SC TO-T

Securities and Exchange Commission

Washington, D.C. 20549

SCHEDULE TO

(Rule 14d-100)

Tender Offer Statement Under Section 14(d)(1) or 13(e)(1)

of The Securities Exchange Act of 1934

________________________

Datakey, Inc.

(Name of Subject Company (Issuer))

Snowflake Acquisition Corp. (Offeror)
A wholly-owned subsidiary of

SafeNet, Inc.
(Names of Filing Persons (identifying status as offeror, issuer or other person))

________________________

Common Stock, Par Value $0.05 per Share
Convertible Preferred Stock, Liquidation Value $2.50 per Share
(Title of Class of Securities)

________________________

Common Stock: 237909 10 6
Convertible Preferred Stock: none
(CUSIP Number of Class of Securities)

________________________

Anthony A. Caputo
Chairman, Chief Executive Officer & President
SafeNet, Inc.
4690 Millennium Drive
Belcamp, MD 21017
(410) 931-7500
(Name, address and telephone number of person authorized to
receive notices and communications on behalf of filing persons)

Copy To:
Elizabeth R. Hughes, Esq.
Matthew B. Swartz, Esq.
Venable LLP
8010 Towers Crescent Drive, Suite 300
Vienna, VA 22182
(703) 760-1600

Calculation of Filing Fee

Transaction Valuation*
$8,023,716 Amount of Filing Fee**
$1,017

* Estimated for purposes of calculating the amount of the filing fee only. The filing fee calculation assumes the purchase of 11,767,254 shares of Common Stock, par value $0.05 per share, and 150,000 shares of Convertible Preferred Stock, liquidation value $2.50 per share, of Datakey, Inc., at a price per share of $0.65 per share for the Common Stock and $2.50 per share for the Convertible Preferred Stock. Such number of shares represents all such shares outstanding as of September 8, 2004.

**The amount of the filing fee, calculated in accordance with Rule 0-11 of the Securities Exchange Act of 1934, as amended, and Fee Rate Advisory #4 for Fiscal Year 2004 issued by the Securities and Exchange Commission on October 31, 2003, equals 0.01267% of the transaction value.

o Check the box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the Form of Schedule and the date of its filing.
Amount Previously Paid : Not applicable
Form or Registration No.: Not applicable
Filing Party: Not applicable
Date Filed: Not applicable

o Check the box if the filing relates solely to preliminary communications made before the commencement of a tender offer.

Check the appropriate boxes below to designate any transactions to which the statement relates:

þ third party tender offer subject to Rule 14d-1

o issuer tender offer subject to Rule 13e-4

o going-private transaction subject to Rule 13e-3

o amendment to Schedule 13D under Rule 13d-2

Check the following box if the filing is a final amendment reporting the results of the tender offer: o

Table of Contents

Item 1.	Summary Term Sheet
Item 2.	Subject Company Information
Item 3.	Identity and Background of the Filing Person
Item 4.	Terms of the Transaction
Item 5.	Past Contacts, Transactions, Negotiations and Agreements
Item 6.	Purposes of the Transaction and Plans or Proposals
Item 7.	Source and Amount of Funds or Other Consideration
Item 8.	Interest in Securities of the Subject Company
Item 9.	Persons/Assets, Retained, Employed, Compensated or Used
Item 10.	Financial Statements
Item 11.	Additional Information
Item 12.	Exhibits
Item 13.	Information Required by Schedule 13E-3
Signature
Exhibit (a)(1)
Exhibit (a)(2)
Exhibit (a)(3)
Exhibit (a)(4)
Exhibit (a)(5)
Exhibit (a)(6)
Exhibit (a)(8)
Exhibit (a)(9)
Exhibit (d)(1)
Exhibit (d)(2)
Exhibit (d)(3)
Exhibit (d)(4)

     This Tender Offer Statement on Schedule TO (this “Statement”) relates to the offer by Snowflake Acquisition Corp., a Minnesota corporation (the “Purchaser”) and a wholly owned subsidiary of SafeNet, Inc., a Delaware Corporation (“SafeNet”), to purchase all of the issued and outstanding shares of Common Stock, par value $.05 per share, of Datakey, Inc., a Minnesota corporation (“Datakey”) (together with any associated preferred stock or other rights issued pursuant to the Rights Agreement, dated as of October 26, 2001, between Datakey and Wells Fargo Bank Minnesota, N.A., as amended from time to time, the “Common Stock”), and all issued and outstanding Convertible Preferred Stock, liquidation value $2.50 per share, of Datakey (the “Convertible Preferred Stock” and, together with the Common Stock, the “Shares” and each share thereof a “Share”), at a price of $0.65 per share of Common Stock and $2.50 per share of Convertible Preferred Stock, in each case, net to the seller in cash, without interest thereon (the “Offer Price”). The terms and conditions of the offer are described in the Offer to Purchase, dated September 21, 2004 (the “Offer to Purchase”), a copy of which is attached hereto as Exhibit (a)(1), and the related Letter of Transmittal and the instructions thereto, a copy of which is attached hereto as Exhibit (a)(2) (which, as they may be amended or supplemented from time to time, together constitute the “Offer”).

     Pursuant to General Instruction F to Schedule TO, the information contained in the Offer to Purchase, including all schedules and annexes thereto, is hereby expressly incorporated herein by reference in response to Items 1 through 11 of this Statement and is supplemented by the information specifically provided herein.

ITEM 1. SUMMARY TERM SHEET.

     The information set forth in the section of the Offer to Purchase entitled “Summary Term Sheet” is incorporated herein by reference.

ITEM 2. SUBJECT COMPANY INFORMATION.

(a)	The subject company and the issuer of the securities subject to the Offer is Datakey, Inc., a Minnesota corporation. Its principal executive office is located at 407 West Travelers Trail, Minneapolis, Minnesota 55337, and its telephone number is (952) 890-6850.
(b)	This Statement relates to the Offer by the Purchaser to purchase all issued and outstanding shares of Common Stock for $0.65 per share, and all issued and outstanding shares of Convertible Preferred Stock for $2.50 per share, in each case, net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in the Offer to Purchase and in the related Letter of Transmittal. The information set forth in the introduction to the Offer to Purchase (the “Introduction”) is incorporated herein by reference.
(c)	The information concerning the principal market, if any, in which the shares of Common Stock are traded and certain high and low sales prices for the Common Stock in the principal market in which it is traded are set forth in “Price Range of the Shares; Dividends on the Shares” in the Offer to Purchase and is incorporated herein by reference. The shares of Convertible Preferred Stock are not publicly traded.

ITEM 3. IDENTITY AND BACKGROUND OF THE FILING PERSON.

     (a), (b), (c) The information set forth in the section of the Offer to Purchase entitled “Certain Information Concerning SafeNet and the Purchaser” and Schedule I to the Offer to Purchase is incorporated herein by reference.

ITEM 4. TERMS OF THE TRANSACTION.

     (a)(1)(i) — (viii), (x), (xii) The information set forth in the Introduction and in the sections of the Offer to Purchase entitled “Terms of the Offer,” “Acceptance for Payment and Payment for Shares,” “Procedure for Tendering Shares,” “Withdrawal Rights,” “Certain United States Federal Income Tax Consequences,” and “Effect of the Offer on the Market for the Shares; Stock Listing; Exchange Act Registration; Margin Regulations” is incorporated herein by reference.

     (a)(1)(ix), (xi) Not applicable.

     (a)(2)(i) — (v), (vii) The information set forth in the Introduction and in the sections of the Offer to Purchase entitled “Effect of the Offer on the Market for the Shares; Stock Listing; Exchange Act Registration; Margin Regulations,” “Certain

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United States Federal Income Tax Consequences,” “Background of the Offer,” “Purpose of the Offer; Interest in Securities of Datakey; Other Matters” and “The Merger Agreement and Other Agreements” is incorporated herein by reference.

     (a)(2)(vi) Not applicable.

ITEM 5. PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS.

     (a), (b) The information set forth in the sections of the Offer to Purchase entitled “Certain Information Concerning SafeNet and the Purchaser,” “Background of the Offer,” “Purpose of the Offer; Interest in Securities of Datakey; Other Matters” and “The Merger Agreement and Other Agreements” is incorporated herein by reference.

ITEM 6. PURPOSES OF THE TRANSACTION AND PLANS OR PROPOSALS.

     (a), (c)(1), (3-7) The information set forth in the Introduction and in the sections of the Offer to Purchase entitled “Purpose of the Offer; Interest in Securities of Datakey; Other Matters” and “The Merger Agreement and Other Agreements” is incorporated herein by reference.

     (c)(2) None.

ITEM 7. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.

     (a), (b) The information set forth in the section of the Offer to Purchase entitled “Source and Amount of Funds” is incorporated herein by reference.

     (d) Not applicable.

ITEM 8. INTEREST IN SECURITIES OF THE SUBJECT COMPANY.

     The information set forth in the Introduction and in the sections of the Offer to Purchase entitled “Certain Information Concerning SafeNet and the Purchaser,” “Background of the Offer,” “Purpose of the Offer; Interest in Securities of Datakey; Other Matters,” and “The Merger Agreement and Other Agreements” is incorporated herein by reference.

ITEM 9. PERSONS/ASSETS, RETAINED, EMPLOYED, COMPENSATED OR USED.

     (a) The information set forth in the Introduction and in the sections of the Offer to Purchase entitled “Certain Information Concerning SafeNet and the Purchaser,” “Background of the Offer” and “The Merger Agreement and Other Agreements” is incorporated herein by reference.

ITEM 10. FINANCIAL STATEMENTS.

     Not applicable.

ITEM 11. ADDITIONAL INFORMATION.

     (a)(1) The information set forth in the sections of the Offer to Purchase entitled “Certain Information Concerning SafeNet and the Purchaser” and “The Merger Agreement and Other Agreements” is incorporated herein by reference.

     (a)(2), (3) The information set forth in the sections of the Offer to Purchase entitled “Certain Conditions of the Offer,” “Certain Legal Matters,” and “The Merger Agreement and Other Agreements” is incorporated herein by reference.

     (a)(4) The information set forth in the sections of the Offer to Purchase entitled “Effect of the Offer on the Market for the Shares; Stock Listing; Exchange Act Registration; Margin Regulations” and “Certain Legal Matters” is incorporated herein by reference.

     (a)(5) The information set forth in the section of the Offer to Purchase entitled “Certain Legal Matters” is incorporated herein by reference.

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     (b) The information set forth in the Offer to Purchase is incorporated herein by reference.

ITEM 12. EXHIBITS.

(a)(1)	Offer to Purchase dated September 21, 2004
(a)(2)	Form of Letter of Transmittal
(a)(3)	Form of Notice of Guaranteed Delivery
(a)(4)	Form of Letter to Brokers, Dealers, Banks, Trust Companies and Other Nominees
(a)(5)	Form of Letter to Clients for Use by Brokers, Dealers, Banks, Trust Companies and Other Nominees
(a)(6)	Form of Guidelines for Certificate of Taxpayer Identification Number on Substitute Form W-9
(a)(7)	Joint Press Release issued by SafeNet and Datakey on September 9, 2004 (incorporated by reference to the Schedule TO-C filed by SafeNet and the Purchaser with the Securities and Exchange Commission on September 10, 2004)
(a)(8)	Summary Advertisement published in the New York Times on September 21, 2004
(a)(9)	Press Release issued by SafeNet on September 21, 2004
(b)	Not Applicable
(d)(1)	Agreement and Plan of Merger dated as of September 9, 2004 by and among SafeNet, the Purchaser and Datakey
(d)(2)	Stockholders' Agreement, dated as of September 9, 2004, by and among SafeNet, the Purchaser and certain stockholders of Datakey identified therein
(d)(3)	Stock Option Agreement, dated as of September 9, 2004, by and among SafeNet, the Purchaser and Datakey
(d)(4)	Mutual Nondisclosure Agreement, dated August 3, 2004, by and between SafeNet and Datakey
(g)	Not Applicable
(h)	Not Applicable

ITEM 13. INFORMATION REQUIRED BY SCHEDULE 13E-3.

Not Applicable.

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SIGNATURE

     After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct.

SNOWFLAKE ACQUISITION CORP.
By:
	Name:	Ken Mueller
	Its: Chief Financial Officer

	SAFENET, INC.
	By:
		Name:	Ken Mueller
Dated: September 21, 2004		Its: Chief Financial Officer

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EX-99.A.1

Offer to Purchase for Cash

All Outstanding Shares of Common Stock

(Including the Associated Preferred Stock Purchase Rights)

at

$0.65 Net Per Share

and

All Outstanding Shares of Convertible Preferred Stock

at

$2.50 Net Per Share

of

Datakey, Inc.

by

Snowflake Acquisition Corp.

a wholly-owned subsidiary of

SafeNet, Inc.

THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT,

NEW YORK CITY TIME, ON TUESDAY, OCTOBER 19, 2004,

UNLESS THE OFFER IS EXTENDED.

      The Offer is being made pursuant to an Agreement and Plan of Merger, dated as of September 9, 2004 (the “Merger Agreement”), by and among SafeNet, Inc., a Delaware corporation (“SafeNet”), Snowflake Acquisition Corp., a Minnesota corporation and a wholly-owned subsidiary of SafeNet (the “Purchaser,” “we” or “us”), and Datakey, Inc., a Minnesota corporation (“Datakey”).

      The Board of Directors of Datakey has unanimously approved the Merger Agreement and the transactions contemplated by the Merger Agreement, including the Offer and the Merger (each as defined below), and it has also unanimously determined that the terms of the Offer, the Merger and the Merger Agreement are fair to and in the best interests of Datakey’s stockholders and has unanimously recommended that holders of all issued and outstanding shares of common stock, par value $.05 per share, of Datakey, including the associated preferred stock purchase or other rights issued pursuant to the Rights Agreement, dated as of October 26, 2001, between Datakey and Wells Fargo Bank Minnesota, N.A., as amended from time to time (together, the “Common Stock”), and all issued and outstanding shares of convertible preferred stock, liquidation value $2.50 per share, of Datakey (the “Preferred Stock,” and together with the Common Stock, the “Shares” and each share thereof a “Share”), tender their Shares.

      The Offer is conditioned upon, among other things, (1) there being validly tendered and not withdrawn prior to the expiration of the Offer (A) that number of shares of Common Stock which, together with any shares of Common Stock then owned by SafeNet or us (without giving effect to shares subject to purchase under the Purchaser Option (as defined below) or the Stockholders Agreement (as defined below)), represents greater than 90% of the shares of Common Stock outstanding and (B) and that number of shares of Convertible Preferred Stock which (without giving effect to shares subject to purchase under the Purchaser Option or the Stockholders Agreement) represents 100% of the Convertible Preferred Stock outstanding and (2) the satisfaction of certain other conditions as set forth in this Offer to Purchase. See Section 14 — “Certain Conditions of the Offer.”

      Questions and requests for assistance may be directed to the Information Agent at the addresses and telephone number set forth on the back cover of this Offer to Purchase. Requests for additional copies of this Offer to Purchase, the Letter of Transmittal, the Notice of Guaranteed Delivery and the Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 may be directed to the Information Agent. A shareholder also may contact brokers, dealers, commercial banks, trust companies or other nominees for assistance concerning the Offer.

September 21, 2004

IMPORTANT

      Any stockholder desiring to tender all or a portion of such stockholder’s Shares must:

      1. for Shares that are registered in such stockholder’s name and held as physical certificates:

•  complete and sign the Letter of Transmittal (or a manually signed facsimile) in accordance with the instructions in the Letter of Transmittal;

•  have such stockholder’s signature on the Letter of Transmittal guaranteed if required by Instruction 1 to the Letter of Transmittal; and

•  mail or deliver the Letter of Transmittal (or a manually signed facsimile), the certificates for such Shares and any other required documents to Wells Fargo Bank, N.A., the Depositary, at its address on the back of this Offer to Purchase.

      2. for Shares that are registered in such stockholder’s name and held in book-entry form:

•  complete and sign the Letter of Transmittal (or a manually signed facsimile) in accordance with the instructions in the Letter of Transmittal or prepare an Agent’s Message (as defined in Section 3 — “Procedure for Tendering Shares”);

•  if using the Letter of Transmittal, have such stockholder’s signature on the Letter of Transmittal guaranteed if required by Instruction 1 of the Letter of Transmittal;

•  deliver an Agent’s Message or the Letter of Transmittal (or a manually signed facsimile) and any other required documents to the Depositary; and

•  transfer the Shares through book-entry transfer into the Depositary’s account.

      3. for Shares that are registered in the name of a broker, dealer, bank, trust company or other nominee:

•  contact the broker, bank, trust company or other nominee and request that the broker, dealer, bank, trust company or other nominee tender the Shares to the Purchaser before the expiration of the Offer.

      The Letter of Transmittal, the certificates for the Shares and any other required documents must be received by the Depositary before the expiration of the Offer, unless the procedures for guaranteed delivery described in Section 3 — “Procedure for Tendering Shares” of this Offer to Purchase are followed.

TABLE OF CONTENTS

		Page
SUMMARY TERM SHEET			1
INTRODUCTION			6
THE TENDER OFFER			9
	Terms of the Offer		9
	Acceptance for Payment and Payment for Shares		11
	Procedure for Tendering Shares		12
	Withdrawal Rights		14
	Certain United States Federal Income Tax Consequences		15
	Price Range of the Shares; Dividends on the Shares		16
	Effect of the Offer on the Market for the Shares; Stock Listing; Exchange Act Registration; Margin Regulations		17
	Certain Information Concerning Datakey		17
	Certain Information Concerning SafeNet and the Purchaser		18
	Source and Amount of Funds		19
	Background of the Offer		19
	Purpose of the Offer; Interest in Securities of Datakey; Other Matters		19
	The Merger Agreement and Other Agreements		22
	Certain Conditions of the Offer		35
	Certain Legal Matters		37
	Fees and Expenses		38
	Miscellaneous		39
SCHEDULE I — Directors and Executive Officers of SafeNet and the Purchaser			40
ANNEX I — Minnesota Anti-Takeover Approval			43
ANNEX II — Minnesota Business Corporation Act Dissenters’ Rights Provisions			44

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SUMMARY TERM SHEET

Securities Sought:	All outstanding shares of Common Stock, including the associated preferred stock purchase or other rights, of Datakey, Inc. and All outstanding shares of Convertible Preferred Stock of Datakey, Inc.
Price Offered Per Share of Common Stock:	$0.65 net to you in cash, without interest (subject to applicable withholding taxes)
Price Offered Per Share of Convertible Preferred Stock:	$2.50 net to you, without interest (subject to applicable withholding taxes)
Scheduled Expiration of Offer:	12:00 midnight, New York City time, on October 19, 2004, unless extended
Purchaser:	Snowflake Acquisition Corp., a wholly-owned subsidiary of SafeNet, Inc.
Datakey Board Recommendation:	Datakey’s board of directors unanimously recommends that you accept the offer and tender your shares

      The following are some of the questions you, as a stockholder of Datakey, may have and our answers to those questions. We urge you to carefully read the remainder of this Offer to Purchase and the Letter of Transmittal because the information in this summary is not complete. Additional important information is contained in the remainder of this Offer to Purchase and the Letter of Transmittal.

