the merits and risks of the investment

                                       10

<PAGE>

in the Notes and Warrants. If other than an individual, such Investor also
represents it has not been organized for the purpose of acquiring the Notes and
Warrants.

         4.7      Accredited Investor. Such Investor is an "accredited investor"
within the meaning of Rule 501 of Regulation D promulgated by the Securities and
Exchange Commission, as presently in effect.

         4.8      Restricted Securities. Such Investor understands that the
Securities it is purchasing are characterized as "restricted securities" under
the federal securities laws inasmuch as they are being acquired from the Company
in a transaction not involving a public offering and that under such laws and
applicable regulations such Securities may be resold without registration under
the Act only in certain limited circumstances. In the absence of an effective
registration statement covering the Securities (or the capital stock issued on
conversion or exercise thereof) or an available exemption from registration
under the Act, the Notes and Warrants (and any capital stock issued on
conversion or exercise thereof) must be held indefinitely.

         4.9      Further Limitations on Disposition. The Investor agrees not to
make any disposition of all or any portion of the Securities unless and until
the transferee has agreed in writing for the benefit of the Company to be bound
by this Section 4 and:

                  (a)      There is then in effect a registration statement
         under the Act covering such proposed disposition and such disposition
         is made in accordance with such registration statement; or

                  (b)      (i) Such Investor shall have notified the Company of
         the proposed disposition and shall have furnished the Company with a
         detailed statement of the circumstances surrounding the proposed
         disposition, and (ii) if requested by the Company, such Investor shall
         have furnished the Company with an opinion of counsel, reasonably
         satisfactory to the Company that such disposition will not require
         registration of such Securities under the Act. It is agreed that the
         Company will not require opinions of an Investor's counsel for
         transactions made pursuant to Rule 144 except in unusual circumstances,
         unless the Company's transfer agent requires such opinion.

                  (c)      Notwithstanding the provisions of subsections (a) and
         (b) above, no such registration statement or opinion of counsel shall
         be necessary for a transfer by an Investor that is a partnership to a
         partner of such partnership or a retired partner of such partnership
         who retires after the date hereof, or to the estate of any such partner
         or retired partner or the transfer by gift, will or intestate
         succession of any partner to his or her spouse or to the siblings,
         lineal descendants or ancestors of such partner or his or her spouse,
         if the transferee agrees in writing to be subject to the terms hereof
         to the same extent as if he or she were an original Investor hereunder.

         4.10     Legends. It is understood that the certificates evidencing the
Securities may bear any legend required by applicable blue sky laws as well as
the following legend:

         THIS SECURITY HAS NOT BEEN REGISTERED UNDER EITHER THE SECURITIES ACT
         OF 1933, AS AMENDED (THE "ACT"), OR

                                       11

<PAGE>

         APPLICABLE BLUE SKY LAWS, AND IS SUBJECT TO CERTAIN INVESTMENT
         REPRESENTATIONS. THIS SECURITY MAY NOT BE SOLD, OFFERED FOR SALE OR
         TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION UNDER THE ACT
         AND APPLICABLE BLUE SKY LAWS, OR AN OPINION OF COUNSEL SATISFACTORY TO
         THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

5.       Conditions of Investors' Obligations at Closing. The obligations of
each Investor under subsection 1.1 (b) of this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions, the
waiver of which shall not be effective against any Investor who does not consent
in writing thereto:

         5.1      Due Diligence. Each Investor shall have completed, to its own
full and complete satisfaction, its due diligence of the Company, including a
detailed review of past and projected financial performance.

         5.2      No Material Adverse Developments. There will have been no
material adverse developments in the Company's business or prospects and absence
of default in any material obligation of the Company since the date of the
signing of this Agreement.

         5.3      Representations and Warranties. The representations and
warranties of the Company contained in Section 3 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 date of such Closing.

         5.4      Performance. The Company shall have performed and complied
with all agreements, obligations and conditions contained in this Agreement that
are required to be performed or complied with by it on or before the Closing.

         5.5      Closing Documents. The Company shall have delivered to each
Investor all of the following documents:

                  (a)      An Officer's Certificate, dated the date of the
         Closing, stating that the conditions specified in Section 5 of this
         Agreement have been fulfilled and stating that there shall have been no
         adverse change in the business, affairs, operations, properties, assets
         or condition of the Company since the signing of this Agreement.