Who is offering to buy my shares?

      Our name is Snowflake Acquisition Corp. We are a Minnesota corporation formed by SafeNet as its direct, wholly-owned subsidiary for the purpose of acquiring all of the outstanding capital stock of Datakey. See the “Introduction” to this Offer to Purchase and Section 9 — “Certain Information Concerning SafeNet and the Purchaser.”

What are the classes and amounts of securities being sought in the offer?

      We are offering to purchase all issued and outstanding shares of Common Stock of Datakey, including the associated preferred stock purchase or other rights, and all issued and outstanding shares of Convertible Preferred Stock of Datakey. See “Introduction” to this Offer to Purchase and Section 1 — “Terms of the Offer.”

How much are you offering to pay and in what form of payment?

      We are offering to pay $0.65, net to you in cash without interest thereon (and subject to applicable withholding taxes), for each share of Common Stock (including the associated preferred stock purchase or other rights) and $2.50, net to you in cash without interest thereon (and subject to applicable withholding taxes), for each share of Convertible Preferred Stock.

Will I have to pay any fees or commissions?

      If you are the record owner of your shares and you tender your shares to us in the offer, you will not have to pay brokerage fees or similar expenses. If you own your shares through a broker or other nominee, and your broker tenders

1

your shares on your behalf, your broker or nominee may charge you a fee for doing so. You should consult your broker or nominee to determine whether any charges will apply. See the “Introduction” to this Offer to Purchase.

Do you have the financial resources to make payment?

      Yes. To finance the purchase, SafeNet will provide us with the funds required to pay for the shares and related fees and expenses from its working capital. Our offer is not contingent on obtaining new sources of financing. See Section 10 — “Source and Amount of Funds.”

Is your financial condition relevant to my decision to tender in the offer?

      Our offer is not subject to any financing condition. Because the form of payment consists solely of cash and all of the funding that will be needed will come from SafeNet’s working capital, we do not think our financial condition is relevant to your decision as to whether to tender your shares into our offer. Pursuant to the merger agreement, SafeNet has agreed to provide us with funds necessary to consummate our offer and to pay for any outstanding capital stock of Datakey not owned by SafeNet or us pursuant to any merger of us into Datakey. See Section 10 — “Source and Amount of Funds.”

How long do I have to decide whether to tender in the offer?

      You will have at least until 12:00 midnight, New York City time, on Tuesday, October 19, 2004 to decide whether to tender your shares in the offer. If you cannot deliver everything that is required in order to make a valid tender by that time, you may be able to use a guaranteed delivery procedure, which is described later in this Offer to Purchase. See Section 1 — “Terms of the Offer” and Section 3 — “Procedure for Tendering Shares.”

Can the offer be extended and under what circumstances?

      Subject to the terms of the merger agreement, we may extend the offer with Datakey’s prior written consent, authorized by Datakey’s board of directors or a duly authorized committee of Datakey’s board of directors.

      Subject to the terms of the merger agreement, we may extend the offer without Datakey’s consent as follows:

•  if, at any scheduled expiration of the offer any of the conditions to our obligation to accept shares for payment has not been satisfied or waived, we may extend the offer for a time period reasonably necessary to permit the condition to be satisfied;

•  if required by any rule, regulation or interpretation of the United States Securities and Exchange Commission (the “SEC”) or the staff thereof applicable to the offer, we may extend (or re-extend) the offer as so required; and

•  if we increase the offer price, the offer may be extended as required by law in connection therewith.

      We may also elect to provide a “subsequent offering period” without Datakey’s consent, which would be an additional period of three to twenty business days beginning after the Offer expires. During this subsequent offering period, you would be permitted to tender, but not withdraw, your shares and receive, for each share of Common Stock, $0.65 per share, net to you in cash, without interest (subject to applicable withholding taxes), and, for each share of Convertible Preferred Stock, $2.50 per share, net to you in cash, without interest (subject to applicable withholding taxes). We do not currently intend to provide a subsequent offering period, although we reserve the right to do so. See Section 1 — “Terms of the Offer.”

How will I be notified if the offer is extended or a subsequent offering period is provided?

      If we extend the offer or provide for a subsequent offering period, we will inform Wells Fargo Bank, N.A., the depositary for the offer, and will make a public announcement of the extension, not later than 9:00 a.m., Eastern time, on the business day after the day on which the offer was scheduled to expire. See Section 1 — “Terms of the Offer.”

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What are the most significant conditions to the offer?

      We are not obligated to purchase any Shares (even though validly tendered) if:

•  a court or other governmental authority enters or threatens any judgment, order, action, or decree that would require any significant change in the terms of the acquisition of Datakey by the Purchaser and SafeNet or would in any way limit the operation of Datakey by Purchaser after the closing of the Merger;

•  any law or interpretation of existing law is proposed which would require any significant change in the terms of the acquisition of Datakey by the Purchaser and SafeNet or would in any way limit the operation of Datakey by SafeNet after the closing of the Merger;

•  any events occur that are reasonably likely to have a material adverse effect on the business of Datakey except for effects resulting from (i) general business or economic conditions, (ii) conditions generally affecting the industry in which Datakey competes, or (iii) the taking of any action contemplated by the Merger Agreement (a “Material Adverse Effect”);

•  there is (i) any suspension of, or limitation on prices for, trading in securities on the New York Stock Exchange or NASDAQ, (ii) a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (iii) any limitation on the extension of credit by banks in the United States, (iv) the commencement of a war, armed hostilities or any other international or national calamity involving the United States or (v) in the case of any of the foregoing existing at the time of the commencement of the offer, a material acceleration or worsening thereof (any of these, and any combination of them, shall be referred to herein as a “National Emergency”);

•  any person other than Purchaser or SafeNet, shall have acquired or entered into an agreement to acquire 50% or more of the then outstanding Shares, or (ii) the Board of Directors of Datakey shall have (A) withdrawn or modified, in a manner adverse to Purchaser or SafeNet, the Board’s recommendation of the Offer, the Merger or the Merger Agreement (including the actions taken by Datakey’s Board of Directors and Special Committee providing the Minnesota Anti-Takeover Approval, as described on Annex I hereto), (B) approved or recommended, or proposed publicly to approve or recommend, a Company Takeover Proposal (as defined in Section 13 — “The Merger Agreement and Other Agreements”), (C) caused Datakey to enter into any agreement relating to any Company Takeover Proposal, or (D) resolved to do any of the foregoing (a “Third Party Acquisition Event”);

•  the representations and warranties of Datakey set forth in the Merger Agreement shall not be true and correct in all material respects;

•  Datakey shall have failed to perform any obligation to be performed with by it under the Merger Agreement;

•  all material consents required from third parties (other than governmental authorities) in connection with the Merger or the Offer have not been obtained by Datakey and Purchaser has not waived this requirement;

•  the Merger Agreement shall have been terminated in accordance with its terms;

•  Purchaser and SafeNet shall have agreed that Purchaser shall terminate the Offer or postpone the acceptance for payment of or payment for Shares thereunder;

•  any one or more of the representations and warranties related to legal requirements applicable to the Offer and the Merger or the amendment of the Datakey’s Rights Plan to facilitate the Merger shall have been breached in any respect or are inaccurate in any respect; or

•  any non-competition or similar obligations of Datakey could reasonably be expected to prohibit or restrict SafeNet or any of SafeNet’s subsidiaries from developing, manufacturing, marketing or selling any of the current products of SafeNet or its subsidiaries or any products of SafeNet or its subsidiaries currently in design or development.

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      The offer is subject to a number of other conditions. We can waive all conditions to the offer without Datakey’s consent. See Section 14 — “Certain Conditions of the Offer.”

How do I tender my shares?

      To tender shares, you must deliver the certificates representing your shares, together with a completed Letter of Transmittal, to Wells Fargo Bank, N.A. the depositary for the Offer, not later than the time the tender offer expires. If your shares are held in street name, the shares can be tendered by your nominee through Wells Fargo Bank, N.A. If you cannot deliver a required item to the depositary by the expiration of the tender offer, you may be able to obtain extra time to do so by having a broker, a bank or other fiduciary which is a member of the Security Transfer Agent Medallion Signature Program guarantee that the missing items will be received by the depositary within three business days. However, the depositary must receive the missing items within that three trading day period or your shares will not be validly tendered. See Section 3 — “Procedure for Tendering Shares.”

How do I withdraw previously tendered shares?

      To withdraw shares, you must deliver a written notice of withdrawal, or a facsimile of one, with the required information to Wells Fargo Bank, N.A., the depositary for the offer, while you still have the right to withdraw the shares. See Section 4 — “Withdrawal Rights.”

Until what time may I withdraw shares that I have tendered?

      You may withdraw shares at any time until the offer has expired. In addition, if we have not agreed to accept your shares for payment by November 19, 2004, you may withdraw them at any time after such time until we accept them for payment. This right to withdraw will not apply to any subsequent offering period. See Section 1 — “Terms of the Offer” and Section 4 — “Withdrawal Rights.”

What does the board of directors of Datakey think of the offer?

      Datakey’s board of directors unanimously determined that $0.65, net to the seller in cash, for each share of Datakey Common Stock (including the associated preferred stock purchase or other rights) and $2.50 per share, net to the seller in cash, for each share of Datakey Convertible Preferred Stock is fair to, and in the best interests of, you and Datakey. Datakey’s board of directors unanimously recommends that you accept the offer and tender your shares to us in the offer. See “Introduction” to this Offer to Purchase and Section 11 — “Background of the Offer.”

Have any Datakey stockholders agreed to tender their shares?

      Yes. All of the directors of Datakey, two significant shareholders, Norwest Equity Partners V, Perkins Capital Management, Inc., and Datakey officers Christopher A. Schwartzbauer, Timothy L. Russell and David A. Feste have each agreed to tender all shares of Common Stock and Convertible Preferred Stock held by them into the offer pursuant to the terms of a Stockholders Agreement, dated September 9, 2004, which they entered into with SafeNet and us. The Shares subject to that agreement represent approximately 23% of the number of Shares outstanding. Notwithstanding the foregoing, SafeNet does not plan to compel the tender of more than 19.9% of the outstanding capital stock of Datakey. See the “Introduction” to this Offer to Purchase and Section 13 — “The Merger Agreement and Other Agreements.”

If 90% of the shares are tendered and accepted for payment, will Datakey continue as a public company?

      If we merge with and into Datakey, SafeNet will own all of the outstanding capital stock of Datakey and Datakey no longer will be publicly owned. Even if the merger does not take place, if we purchase all of the tendered shares, there may be so few remaining stockholders and publicly held shares of Datakey that there may not be a public trading market for Datakey stock and Datakey may cease making filings with the SEC or otherwise being required to comply with the SEC rules relating to publicly held companies. See Section 7 — “Effect of the Offer on the Market for the Shares; Stock Listing; Exchange Act Registration; Margin Regulations.”

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Will the tender offer be followed by a merger if all Datakey shares are not tendered in the offer?

      If we accept for payment and pay for shares of Datakey, we intend to merge Purchaser with and into Datakey subject to the terms and conditions of the merger agreement and upon the vote of Datakey’s stockholders, if such vote is required. Datakey will be the surviving corporation in the merger and will become a wholly-owned subsidiary of SafeNet. In the merger, Datakey stockholders who did not tender their shares will receive $0.65 per share (or any higher price per share which is paid in our offer) of Common Stock and $2.50 per share (or any higher price per share which is paid in our offer) of Convertible Preferred Stock, in cash, without any interest thereon (subject to applicable withholding taxes). If shares tendered in the offer constitute more than 90% of the outstanding shares of each of Datakey’s Common Stock and Convertible Preferred Stock, we will be able to effect the merger without convening a meeting of stockholders. Pursuant to the Stockholders Agreement described above, all of the shares of Convertible Preferred Stock are required to be tendered into the offer. There are no dissenters’ rights available in connection with our offer, but stockholders who have not sold their shares in the offer would have dissenters’ rights available in connection with the merger under Minnesota law if those rights are perfected. See the “Introduction” to this Offer to Purchase.

If I decide not to tender, how will the offer affect my shares?

      If you do not tender your shares in the offer and the merger described above takes place, your shares will be cancelled. Unless you exercise dissenters’ rights under Minnesota law (see Section 12 — “Purpose of the Offer; Interest in Securities of Datakey; Other Matters”), you will receive the same amount of cash per share that you would have received had you tendered your shares in the offer. Therefore, if the merger takes place, the only difference to you between tendering your shares and not tendering your shares is that you will be paid earlier if you tender your shares and that, in connection with the merger, you will have dissenters’ rights under Minnesota law if you take appropriate action to perfect these rights. If the merger does not take place after the offer closes, however, the number of stockholders and number of shares of Datakey stock which are still in the hands of the public may be so small that there no longer may be an active public trading market (or, possibly, any public trading market) for Datakey common stock. Also, as described above, Datakey may cease making filings with the SEC or otherwise being required to comply with the SEC rules relating to publicly held companies. See the “Introduction” to this Offer to Purchase and Section 7 — “Effect of the Offer on the Market for the Shares; Stock Listing; Exchange Act Registration; Margin Regulations.”

What is the market value of my shares as of a recent date?

      On September 9, 2004, the last trading day before we announced the tender offer and the possible subsequent merger, the last sale price of Datakey Common Stock reported on the OTC Bulletin Board was $0.46 per share. On September 17, 2004, the closest practicable date prior to commencement of the Offer, the last reported sales price of Datakey Common Stock on the OTC Bulletin Board was $0.64 per share. We advise you to obtain a recent quotation for shares of Datakey Common Stock in deciding whether to tender your shares. There is no established trading market in Datakey’s Convertible Preferred Stock. See Section 6 — “Price Range of the Shares; Dividends on the Shares.”

Who can I talk to if I have questions about the tender offer?

      You may call Innisfree M & A Incorporated, the information agent for the offer, at (212) 750-5833. See the back cover of this Offer to Purchase for additional information on how to contact our information agent.

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To the Holders of Common Stock and Convertible Preferred Stock of Datakey, Inc.:

INTRODUCTION

      Snowflake Acquisition Corp., a Minnesota corporation (the “Purchaser”) and a wholly-owned subsidiary of SafeNet, Inc., a Delaware corporation (“SafeNet”), hereby offers to purchase all issued and outstanding shares of Common Stock, par value $.05 per share, of Datakey, Inc., a Minnesota corporation (“Datakey”), including any associated preferred stock purchase or other rights issued pursuant to the Rights Agreement, dated as of October 26, 2001, between Datakey and Wells Fargo Bank Minnesota, N.A., as amended from time to time (together, the “Common Stock”), at a price of $0.65 per Share, net to the seller in cash, and all issued and outstanding shares of Convertible Preferred Stock, liquidation value $2.50 per share, of Datakey (the “Convertible Preferred Stock”) at a price of $2.50 per share, net to the seller in cash, each without interest thereon (and subject to applicable withholding taxes) upon the terms and subject to the conditions set forth in this Offer to Purchase and in the related Letter of Transmittal (which, together with any amendments or supplements thereto, collectively constitute the “Offer”). The Common Stock, together with the Preferred Stock, shall be referred to as the “Shares” and each share thereof a “Share.”

      The Purchaser is a corporation newly formed by SafeNet to effect the Offer and other transactions contemplated by the Merger Agreement (as defined below). SafeNet develops, markets, sells and supports hardware and software network security products and services that enable secure communications and data services. SafeNet’s products and services are used to create secure wide area networks and virtual private networks over the Internet to prevent security breaches that could result in unauthorized access to confidential data, invasion of privacy and financial loss. SafeNet’s security solutions allow its customers to lower the cost of deploying and managing secure, reliable wide area networks and enable the use of the Internet for secure business communications and transactions with customers, suppliers and employees. SafeNet’s common stock is traded on the Nasdaq National Market under the symbol “SFNT.” For additional information concerning SafeNet and the Purchaser, see Section 9 — “Certain Information Concerning SafeNet and the Purchaser.”

      The Offer is being made pursuant to an Agreement and Plan of Merger, dated September 9, 2004 (the “Merger Agreement”), by and among SafeNet, the Purchaser and Datakey. Pursuant to the Merger Agreement, as soon as practicable after the completion of the Offer and the satisfaction or waiver of all conditions to the Merger (as defined below), the Purchaser will be merged with and into Datakey with Datakey surviving the Merger as a wholly-owned subsidiary of SafeNet (the “Merger”). At the effective time of the Merger, each Share then outstanding (other than Shares owned by SafeNet, the Purchaser, or by stockholders, if any, who are entitled to and properly exercise dissenters’ rights under Minnesota law) will be converted into the right to receive $0.65 per share of Common Stock and $2.50 per share of Convertible Preferred Stock, net to the seller in cash, or any higher price per Share paid in the Offer (such price being referred to herein as the “Offer Price”), without interest thereon (and subject to applicable withholding taxes). Stockholders who exercise dissenters’ rights under Minnesota law will receive a judicially determined fair value for their Shares, which value could be more or less than the price per Share to be paid in the Merger. (See Section 12 — “Purpose of the Offer; Interest in Securities of Datakey; Other Matters.”)

      The Merger Agreement is more fully described in Section 13 — “The Merger Agreement and the Other Agreements.”

      Datakey has informed the Purchaser that, as of September 9, 2004, (1) 11,767,254 shares of Common Stock were issued and outstanding, (2) 150,000 shares of Convertible Preferred Stock were issued and outstanding, (3) no shares of Series B Preferred Stock were issued and outstanding, (4) no shares of undesignated capital stock were issued and outstanding, (5) 1,789,728 shares of Common Stock were reserved for issuance pursuant to outstanding Datakey options, (6) 6,593,823 shares of Common Stock were subject to issuance under Datakey warrants and (7) 83,876 shares of Common Stock were available for issuance in the purchase period ending December 31, 2004 under Datakey’s employee stock purchase plan. Based on the foregoing, and assuming that no Shares were issued after September 9, 2004, the Minimum Condition (as defined below) will be satisfied if at least 10,590,530 shares of Common Stock and all 150,000 shares of Convertible Preferred Stock are validly tendered and not withdrawn prior to the expiration of the Offer. If the Minimum Condition is satisfied and the Purchaser accepts for payment the Shares tendered pursuant to the Offer, the Purchaser will be able to elect a majority of the members of Datakey’s board of directors and to effect the Merger without

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the affirmative vote of any other stockholder of Datakey. See Section 12 — “Purpose of the Offer; Interest in Securities of Datakey;” “Other Matters” and Section 13 — “The Merger Agreement and Other Agreements.”

      SafeNet and Datakey have also entered into a Secured Loan Purchase Agreement dated September 9, 2004 (the “Loan Agreement”), pursuant to which SafeNet agreed to loan approximately $2.2 million to Datakey to repay the principal and interest due on outstanding convertible promissory notes of Datakey. In connection with the loan, Datakey issued a promissory note to SafeNet bearing interest at a rate of 10% per annum (the “Note”). The entire outstanding principal balance of the Note and all accrued and unpaid interest thereon is due and payable on September 9, 2005.