                  (b)      A Secretary's Certificate, certifying copies of the
         resolutions duly adopted by the Company's board of directors
         authorizing the execution, delivery and performance of the Transaction
         Agreements and each of the other agreements contemplated hereby, and
         the issuance and sale of the Notes and Warrants and the consummation of
         all other transactions contemplated by this Agreement; and

                  (c)      Certificates of good standing issued by the secretary
         of state for each state where the Company is authorized to do business.

         5.6      Qualifications. All authorizations, approvals or permits, if
any, of any governmental authority or regulatory body of the United States or of
any state or foreign

                                       12

<PAGE>

jurisdiction that are required in connection with the lawful issuance and sale
of the Securities pursuant to this Agreement shall be duly obtained and
effective as of the Closing.

         5.7      Proceedings and Documents. All corporate and other proceedings
in connection with the transactions contemplated at the Closing and all
documents incident thereto shall be reasonably satisfactory in form and
substance to Investors' special counsel, and they shall have received all such
counterpart original and certified or other copies of such documents as they may
reasonably request.

         5.8      Opinion of Company Counsel. Each Investor shall have received
from Fredrikson and Byron, P.A., counsel for the Company, an opinion, dated as
of the Closing, in the form attached hereto as Exhibit G.

         5.9      Termination of Outstanding Financing Statements. All security
interests that were granted not in the ordinary course of business shall have
been terminated on or prior to Closing. The Company has delivered to the Agents
on or prior to Closing a termination statement covering the security interest
held by Fidelity Bank, to be filed by such Agents.

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 Investor shall have delivered
the purchase price specified in Section 1.1(b).

         6.3      Qualifications. All authorizations, approvals or permits, if
any, of any governmental authority or regulatory body of the United States or of
any state or foreign jurisdiction that are required in connection with the
lawful issuance and sale of the Securities pursuant to this Agreement shall be
duly obtained and effective as of the Closing.

7.       Indemnification. The Company agrees to indemnify and hold harmless each
Investor and its successors and assigns, together with any of their officers,
directors, or shareholders (such persons, the "Indemnified Parties"), from and
against any and all losses, damages, liabilities, obligations, costs or expenses
(any one such item being herein called a "Loss" and all such items being herein
collectively called "Losses") which are caused by or arise out of, or (in the
case of claims asserted against any Indemnified Parties by a third party)
alleged to result from, arise out of or have been incurred with respect to, (a)
any breach or default in the performance by the Company of any covenant or
agreement of the Company contained in this Agreement, (b) any breach of warranty
or inaccurate or erroneous representation made by the Company herein or in any
certificate or other instrument delivered by or on behalf of the Company
pursuant hereto, and (c) any and all actions, suits, proceedings, claims,
demands, judgments, costs and expenses (including costs and attorneys' fees)
arising out of the foregoing except when such actions, suits, proceedings,
claims, demands, judgments, costs and expenses arise as a result of the grossly
negligent or intentional actions or omissions of any Investor. Furthermore,
except for Losses

                                       13

<PAGE>

caused by or arising out of the gross negligence or willful misconduct of the
Company, any Losses resulting from (a) or (b) under this Agreement shall be
limited to the actual amount invested pursuant to this Agreement.

8.       Miscellaneous.

         8.1      Survival. The warranties, representations and covenants of the
Company and Investors and the indemnification obligations of each party
contained in or made pursuant to this Agreement shall survive the execution and
delivery of this Agreement and the Closing and shall in no way be affected by
any investigation of the subject matter thereof made by or on behalf of the
Investors or the Company.

         8.2      Successors and Assigns. Except as otherwise provided herein,
the terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
permitted transferees of any Securities). Nothing in this Agreement, express or
implied, is intended to confer upon any party, other than the parties hereto or
their respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.

         8.3      Governing Law. This Agreement shall be governed by and
construed under the substantive laws of the State of Minnesota, without regard
to the conflicts of law provisions thereof, as applied to agreements among
Minnesota residents entered into and to be performed entirely within Minnesota.

         8.4      Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.

         8.5      Notices. All notices required or permitted hereunder shall be
in writing and shall be deemed effectively given: (a) upon personal delivery to
the party to be notified, (b) when sent by confirmed telex, electronic mail or
facsimile if sent during normal business hours of the recipient, if not, then on
the next business day; (c) five days after having been sent by registered or
certified mail, return receipt requested, postage prepaid; or (d) one day after
deposit with a nationally recognized overnight courier, specifying next day
delivery, with written verification of receipt. All communications shall be sent
to the address as set forth on Exhibit A attached hereto, or, in the case of the
Company, to the address set forth in the first paragraph of this Agreement, or
at such other address as such party may designate by ten days' advance written
notice to the other parties hereto.

         8.6      Finder's Fee. Each party represents that it neither is nor
will be obligated for any finder's fee or commission in connection with this
transaction. The Company hereby acknowledges and agrees that it has paid
Sapphire Financial Group, LLC a $5,000 retainer and has agreed to pay to
Sapphire an additional fee of $50,000, reduced by the retainer net of expenses
incurred, plus warrants to purchase 10,000 shares of the capital stock of the
Company (the cash and the warrants are collectively referred to as the
"Financial Adviser's Fee"). The Company hereby agrees to indemnify and hold
harmless each Investor from any liability for any commission or compensation in
the nature of a finder's fee for which the Company or any of its officers,
employees or representatives is responsible and for the Financial Adviser's Fee,
(and

                                       14

<PAGE>

the costs and expenses of defending against such liability or asserted
liability). Each Investor agrees to indemnify and to hold harmless the Company
from any liability for any commission or compensation in the nature of a
finder's fee (and the costs and expenses of defending against such liability or
asserted liability) for which such Investor or any of its officers, partners,
employees or representatives is responsible.

         8.7      Fees and Expenses. Irrespective of whether the Closing is
effected, the Company shall pay all costs and expenses that it incurs with
respect to the negotiation, execution, delivery and performance of this
Agreement. Unless the failure to effect the Closing is due solely to the
Investors' unjustified unwillingness to pay the amounts required by Section
1.1(b), the Company shall also pay the expenses of the Investors. If the Closing
is effected, the Company shall, at the Closing, reimburse the reasonable fees of
special counsel for the Investors, not to exceed $20,000, and shall, upon
receipt of a bill therefor, reimburse the reasonable out of pocket expenses of
such counsel from October 2, 2003, the date of the term sheet, until the date of
Closing. If any action at law or in equity is necessary to enforce or interpret
the terms of the Transaction Agreements, the prevailing party shall be entitled
to reasonable attorneys' fees, costs and necessary disbursements in addition to
any other relief to which such party may be entitled.

         8.8      Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
70% of the then outstanding principal amount of all of the Notes. Any amendment
or waiver effected in accordance with this paragraph shall be binding upon each
holder of any securities purchased under this Agreement at the time outstanding
(including securities into which such securities are convertible) and each
future holder of all such securities and the Company.

         8.9      Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.

         8.10     Entire Agreement. This Agreement and the documents referred to
herein constitute the entire agreement among the parties and no party shall be
liable or bound to any other party in any manner by any warranties,
representations or covenants except as specifically set forth herein or therein.

         8.11     Counterparts. This Agreement may be executed 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.

         8.12     Acknowledgement Among Investors. Each Investor acknowledges,
as to itself, that such Investor is not relying upon any person, firm or
corporation, other than the Company and its officers and employees, in making
its investment or decision to invest in the Company. Each Investor agrees that
no other Investor (or their respective officers, directors or employees) shall
be liable for any action taken or omitted to be taken in connection with the
sale of the Notes and Warrants.

                                       15

<PAGE>

                            [Signature Pages Follow]

                                       16

<PAGE>

         IN WITNESS WHEREOF, the parties have executed this Secured Convertible
Promissory Note Purchase Agreement as of the date first above written.

                                        COMPANY:

                                        DATAKEY, INC.

                                        By:   /s/ Alan G. Shuler
                                            -------------------------------

                                        Name: Alan G. Shuler
                                        Its:  Vice President and CFO

<PAGE>

         IN WITNESS WHEREOF, the parties have executed this Secured Convertible
Promissory Note Purchase Agreement as of the date first above written.

                                        INVESTOR:

                                        ________________________________________

                                             By ________________________________

                                             Its _______________________________

                                        Print Address:

                                        ________________________________________

                                        ________________________________________

                                        ________________________________________

                                        Tax ID No.: ____________________________

<PAGE>

         IN WITNESS WHEREOF, the parties have executed this Secured Convertible
Promissory Note Purchase Agreement as of the date first above written.

                                        INVESTOR:

                                        ________________________________________

                                        Print Name and Address:

                                        ________________________________________

                                        ________________________________________

                                        ________________________________________

                                        Social Security No.: ___________________

<PAGE>

                                 SCHEDULE 3.2(d)

                 RIGHTS TO ACQUIRE COMMON STOCK OF DATAKEY, INC.