      The Note cannot be prepaid prior to December 31, 2004 and Datakey’s obligations under the note are secured by all of the assets of Datakey pursuant to a general security agreement and an intellectual property security agreement by and between Datakey and SafeNet. If under certain circumstances Datakey enters into certain acquisition transactions with a party or parties other than SafeNet or its affiliates prior to the Note being paid in full, then SafeNet is entitled to receive an additional $500,000 payment in addition to the principal and interest due under the note.

      The Loan Agreement is more fully described in Section 13 — “The Merger Agreement and Other Agreements.”

      Norwest Equity Partners V, Perkins Capital Management, Inc., Christopher A. Schwartzbauer, Timothy L. Russell and David A. Feste (together the “Agreed Investors”) and each of the directors of Datakey (together with the Agreed Investors, the “Stockholders” and each, a “Stockholder”) have agreed to tender the shares of Common Stock and Convertible Preferred Stock held by them into the Offer pursuant to the terms of a Stockholders Agreement, dated September 9, 2004, which they entered into with the Purchaser and SafeNet (the “Stockholders Agreement”). The Stockholders Agreement provides for the tender into the Offer of all Shares held by the Stockholders which represent approximately 23% of the issued and outstanding Shares, including any Shares acquired after the date of the Stockholders Agreement, whether upon the exercise of warrants or options to acquire Shares or otherwise, into the Offer. Notwithstanding the foregoing, SafeNet does not plan to compel the tender of more than 19.9% of the outstanding capital stock of Datakey. The Stockholders Agreement is more fully described in Section 13 — “The Merger Agreement and Other Agreements.”

      Tendering stockholders whose Shares are registered in their own names and who tender directly to the Depositary (as defined below) will not be obligated to pay brokerage fees or commissions or, except as set forth in Instruction 6 of the Letter of Transmittal, transfer taxes on the sale of Shares pursuant to the Offer. The Purchaser will pay all fees and expenses incurred in connection with the Offer by Wells Fargo Bank, N.A., which is acting as the Depositary (the “Depositary”), and Innisfree M & A, Incorporated, which is acting as the Information Agent (the “Information Agent”). See Section 16 — “Fees and Expenses.”

      The board of directors of Datakey unanimously determined that the consideration to be paid for each Share in the Offer and the Merger is fair to and in the best interests of Datakey and that the holders of the Shares and that the holders of the Shares should accept the Offer and tender their Shares to the Purchaser pursuant to the Offer. The board of directors of Datakey, by a unanimous vote, further determined that the Merger Agreement is advisable and that, following the Offer, Datakey’s stockholders should approve and adopt the Merger Agreement and each of the transactions contemplated thereby. The Offer is conditioned upon, among other things, (1) there being validly tendered and not withdrawn prior to the expiration of the Offer (A) that number of shares of Common Stock which, together with any shares of Common Stock then owned by SafeNet or the Purchaser (without giving effect to shares subject to the Purchaser Option or the Stockholders Agreement (each as described in Section 13 — “The Merger Agreement and Other Agreements”), represents greater than 90% of the shares of Common Stock outstanding and (B) that number of shares of Convertible Preferred Stock which, (without giving effect to Shares subject to the Purchaser Option or the Stockholders Agreement), represents 100% of the Convertible Preferred Stock outstanding (the “Minimum Condition”); (2) no court or other governmental authority entering or threatening any judgment, order, action, or decree that would require any significant change in the terms of the acquisition of Datakey by the Purchaser and SafeNet or would limit the operation of Datakey by Purchaser after the closing of the Merger; (3) no law or interpretation of existing law being proposed which would require any significant change in the terms of the acquisition of Datakey by the Purchaser and SafeNet or would in any way limit the operation of Datakey by SafeNet after the closing of the Merger; (4) there being no Material Adverse Effect; (5) there being no occurrence of a National Emergency; (6) there being no Third Party Acquisition Event; (6) the representations and warranties of Datakey in the Merger Agreement being true and correct in

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all material respects as of September 9, 2004 and being true and correct in all material respects as of the expiration of the Offer; (6) Datakey not having breached or failed to perform or to comply with any of its material agreements, obligations or covenants in the Merger Agreement; (7) all material consents required from third parties (other than governmental authorities) in connection with the Merger or the Offer having been obtained by Datakey; or (8) no non-competition or similar obligations of Datakey being reasonably expected to prohibit or restrict SafeNet or any of SafeNet’s subsidiaries from developing, manufacturing, marketing or selling any of the current products of SafeNet or its subsidiaries or any products of SafeNet or its subsidiaries currently in design or development.

      Manchester Financial Group, LLC (“Manchester”), Datakey’s financial advisor, has delivered to Datakey’s board of directors its written opinion, dated September 9, 2004, to the effect that, as of such date, based upon and subject to the considerations and assumptions set forth therein, the $0.65 per share of Common Stock in cash to be received by the holders of shares of Common Stock in the Offer (or, as the case may be, the Merger) is fair from a financial point of view to such holders. The full text of Manchester’s opinion is set forth as Exhibit (a)(3) to Datakey’s Solicitation/ Recommendation Statement on Schedule 14D-9 (the “Schedule 14D-9”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which is being mailed to stockholders of Datakey with this Offer to Purchase. Stockholders are urged to read each of the Schedule 14D-9 and such opinion carefully in its entirety.

      Consummation of the Merger is subject to a number of conditions, including the approval and adoption of the Merger Agreement by the affirmative vote of the holders of a majority of the outstanding Shares (including the Convertible Preferred Stock voting on an as-converted basis), if required by applicable law in order to consummate the Merger. Each share of Convertible Preferred Stock is entitled to one vote for every share of Common Stock into which it is convertible. See Section 15 — “Certain Legal Matters.” If the Purchaser acquires at least 90% of the outstanding shares of each of the Common Stock and Convertible Preferred Stock (the Minimum Condition requires the Purchaser to obtain greater than 90% of the Common Stock and 100% of the Convertible Preferred Stock), the Purchaser will be able to merge with and into Datakey pursuant to the “short-form” merger provisions of the Minnesota Business Corporation Act (“MBCA”) without prior notice to, or any action by, any other stockholder of Datakey (See Section 12 — “Purpose of the Offer; Interest in Securities of Datakey; Other Matters”). In order to facilitate a short-form merger following completion of the Offer, the Purchaser and SafeNet entered into a Stock Option Agreement, dated September 9, 2004, with Datakey, pursuant to which Datakey granted the Purchaser an irrevocable option (the “Purchaser Option”) to purchase for the Offer Price, shares of Common Stock and/or Convertible Preferred Stock, in such relative amounts as determined by the Purchaser in its discretion up to such number of shares which, upon exercise, would result in Purchaser owning in excess of ninety (90%) of the then-outstanding shares of Common Stock and Convertible Preferred Stock on as-converted basis (collectively, the “Optioned Shares”). The exercise of the Purchaser Option for Common Stock is conditioned upon the Purchaser and SafeNet owning in the aggregate, immediately following such exercise, at least 90% of the outstanding shares of Common Stock and Convertible Preferred Stock. The exercise of the Purchaser Option for Convertible Preferred Stock is conditioned upon the Purchaser and SafeNet owning in the aggregate, immediately following such exercise, at least 90% of the outstanding Shares of Convertible Preferred Stock. See Section 13 — “The Merger Agreement and Other Agreements.” SafeNet, the Purchaser and Datakey have agreed in the Merger Agreement to make reasonable best efforts to cause the Merger to become effective as soon as practicable after the acceptance and payment for Shares by the Purchaser pursuant to the Offer. See Section 13 — “The Merger Agreement and Other Agreements.”

      Certain U.S. federal tax consequences of the sale of Shares pursuant to the Offer and the conversion of Shares pursuant to the Merger are described in Section 5 — “Certain United States Federal Income Tax Consequences.”

      THIS OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT INFORMATION AND SHOULD BE READ IN THEIR ENTIRETY BEFORE ANY DECISION IS MADE WITH RESPECT TO THE OFFER.

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THE TENDER OFFER

1. Terms of the Offer

      Upon the terms and subject to the conditions of the Offer, the Purchaser will accept for payment and pay $0.65 per share of Common Stock and $2.50 per share of Convertible Preferred Stock, net to the seller in cash, without interest thereon (subject to applicable withholding taxes), for all Shares validly tendered prior to the Expiration Date and not theretofore withdrawn in accordance with Section 4 — “Withdrawal Rights.” The term “Expiration Date” means 12:00 midnight, New York City time, on Tuesday, October 19, 2004 (such date and time, the “Initial Expiration Date”), unless and until, in accordance with the terms of the Merger Agreement, the Purchaser extends the period of time for which the Offer is open, in which event the term “Expiration Date” means the latest time and date at which the Offer, as so extended by the Purchaser, expires.

      The Purchaser may, without the consent of Datakey, extend the Offer, and thereby delay acceptance for payment of, and the payment for, any Shares, by giving oral or written notice of such extension to the Depositary if:

•  any of the conditions to the Purchaser’s obligation to purchase Shares in the Offer are not satisfied or waived, in which case the extension must be limited to a time period reasonably necessary to permit such condition or conditions to be satisfied;

•  any rule, regulation or interpretation of the United States Securities and Exchange Commission (“SEC”) or the staff thereof applicable to the Offer requires that the Offer be extended;

•  Purchaser increases the Offer Price, in which case the Offer may be extended to the extent required by law in connection with such increase.

      Subject to the terms of the Merger Agreement, the Purchaser may also extend the Offer with Datakey’s prior written consent, authorized by Datakey’s board of directors or a duly authorized committee of Datakey’s board of directors.

      If at the Expiration Date all of the conditions to the Offer have been satisfied or waived, the Purchaser may elect to provide a subsequent offering period of three to twenty business days (a “Subsequent Offering Period”) in accordance with Rule 14d-11 under the Exchange Act. A Subsequent Offering Period would be an additional period of time following the expiration of the Offer during which stockholders may tender Shares not tendered in the Offer and receive the same per share amount paid in the Offer. During a Subsequent Offering Period, the Purchaser will immediately accept and promptly pay for Shares as they are tendered and tendering stockholders will not have withdrawal rights. The Purchaser cannot elect to provide a Subsequent Offering Period unless the Purchaser announces the results of the Offer no later than 9:00 a.m. New York City time, on the next business day after the Expiration Date and immediately begins the Subsequent Offering Period. The Purchaser does not currently intend to provide a Subsequent Offering Period, although it reserves the right to do so in its own discretion.

      Under no circumstances will interest be paid on the Offer Price for tendered Shares, regardless of any extension of or amendment to the Offer or any delay in paying for such Shares.

      The Purchaser may, at any time and from time to time prior to the expiration of the Offer, waive any condition to the Offer, or modify the terms of the Offer, by giving oral or written notice of such waiver or modification to the Depositary, except that, without the consent of Datakey, the Purchaser may not:

•  reduce the price per Share to be paid in the Offer;

•  change the form of consideration payable in the Offer;

•  decrease the number of Shares sought in the Offer;

•  impose additional conditions to the Offer or amend any existing conditions of the Offer in any manner adverse to the holders of the Shares; or

•  extend the Offer other than described in this Section 1 of this Offer to Purchase.

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      The Offer is conditioned upon, among other things, the satisfaction of the Minimum Condition and the other conditions set forth in Section 14 — “Certain Conditions of the Offer.” If by 12:00 midnight, New York City time, on Tuesday, October 19, 2004 (or any date or time then set as the Expiration Date) any or all of the conditions to the Offer have not been satisfied or waived (where permitted), the Purchaser, subject to the terms of the Merger Agreement and the applicable rules and regulations of the SEC, may:

•  terminate the Offer and not accept for payment or pay for any Shares and return all tendered Shares to tendering stockholders;

•  waive any of the unsatisfied conditions, to the extent permitted by applicable law, and subject to complying with applicable rules and regulations of the SEC and its staff applicable to the Offer, accept for payment and pay for all Shares validly tendered and not withdrawn prior to the Expiration Date;

•  except as set forth above, extend the Offer and, subject to the right of stockholders to withdraw Shares until the Expiration Date, retain the Shares that have been tendered during the period or periods for which the Offer is open or extended; or

•  except as set forth above, amend the Offer.

      If the Purchaser extends the Offer, or if the Purchaser (whether before or after its acceptance for payment of Shares) is delayed in its purchase of or payment for Shares or is unable to pay for Shares pursuant to the Offer for any reason, then, without prejudice to the Purchaser’s rights under the Offer, the Depositary may retain tendered Shares on behalf of the Purchaser, and such Shares may not be withdrawn except to the extent tendering stockholders are entitled to withdrawal rights as described in Section 4 — “Withdrawal Rights.” However, the ability of the Purchaser to delay the payment for Shares which the Purchaser has accepted for payment is limited by Rule 14e-1(c) under the Exchange Act, which requires that a bidder pay the consideration offered or return the securities deposited by or on behalf of holders of securities promptly after the termination or withdrawal of the Offer. Any extension, amendment or termination of the Offer will be followed as promptly as practicable by public announcement thereof, the announcement in the case of an extension to be issued no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date subject to applicable law (including Rules 14d-4(d) and 14d-6(c) under the Exchange Act, which require that material changes be promptly disseminated to holders of the Shares). Without limiting the obligation of the Purchaser under such Rule or the manner in which the Purchaser may choose to make any public announcement, the Purchaser currently intends to make announcements by issuing a press release.

      If the Purchaser makes a material change in the terms of the Offer or the information concerning the Offer or waives a material condition of the Offer, the Purchaser will disseminate additional tender offer materials and extend the Offer to the extent required by Rules 14d-4(c), 14d-6(d) and 14e-1 under the Exchange Act. The minimum period during which the Offer must remain open following material changes in the terms of the Offer or information concerning the Offer, other than a change in price or a change in percentage of securities sought, will depend upon the facts and circumstances then existing, including the relative materiality of the changed terms or information. In the SEC’s view, an offer should remain open for a minimum of five business days from the date a material change is first published, sent or given to security holders and that, if material changes are made, a minimum of ten business days may be required to allow adequate dissemination and investor response. The requirement to extend an offer will not apply to the extent that the number of business days remaining between the occurrence of the change and the then-scheduled expiration date equals or exceeds the minimum extension period that would be required because of such amendment. As used in this Offer to Purchase, “business day” has the meaning set forth in Rule 14d-1 under the Exchange Act.

      As described above, the Purchaser may, subject to certain conditions, elect to provide a Subsequent Offering Period. In a public release, the SEC has expressed the view that the inclusion of a Subsequent Offering Period would constitute a material change to the terms of the Offer requiring the Purchaser to disseminate new information to stockholders in a manner reasonably calculated to inform them of such change sufficiently in advance of the Expiration Date (generally five business days). The SEC, however, has recently stated that such advance notice may not be required under certain circumstances. In the event the Purchaser elects to include a Subsequent Offering Period, it will notify stockholders of Datakey consistent with the requirements of the SEC.

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      Datakey has agreed to provide the Purchaser with Datakey’s stockholder lists and security position listings for the purpose of disseminating the Offer to holders of Shares. This Offer to Purchase and the related Letter of Transmittal will be mailed by the Purchaser to record holders of Shares and will be furnished by the Purchaser to brokers, dealers, banks and similar persons whose names, or the names of whose nominees, appear on the stockholder lists or, if applicable, who are listed as participants in a clearing agency’s security position listing, for subsequent transmittal to beneficial owners of Shares.

2. Acceptance for Payment and Payment for Shares

      Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of any such extension or amendment) and provided that the Offer has not been terminated as described in Section 1 of this Offer to Purchase, the Purchaser will accept for payment and will pay for all Shares validly tendered prior to the Expiration Date and not properly withdrawn in accordance with Section 4 — “Withdrawal Rights” promptly after the Expiration Date. If the Purchaser includes a Subsequent Offering Period, the Purchaser will immediately accept and promptly pay for Shares as they are tendered during the Subsequent Offering Period. If the Purchaser is delayed in its acceptance for payment of or payment for Shares or is unable to accept for payment or pay for Shares pursuant to the Offer, then, without prejudice to the Purchaser’s rights under the Offer (but subject to compliance with Rule 14e-1(c) under the Exchange Act) the Depositary may, nevertheless, on behalf of the Purchaser, retain tendered Shares, and such Shares may not be withdrawn except to the extent tendering stockholders are entitled to do so as described in Section 4 — “Withdrawal Rights.” See Section 15 — “Certain Legal Matters.”

      In all cases, payment for Shares accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of:

•  the certificates for such Shares, together with a Letter of Transmittal (or a manually signed facsimile thereof), properly completed and duly executed, with any required signature guarantees; or

•  in the case of a transfer effected pursuant to the book-entry transfer procedures described in Section 3 — “Procedure for Tendering Shares,” a Book-Entry Confirmation and either a Letter of Transmittal (or a manually signed facsimile thereof), properly completed and duly executed, with any required signature guarantees, or an Agent’s Message as described in Section 3 — “Procedure for Tendering Shares;” and

•  any other required documents.

      For purposes of the Offer, the Purchaser will be deemed to have accepted for payment, and thereby purchased, Shares properly tendered to the Purchaser and not withdrawn as, if and when the Purchaser gives notice to the Depositary of the Purchaser’s acceptance for payment of such Shares pursuant to the Offer. Upon the terms and subject to the conditions of the Offer, payment for Shares accepted for payment pursuant to the Offer will be made by deposit of the Offer Price therefor with the Depositary, which will act as agent for tendering stockholders for the purpose of receiving payment from the Purchaser and transmitting payment to tendering stockholders. Under no circumstances will interest be paid on the Offer Price to be paid by the Purchaser for the Shares, regardless of any extension of the Offer or any delay in making such payment.

      If any tendered Shares are not accepted for payment pursuant to the terms and conditions the Offer for any reason, certificates representing such unpurchased Shares will be returned, without expense to the tendering stockholder (or, in the case of Shares delivered by book-entry transfer of such Shares into the Depositary’s account at the Book-Entry Transfer Facility pursuant to the procedures set forth in Section 3 — “Procedure for Tendering Shares,” the Depositary will notify the Book-Entry Transfer Facility of the Purchaser’s decision not to accept the Shares and such Shares will be credited to an account maintained at the Book-Entry Transfer Facility), as promptly as practicable after the expiration or termination of the Offer.

      The Purchaser reserves the right to transfer or assign, in whole or in part, to SafeNet or to any affiliate of SafeNet, the right to purchase Shares tendered pursuant to the Offer, but any such transfer or assignment will not relieve the Purchaser of its obligations under the Offer and will in no way prejudice the rights of tendering stockholders to receive payment for Shares validly tendered and accepted for payment pursuant to the Offer.

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3. Procedure for Tendering Shares

      Valid Tender. A stockholder must follow one of the following procedures to validly tender Shares pursuant to the Offer:

•  for Shares held as physical certificates (“Share Certificates”), the certificates for tendered Shares, a Letter of Transmittal (or a manually signed facsimile thereof), properly completed and duly executed, with any required signature guarantees and any other documents required by the Letter of Transmittal must be received by the Depositary at its address set forth on the back cover of this Offer to Purchase prior to the Expiration Date (unless such tender is made during a Subsequent Offering Period, if one was provided);

•  for Shares held in book-entry form, either a Letter of Transmittal (or a manually signed facsimile thereof), properly completed and duly executed, with any required signature guarantees, or an Agent’s Message (as defined below), and any other required documents, must be received by the Depositary at its address set forth on the back cover of this Offer to Purchase, and such Shares must be delivered pursuant to the book-entry transfer procedures described below under “Book-Entry Transfer” and a Book-Entry Confirmation (as defined below) must be received by the Depositary, in each case prior to the Expiration Date (unless such tender is made during a Subsequent Offering Period, if one was provided); or

•  the tendering stockholder must comply with the guaranteed delivery procedures described below under “Guaranteed Delivery” prior to the Expiration Date.

      The valid tender of Shares pursuant to one of the procedures described above will constitute a binding agreement between the tendering stockholder and the Purchaser upon the terms and subject to the conditions of the Offer.

      Book-Entry Transfer. The Depositary will establish an account or accounts with respect to the Shares at The Depository Trust Company (the “Book-Entry Transfer Facility”) for purposes of the Offer within two business days after the date of this Offer to Purchase. Any financial institution that is a participant in the Book-Entry Transfer Facility’s systems may make book-entry delivery of Shares by causing the Book-Entry Transfer Facility to transfer such Shares into the Depositary’s account in accordance with the Book-Entry Transfer Facility’s procedure for such transfer. However, although delivery of Shares may be effected through book-entry transfer into the Depositary’s account at the Book-Entry Transfer Facility, the properly completed and duly executed Letter of Transmittal (or a manually signed facsimile thereof), with any required signature guarantees, or an Agent’s Message in lieu of the Letter of Transmittal, and any other required documents must, in any case, be received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase prior to the Expiration Date (except with respect to a Subsequent Offering Period, if one is provided), or the tendering stockholder must comply with the guaranteed delivery procedures described below for a valid tender of Shares by book-entry. The confirmation of a book-entry transfer of Shares into a Depositary’s account at the Book-Entry Transfer Facility as described above is referred to in this Offer to Purchase as a “Book-Entry Confirmation.”

      The term “Agent’s Message” means a message, transmitted through electronic means by a Book-Entry Transfer Facility, in accordance with the normal procedures of the Book-Entry Transfer Facility and the Depositary, to and received by the Depositary and forming a part of a Book-Entry Confirmation, which states that the Book-Entry Transfer Facility has received an express acknowledgment from the participant in the Book-Entry Transfer Facility tendering the Shares which are the subject of Book-Entry Confirmation that such participant has received and agrees to be bound by the terms of the Letter of Transmittal and that the Purchaser may enforce such agreement against the participant. The term “Agent’s Message” shall also include any hard copy printout evidencing such message generated by a computer terminal maintained at the Depositary’s office. For Shares to be validly tendered during any Subsequent Offering Period, the tendering stockholder must comply with the foregoing procedures except that the required documents and certificates must be received during the Subsequent Offering Period.

      The method of delivery of Shares, the Letter of Transmittal and all other required documents, including delivery through the Book-Entry Transfer Facility, is at the election and risk of the tendering stockholder. Delivery of documents to the Book-Entry Transfer Facility in accordance with the Book-Entry Transfer Facility’s procedures does not constitute delivery to the Depositary. Shares will be deemed delivered only when actually received by the Depositary (including, in the case of a Book-Entry Transfer, by Book-Entry Confirmation). If delivery is by mail, registered mail

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with return receipt requested, properly insured, is recommended. In all cases, sufficient time should be allowed to ensure timely delivery.

      Signature Guarantees. No signature guarantee is required on the Letter of Transmittal (1) if the Letter of Transmittal is signed by the registered holder(s) (which term, for purposes of this Section 3 includes any participant in the Book-Entry Transfer Facility’s systems whose name appears on a security position listing as the owner of the Shares) of Shares tendered therewith and such registered holder has not completed either the box entitled “Special Delivery Instructions” or the box entitled “Special Payment Instructions” on the Letter of Transmittal or (2) if such Shares are tendered for the account of a financial institution (including most commercial banks, savings and loan associations and brokerage houses) that is a participant in the Security Transfer Agent Medallion Signature Program, (each, an “Eligible Institution” and, collectively, “Eligible Institutions”). In all other cases, all signatures on Letters of Transmittal must be guaranteed by an Eligible Institution. See Instructions 1 and 5 to the Letter of Transmittal. If a Share certificate is registered in the name of a person other than the signer of the Letter of Transmittal, or if payment is to be made, or a Share certificate not tendered or not accepted for payment are to be returned, to a person other than the registered holder of the certificates surrendered, then the tendered Share certificate must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name or names of the registered holders or owners appear on the Share certificate, with the signature(s) on the certificates or stock powers guaranteed by an Eligible Institution as provided in the Letter of Transmittal. See Instructions 1 and 5 to the Letter of Transmittal.

      Guaranteed Delivery. If a stockholder desires to tender Shares pursuant to the Offer and the Share certificates are not immediately available or the procedures for book-entry transfer cannot be completed on a timely basis or time will not permit all required documents to reach the Depositary prior to the Expiration Date, such stockholder’s tender may be effected if all the following conditions are met:

•  such tender is made by or through an Eligible Institution;

•  a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form provided by the Purchaser, is received by the Depositary, as provided below, prior to the Expiration Date; and

•  the Share certificates (or a Book-Entry Confirmation), in proper form for transfer, together with a properly completed and duly executed Letter of Transmittal (or a manually signed facsimile thereof), with any required signature guarantees (or, in the case of a book-entry transfer, an Agent’s Message in lieu of a Letter of Transmittal), and any other documents required by the Letter of Transmittal are received by the Depositary within three trading days after the date of execution of such Notice of Guaranteed Delivery. A “trading day” is any day on which the National Association of Security Dealers Automated Quotation System, Inc. (the “NASDAQ”) is open for business.

      The Notice of Guaranteed Delivery may be delivered by hand or transmitted by telegram, facsimile transmission or mail (or if sent by a Book-Entry Transfer Facility, a message transmitted through electronic means in accordance with the usual procedures of the Book-Entry Transfer Facility and the Depositary; provided, however, that if such notice is sent by a Book-Entry Transfer Facility through electronic means, it must state that the Book-Entry Transfer Facility has received an express acknowledgment from the participant on whose behalf such notice is given that such participant has received and agrees to become bound by the form of such notice) to the Depositary and must include a guarantee by an Eligible Institution in the form set forth in such Notice of Guaranteed Delivery made available by the Purchaser.

      Other Requirements. Notwithstanding any other provision hereof, payment for Shares accepted for payment pursuant to the Offer will in all cases be made only after timely receipt by the Depositary of (1) Share certificates (or a timely Book-Entry Confirmation), (2) a properly completed and duly executed Letter of Transmittal (or a facsimile thereof), with any required signature guarantees (or, in the case of a book-entry transfer, an Agent’s Message in lieu of a Letter of Transmittal) and (3) any other documents required by the Letter of Transmittal. Accordingly, tendering stockholders may be paid at different times depending upon when Share certificates or Book-Entry Confirmations with respect to Shares are actually received by the Depositary. Under no circumstances will interest be paid on the Offer Price to be paid by the Purchaser for the Shares, regardless of any extension of the Offer or any delay in making such payment.

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      Appointment as Proxy. By executing the Letter of Transmittal (or a facsimile thereof) (or, in the case of a book-entry transfer, an Agent’s Message in lieu of a Letter of Transmittal), the tendering stockholder will irrevocably appoint designees of the Purchaser as such stockholder’s agents and attorneys-in-fact and proxies in the manner set forth in the Letter of Transmittal, each with full power of substitution, to the full extent of such stockholder’s rights with respect to the Shares tendered by such stockholder and accepted for payment by the Purchaser and with respect to any and all other Shares or other securities or rights issued or issuable in respect of such Shares on or after the date of this Offer to Purchase. All such proxies will be considered coupled with an interest in the tendered Shares. Such appointment will be effective when, and only to the extent that, the Purchaser accepts for payment Shares tendered by such stockholder as provided herein. Upon the effectiveness of such appointment, all prior powers of attorney, proxies and consents given by such stockholder with respect to such Shares or other securities or rights will, without further action, be revoked and no subsequent powers of attorney, proxies, consents or revocations may be given by such stockholder (and, if given, will not be deemed effective). The designees of the Purchaser will thereby be empowered to exercise all voting and other rights with respect to such Shares and other securities or rights, including, without limitation, in respect of any regular, special or adjourned meeting of Datakey’s stockholders, actions by written consent in lieu of any such meeting or otherwise, as they in their sole discretion deem proper. The Purchaser reserves the right to require that, in order for Shares to be deemed validly tendered, immediately upon the Purchaser’s acceptance for payment of such Shares, the Purchaser must be able to exercise full voting, consent and other rights with respect to such Shares and other related securities or rights, including voting at any meeting of stockholders. The Offer does not constitute a solicitation of proxies, absent a purchase of Shares for any meeting of Datakey stockholders.

      Determination of Validity. All questions as to the validity, form, eligibility (including time of receipt) and acceptance of any tender of Shares, including questions as to the proper completion or execution of any Letter of Transmittal (or facsimile thereof), Notice of Guaranteed Delivery or other required documents and as to the proper form for transfer of any certificate of Shares, shall be resolved by the Purchaser, in its sole discretion, whose determination shall be final and binding. The Purchaser shall have the absolute right to determine whether to reject any or all tenders not in proper or complete form or to waive any irregularities or conditions, and the Purchaser’s interpretation of the Offer to Purchase, the Letter of Transmittal and the instructions thereto and the Notice of Guaranteed Delivery (including without limitation the determination of whether any tender is complete and proper) shall be final and binding. No tender of Shares will be deemed to have been validly made until all defects or irregularities relating thereto have been cured or waived. None of the Purchaser, SafeNet, the Depositary, the Information Agent, Datakey or any other person will be under any duty to give notification of any defects or irregularities in tenders or incur any liability for failure to give any such notification.

      Backup Withholding. In order to avoid “backup withholding” of U.S. federal income tax on payments of cash pursuant to the Offer, a stockholder surrendering Shares in the Offer must, unless an exemption applies, provide the Depositary with such stockholder’s correct taxpayer identification number (“TIN”) on a Substitute Form W-9, certify under penalties of perjury that such TIN is correct and provide certain other certifications. If a stockholder does not provide such stockholder’s correct TIN or fails to provide the required certifications, the Internal Revenue Service (the “IRS”) may impose a penalty on such stockholder and payment of cash to such stockholder pursuant to the Offer may be subject to backup withholding of 28%. All stockholders surrendering Shares pursuant to the Offer should complete and sign the main signature form and the Substitute Form W-9 included as part of the Letter of Transmittal to provide the information and certification necessary to avoid backup withholding (unless an applicable exemption exists and is proved in a manner satisfactory to the Purchaser and the Depositary). Certain stockholders (including, among others, all corporations) are not subject to backup withholding. Noncorporate foreign stockholders should complete and sign the main signature form included as part of the Letter of Transmittal and an appropriate Form W-8 (instead of a Form W-9) a copy of which may be obtained from the Depositary, in order to avoid backup withholding. See Instruction 8 to the Letter of Transmittal.

4. Withdrawal Rights

      Except as provided in this Section 4, or as provided by applicable laws, tenders of Shares are irrevocable.

      Shares tendered pursuant to the Offer may be withdrawn pursuant to the procedures set forth below at any time prior to the Expiration Date and, unless theretofore accepted for payment and paid for by the Purchaser pursuant to the Offer, may also be withdrawn at any time after November 19, 2004.

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      For a withdrawal to be effective, a written, telegraphic or facsimile transmission notice of withdrawal must be timely received by the Depositary at its address set forth on the back cover of this Offer to Purchase and must specify the name of the person who tendered the Shares to be withdrawn, the number and type of Shares to be withdrawn and the name of the registered holder of the Shares to be withdrawn, if different from the name of the person who tendered the Shares. If certificates representing Shares have been delivered or otherwise identified to the Depositary, then, prior to the physical release of such certificates, the tendering stockholder must also submit the serial numbers shown on the particular certificates evidencing such Shares and the signature on the notice of withdrawal must be guaranteed by an Eligible Institution. If Shares have been tendered pursuant to the procedures for book-entry transfer as set forth in Section 3 — “Procedure for Tendering Shares,” any notice of withdrawal must also specify the name and number of the account at the appropriate Book-Entry Transfer Facility to be credited with the withdrawn Shares and otherwise comply with such Book-Entry Transfer Facility’s procedures. Withdrawals of tenders of Shares may not be rescinded, and any Shares properly withdrawn will no longer be considered properly tendered for purposes of the Offer. However, withdrawn Shares may be retendered by again following one of the procedures described in Section 3 — “Procedure for Tendering Shares” any time prior to the Expiration Date.

      No withdrawal rights will apply to Shares tendered into a Subsequent Offering Period under Rule 14d-11 of the Exchange Act.

      All questions as to the form and validity (including time of receipt) of notices of withdrawal will be determined by the Purchaser, in its sole discretion, which determination will be final and binding. None of the Purchaser, SafeNet, the Depositary, the Information Agent or any other person will be under any duty to give notification of any defects or irregularities in any notice of withdrawal or incur any liability for failure to give any such notification.

      The method for delivery of any documents related to a withdrawal is at the risk of the withdrawing stockholder. Any documents related to a withdrawal will be deemed delivered only when actually received by the Depositary. If delivery is by mail, registered mail with return receipt requested, properly insured, is recommended. In all cases, sufficient time should be allowed to ensure timely delivery.

5. Certain United States Federal Income Tax Consequences

      The following is a summary of certain United States federal income tax consequences of the Offer and the Merger to holders of Shares whose Shares are, respectively, sold pursuant to the Offer or converted into the right to receive cash in the Merger. This discussion is for general information purposes only and does not address all aspects of United States federal income taxation that may be relevant to particular holders of Shares in light of their specific investment or tax circumstances. The tax consequences to any particular stockholder may differ depending on that stockholder’s own circumstances and tax position. The discussion is based on current provisions of the Internal Revenue Code of 1986, as amended (the “Code”), Treasury regulations issued thereunder, and administrative and judicial interpretations thereof, all as in effect as of the date hereof and all of which are subject to change, possibly with retroactive effect. This discussion applies only to holders who hold Shares as “capital assets” within the meaning of section 1221 of the Code, and does not apply to holders who acquired their Shares pursuant to the exercise of employee stock options or otherwise as compensation. In addition, this discussion does not apply to certain types of holders subject to special tax rules including, but not limited to, non-U.S. persons, insurance companies, tax-exempt organizations, financial institutions, brokers or dealers, holders who perfect their Dissenters’ rights, if any, or persons who held their Shares as a part of a straddle, hedge, conversion, or other integrated investment. The tax consequences of the Offer and the Merger to holders who hold their shares through a partnership or other pass-through entity generally will depend upon such holder’s status for United States federal income tax purposes.

      Each holder is urged to consult such holder’s tax advisor regarding the specific United States federal, state, local and foreign income and other tax consequences of the Offer and the Merger in light of such holder’s specific tax situation.

      The receipt of cash for Shares pursuant to the Offer or the Merger will be a taxable transaction for United States federal income tax purposes and may also be a taxable transaction under state, local, or foreign tax laws. In general, a holder who receives cash in exchange for Shares pursuant to the Offer or the Merger will recognize gain or loss for United States federal income tax purposes equal to the difference, if any, between the amount of cash received and the holder’s tax basis in the Shares exchanged. Gain or loss will be determined separately for each block of Shares (i.e., Shares

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acquired at the same time and price) exchanged pursuant to the Offer or the Merger. Such gain or loss will generally be capital gain or loss and generally will be long-term capital gain or loss if such Shares have been held for more than one year at the time of disposition. Tendering noncorporate stockholders generally will be eligible for a maximum U.S. federal income tax rate of 15% of any long-term gains. Any claim of a deduction in respect of a capital loss is subject to limitations.

      A stockholder (other than certain exempt stockholders including, among others, all corporations and certain foreign individuals) that tenders Shares may be subject to backup withholding at a rate equal to the fourth lowest rate applicable to ordinary income of unmarried individuals (under current law, the backup withholding rate is 28%) unless the stockholder provides its TIN and certifies under penalties of perjury that such TIN is correct (or properly certifies that it is awaiting a TIN) and certifies as to no loss of exemption from backup withholding and otherwise complies with the applicable requirements of the backup withholding rules. Backup withholding is not an additional tax. Rather, the amount of any backup withholding can be credited against the U.S. federal income tax liability of the person subject to the backup withholding, provided that the required information is given to the IRS. If backup withholding results in an overpayment of tax, a stockholder can claim a refund by filing a U.S. federal income tax return. A stockholder that does not furnish a required TIN or that does not otherwise establish a basis for an exemption from backup withholding may be subject to a penalty imposed by the IRS. See “Backup Withholding” under Section 3 — “Procedure for Tendering Shares.” Each stockholder should complete and sign the Substitute Form W-9 included as part of the Letter of Transmittal so as to provide the information and certification necessary to avoid backup withholding.

6.     Price Range of the Shares; Dividends on the Shares

      The Common Stock has been traded through the OTC Bulletin Board under the symbol “DKEY.BB” since November 13, 2003. The following table sets forth, for each of the periods indicated, the high and low reported sales price per share of Common Stock on the OTC Bulletin Board based on published financial sources.

		High		Low
Year Ended December 31, 2002
	First Quarter	$	6.99	$	3.65
	Second Quarter	$	5.05	$	2.50
	Third Quarter	$	3.60	$	2.01
	Fourth Quarter	$	2.50	$	1.35
Year Ended December 31, 2003
	First Quarter	$	2.01	$	0.67
	Second Quarter	$	1.63	$	0.56
	Third Quarter	$	1.30	$	0.56
	Fourth Quarter	$	1.39	$	0.55
Year Ended December 31, 2004
	First Quarter	$	0.89	$	0.61
	Second Quarter	$	0.87	$	0.64
	Third Quarter (through September 14, 2004)	$	0.67	$	0.32

      On September 9, 2004, the last full trading day prior to the public announcement of the execution of the Merger Agreement, the last reported sales price of the Common Stock on the OTC Bulletin Board was $0.46 per share. On September 17, 2004, the most recent practicable trading day prior to the commencement of the Offer, the last reported sales price of the Common Stock on the OTC Bulletin Board was $0.64 per share. Stockholders are urged to obtain a current market quotation for the Common Stock.

      No established trading market exists or has existed for the Convertible Preferred Stock.

      The Purchaser has been advised by Datakey that Datakey has not declared or paid any cash dividends during any of the periods indicated in the above table and that it does not intend to declare or pay any cash dividends in the foreseeable future.

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      Further, the Merger Agreement provides that, without the prior written consent of SafeNet, from the date of the Merger Agreement until the earlier to occur of the termination of the Merger Agreement or the Effective Time, Datakey may not declare, pay, or set aside, any dividends on or make any other distributions in respect of any of its capital stock.