<TABLE>
<CAPTION>
Common Stock       Right/Security
------------       --------------
<S>                <C>
    367,538        150,000 shares of Convertible Preferred stock

  1,295,933        Warrants issued to investors as part of February 2001
                   financing (exercisable until November 30, 2003 at $0.70 and
                   then at $3.02 until February 20, 2006)

    880,000        Warrants issued to investors and selling agent as part of
                   February 2000 financing (exercisable until February 2005,
                   with 800,000 at $5.00 and 80,000 at $5.50)

    370,000        Warrants issued to investors and selling agent as part of
                   October 1999 financing (exercisable until October 2009, with
                   365,000 at $1.25 and 5,000 at $1.375)

     10,000        Warrants issued to investor as part of June 1999 financing
                   (exercisable until June 2004 at $2.50)

     37,890        Warrants issued to selling agent as part of May 1998
                   financing (exercisable until May 2008 at $6.60)

    121,667        Shares reserved for 1987 Stock Option Plan (121,667 options
                   outstanding with exercise prices ranging from $3.00 to $7.25
                   and expiration dates ranging from January 2005 to June 2006)

     85,000        Shares reserved for 1994 Consultant Stock Option Plan (35,000
                   options outstanding and exercisable until October 2005 at
                   $3.625)

  1,634,896        Shares reserved for 1997 Stock Option Plan (1,496,720 options
                   outstanding with prices ranging from $.01 to $8.375);
                   expiration dates range from March 2007 to June 2013)

    118,422        Shares reserved under the 1998 Employee Stock Purchase Plan
                   (shares issued to participants at 85% of the closing price at
                   the beginning or end of a 12-month phase, whichever is lower)

  1,295,933        Warrants to be issued to certain holders of warrants issued
                   in the February 2001 financing, which warrants will have an
                   exercise price of $0.77.

    120,000        Series B Preferred Stock

     10,000        Warrants to purchase common stock issued to Sapphire at $0.77
                   per share
</TABLE>

<PAGE>

                                  SCHEDULE 3.9

                             PATENTS AND TRADEMARKS

1.       Patent Applications

                  Title:       Administrative System for Smart Card Technology
                  Serial #:    60/485,284
                  Filing Date: July 7, 2003

2.       Registered Trademarks

<TABLE>
<CAPTION>
Trademark    Registration No.    Registration Date
---------    ----------------    -----------------
<S>          <C>                 <C>
SIGNASURE         2359427        June 20, 2000

DATAKEY           1455104        September 1, 1987

DATAKEY           1457273        September 15, 1998
</TABLE>

<PAGE>

                                  SCHEDULE 3.19

                          REGISTRATION RIGHTS IN EFFECT

1.       Perkins Capital Management and Special Situations have registration
rights with respect to 1,295,933 shares of common stock.

<PAGE>

                                    EXHIBIT A

                              SCHEDULE OF INVESTORS

<PAGE>

                                    EXHIBIT B

                                  FORM OF NOTE

<PAGE>

                                    EXHIBIT C

                                 FORM OF WARRANT

<PAGE>

                                    EXHIBIT D

                      FORM OF REGISTRATION RIGHTS AGREEMENT

<PAGE>

                                    EXHIBIT E

                           FORM OF SECURITY AGREEMENT

<PAGE>

                                    EXHIBIT F

                FORM OF INTELLECTUAL PROPERTY SECURITY AGREEMENT

<PAGE>

                                    EXHIBIT G

                       FORM OF OPINION OF COMPANY COUNSEL<PAGE>

                                                                    EXHIBIT 10.2

                          REGISTRATION RIGHTS AGREEMENT

         This Registration Rights Agreement (this "Agreement") is made and
entered into as of the 17th day of October, 2003, by and among Datakey, Inc., a
Minnesota corporation (the "Company") and each Investor listed on Exhibit A
attached hereto and incorporated herein by reference (each, an "Investor" and
collectively, the "Investors").

                                    RECITALS

         A.       The Company is in need of working capital for the operations
of its business and for the marketing of the Company's "smart cards."

         B.       The Investors have agreed to lend the Company an aggregate of
$2,000,000 in a bridge financing transaction pursuant to the terms and
conditions of that certain Secured Convertible Promissory Note Purchase
Agreement, dated as of the date hereof, by and between the Company and the
Investors (the "Purchase Agreement").

         C.       In connection with the execution of the Purchase Agreement,
the Company has executed those certain Secured Convertible Promissory Notes,
dated as of the date hereof, in favor of the Investors (the "Notes") and those
certain Warrants to purchase the capital stock of the Company (the "Warrants").