7. Effect of the Offer on the Market for the Shares; Stock Listing; Exchange Act Registration; Margin Regulations

      Market for the Shares. The Purchaser’s purchase of Shares pursuant to the Offer will reduce the number of holders of Common Stock and Convertible Preferred Stock. Purchaser’s purchase of Shares in the Offer will also reduce the number of shares of Common Stock that might otherwise trade publicly and could adversely affect the liquidity and market value of the remaining shares of Common Stock held by the public. Shares of Convertible Preferred Stock are held by only Norwest Equity Partners V. No established trading market exists or has existed for shares of Convertible Preferred Stock.

      OTC Bulletin Board Quotation. Depending upon the number of shares of Common Stock purchased pursuant to the Offer, the Common Stock may no longer be quoted on the OTC Bulletin Board. As a result of the purchase of shares of Common Stock pursuant to the Offer, there may be so few shares of Common Stock held by anyone other than Purchaser or SafeNet that no market maker will quote Datakey shares and trading of Datakey on the OTC Bulletin Board will be discontinued.

      Exchange Act Registration. The Common Stock is currently registered under the Exchange Act. Such registration may be terminated upon application of Datakey to the SEC if the Common Stock is neither listed on a national securities exchange nor held by 300 or more holders of record. Termination of registration of the Common Stock under the Exchange Act, assuming there are no other securities of Datakey subject to registration, would substantially reduce the information required to be furnished by Datakey to its stockholders and to the SEC and would make certain provisions of the Exchange Act no longer applicable to Datakey, such as the short-swing profit recovery provisions of Section 16(b), the requirement of furnishing a proxy statement pursuant to Section 14(a) or 14(c) in connection with stockholders’ meetings and the related requirement of furnishing an annual report to stockholders. Furthermore, the ability of “affiliates” of Datakey and persons holding “restricted securities” of Datakey to dispose of such securities pursuant to Rule 144 or Rule 144A promulgated under the Securities Act of 1933, as amended (the “Securities Act”), may be impaired or eliminated. The Purchaser intends to seek to cause Datakey to apply for termination of registration of the Common Stock under the Exchange Act as soon after the completion of the Offer as the requirements for such termination are met.

      Margin Regulations. The shares of Common Stock currently are “margin securities” under the regulations of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), which status has the effect, among other things, of allowing brokers to extend credit on the collateral of shares of Common Stock. Depending upon factors similar to those described above regarding listing and market quotations, it is possible that, following the Offer, shares of Common Stock would no longer constitute “margin securities” for the purposes of the margin regulations of the Federal Reserve Board and therefore could no longer be used as collateral for loans made by brokers.

8. Certain Information Concerning Datakey

      Datakey is a Minnesota corporation with its principal executive office at 407 West Travelers Trail, Minneapolis, Minnesota 55337. The telephone number of Datakey at such office is (952) 890-6850. According to its Quarterly Report for the quarterly period ended June 30, 2004 on Form 10-QSB, Datakey develops and markets software products that are designed to simplify and strengthen user authentication for the information security market. Datakey also distributes smart cards, tokens and readers for use with its line of access and identity software solutions.

      Selected Financial Information. Consolidated financial information with respect to Datakey, can be found in Datakey’s Annual Report on Form 10-KSB for the year ended 2003 and its Quarterly Report on Form 10-QSB for the three-month periods ended March 31, 2004 and June 30, 2004, each as filed with the SEC pursuant to the Exchange Act. More comprehensive financial information is included in such report and in other documents filed by Datakey with the SEC. These filings are available at the SEC as provided below.

      Available Information. Datakey is subject to the informational filing requirements of the Exchange Act and, in accordance therewith, is obligated to file reports, proxy statements and other information with the SEC relating to its

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business, financial condition and other matters. Information as of particular dates concerning Datakey’s directors and officers, their remuneration, options granted to them, the principal holders of Datakey’s securities and any material interests of such persons in transactions with Datakey is required to be disclosed in proxy statements distributed to Datakey’s stockholders and filed with the SEC. Such reports, proxy statements and other information are available for inspection at the public reference facilities of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such information are obtainable by mail, upon payment of the SEC’s customary charges, by writing to the SEC’s principal office at 450 Fifth Street, N.W., Washington, D.C. 20549. The SEC also maintains a website at http://www.sec.gov that contains reports, proxy statements and other information relating to Datakey that have been filed via the EDGAR System.

9. Certain Information Concerning SafeNet and the Purchaser

      SafeNet and the Purchaser. SafeNet is a Delaware corporation. SafeNet develops, markets, sells and supports hardware and software network security products and services that enable secure communications and data services. SafeNet’s products and services are used to create secure wide area networks and virtual private networks over the Internet to prevent security breaches that could result in unauthorized access to confidential data, invasion of privacy and financial loss. SafeNet’s security solutions allow its customers to lower the cost of deploying and managing secure, reliable wide area networks and enable the use of the Internet for secure business communications and transactions with customers, suppliers and employees. SafeNet’s principal executive offices are located at 4690 Millennium Drive, Belcamp, Maryland 21017, and its telephone number at that address is (443) 327-1200.

      The Purchaser is a Minnesota corporation which was recently formed at the direction of SafeNet for the purpose of effecting the Offer and the Merger. SafeNet owns all of the outstanding capital stock of the Purchaser. Until immediately prior to the time the Purchaser purchases Shares pursuant to the Offer, it is not anticipated that the Purchaser will have any significant assets or liabilities or engage in any activities other than those incident to the Offer and the Merger. The Purchaser’s principal executive offices are located at 4690 Millennium Drive, Belcamp, Maryland 21017, and its telephone number at that address is (443) 327-1200.

      The name, citizenship, business address, present principal occupation or employment and five-year employment history of each of the directors and executive officers of the Purchaser and SafeNet are set forth in Schedule I hereto.

      None of the persons listed in Schedule I has, during the past five years, been a party to any judicial or administrative proceeding (except for matters that were dismissed without sanction or settlement) that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws. None of the persons listed in Schedule I has, during the past five years, been convicted in a criminal proceeding.

      Pursuant to the Stockholders Agreement and the Purchaser Option, SafeNet and the Purchaser may be deemed to beneficially own approximately 23% of the total outstanding Shares on a fully diluted, as converted basis, assuming the conversion of the Convertible Preferred Stock subject to the Stockholders Agreement. See Section 13 — “The Merger Agreement and Other Agreements.”

      Available Information. Pursuant to Rule 14d-3 under the Exchange Act, SafeNet and the Purchaser filed with the SEC a Tender Offer Statement on Schedule TO (the “Schedule TO”), of which this Offer to Purchase forms a part, and exhibits to the Schedule TO.

      Additionally, SafeNet is subject to the information and reporting requirements of the Exchange Act and is required to file periodic reports, proxy statements and other information with the SEC relating to its business, financial condition and other matters. Certain information, as of particular dates, concerning SafeNet’s business, principal physical properties, capital structure, material pending legal proceedings, operating results, financial condition, directors and officers (including their remuneration and stock options granted to them), the principal holders of SafeNet’s securities, any material interests of such persons in transactions with SafeNet and certain other matters is required to be disclosed in proxy statements and annual reports distributed to SafeNet’s stockholders and filed with the SEC. The Schedule TO and the exhibits thereto, as well as these other reports, proxy statements and other information, may be inspected at the SEC’s public reference library at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such information are obtainable by mail, upon payment of the SEC’s customary charges, by writing to the SEC’s principal office at 450 Fifth Street, N.W., Washington D.C. 20549. The SEC also maintains a website at http://www.sec.gov that contains reports, proxy statements and other information relating to SafeNet that have been filed via the EDGAR System.

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10.     Source and Amount of Funds

      The Offer is not conditioned upon any financing arrangements. SafeNet and Purchaser estimate that the total amount of funds required to consummate the Offer and the Merger will be approximately $8.0 million, not including related fees and expenses. SafeNet has available to it sufficient funds to close the Offer and the Merger, and will cause the Purchaser to have sufficient funds available to close the Offer and the Merger.

      Because the only consideration in the Offer and Merger is cash and the Offer is to purchase all outstanding Shares, and in view of the absence of a financing condition and the amount of consideration payable in relation to the financial capacity of SafeNet and its affiliates, the Purchaser believes the financial condition of SafeNet and its affiliates is not material to a decision by a holder of Shares whether to sell, tender or hold Shares pursuant to the Offer.

11. Background of the Offer

      SafeNet continually explores and conducts internal discussions with regard to acquisitions and other strategic corporate transactions that are consistent with its corporate strategies.

      On July 14, 2004, Shelley Harrison of SafeNet made a telephone call to Tim Russell of Datakey to inquire about Datakey’s products and technologies. Mr. Harrison was evaluating various products and technologies to assess compatibility with SafeNet’s strategic direction and product plans.

      On July 27, 2004 at SafeNet Headquarters in Belcamp, Maryland Anthony Caputo, Shelley Harrison, and Kevin Hicks of SafeNet met with Tim Russell, Dave Feste, and Chris Schwartzbauer of Datakey to discuss business synergies between SafeNet and Datakey and to consider the terms of a potential acquisition transaction. The prospect of a loan by SafeNet to Datakey was also discussed. Mr. Caputo was present by telephone.

      On August 19, 2004 at Datakey headquarters in Minneapolis, Minnesota, Anthony Caputo and Shelley Harrison of SafeNet and Tim Russell, Dave Feste and Chris Schwartzbauer of Datakey met to further analyze the value of combining Datakey with SafeNet and to generally discuss business terms of an acquisition and terms of a loan by SafeNet to Datakey.

      On August 24, 2004 at the Omni Ambassador Hotel in Chicago, Anthony Caputo and Ken Mueller of SafeNet and Tim Russell and Dave Feste of Datakey met to negotiate terms of a possible acquisition of Datakey by SafeNet. The terms of a loan by SafeNet to Datakey were also discussed.

      On September 7, 2004, at SafeNet’s Headquarters in Belcamp, Maryland, Carole Argo and Phil Saunders of SafeNet and Tim Russell and Chris Schwartzbauer of Datakey met to review management and staffing of Datakey were it to be acquired by SafeNet.

      Between September 7, 2004, and September 9, 2004, attorneys and representatives of SafeNet and Datakey met to negotiate the terms of a definitive Agreement and Plan of Merger, Stock Option Agreement, and Secured Loan Agreement.

      After the close of financial markets on the afternoon of September 9, 2004, SafeNet and Datakey finalized and executed the definitive Merger Agreement, the Stock Option Agreement, and the Secured Loan Agreement. At the same time, certain stockholders of Datakey signed the Stockholders Agreements. A joint press release announcing the transaction was issued immediately after the signing of the definitive Merger Agreement.

12. Purpose of the Offer; Interest in Securities of Datakey; Other Matters

      Purpose of the Offer. The purpose of the Offer is to enable SafeNet to acquire control of, and the entire equity interest in, Datakey. The Offer is being made pursuant to the Merger Agreement and is intended to increase the likelihood that the Merger will be effected. The purpose of the Merger is to acquire all outstanding Shares not purchased pursuant to the Offer. The transaction structure includes the Merger in order to ensure the acquisition by SafeNet of all the outstanding Shares.

      If the Merger is consummated, SafeNet’s common equity interest in Datakey would increase to 100% and SafeNet would be entitled to all the benefits resulting from that interest. These benefits include complete management with regard to the future conduct of Datakey’s business and any increase in its value. Similarly, SafeNet will also bear the risk of any losses incurred in the operation of Datakey and any decrease in the value of Datakey.

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      Datakey stockholders who sell their Shares in the Offer will cease to have any equity interest in Datakey and to participate in any future growth. If the Merger is consummated, the stockholders of Datakey will no longer have an equity interest in Datakey and instead will have only the right to receive cash consideration pursuant to the Merger Agreement. See Section 13 — “The Merger Agreement and Other Agreements.” Similarly, the stockholders of Datakey will not bear the risk of any decrease in the value of Datakey after selling their Shares in the Offer or the subsequent Merger.

      Plans for Datakey. Except as disclosed in this Offer to Purchase, neither SafeNet nor the Purchaser has any present plan or proposal (1) to effect an extraordinary corporate transaction, such as a merger, reorganization or liquidation, involving Datakey or (2) for the sale or transfer of a material amount of assets of Datakey (3) to make any material change in the present dividend rate or policy, or indebtedness or capitalization of Datakey; (4) to change the present board of directors or management of Datakey, (5) to make any other material change in Datakey’s corporate structure or business; or (6) for any person to acquire additional securities of Datakey, or to dispose of securities of the Datakey. After the purchase of the Shares by the Purchaser pursuant to the Offer, SafeNet may appoint its representatives to the board of directors of Datakey in proportion to its ownership of the outstanding Shares, as described below under the caption “Datakey’s Board of Directors” in Section 13 — “The Merger Agreement and Other Agreements.” Following completion of the Offer and the Merger, SafeNet intends to operate Datakey as a subsidiary of SafeNet under the direction of SafeNet’s management. SafeNet will continue to evaluate and review Datakey and its business, assets, corporate structure, capitalization, operations, properties, policies, management and personnel with a view toward determining how optimally to realize any potential benefits which arise from the rationalization of the operations of Datakey with those of the other business units and subsidiaries of SafeNet. Such evaluation and review is ongoing and is not expected to be completed until after the consummation of the Offer and Merger. If, as and to the extent that SafeNet acquires control of Datakey, SafeNet will complete such evaluation and review of Datakey and will determine what, if any, changes would be desirable in light of the circumstances and the strategic business portfolio which then exist. Such changes could include, among other things, restructuring Datakey through changes in Datakey’s business, corporate structure, certificate of incorporation, by-laws, capitalization or management or could involve consolidating and streamlining certain operations and reorganizing other businesses and operations. Accordingly, SafeNet and the Purchaser reserve the right to change their plans and intentions at any time, as they deem appropriate.

      SafeNet, Purchaser or an affiliate of SafeNet may, following the consummation or termination of the Offer, seek to acquire additional Shares through open market purchases, privately negotiated transactions, a tender offer or exchange offer or otherwise, upon such terms and at such prices as they will determine, which may be more of less than the price paid in the Offer.

      Interest in Securities of Datakey. Pursuant to the Loan Agreement, SafeNet agreed to loan approximately $2.2 million to Datakey. In connection with the loan, Datakey issued a promissory note to SafeNet bearing interest at a rate of 10% per annum, which may be defined as a security under federal securities law. The entire outstanding principal balance of the promissory note and all accrued and unpaid interest thereon is due and payable on September 9, 2005. The promissory note cannot be prepaid prior to December 31, 2004 and Datakey’s obligations under the note are secured by all of the assets of Datakey pursuant to a general security agreement and an intellectual property security agreement by and between Datakey and SafeNet. If under certain circumstance Datakey enters into certain acquisition transactions with a party or parties other than SafeNet or its affiliates prior to the note being paid in full, then SafeNet is entitled to receive an additional $500,000 payment in addition to the principal and interest due under the promissory note.

      Stockholder Approval. Under the MBCA and Datakey’s articles of incorporation, the approval of the Datakey board of directors and the affirmative vote of the holders of a majority of the outstanding shares of Common Stock and 90% of the outstanding Convertible Preferred Stock is required to adopt and approve the Merger Agreement and the Merger. Datakey has represented in the Merger Agreement that the execution and delivery of the Merger Agreement by Datakey and the consummation by Datakey of the transactions contemplated by the Merger Agreement have been duly authorized by all necessary corporate action on the part of Datakey, subject to the approval of the Merger by Datakey’s stockholders if required in accordance with the MBCA. In addition, Datakey has represented that the affirmative vote of the holders of a majority of the outstanding shares of Common Stock and 90% of the outstanding shares of Convertible Preferred Stock is the only vote of the holders of any class or series of Datakey’s capital stock necessary to approve the Merger, and no vote of any class or series of Datakey’s capital stock is necessary to approve any of the transactions contemplated by the Merger Agreement other than the Merger. Therefore, unless the Merger is consummated pursuant to the Short-Form Merger (as defined below) provisions under the MBCA described below (in which case no further

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corporate action by the Datakey stockholders will be required to complete the Merger), the only remaining required corporate action of Datakey will be the approval of the Merger Agreement and the transactions contemplated thereby by the affirmative vote of the holders of a majority of the outstanding shares of Common Stock and 90% of the outstanding shares of Convertible Preferred Stock. Datakey has agreed to duly call, give notice of, convene and hold a special meeting of its stockholders to consider and take action upon the approval and adoption of the Merger Agreement and the approval of the Merger as soon as reasonably practicable following the acceptance for payment and purchase of Shares by Purchaser pursuant to the Offer for the purpose of considering and taking action upon the Merger Agreement. SafeNet has agreed to use its reasonable best efforts to consummate the Merger. In the event that SafeNet, Purchaser and SafeNet’s other subsidiaries and affiliates acquire in the aggregate at least a majority of the outstanding shares of Common Stock and at least 90% of the outstanding shares of Convertible Preferred Stock (which would be the case if the Minimum Condition is satisfied and the Purchaser were to accept for payment Shares tendered in the Offer), they would have the ability to effect the Merger without the affirmative votes of any other Datakey stockholders.

      Short-Form Merger. Section 302A.621 of the MBCA provides that, if a corporation owns at least 90% of the outstanding shares of each class of another corporation, the corporation holding such stock may merge itself into such corporation without any action or vote on the part of the board of directors or the stockholders of such other corporation (such merger, a “Short-Form Merger”). In the event that SafeNet, the Purchaser and any other subsidiaries of SafeNet acquire in the aggregate at least 90% of the outstanding shares of Common Stock and at least 90% of the outstanding shares of Convertible Preferred Stock, pursuant to the Offer or otherwise, then, at the election of SafeNet, a Short-Form Merger could be effected without any approval of the Datakey board of directors or the stockholders of Datakey, subject to compliance with the provisions of Section 302A.621 of the MBCA. Even if SafeNet and the Purchaser do not own 90% of the outstanding shares of Common Stock and at least 90% of the outstanding shares of Convertible Preferred Stock following consummation of the Offer, SafeNet and the Purchaser could exercise the Purchaser Option described in Section 13 — “The Merger Agreement and Other Agreements” or seek to purchase additional shares in the open market or otherwise in order to reach the 90% threshold and employ a Short-Form Merger. The parties have agreed that the per-share cash consideration paid for any Shares acquired under the Purchaser Option would be $0.65 per Share of Common Stock and $2.50 per share of Convertible Preferred Stock. SafeNet presently intends to effect a Short-Form Merger if permitted to do so under the MBCA.

      Going Private Transactions. The SEC has adopted Rule 13e-3 under the Exchange Act which is applicable to certain “going private” transactions and which may under certain circumstances be applicable to the Merger or another business combination following the purchase of Shares pursuant to the Offer in which the Purchaser seeks to acquire the remaining Shares not held by it. The Purchaser believes that Rule 13e-3 will not be applicable to the Merger because it is anticipated that the Merger will be effected within one year following the consummation of the Offer and, in the Merger, stockholders will receive the same price per Share as paid in the Offer. Rule 13e-3 requires, among other things, that certain financial information concerning Datakey and certain information relating to the fairness of the proposed transaction and the consideration offered to minority stockholders be filed with the SEC and disclosed to stockholders prior to consummation of the transaction.