         D.       The Company is required to issue shares of capital stock upon
conversion of the Notes under certain conditions and is required to issue shares
of capital stock upon exercise of the Warrants.

         E.       In order to induce the Lenders to invest $2,000,000 in the
Company, the Company has agreed to enter into this Agreement pursuant to the
terms and conditions hereinafter set forth.

                                    AGREEMENT

         NOW, THEREFORE, in consideration of the foregoing, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:

         1.       Registration Rights. As used in this Agreement, "Registrable
Securities" means any and all shares of capital stock, regardless of class or
series, issued or issuable upon conversion of the Notes and upon exercise of the
Warrants.

         2.       Demand Registrations.

                  (a)      Investors who together hold at least Five Hundred
         Thousand (500,000) shares of the Registrable Securities may make one
         request on or before August 17, 2005 that the Company file a
         Registration Statement covering the resale or distribution by the
         Investors of the Registrable Securities (the "Initial Demand
         Registration"). Any Investor who is, immediately following the closing
         of the transactions contemplated by the

<PAGE>

         Purchase Agreement, an Affiliate of the Company may make one request
         that the Company file a Registration Statement covering the resale or
         distribution by such Investor of the Registrable Securities provided
         that such Investor is an Affiliate at the time of such request (an
         "Affiliate Demand Registration"). The Initial Demand Registration and
         the Affiliate Demand Registration are each referred to herein as a
         "Demand Registration." Upon the receipt of a request for a Demand
         Registration, the Company will promptly file a registration statement
         on an appropriate form under the Securities Act of 1933, as amended
         (the "Securities Act"), relating to all Registrable Securities and
         shall use its best efforts to cause such registration statement to be
         declared effective no later than one hundred twenty (120) days after
         the date of the request from the Investors. Notwithstanding the
         foregoing, if at the time of the request to register the Registrable
         Securities, the Company is engaged in, or has fixed plans to engage in
         any other activity which, in the good faith determination of the Board
         of Directors of the Company, would be adversely affected by the Demand
         Registration to the material detriment of the Company, then the Company
         may at its option direct that such demand registration be delayed for a
         period not to exceed ninety (90) days. In addition, the Company shall
         not be required to effect any Demand Registration within ninety (90)
         days after the effective date of any other registration statement of
         the Company. For the purposes of this Agreement, "Affiliate" has the
         meaning given to it in Rule 144 of the Securities Act.

                  (b)      The Demand Registration by the Investors shall state
         the intended method of disposition of the Registrable Securities. Upon
         receiving a request for a Demand Registration, the Company shall
         promptly take such steps as are necessary or appropriate to prepare for
         the registration of all of the Registrable Securities.

                  (c)      A registration shall not constitute a Demand
         Registration until it has become effective and remains continuously
         effective for the Registration Period described in Section 4 hereof. In
         addition, a registration shall not constitute a Demand Registration if
         (i) after such Demand Registration has become effective, such
         registration or the related offer, sale or distribution of Registrable
         Securities is interfered with by any stop order, injunction or other
         order or requirement of the Securities and Exchange Commission (the
         "Commission") or other governmental agency or court for any reason not
         attributable to the Investors and such interference is not thereafter
         eliminated, or (ii) the conditions to closing specified in the
         underwriting agreement, if any, entered into in connection with such
         Demand Registration are not satisfied or waived, other than by reason
         of a failure by the Investors.

                  (d)      Notwithstanding the foregoing, the Company may at any
         time effect the Initial Demand Registration (prior to receipt of any
         request by Investors to do so) by filing the registration statement
         contemplated by this Section 2, notifying all Investors thereof and
         otherwise complying with all obligations of the Company hereunder in
         connection with such Initial Demand Registration, including without
         limitation the obligations of the Company under Section 4.

         3.       Incidental Registrations. At any time after the date of this
Agreement, if the Company proposes to file a registration statement under the
Securities Act with respect to an

                                       2

<PAGE>

offering by the Company for its own account or pursuant to a demand registration
of any other investor, then the Company shall give written notice of such
proposed filing to each of the Investors at least thirty (30) days before the
anticipated filing date. Such notice shall describe the proposed registration
and distribution and shall offer the Investors the opportunity to register all
or a portion of the Registrable Securities then owned by such Investor (an
"Incidental Registration"). The Company shall (within ten (10) days of the
notice provided for in the preceding sentence) cause the managing underwriter or
underwriters of a proposed underwritten offering (the "Managing Underwriter") to
permit each of the Investors who have requested in writing to participate in the
Incidental Registration to include such Investors' Registrable Securities in
such offering on the same terms and conditions as the securities of the Company
included therein, subject to the right of the Company and its underwriters to
reduce the number of shares proposed to be registered pursuant to the Incidental
Registration in view of market conditions. Such reduction shall not exceed 25%
of the securities to be registered in the Incidental Registration. If there is
any reduction in the number of Registrable Securities offered pursuant to the
Incidental Registration, then no party other than the Company and the Investors
may sell shares registered in the Incidental Registration.