      Dissenters’ Rights. Holders of the Shares do not have dissenters’ rights in connection with the Offer. However, if the Merger (including a Short-Form Merger) is consummated, holders of the Shares at the Effective Time will have certain rights pursuant to the provisions of Section 302A.471 and 302A.473 of the MBCA, including the right to dissent and to receive payment in cash of the fair value of their Shares. Dissenting Datakey stockholders who comply with the applicable statutory procedures will be entitled to receive a judicial determination of the fair value of their Shares and to receive payment of such statutory value in cash, together with a fair rate of interest thereon. Any such judicial determination of the fair value of the Shares could be based upon factors other than, or in addition to, the price per Share to be paid in the Merger or the market value of the Shares. The value so determined could be more or less than the price per Share to be paid in the Merger.

      THE FOREGOING SUMMARY OF THE DISSENTERS’ RIGHTS UNDER THE MBCA DOES NOT PURPORT TO BE A COMPLETE STATEMENT OF THE PROCEDURES TO BE FOLLOWED BY STOCKHOLDERS DESIRING TO EXERCISE ANY DISSENTERS’ RIGHTS AVAILABLE UNDER THE MBCA. THE PRESERVATION AND EXERCISE OF DISSENTERS’ RIGHTS REQUIRE STRICT ADHERENCE TO THE APPLICABLE PROVISIONS OF THE MBCA. IF A SHAREHOLDER WITHDRAWS OR LOSES HIS RIGHT TO DISSENTERS’ RIGHTS, SUCH HOLDER’S SHARES WILL BE AUTOMATICALLY CON-

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VERTED INTO, AND REPRESENT ONLY THE RIGHT TO RECEIVE, THE MERGER CONSIDERATION, WITHOUT INTEREST. SEE ANNEX II FOR THE COMPLETE TEXT OF THE MBCA’S DISSENTERS’ RIGHTS PROVISIONS.

13. The Merger Agreement and Other Agreements

Merger Agreement

      The following summary of certain provisions of the Merger Agreement is qualified in its entirety by reference to the Merger Agreement itself, which is incorporated herein by reference. A copy of the Merger Agreement has been filed by SafeNet and the Purchaser, pursuant to Rule 14d-3 under the Exchange Act, as Exhibit (d)(1) to the Tender Offer Statement on Schedule TO (together with any amendments, supplements, schedules, annexes and exhibits thereto, the “Schedule TO”). The Merger Agreement may be examined and copies may be obtained at the places and in the manner set forth in Section 9 — “Certain Information Concerning SafeNet and Purchaser.” Stockholders and other interested parties should read the Merger Agreement in its entirety for a more complete description of the provisions summarized below. Capitalized terms used herein and not otherwise defined have the meanings ascribed to them in the Merger Agreement.

      The Offer. The Merger Agreement provides for the making of the Offer. The terms of the Offer are described in Section 1 — “Terms of the Offer.” The obligation of the Purchaser to accept for payment and pay for Shares tendered pursuant to the Offer is subject to the satisfaction of the Minimum Condition and certain other conditions described in Section 14 — “Certain Conditions of the Offer.”

      The Merger. The Merger Agreement provides that, following the consummation of the Offer, subject to the terms and conditions thereof, at the effective time of the Merger:

•  the Purchaser will be merged with and into Datakey and, as a result of the Merger, the separate corporate existence of the Purchaser will cease;

•  Datakey will be the successor or surviving corporation (sometimes referred to as the “Surviving Corporation”) in the Merger and will continue to be governed by the laws of the State of Minnesota;

•  the separate corporate existence of Datakey, with all its rights, privileges, immunities, powers and franchises, will continue unaffected by the Merger; and

•  Datakey will succeed to and assume all the rights and obligations of the Purchaser.

      The respective obligations of SafeNet and the Purchaser, on the one hand, and Datakey, on the other hand, to effect the Merger are subject to the satisfaction on or prior to the closing of the merger of each of the following conditions:

•  the Merger Agreement will have been approved and adopted by the requisite vote of the holders of the Shares, to the extent required by Datakey’s articles of incorporation and the MBCA, in order to consummate the Merger;

•  no law will have been enacted or promulgated by any United States or other governmental entity which prohibits the consummation of the Merger, and there will be no order or injunction of a court of competent jurisdiction in effect preventing the consummation of the Merger; and

•  the Purchaser will have purchased, or caused to be purchased, the Shares pursuant to the Offer, unless its failure to purchase the Shares is a result of a breach of its obligation to accept for payment or pay for Shares validly tendered pursuant to the Offer in violation of the terms of the Offer or the Merger Agreement.

      At the effective time of the Merger each issued and outstanding share of Purchaser common stock will be converted into one fully paid and nonassessable share of common stock of the Surviving Corporation. Each Share that is owned by Datakey as treasury stock and each Share owned by SafeNet, the Purchaser or any other wholly-owned subsidiary of SafeNet will be automatically cancelled and no consideration will be delivered in exchange therefor, and each issued and outstanding Share will be converted into $0.65 per Share, without interest (and subject to applicable withholding taxes). From and after the effective time of the Merger, none of the Shares will be outstanding and will automatically be cancelled, and each holder of a certificate representing any Shares will cease to have any rights with respect thereto,

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except the right to receive $0.65 therefor, without interest thereon (and subject to applicable withholding taxes) upon the surrender of such certificate.

      Datakey Option Plans. Except as provided below with respect to (i) Datakey’s 1999 Employee Stock Purchase Plan (the “Datakey ESPP”), (ii) options with exercise prices exceeding $0.82, and (iii) options with exercises prices below the price per share paid in the Offer, at the effective time of the Merger, each outstanding stock option (a “Datakey Option” or “Datakey Options”) granted under Datakey’s 1987 Stock Option Plan, 1997 Stock Option Plan and 1994 Consultant Plan (collectively, the “Datakey Option Plans”) or otherwise will (without any action on the part of the holder) automatically be converted into an option to purchase SafeNet common stock, par value $.01 per share (“SafeNet Common Stock”) having the same terms and conditions as Datakey Options (including such terms and conditions as may be incorporated by reference into the agreements evidencing the Datakey Options pursuant to the plans or arrangements pursuant to which such Datakey Options were granted) except as follows: as of the effective time of the Merger, each converted Datakey Option will be exercisable (or will become exercisable in accordance with its terms) for that number of whole shares of SafeNet Common Stock equal to the product of the number of shares of Common Stock that were issuable upon exercise of the Datakey Option immediately prior to the effective time of the Merger multiplied by the Option Exchange Ratio (defined below), rounded to the nearest whole number, and the per share exercise price for the shares of SafeNet Common Stock issuable upon exercise of such Datakey Option so converted will be equal to the quotient determined by dividing the exercise price per share of Common Stock at which such Datakey Option was exercisable immediately prior to the effective time of the Merger by the Option Exchange Ratio, rounded to the nearest whole cent. “Option Exchange Ratio” means the quotient determined by dividing the price per Share paid in the Offer by the average closing prices of SafeNet Common Stock on the Nasdaq National Market for the five business day period ending two days prior the effective time of the Merger. Notwithstanding the foregoing, the conversion of any Datakey Options which are “incentive stock options,” within the meaning of Section 422 of the Code, into options to purchase SafeNet Common stock will be made so as not to constitute a “modification” of such Datakey Options within the meaning of Section 424 of the U.S. Internal Revenue Code.

      As of the effective time of the Merger, except as provided above, all rights under any provision of the Datakey Option Plans and any other plan, program, agreement or arrangement providing for the issuance or grant of any other interest in respect of the capital stock of Datakey or any subsidiary of Datakey will be cancelled. As of the Effective Time, the Datakey ESPP will be terminated and each participant under the Datakey ESPP shall receive a cash payment equal to the balance, if any, of any accumulated payroll deductions for which they did not receive Shares.

      Each Datakey Option with an exercise price greater than $0.82 per share of Common Stock that is outstanding and unexercised at the Effective Time shall terminate at the Effective Time and shall not be assumed or replaced by Purchaser.

      Each Datakey Option with an exercise price per share of less than the price per share paid in the Offer (a “Cash Out Option”) shall be surrendered and cancelled in exchange for a payment by the Purchaser equal to the product of (i) the number of shares of Common Stock to be acquired upon the exercise of such Cash Out Option, multiplied by (ii) the amount equal to (A) the price per share paid in the Offer minus (B) the exercise price per share of such Cash Out Option, less applicable withholding.

      Datakey Warrants. If permitted under the terms of the applicable governing instruments, each holder of an outstanding warrant to purchase shares of Common Stock will have the right to receive, in lieu of the shares of Common Stock theretofore issuable upon exercise of such warrant, an amount per share equal to the excess of the price per Share paid in the Offer over the exercise price per share of such warrant; provided, however, that to the extent the foregoing is not permissible under the terms of any Datakey warrant, the warrant will, at the effective time of the Merger, be deemed to constitute a warrant to acquire, upon payment of the aggregate exercise price of such warrant, and otherwise on the same terms and conditions as were applicable under such warrant prior to the effective time of the Merger, the aggregate price per Share paid in the Offer, without interest thereon (and subject to applicable withholding taxes), that the holder of such warrant would have been entitled to receive had such holder exercised the warrant in full immediately prior to the effective time of the Merger.

      Datakey’s Board of Directors. The Merger Agreement provides that, effective upon the purchase of and payment for any Shares by SafeNet or the Purchaser or any of their affiliates pursuant to the Offer, SafeNet will be entitled to elect or designate that number of directors, rounded up to the next whole number, on Datakey’s board of directors as is equal to

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the product of the total number of directors on Datakey’s board of directors multiplied by the percentage that the aggregate number of Shares beneficially owned by the Purchaser, SafeNet and any of their affiliates bears to the total number of Shares then outstanding. Datakey will, upon SafeNet’s request, use all reasonable efforts either to promptly increase the size of Datakey’s board of directors or promptly secure the resignations of that number of its incumbent directors, or both, as is necessary to enable SafeNet’s designees to be so elected or designated to Datakey’s board of directors, and will use all reasonable efforts to cause SafeNet’s designees to be so elected or designated at such time. At such time, Datakey will also, upon SafeNet’s request, cause persons elected or designated by SafeNet to constitute the same percentage (rounded up to the next whole number) as is on Datakey’s board of directors of each committee of Datakey’s board of directors, each board of directors (or similar body) of each Datakey subsidiary, and each committee (or similar body) of each such board of directors, in each case only to the extent permitted by applicable law or the rules of any stock exchange on which Datakey Common Stock is listed or traded.

      In the event that SafeNet’s designees are elected or designated to Datakey’s board of directors, then, until the effective time of the Merger, Datakey will cause its board of directors to have at least two directors who were directors on September 9, 2004, including at least two directors shall both be “disinterested” as defined in Section 302A.673, Subd. 1(d), of the MBCA (the “Independent Directors”), provided, however, that if any Independent Director is unable to serve due to death or disability, the remaining Independent Director(s) will be entitled to elect or designate another person (or persons) who served as a director on September 9, 2004 to fill such vacancy, and such person (or persons) will be deemed to be an Independent Director. If no Independent Director then remains, the other directors will designate two persons who were directors on September 9, 2004 (or, in the event there will be less than two directors available to fill such vacancies as a result of such persons’ deaths, disabilities or refusals to serve, such smaller number of persons who were directors on September 9, 2004) to fill such vacancies and such persons will be deemed Independent Directors. If SafeNet’s designees constitute a majority of Datakey board of directors after the Purchaser’s acceptance for payment of Shares pursuant to the Offer and prior to the effective time of the Merger, then the affirmative vote of a majority of the Independent Directors (or if only one exists, then the vote of such Independent Director) will be required to take any of the following actions:

•  amend or terminate the Merger Agreement by Datakey;

•  exercise or waive any of Datakey’s rights, benefits or remedies under the Merger Agreement, if such action would substantially and adversely affect holders of Shares other than SafeNet or the Purchaser; or

•  waiver by Datakey of any right under the Merger Agreement, including extension of the time for the performance of any of the obligations or other acts of Purchaser or Merger Sub under the Merger Agreement.

      Stockholders’ Meeting; Merger Without a Meeting of Stockholders. Pursuant to the Merger Agreement, if required by applicable law in order to consummate the Merger, Datakey will promptly:

•  duly call, give notice of, convene and hold a special meeting of its stockholders to consider the approval and adoption of the Merger Agreement and the approval of the Merger (the “Special Meeting”) as soon as reasonably practicable following the acceptance for payment and purchase of Shares by the Purchaser pursuant to the Offer for the purpose of considering and taking action upon the Merger Agreement;

•  prepare and file with the SEC under the Exchange Act a preliminary proxy or information statement relating to the Merger and the Merger Agreement and use all reasonable efforts to obtain and furnish the information required to be included by the SEC in the definitive proxy or information statement (the “Proxy Statement”) and, after SafeNet and its counsel have had a reasonable opportunity to review and comment on the Proxy Statement, respond promptly to any comments made by the SEC with respect to the preliminary proxy or information statement and cause the Proxy Statement to be mailed to its stockholders as promptly as practicable;

•  include in the Proxy Statement the recommendation of Datakey board of directors that stockholders of Datakey vote in favor of the approval of the Merger and the approval and adoption of the Merger Agreement; and

•  use all reasonable efforts to solicit from holders of Shares proxies in favor of the Merger and take all other action reasonably necessary or advisable to secure the approval of stockholders required by the MBCA and any other applicable law and Datakey’s certificate of incorporation and bylaws (if applicable) to effect the Merger.

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      Notwithstanding Datakey’s obligations under the Merger Agreement in respect of the Special Meeting, in the event SafeNet and the Purchaser acquire at least 90% of the outstanding shares of each class of capital stock of Datakey entitled to vote on the Merger, SafeNet and the Purchaser will cause the Merger to become effective as soon as practicable after such acquisition without a meeting of the stockholders of Datakey, in accordance with Section 302A.621 of the MBCA.

      Interim Operations; Covenants. Until the earlier of the termination of the Merger Agreement pursuant to its terms or the effective time of the Merger, Datakey has agreed to, except to the extent that SafeNet otherwise consents in writing, carry on its business in the usual, regular and ordinary course, in substantially the same manner as previously conducted and in compliance in all material respects with all applicable laws and regulations, pay its debts and taxes when due subject to good faith disputes over such debts, pay or perform other material obligations when due, and use its commercially reasonable efforts consistent with past practices and policies to preserve intact its present business organization, keep available the services of its present officers, employees and contractors and preserve its relationships with customers, suppliers, licensors, licensees, and others with which it has business dealings.

      Pursuant to the Merger Agreement, without the prior written consent of SafeNet, during the period from the date of the Merger Agreement and continuing until the earlier of its termination or the effective time of the Merger, Datakey will not do any of the following (except as may be expressly contemplated or specifically permitted by the Merger Agreement):

•  amend or propose to amend its Articles of Incorporation or Bylaws (or comparable governing instruments);

•  authorize for issuance, issue, grant, sell, pledge, dispose of or propose to issue, grant, sell, pledge or dispose of any shares of, or any options, warrants, commitments, subscriptions or rights of any kind to acquire or sell any shares of, the capital stock or other securities of or any Voting Debt of Datakey including, but not limited to, any securities convertible into or exchangeable for shares of stock of any class of Datakey, except for the issuance of Shares pursuant to the exercise of stock options outstanding on the date of the Merger Agreement in accordance with their present terms. The term “Voting Debt” shall mean indebtedness having general voting rights and debt convertible into securities having such rights;

•  split, combine or reclassify any shares of its capital stock or declare, pay or set aside any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of its capital stock, or directly or indirectly redeem, purchase or otherwise acquire or offer to acquire any shares of its capital stock or other securities and other than pursuant to commitments outstanding on the date of the Merger Agreement in accordance with their present terms as disclosed by Datakey in the disclosure schedule to the Merger Agreement (the “Disclosure Schedule”);

•  (a) create, incur, assume, forgive or make any changes to the terms or collateral of any debt, receivables or employee or officer loans or advances, except incurrences that constitute refinancing of existing obligations on terms that are no less favorable to Datakey than the existing terms; (b) assume, guarantee, endorse or otherwise become liable or responsible (whether directly, indirectly, contingently or otherwise) for the obligations of any person; (c) make any capital expenditures or incur any preopening expenses, other than as set forth by Datakey in the Disclosure Schedule; (d) make any loans, advances or capital contributions to, or investments in, any other person (other than customary travel, relocation or business advances to employees); (e) acquire the stock or assets of, or merge or consolidate with, any other person; (f) voluntarily incur any material liability or obligation (absolute, accrued, contingent or otherwise) other than in the ordinary course of business consistent with past practice; or (g) sell, transfer, mortgage, pledge, or otherwise dispose of, or encumber, or agree to sell, transfer, mortgage, pledge or otherwise dispose of or encumber, any assets or properties (real, personal or mixed) material to Datakey other than to secure debt permitted under subclause (a) above or other than in the ordinary course of business consistent with past practice;

•  except as set forth by Datakey in the Disclosure Schedule, increase in any manner the wages, salaries, bonus, compensation or other benefits of any of its officers or employees or enter into, establish, amend or terminate any employment, consulting, retention, change in control, collective bargaining, bonus or other incentive compensation, profit sharing, health or other welfare, stock option or other equity, pension, retirement, vacation, severance, termination, deferred compensation or other compensation or benefit plan, policy, agreement, trust, fund or arrangement with, for or in respect of, any share holder, officer, director, other employee, agent, consultant or

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	affiliate other than as required pursuant to the terms of agreements in effect on the date of the Merger Agreement, or enter into or engage in any agreement, arrangement or transaction with any of its directors, officers, employees or affiliates except current compensation and benefits in the ordinary course of business, consistent with past practice;
•	commence or settle any litigation or other proceedings with any governmental authority or other person, or make or rescind any election relating to taxes, settle any claim, action, suit, litigation, proceeding, arbitration, investigation, audit or controversy relating to taxes, file any amended tax return or claim for refund, change any method of accounting or make any other material change in its accounting or tax policies or procedures;
•	adopt or amend any resolution or agreement concerning indemnification of its directors, officers, employees or agents;
•	transfer or license to any person or entity or otherwise extend, amend, modify, permit to lapse or fail to preserve any intellectual property rights material to Datakey’s business as presently conducted or proposed to be conducted, other than nonexclusive licenses in the ordinary course of business consistent with past practice, or disclose to any person who has not entered into a confidentiality agreement any trade secrets;
•	modify, amend or terminate any material contract, or waive, release or assign any material rights or claims thereunder, other than any such modification, amendment or termination of any such material contract or any such waiver, release or arrangement thereunder in the ordinary course of business consistent with past practice;
•	modify, amend or terminate, or waive, release or assign any material rights or claims with respect to any confidentiality agreement or non-competition agreement to which Datakey is a party;
•	commit or omit to do any act which act or omission would cause a breach of any covenant contained in the Merger Agreement or would cause any representation or warranty contained in the Merger Agreement to become untrue, as if each such representation and warranty were continuously made from and after the date hereof;
•	fail to maintain its books, accounts and records in the usual manner on a basis consistent with that heretofore employed;
•	establish any subsidiary or enter into any new line of business;
•	enter into any lease, contract or agreement pursuant to which Datakey is obligated to pay or incur obligations of more than $25,000 per year, other than the purchase of inventory in the ordinary course of business consistent with past practice;
•	make any changes to its current investment strategy, policy or practices;
•	permit any insurance policy naming Datakey as a beneficiary or a loss payee to be cancelled or terminated without notice to and consent by SafeNet;
•	revalue any of its assets or make any change in accounting methods, principles or practices, except as required by generally accepted accounted principles after notice to SafeNet;
•	fail to make in a timely manner any filings with the SEC required under the Securities Act or the Exchange Act or the rules and regulations promulgated thereunder;
•	discharge any obligations (including accounts payable) other than on a timely basis in the ordinary course of business consistent with past practice, or delay the making of any capital expenditures from Datakey’s current capital expenditure schedule; or
•	authorize any of, or agree to commit to do any of, the foregoing actions.