         4.       Registration Period. The Company shall use its reasonable best
efforts to keep any registration statement filed pursuant to this Agreement (a
"Registration Statement") continuously effective in order to permit the
prospectus included therein to be lawfully delivered by the Investors for the
following periods: (a) in the case of the Initial Demand Registration, until
October 17, 2005, and (b) in the case of an Affiliate Demand Registration, for a
period of 12 months from the date of its effectiveness. Notwithstanding the
foregoing the Company shall not be obligated to keep effective any Registration
Statement after all Registrable Securities (x) have been sold pursuant thereto
or (y) are no longer restricted securities (as defined in Rule 144 under the
Securities Act). The period during which any Registration Statement is required
hereunder to be kept effective is referred to as the "Registration Period." The
Company shall be deemed not to have used its best efforts to keep the
Registration Statement effective during the requisite period if it voluntarily
takes any action that would result in Investors owning Registrable Securities
covered thereby not being able to offer and sell such Shares during that period.

         5.       Compliance with Laws. Notwithstanding any other provisions of
this Agreement to the contrary, the Company shall cause all Registration
Statements and the related prospectuses and any amendments or supplements
thereto, as of the effective date of the Registration Statement, amendment or
supplement, (i) to comply in all material respects with the applicable
requirements of the Securities Act and the rules and regulations of the
Commission and (ii) not to contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.

         6.       Registration - General Provisions. In connection with any and
all Registration Statements, the Company will comply with the following
provisions:

                                       3

<PAGE>

                  (a)      if the Registration Statement is to be underwritten,
         then the Company shall select the underwriters who shall be reasonably
         acceptable to the Investors selling Registrable Securities thereunder
         (the "Selling Investors");

                  (b)      prepare and file with the Commission such amendments
         to the Registration Statements and supplements to the prospectus
         contained therein as may be necessary to keep the Registration
         Statements effective for the period during which the prospectus is
         required to be current during the Registration Period;

                  (c)      prior to filing the Registration Statements with the
         Commission, provide the Selling Investors with reasonable opportunities
         to review and comment on the Registration Statements;

                  (d)      furnish to the Selling Investors and to the
         underwriters of the securities being registered, if any, such
         reasonable number of copies of the Registration Statements, preliminary
         prospectuses, final prospectuses and such other documents as the
         Selling Investors and the underwriters may reasonably request in order
         to facilitate the public offering of such securities;

                  (e)      use its diligent, good faith efforts to register or
         qualify the resale of the Registrable Securities under such state
         securities or blue sky laws of such jurisdictions as the Selling
         Investors may request;

                  (f)      notify the Selling Investors promptly after the
         Company receives notice of the time when the Registration Statement has
         become effective or a supplement to any prospectus forming a part of
         such Registration Statement has been filed with the Commission;

                  (g)      notify the Selling Investors promptly of any request
         by the Commission for the amending or supplementing of the Registration
         Statements or prospectuses or for additional information;

                  (h)      prepare and file with the Commission, promptly upon
         the request of the Selling Investors, any amendments or supplements to
         the Registration Statements or prospectuses which, in the opinion of
         the Selling Investors, are required under the Securities Act or the
         rules and regulations promulgated thereunder in connection with the
         distribution of the Registrable Securities;

                  (i)      prepare and promptly file with the Commission any
         required amendment or supplement to the Registration Statements or
         prospectuses, and promptly notify the Selling Investors of the filing
         of such amendment or supplement to the Registration Statements or
         prospectuses, as may be necessary to correct any statements or
         omissions if, at the time when a prospectus relating to such securities
         is required to be delivered under the Securities Act, any event shall
         have occurred, the result of which is that any such prospectus or any
         other prospectus then in effect would include an untrue statement

                                       4

<PAGE>

         of a material fact or omit to state any material fact necessary to make
         the statements therein, in the light of the circumstances in which they
         were made, not misleading;