      No Solicitation. Each of Datakey and its Representatives (as defined below) has ceased and caused to be terminated all existing solicitations, initiations, encouragements, discussions, negotiations and communications with any

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persons or group with respect to any offer or proposal relating to any transaction or series of related transactions other than the transactions involving:

•  any acquisition or purchase from Datakey by any person or group of more than a 10% interest in the total outstanding voting securities of Datakey or any tender offer or exchange offer or other transaction that if consummated would result in any person or group beneficially owning 10% or more of the total outstanding voting securities of Datakey;

•  any merger, consolidation, share exchange, business combination, recapitalization, liquidation, dissolution or similar transaction involving Datakey; or

•  any direct or indirect acquisition or purchase of assets representing 10% or more of the assets of Datakey.

      An offer or proposal relating to any of the foregoing transactions is referred to in this Offer to Purchase and the Merger Agreement as a “Company Takeover Proposal.” Except as provided in below, from September 9, 2004 until the earlier of termination of the Merger Agreement or the effective time of the Merger, Datakey will not and will not authorize or permit its officers, directors, employees, agents or consultants (collectively, “Representatives”) to directly or indirectly:

•  solicit, encourage, initiate or seek the making, submission or announcement of any Company Takeover Proposal;

•  furnish any non-public information regarding Datakey to any person (other than SafeNet or Purchaser or their representatives) in connection with or in response to a Company Takeover Proposal or an inquiry that Datakey believes in good faith could be expected to lead to a Company Takeover Proposal;

•  engage in discussions or negotiations with any person with respect to any Company Takeover Proposal, except as to the existence of these provisions;

•  withdraw or modify, or propose publicly to withdraw or modify, in a manner adverse to SafeNet, the approval or recommendation by Datakey’s board of directors of the Offer, the Merger Agreement or the Merger;

•  approve or recommend, or propose publicly to approve or recommend, any Company Takeover Proposal; or

•  cause Datakey to enter into any letter of intent, agreement in principle, acquisition agreement or other similar agreement related to any Company Takeover Proposal.

      Notwithstanding these restrictions, nothing shall prohibit:

      (A) Datakey, or the board of directors of Datakey, prior to the time of the first acceptance of Shares for payment pursuant to the Offer, from furnishing nonpublic information regarding Datakey to, or entering into discussions or negotiations with, any person in response to an unsolicited, bona fide written Company Takeover Proposal that the board of directors of Datakey concludes in good faith could reasonably be expected to result in a superior offer (as defined in the Merger Agreement) that is submitted to Datakey by such person (and not withdrawn) if:

•  neither Datakey nor any Representative of Datakey shall have violated any of the restrictions set forth in the Merger Agreement in connection with the receipt of such Company Takeover Proposal;

•  the board of directors of Datakey concludes in good faith, after consultation with its outside legal counsel, that such action with respect to such Company Takeover Proposal is required to comply with the fiduciary duties of the board of directors of Datakey to Datakey’s stockholders under applicable law;

•  Datakey gives SafeNet prompt written notice of Datakey’s intention to furnish nonpublic information to, or enter into discussions with, such person, and Datakey receives from such person an executed confidentiality agreement with provisions no less favorable to Datakey than those contain in the confidentiality agreement by and between Datakey and SafeNet; and

•  Datakey furnishes such nonpublic information to such person and to SafeNet at substantially the same time (to the extent such nonpublic information has not been previously furnished by Datakey to SafeNet); or

      (B) Datakey from complying with Rules 14d-9 and 14e-2 promulgated under the Exchange Act with regard to any Company Takeover Proposal.

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      Datakey agrees that it will promptly, and in any event within 24 hours following receipt of a Company Takeover Proposal, notify SafeNet orally and in writing of such Company Takeover Proposal, which notice shall disclose the identity of the other party and the material terms of the Company Takeover Proposal. Datakey will keep SafeNet informed in all material respects on a prompt basis with respect to the status of any such Company Takeover Proposal or request and any material modification or proposed material modification thereto.

      Datakey also agreed not to release any person (other than SafeNet) from or waive any provision of any confidentiality, “standstill” or similar agreement to which Datakey is a party and which relates to a Company Takeover Proposal, and will use its commercially reasonable efforts to enforce each such agreement at the request of SafeNet.

      Notwithstanding the foregoing, prior to the time of acceptance for payment of Shares in the Offer, Datakey’s board of directors may (subject to the terms of this and the following sentence) withdraw or modify its approval or recommendation in favor of the Offer, the Merger Agreement or the Merger, or approve or recommend a Company Superior Offer if:

•  an unsolicited, bona fide written offer is made to Datakey by a third party for a Company Takeover Proposal, and such offer is not withdrawn;

•  Datakey’s board of directors determines in good faith, after consultation with its financial advisor, that such offer constitutes a Company Superior Offer;

•  following consultation with outside legal counsel, Datakey’s board of directors determines that the withdrawal or modification of its approval or recommendation of the Offer, the Merger Agreement or the Merger is required to comply with the fiduciary duties of the board of directors of Company to the stockholders of Datakey under applicable law;

•  such approval or recommendation is not withdrawn or modified in a manner adverse to SafeNet at any time prior to three (3) business days after SafeNet receives written notice from Datakey confirming that Datakey’s board of directors has determined that such offer is a Company Superior Offer; and

•  at the end of such three (3) business day period, after taking into account any adjustment or modification of the terms of the Merger Agreement proposed by SafeNet (and any adjustment or modification of the terms of such Company Takeover Proposal), the board of directors of Datakey again makes the determination in good faith that the withdrawal or modification of such approval or recommendation of the Offer, the Merger Agreement or the Merger is required to comply with the fiduciary duties of the board of directors of Datakey to the stockholders of Datakey under applicable Law.

      In the event that prior to termination of the Merger Agreement a bona fide Company Takeover Proposal is made known to Datakey or has been made directly to its stockholders generally or any person shall have publicly announced an intention to make a bona fide Company Takeover Proposal, and thereafter the Merger Agreement is terminated (for reasons specified in the Merger Agreement), then Datakey shall promptly, but in no event later than, in the case of termination by Purchaser, two days after, or in the case of termination by Datakey, immediately prior to, termination of the Merger Agreement giving rise to Datakey’s payment obligation, pay Purchaser One Million Dollars ($1,000,000), plus the reimbursement of any and all expenses (as defined in the Merger Agreement) incurred by Purchaser and SafeNet up to Three Hundred Thousand Dollars ($300,000).

      In addition to the termination fee payable to SafeNet pursuant to the Merger Agreement described above, Datakey is obligated to pay SafeNet $500,000 pursuant to the Loan Agreement if Datakey enters into any acquisition transactions with third parties other than SafeNet prior to the loan being repaid (in addition to the immediate repayment of principal and interest due under the Note).

      In the event that SafeNet terminates the Merger Agreement solely because of the failure to occur of certain conditions specified in the Merger Agreement, and at the time of such termination, SafeNet does not deliver to Datakey a written certification signed by SafeNet’s Chief Executive Officer stating that such termination is based, in whole or in part, on the material unsatisfactory results, in SafeNet’s sole discretion, of SafeNet’s due diligence review of Datakey, and at the time of such termination, more than 75% of the Shares (including all of the Convertible Preferred Stock) shall have been validly tendered and not withdrawn pursuant to the Offer, then SafeNet shall immediately prior to its termination of the Merger Agreement on such basis pay Datakey One Million Dollars ($1,000,000) plus the

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reimbursement of any and all expenses (as defined in the Merger Agreement) incurred by Datakey up to Three Hundred Thousand Dollars ($300,000).

      Indemnification and Insurance. The articles of incorporation and bylaws of the Surviving Corporation will contain provisions with respect to exculpation and indemnification that are at least as favorable to the directors, officers, agents or employees of Datakey or otherwise entitled to indemnification (“Indemnified Parties”) as those contained in the articles of incorporation and bylaws of Datakey as in effect immediately prior to the closing of the Merger, which provisions will not be amended, repealed or otherwise modified for a period of six years from the effective time of the Merger in any manner that would adversely affect the rights thereunder of the Indemnified Parties.

      Confidentiality; Access to Information. SafeNet and the Purchaser agree to hold any information which is non-public in confidence, subject to customary limitations, and, in the event the Merger Agreement is terminated for any reason, SafeNet or the Purchaser shall promptly return or destroy such information.

      Datakey will afford SafeNet and its Representatives reasonable access during normal business hours to the properties, books, analysis, projections, plans, systems, contracts, commitments, records, personnel offices and other facilities of Datakey during the period prior to the effective time of the Merger to obtain all information concerning the business and use all reasonable efforts to make available at all reasonable times during normal business hours to SafeNet the appropriate individuals (including management personnel, attorneys, accountants and other professionals) for discussion of Datakey’s business, properties, prospects and personnel as SafeNet may reasonably request.

      Public Disclosure. Datakey will not disseminate any press release or other public announcement concerning the Merger, the Offer or the Merger Agreement or the other transactions contemplated by the Merger Agreement without the prior written consent of each of the other parties to the Merger Agreement, except where required to do so by law. If so required, Datakey will consult with Purchaser and SafeNet prior to such release or announcement.

      Reasonable Efforts; Notification. Subject to the express provisions of the no solicitation covenant and upon the terms and subject to the conditions set forth in the Merger Agreement, each of the parties agrees to use all reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective, the Merger and the other transactions contemplated by the Merger Agreement, including complying in all material respects with all applicable laws and with all rules and regulations of any governmental entity. Datakey shall also use all reasonable efforts to accomplish the following:

•  the taking of all reasonable acts necessary to cause the Minimum Condition and all the conditions to the Merger (described above) and all conditions to the Offer described in Section 14 — “Certain Conditions of the Offer” to be satisfied and to consummate and make effective the Offer, the Merger and the other transactions;

•  the obtaining of all necessary consents, approvals or waivers from third parties and government entities; or

•  the execution or delivery of any additional instruments necessary to consummate the transactions, and to carry out fully the purposes of, the Merger Agreement.

      Datakey is obligated to give prompt notice to SafeNet of:

•  any representation or warranty made by Datakey in the Merger Agreement that is untrue or inaccurate in any material respect at any time from the date hereof to the effective time of the Merger;

•  receipt of any notice or other communication in writing from any third party alleging that the consent of such third party is or may be required in connection with the transactions contemplated by the Merger Agreement, provided that such consent would have been required to have been disclosed in the Merger Agreement;

•  receipt of any material notice or other communication from any governmental authority (as defined in the Merger Agreement) in connection with the transactions contemplated by the Merger Agreement;

•  any material failure of Datakey or any Representative to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it under the Merger Agreement;

•  the commencement or threat of any litigation involving or affecting Datakey, or any of their respective properties or assets, or, to its knowledge, any employee, agent, director or officer, in his or her capacity as such, of Datakey

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which, if pending on the date hereof, would have been required to have been disclosed in the Merger Agreement or which relates to the consummation of the Offer or the Merger;

provided, however, that no such notification shall affect the representations, warranties, covenants or agreements of the parties or the conditions to the obligations of the parties under the Merger Agreement or the Purchaser Option.

      Employee Benefits. SafeNet will to the extent practicable either maintain and provide to Datakey’s employees the employee benefits and programs as substantially in effect as of the date of the Merger Agreement or cause the Surviving Corporation to provide employee benefits and programs to Datakey’s employees that, in the aggregate, are substantially comparable to those of SafeNet. However, the Surviving Corporation or SafeNet may amend, suspend or terminate any of its employee benefit plans or programs at any time.

      From and after the Merger, Surviving Corporation shall honor, in accordance with their terms, all employment and severance agreements in effect immediately prior to the Merger that are applicable to any current or former employees or directors of Datakey.

      Representations and Warranties. Pursuant to the Merger Agreement, Datakey has made customary representations and warranties to SafeNet and the Purchaser with respect to, among other things, its due incorporation and good standing, its capitalization, its subsidiaries, its authority to consummate the transactions and the binding nature of the Merger Agreement, required government approvals, compliance with its charter, bylaws, and contracts, its filings with the SEC and its financial statements, the absence of changes in its business, the absence of undisclosed liabilities, its compliance with laws, its obtaining of any required permits, its involvement in litigation, any restrictions on its business activities, its contracts, any government contracts, its technology and intellectual property, its employee benefit plans, its taxes and tax returns, any finders and investment bankers used by it, its obtaining a fairness opinion, its insurance coverage, requisite votes and applicable statutes to the transactions, title to its properties, its employee matters, its customers and suppliers, its orders, commitments, and returns, its inventory, its accounts receivable, environmental matters, its rights plan, its Schedule 14D-9, documents related to the Offer and any proxy statement, the absence of questionable payments, and the completeness of each of the foregoing representations and warranties.

      Certain representations and warranties in the Merger Agreement made by Datakey are qualified as to “materiality” or “Material Adverse Effect.” For purposes of the Merger Agreement and this Offer to Purchase, the term “Material Adverse Effect” shall mean a material adverse effect on the business, assets, condition (financial or otherwise), liabilities or the results of operations of Datakey, except in each case for any such effects resulting from, arising out of, or relating to (i) general business or economic conditions, (ii) conditions generally affecting the industry in which Datakey competes, or (iii) the taking of any action contemplated by the Merger Agreement.

      Pursuant to the Merger Agreement, SafeNet has made customary representations and warranties to Datakey with respect to, among other things, incorporation and good standing, its authority to consummate the transactions and the binding nature of the Merger Agreement, required government approvals, compliance with its charter, bylaws, and contracts, any finders or investment bankers used by it, and its ability to finance the Merger.

      None of the representations and warranties contained in the Merger Agreement or in any schedule, instrument or other document delivered pursuant to the Merger Agreement shall survive the effective time of the Merger. Only the covenants and exhibits in the Merger Agreement that by their terms survive the effective time of the Merger.

      Termination; Fees. The Merger Agreement may be terminated and the transactions contemplated by the Merger Agreement may be abandoned at any time before the effective time of the Merger, whether before or after shareholder approval thereof:

•  by mutual written consent duly authorized by the board of directors of SafeNet and the board of directors of Datakey; or

•  by either SafeNet or Datakey

•  if a court of competent jurisdiction or other governmental entity issued an order, decree or ruling or taken any other action (including the failure to have taken an action), in each case having the effect of permanently restraining, enjoining or otherwise prohibiting any of the transactions contemplated by the Merger Agreement;

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•  if the Merger shall not have been consummated prior to December 31, 2004 (the “Termination Date”), provided that the party responsible for the failure of this condition to occur may not invoke it as the basis for termination; or

•  if required under the MBCA, the vote of Datakey’s stockholders shall have been taken at a meeting duly convened therefor which is insufficient to approve the Merger and the Merger Agreement.

      or

•  by SafeNet if

•  there has been a material breach by Datakey of any representation, warranty, covenant or agreement set forth in the Merger Agreement, which breach has not been cured or such condition has not been satisfied within 20 business days after the giving of written notice thereof to;

•  Datakey has breached in any material respect its covenant against solicitation described in Section 13 — “The Merger Agreement and other Agreements.”

•  Datakey’s board of directors (or special committee thereof) shall have withdrawn or modified in a manner adverse to SafeNet its approval or recommendation of the Offer, the Merger or the Merger Agreement, or failed to reconfirm its recommendation within five (5) business days after a written request to do so, or approved or recommended any Company Superior Offer (or Datakey’s Board of Directors (or special committee) shall have resolved to take any of the foregoing actions);

•  on or before the expiration date of the Offer (the “Decision Date”), if any one or more material consents required from third parties (other than governmental authorities) in connection with the Merger Agreement have not been obtained; or

•  other than as a result of a breach by the Purchaser or SafeNet of its obligations under the Merger Agreement, if as a result of any condition to the Offer set forth in the Merger Agreement failing to be satisfied, SafeNet have (i) failed to commence the Offer within 30 days following the date the Merger Agreement, or (ii) terminated the Offer without having accepted any Shares for payment thereunder.

•  by Datakey if

•  there has been a material breach by SafeNet or the Purchaser of any representation, warranty, covenant or agreement contained in the Merger Agreement which breach has not been cured or which condition has not been satisfied within 20 business days after the receipt of notice thereof; or

•  by Datakey, upon approval of its Board of Directors, if the Purchaser shall have terminated the Offer without having accepted any Shares for payment thereunder, other than as a result of a breach by Datakey of its obligations hereunder.

      The Merger Agreement shall also be terminated without any action on the part of any party thereto on the day immediately following the Decision Date in the event that all material consents required from third parties (other than Governmental Authorities) in connection with the Merger Agreement have not been obtained by Datakey by or on the Decision Date and Purchaser (i) has not terminated the Agreement by or on the Decision Date or (ii) has not waived all such material consents which have not been obtained by Datakey by or on the Decision Date.

Effect of Termination

      In the event of the termination of the Merger Agreement, written notice thereof shall forthwith be given to the other party or parties and the Merger Agreement shall forthwith become null and void and there shall be no liability on the part of SafeNet, the Purchaser or Datakey (or any of their affiliates) provided, however, that no such termination shall relieve any party hereto from any liability for any breach of the Merger Agreement prior to termination. If the Merger Agreement is terminated, each party shall use its reasonable best efforts to redeliver all documents, work papers and other material (including any copies thereof) of any other party relating to the transactions contemplated hereby, whether obtained before or after the execution hereof, to the party furnishing the same.