                  (j)      advise the Selling Investors promptly after it
         receives notice or obtains knowledge of the issuance of any stop order
         by the Commission or other governmental agency suspending the
         effectiveness of such Registration Statements or the initiation or
         threatening of any proceeding for that purpose and promptly use its
         best efforts to prevent the issuance of any stop order or to obtain its
         withdrawal if such stop order should be issued;

                  (k)      not file any amendment or supplement to the
         Registration Statements or prospectuses to which the Selling Investors
         have reasonably objected on the grounds that such amendment or
         supplement does not comply in all material respects with the
         requirements of the Securities Act or the rules and regulations
         promulgated thereunder, after having been furnished with a copy thereof
         at least five business days prior to the filing thereof, unless in the
         opinion of counsel for the Company the filing of such amendment or
         supplement is reasonably necessary to protect the Company from any
         material liabilities under any applicable federal or state law and such
         filing will not violate applicable law;

                  (l)      give the Selling Investors 30 days' written notice
         prior to the voluntary termination of any registration statement in an
         Incidental Registration;

                  (m)      at the request of the Selling Investors, furnish on
         the effective date of the Registration Statement: (i) opinions, dated
         such respective dates, of the counsel representing the Company for the
         purposes of such registration, addressed to the underwriters, if any,
         and to the Selling Investors, covering such matters as the underwriters
         or Selling Investors may reasonably request, and (ii) letters, dated
         such respective dates, from the independent certified public
         accountants of the Company, addressed to the underwriters, if any, and
         to the Selling Investors, covering such matters as the underwriters or
         the Selling Investors may reasonably request, in which letter such
         accountants shall state (without limiting the generality of the
         foregoing) that they are independent certified public accountants
         within the meaning of the Securities Act and that in the opinion of
         such accountants the financial statements and other financial data of
         the Company included in the Registration Statement or the prospectus or
         any amendment or supplement thereto comply in all material respects
         with the applicable accounting requirements of the Securities Act.

         7.       Registration Expense. The Company shall pay all Registration
Expenses (as defined below) in connection with the inclusion of the Registrable
Shares in any registration statement, or application to register or qualify such
shares under state securities laws, filed by the Company hereunder. For purposes
of this Agreement, the term "Registration Expenses" means the filing fees
payable to the Commission, any state agency and the National Association of
Securities Dealers (the "NASD"); the fees and expenses of the Company's legal
counsel and independent certified public accountants in connection with the
preparation and filing of the Registration Statements (and all amendments and
supplements thereto) with the Commission;

                                       5

<PAGE>

and all expenses relating to the printing of the Registration Statements,
prospectuses and various agreements executed in connection with the Registration
Statements. The Company shall also bear all registration expenses of the Selling
Investors (exclusive of underwriting discounts and commissions), including the
expenses of one special counsel of the Selling Investors to be selected by a
majority in interest of the Selling Investors.

         8.       Indemnification. With respect to the registration of the
resale of the shares of Registerable Securities:

                  (a)      To the fullest extent permitted by law, the Company
         will indemnify and hold harmless the Selling Investors, and their
         respective officers, directors, equity holders, employees, agents,
         independent contractors and underwriters (as defined in the Securities
         Act) and each person, who controls the Investors or its underwriters
         within the meaning of the Securities Act or the Securities Exchange Act
         of 1934, as amended (the "Exchange Act") (all such persons indemnified
         under this subsection shall be referred to herein as the "Indemnified
         Parties"), against any losses, claims, damages, or liabilities (joint
         or several) to which they may become subject under the Securities Act,
         the Exchange Act or other federal or state law, insofar as such losses,
         claims, damages or liabilities (or actions in respect thereof) arise
         out of or are based upon any of the following statements, omissions or
         violations (collectively a "Violation") by the Company: (i) any untrue
         statement of a material fact contained in the Registration Statements,
         including any preliminary prospectus or final prospectus contained
         therein or any amendments or supplements thereto, (ii) the omission to
         state therein a material fact required to be stated therein, or
         necessary to make the statements therein not misleading, or (iii) any
         violation by the Company of the Securities Act, the Exchange Act, any
         state securities law or any rule or regulation promulgated under the
         Securities Act, the Exchange Act or any state securities law in
         connection with the offering covered by the Registration Statements;
         and the Company will reimburse the Indemnified Parties for any legal or
         other expenses reasonably incurred by them in connection with
         investigating or defending any such loss, claim, damage, liability or
         action; provided, however, that the indemnity agreement contained in
         this Section shall not apply to amounts paid in settlement of any such
         loss, claim, damage, liability or action to the extent that it arises
         out of or is based upon a Violation which occurs in reliance upon and
         in conformity with written information furnished to it expressly for
         use in connection with such registration by the Indemnified Parties.

                  (b)      To the fullest extent permitted by law, each Selling
         Investor will, severally and not jointly, indemnify and hold harmless
         the Company, each of its directors, each of its officers, each person,
         if any, who controls the Company within the meaning of the Securities
         Act, any underwriter and any other investor selling securities under
         the Registration Statements against any losses, claims, damages or
         liabilities (joint or several) to which the Company or any such
         director, officer, controlling person, underwriter or other such
         investor may become subject under the Securities Act, the Exchange Act
         or other federal or state law, insofar as such losses, claims, damages
         or liabilities (or actions in respect thereto) arise out of or are
         based upon any Violation, in each case to the extent (and only to the
         extent) that such Violation occurs in reliance upon and in conformity
         with written information furnished by such Selling Investor and

                                       6

<PAGE>

         directly incorporated into the Registration Statements; and such
         Investor will reimburse any legal or other expenses reasonably incurred
         by the Company or any such director, officer, controlling person,
         underwriter or other investor, in connection with investigating or
         defending any such loss, claim, damage, liability or action if it is
         judicially determined that there was such a Violation; provided
         however, that in no event shall any indemnity under this Section exceed
         the gross proceeds from the offering received by such Selling Investor
         unless the Violation is the result of fraud on the part of such Selling
         Investor.

                  (c)      The obligation of the Company and each Selling
         Investor under this Section shall survive the completion of any
         offering for resale of shares of the Registerable Securities in the
         Registration Statements, and otherwise.

         9.       Termination of Rights. The registration rights granted under
this Agreement shall terminate as to any Investor on the date on which all
shares held by such Investor can be resold without restrictions pursuant to Rule
144 promulgated by the Securities and Exchange Commission, as amended from time
to time.

         10.      Miscellaneous.

                  (a)      Except as otherwise provided herein, the provisions
         of this Agreement may not be amended, modified or supplemented, and
         waivers or consents to or departures from the provisions hereof may not
         be given or made unless the Company has obtained the written consent of
         the holders of at least 70% of the outstanding principal remaining on
         the Notes.

                  (b)      All notices and other communications provided for or
         permitted hereunder shall be made by hand delivery, telex, facsimile,
         overnight courier or registered first-class mail to the address set
         forth above for the Company and to the addresses set forth on Exhibit
         A, if to the Investors. All such notices and communications shall be
         deemed to have been duly given when delivered, if by hand, overnight
         courier or mail; when the appropriate answer back is received, if by
         telex; and when transmission is confirmed by the sending unit, if by
         facsimile.

                  (c)      This Agreement may be executed in any number of
         counterparts and by the parties hereto in separate counterparts, each
         of which when so executed shall be deemed to be an original and both of
         which taken together shall constitute one and the same agreement.

                  (d)      The headings to this Agreement are for convenience of
         reference only and shall not limit or otherwise affect the meaning
         hereof.

                  (e)      This Agreement shall be governed by and construed in
         accordance with the laws of the State of Minnesota without giving
         effect to the principles of choice or conflict of law thereof.

                  (f)      In the event that any one or more of the provisions
         contained herein, or the application thereof in any circumstances, is
         held invalid, illegal or unenforceable in any

                                       7

<PAGE>

         respect for any reason, the validity, legality and enforceability of
         such provision in every other respect and of the remaining provisions
         contained herein shall not be in any way impaired thereby, it being
         intended that all of the rights and privileges of the Investors and the
         Company shall be enforceable to the fullest extent permitted by law.

                  (g)      The remedies provided for in this Agreement shall be
         cumulative and in addition to all other remedies available, at law or
         in equity, and nothing herein shall limit any party's right to pursue
         actual damages for any failure to comply with the terms of this
         Agreement.

                                       8

<PAGE>

         IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above:

                                        DATAKEY, INC., a Minnesota corporation

                                        By:  /s/ Alan G. Shuler
                                            ------------------------------------
                                             Name: Alan G. Shuler
                                             Title:  Vice President and CFO

                                       9

<PAGE>

         IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above:

                                        INVESTORS:

                                        ________________________________________

                                        By:    _________________________________

                                        Name:  _________________________________

                                        Title: _________________________________

                                       10

<PAGE>

         IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above:

                                        INVESTORS:

                                        _________________________________
                                        Sign Name

                                        _________________________________
                                        Print Name

                                       11

<PAGE>

                                    EXHIBIT A

                        NAMES AND ADDRESSES OF INVESTORS

                                       12

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