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Purchaser Termination Fee

      In the event that prior to termination of the Merger Agreement a bona fide Company Takeover Proposal shall have been made and thereafter:

      (x) the Merger Agreement is terminated by SafeNet or Datakey because the Merger shall not have been consummated by the Termination Date or the vote of Datakey’s stockholders (if required under the MBCA) shall have been taken at a meeting duly convened therefor and shall be insufficient to approve the Merger and the Merger Agreement; or

      (y) by Purchaser because of:

•  a material breach by Datakey of any representation, warranty, covenant or agreement set forth in the Merger Agreement, which breach was not cured or such condition satisfied within 20 business days after the giving of written notice thereof ;

•  a material breach by Datakey of its covenant against solicitation described in Section 13 — “No Solicitation;”

•  Datakey’s board of directors (or special committee thereof) having withdrawn or modified in a manner adverse to the Purchaser its approval or recommendation of the Offer, the Merger or the Merger Agreement, or failed to reconfirm its recommendation within five (5) business days after a written request to do so, or approved or recommended any Company Superior Offer (or resolved to take any of these actions);

•  the failure of Datakey to obtain, on or before the Decision Date, any one or more material consents required from third parties (other than governmental authorities) in connection with the Merger Agreement; or

•  the failure of any condition to the Offer set forth in the Merger Agreement to be satisfied, where SafeNet shall have (i) failed to commence the Offer within 30 days following the date the Merger Agreement, or (ii) terminated the Offer without having accepted any Shares for payment thereunder, provided that the condition not satisfied

      (i) was related to the acquisition of Datakey by a third party or a change in the recommendation by Datakey’s board of directors of the Offer or the Merger;

      (ii) involved the representations and warranties of Datakey set forth in the Agreement not having been true and correct in all material respects;

      (iii) involved Datakey’s failure to perform in all material respects any obligation or to comply in any material respect with any agreement or covenant under the Merger Agreement;

      (iv) obligated Datakey to obtain all material Consents required from third parties (other than governmental authorities); or

      (v) required that certain representations and warranties related to legal requirements applicable to the Offer and the Merger be true in all respects or stated that Datakey’s Rights Plan be amended to facilitate the Offer and the Merger;

then Datakey shall promptly pay SafeNet One Million Dollars ($1,000,000), plus the reimbursement of any and all expenses incurred by Purchaser and SafeNet in connection with the transactions contemplated by the Merger Agreement up to Three Hundred Thousand Dollars ($300,000).

      In addition to the termination fee payable to SafeNet pursuant to the Merger Agreement described above, Datakey is obligated to pay SafeNet $500,000 pursuant to the Loan Agreement if Datakey enters into any acquisition transactions with third parties other than SafeNet prior to the loan being repaid (in addition to the immediate repayment of principal and interest due under the note).

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Datakey Termination Fee

      In the event that (1) Purchaser terminates the Merger Agreement solely because, as a result of any condition to the Offer set forth in the Merger Agreement failing to be satisfied, SafeNet shall have (i) failed to commence the Offer within 30 days following the date of the Merger Agreement, or (ii) terminated the Offer without having accepted any Shares for Payment, (2) Purchaser does not certify that its termination is based upon unsatisfactory results of its due diligence investigation, and (3) at the time of such termination, more than 75% of the Shares (including all of the Convertible Preferred Stock) shall have been validly tendered and not withdrawn pursuant to the Offer, then Purchaser shall pay Datakey One Million Dollars ($1,000,000) plus the reimbursement of any and all Datakey expenses incurred in connection with the transactions contemplated by the Merger Agreement up to Three Hundred Thousand Dollars ($300,000).

Stockholders Agreement

      The following summary of certain provisions of the Stockholders Agreement is qualified in its entirety by reference to the Stockholders Agreement itself, which is incorporated herein by reference and a copy of which has been filed with the SEC as Exhibit (d)(2) to the Schedule TO. Stockholders and other invested parties should read the Stockholders Agreement in its entirety for a more complete description of the provisions summarized below.

      As a condition and inducement to SafeNet’s and the Purchaser’s willingness to enter into the Merger Agreement, each director of Datakey and each of Norwest Equity Partners V, Perkins Capital Management, Inc., Timothy L. Russell, Christopher A. Schwartzbauer, and David A. Feste executed the Stockholders Agreement. The Stockholders Agreement provides for the tender into the Offer of all Shares held by the Stockholders which represent all of the outstanding Shares of Convertible Preferred Stock and approximately 23% of the issued and outstanding Shares and, in addition, requires that Stockholders tender Shares acquired after the date of the Stockholders Agreement, whether upon the exercise of warrants or options to acquire Shares or otherwise. Shares subject to the Stockholders Agreement must be validly tendered into the Offer as promptly as practicable, and in any event no later than the fifth business day, following the commencement of the Offer and receipt of the applicable tender offer documentation. The Stockholders may not withdraw any Shares so tendered unless the Stockholders Agreement is terminated or the Offer is terminated or has expired without the Purchaser purchasing all Shares validly tendered in the Offer and not withdrawn. Notwithstanding the foregoing, each Stockholder may decline to tender, or may withdraw, any and all of such Stockholders’ Shares if, without the consent of such Stockholder, the Purchaser amends the Offer to reduce the Offer Price, reduces the number of Shares subject to the Offer, changes the form of consideration payable in the Offer or amends or modifies any term or condition of the Offer in a manner adverse to the stockholders of Datakey (other than insignificant changes or amendments or other than to waive any condition). Notwithstanding the foregoing, SafeNet does not plan to compel the tender of more than 19.9% of the outstanding capital stock of Datakey, including but not limited to the Shares.

      Prior to the termination of the Stockholders Agreement and except as otherwise provided therein, each of the Stockholders will not:

•  transfer, assign, sell, gift-over, pledge, hypothecate, encumber or otherwise dispose of, or consent to any of the foregoing (“Transfer”), any or all of the Shares, options, warrants or other rights to acquire Common Stock or Convertible Preferred Stock or any right or interest therein;

•  enter into any contract, option or other agreement, arrangement or understanding with respect to any Transfer;

•  grant any proxy, power-of-attorney or other authorization or consent with respect to any of the Shares;

•  deposit any of the Shares into a voting trust, or enter into a voting agreement or arrangement with respect to any of the Shares; or

•  take any other action that would in any way restrict, limit or interfere with the performance of such Stockholder’s obligations hereunder or the transactions contemplated hereby or make any representation or warranty of such Stockholder untrue or incorrect.

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      Each Stockholder will during the time the Stockholders Agreement is in effect, at any meeting of the stockholders of Datakey (a “Datakey Stockholders’ Meeting”), however called, and at every adjournment or postponement thereof:

•  appear at the meeting or otherwise cause his or its Shares to be counted as present thereat for purposes of establishing a quorum;

•  vote, or execute consents in respect of, his, hers or its Shares, or cause his, hers or its Shares to be voted, or consents to be executed in respect thereof, in favor of the approval and adoption of the Merger Agreement (including any revised or amended Merger Agreement that has been agreed to by Datakey) and the Merger, and any action required in furtherance thereof; and

•  vote, or execute consents in respect of, his, hers or its Shares, or cause his, hers or its Shares to be voted, or consents to be executed in respect thereof, against any agreement or transaction relating to any acquisition proposal (other than as proposed by SafeNet or the Purchaser) or any amendment of Datakey’s certificate of incorporation or bylaws or other proposal, action or transaction involving Datakey or any of its subsidiaries or any of its stockholders, which amendment or other proposal, action or transaction that could reasonably be expected to prevent or materially impede or delay the consummation of the Offer or Merger or the other transactions contemplated by the Merger Agreement or the consummation of the transactions contemplated by the Merger Agreement or to deprive SafeNet of any material portion of the benefits anticipated by SafeNet to be received from the consummation of the Merger or the other transactions or the transactions contemplated by the Stockholders Agreement, or change in any manner the voting rights of Common Stock or Convertible Preferred Stock presented to the stockholders of Datakey (regardless of any recommendation of the board of directors of Datakey) or in respect of which vote or consent of the Stockholder is requested or sought, unless such transaction has been approved in advance by SafeNet or the Purchaser.

      Notwithstanding the foregoing, SafeNet does not plan to restrict the vote of more than 19.9% of the outstanding capital stock of Datakey.

      As security for the Stockholders’ voting obligations, each of the Stockholders irrevocably constituted and appointed SafeNet, Kevin Hicks and its or his designees as his or its attorney and proxy in accordance with the MBCA, with full power of substitution and resubstitution, to cause the Stockholder’s shares to be counted as present at any Datakey stockholders meetings, to vote his or its Shares at any Datakey stockholders meeting, however called, and to execute consents in respect of his or its Shares as and to the extent provided in the Stockholders Agreement relating to the voting of the Shares.

      The Stockholders Agreement, and all rights and obligations of the parties thereunder, will terminate immediately upon the termination of the Merger Agreement by SafeNet or otherwise upon the earlier to occur of (1) termination of the Merger Agreement by Datakey and (2) December 31, 2004.

The Stock Option Agreement

      The following summary of certain provisions of the Stock Option Agreement is qualified in its entirety by reference to the Stock Option Agreement itself, which is incorporated herein by reference and a copy of which has been filed with the SEC as Exhibit (d)(3) to the Schedule TO. Stockholders and other invested parties should read the Stock Option Agreement in its entirety for a more complete description of the provisions summarized below.

      As a condition and inducement to SafeNet’s and Purchaser’s willingness to enter into the Merger Agreement, Datakey entered into a Stock Option Agreement, dated September 9, 2004 (the “Stock Option Agreement”), by and between SafeNet, Purchaser and Datakey, pursuant to which Datakey granted Purchaser an irrevocable option (the “Purchaser Option”) to purchase for the Offer Price, shares of Common Stock and/or Convertible Preferred Stock, in such relative amounts as shall be determined by Purchaser in its discretion up to such number of shares which, upon exercise would result in Purchaser owning in excess of 90% of the then-outstanding shares of Common Stock and Convertible Preferred Stock on as-converted, fully diluted basis (collectively, the “Optioned Shares”). Purchaser’s exercise of the Purchaser Option for Common Stock is conditioned upon Purchaser and SafeNet owning in the aggregate, immediately following such exercise, at least 90% of the outstanding shares of Common Stock. Purchaser’s exercise of the

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Purchaser Option for Convertible Preferred Stock is conditioned upon Purchaser and SafeNet owning in the aggregate, immediately following such exercise, at least 90% of the outstanding Shares of Convertible Stock.

      The Purchaser Option provides that Purchaser will pay for the Optioned Shares upon exercise of the Purchaser Option by delivering to Datakey the aggregate price for the par value of the Optioned Shares so purchased in official bank check or by wire transfer to a bank designated in writing by Datakey and by delivering to Datakey a promissory note of Purchaser substantially in the form attached to the Stock Option Agreement for the balance of the exercise price.

Loan Agreement

      SafeNet and Datakey entered into a Secured Loan Purchase Agreement dated September 9, 2004 (the “Loan Agreement”), pursuant to which SafeNet agreed to loan approximately $2.2 million to Datakey to repay the principal and interest due on outstanding convertible promissory notes of Datakey.

      In connection with the loan, Datakey issued a promissory note to SafeNet bearing interest at a rate of 10% per annum. The entire outstanding principal balance of the note and all accrued and unpaid interest thereon is due and payable on September 9, 2005. The note cannot be prepaid prior to December 31, 2004 and Datakey’s obligations under the note are secured by all of the assets of Datakey pursuant to a general security agreement and an intellectual property security agreement by and between Datakey and SafeNet.

      If under certain circumstance Datakey enters into certain acquisition transactions with a party or parties other than SafeNet or its affiliates prior to the note being paid in full, then SafeNet is entitled to receive an additional $500,000 payment in addition to the principal and interest due under the note.

Mutual Nondisclosure Agreement

      The following summary of certain provisions of the Mutual Nondisclosure Agreement (as defined below) is qualified in its entirety by reference to the Mutual Nondisclosure Agreement itself, which is incorporated herein by reference and a copy of which has been filed with the SEC as Exhibit (d)(4) to the Schedule TO. Stockholders and other interested parties should read the Mutual Nondisclosure Agreement in its entirety for a more complete description of the provisions summarized below.

      SafeNet and Datakey entered into a confidentiality agreement on August 3, 2004 (the “Mutual Nondisclosure Agreement”). The Mutual Nondisclosure Agreement contains customary provisions pursuant to which, among other matters, the parties agreed, subject to certain exceptions, to keep confidential all nonpublic information regarding the disclosing party which is furnished to the receiving party (the “Confidential Information”), and to use the Confidential Information, or notes, summaries, or other material derived therefrom solely for the purpose of evaluating a possible transaction involving Datakey and SafeNet. Upon termination of negotiations before the execution of a contract, the receiving party must return all Confidential Information disclosed under the Mutual Nondisclosure Agreement. The confidentiality obligations set forth in the Mutual Nondisclosure Agreement remain in effect for three years. The Mutual Nondisclosure Agreement also provides that neither party will, for one year, solicit for employment any employee of the other party or any other employee of the other party about whom the hiring received confidential information.

14. Certain Conditions of the Offer

      Conditions of the Offer. Capitalized terms used but not otherwise defined herein shall have the meanings set forth in the Merger Agreement. The Merger Agreement may be examined, and copies obtained, in the manner set forth in Section 9 — “Certain Information Concerning Datakey.” Notwithstanding any other provisions of the Offer, and in addition to (and not in limitation of) Purchaser’s rights to extend and amend the Offer at any time in its sole discretion (subject to the provisions of the Merger Agreement), Purchaser is not required to accept for payment or, subject to any applicable rules and regulations of the SEC, including Rule 14e-1(c) under the Exchange Act (relating to Purchaser’s obligation to pay for or return tendered Shares promptly after termination or withdrawal of the Offer), pay for, and may delay the acceptance for payment of or, subject to the restriction referred to above, the payment for, any validly tendered Shares unless the Minimum Condition has been satisfied (though Purchaser may elect to waive the Minimum Condition,

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Purchaser has no intention to do so). Furthermore, notwithstanding any other provisions of the Offer, Purchaser shall not be required to accept for payment or pay for any validly tendered Shares if, at the scheduled expiration date any of the following conditions shall exist:

•  there shall have been entered or threatened by any governmental authority, any judgment, order, action, or decree: (i) which could reasonably be expected to restrain or make more costly the Offer; (ii) which could reasonably be expected to limit the ownership or operation by SafeNet, Purchaser or any of their subsidiaries of all or any portion of the business or assets of Datakey or to require Datakey to dispose of all or any portion of the business, assets, or shares of Datakey; (iii) which could reasonably be expected to impose limitations on the ability of Purchaser, SafeNet, or any other affiliate of Purchaser to exercise full rights of ownership of any Shares; or (iv) which otherwise could reasonably be expected to have a Company Material Adverse Effect or a Purchaser Material Adverse Effect;

•  there shall have been any law or interpretation of any nature pending, proposed, or issued by any governmental authority or deemed by any governmental authority applicable to (i) Purchaser, Datakey or any subsidiary or affiliate of Purchaser or Datakey or (ii) any transaction contemplated by the Agreement, which is reasonably likely to result, directly or indirectly, in any of the consequences referred to in the paragraph above;

•  there shall have occurred any changes, conditions, events or developments that would have, or be reasonably likely to have, individually or in the aggregate, a Material Adverse Effect;

•  there shall have occurred (i) any general suspension of, or limitation on prices for, trading in securities on the New York Stock Exchange or NASDAQ, (ii) a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (iii) any limitation on the extension of credit by banks in the United States, (iv) the commencement of a war, armed hostilities or any other international or national calamity involving the United States or (v) in the case of any of the foregoing existing at the time of the commencement of the offer, a material acceleration or worsening thereof;

•  it shall have been publicly disclosed or the Purchaser shall have otherwise learned that any person, other than Purchaser or SafeNet, shall have acquired or entered into a definitive agreement or agreement in principle to acquire beneficial ownership of 50% or more of the then outstanding Shares, or (ii) the board of directors of Datakey, the Special Committee or any other committee thereof shall have (A) withdrawn, modified or changed, in a manner adverse to Purchaser or SafeNet, the recommendation by such board of directors or approval by such committee of the Offer, the Merger or the Merger Agreement, including, without limitation, the Minnesota Anti-Takeover Approval of the Special Committee, (B) approved or recommended, or proposed publicly to approve or recommend, a Company Takeover Proposal, (C) caused Datakey to enter into any agreement relating to any Company Takeover Proposal, or (D) resolved to do any of the foregoing;

•  the representations and warranties of Datakey set forth in the Agreement shall not be true and correct in all material respects as of the date of the Agreement and as of such time on or after the date of the Agreement;

•  Datakey shall have failed to perform in any material respect any obligation or to comply in any material respect with any agreement or covenant of Datakey to be performed or complied with by it under the Agreement;

•  all material Consents required from third parties (other than Governmental Authorities) in connection with the Agreement and the transactions contemplated thereby have not been obtained by Datakey by or on the Decision Date and Purchaser has not waived all material Consents not obtained;

•  the Merger Agreement shall have been terminated in accordance with its terms;

•  Purchaser and SafeNet shall have agreed that Purchaser shall terminate the Offer or postpone the acceptance for payment of or payment for Shares thereunder;

•  if any one or more of the representations and warranties related to legal requirements applicable to the Offer and the Merger or the amendment of the Datakey’s Rights Plan to facilitate the Merger shall have been breached in any respect or are inaccurate in any respect; or

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•  any non-competition or similar obligations of Datakey could reasonably be expected to prohibit or restrict SafeNet or any of SafeNet’s subsidiaries from developing, manufacturing, marketing or selling any of the current products of SafeNet or its subsidiaries or any products of SafeNet or its subsidiaries currently in design or development.

      The foregoing conditions are for the benefit of SafeNet and Purchaser and may be asserted by SafeNet or Purchaser regardless of the circumstances giving rise to any such condition or may be waived by Purchaser or Merger Sub in whole or in part at any time and from time to time in their reasonable discretion. The failure by SafeNet or Purchaser at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right; the waiver of any such right with respect to particular facts and other circumstances shall not be deemed a waiver with respect to any other facts and circumstances; and each such right shall be deemed an ongoing right that may be asserted at any time and from time to time.

15. Certain Legal Matters

      Except as described in this Section 15 — “Certain Legal Matters,” based on information provided by Datakey, none of Datakey, Purchaser or SafeNet is aware of any license or regulatory permit that appears to be material to the business of Datakey that might be adversely affected by the Purchaser’s acquisition of shares as contemplated herein or of any approval or other action by a domestic or foreign governmental, administrative or regulatory agency or authority that would be required for the acquisition and ownership of the shares by the Purchaser as contemplated herein. Should any such approval or other action be required, the Purchaser and SafeNet presently contemplate that such approval or other action will be sought, except as described below under “State Takeover Statutes.” While, except as otherwise described in this Offer to Purchase, the Purchaser does not presently intend to delay the acceptance for payment of or payment for shares tendered pursuant to the Offer pending the outcome of any such matter, there can be no assurance that any such approval or other action, if needed, would be obtained or would be obtained without substantial conditions or that failure to obtain any such approval or other action might not result in consequences adverse to Datakey’s business or that certain parts of Datakey’s business might not have to be disposed of or other substantial conditions complied with in the event that such approvals were not obtained or such other actions were not taken or in order to obtain any such approval or other action. If certain types of adverse action are taken with respect to the matters discussed below, the Purchaser could decline to accept for payment or pay for any shares tendered. See Section 14 — “Certain Conditions of the Offer” for certain conditions to the Offer, including conditions with respect to governmental actions.

Anti-Takeover Statutes

      State Takeover Statutes. A number of states have adopted laws and regulations that purport to apply to attempts to acquire corporations that are incorporated in such states, or whose business operations have substantial economic effects in such states, or which have substantial assets, security holders, employees, principal executive offices or principal places of business in such states. In Edgar v. MITE Corp., the Supreme Court of the United States (the “Supreme Court”) invalidated on constitutional grounds the Illinois Business Takeover statute, which, as a matter of state securities law, made takeovers of corporations meeting certain requirements more difficult. However, in 1987, in CTS Corp. v. Dynamics Corp. of America, the Supreme Court held that the State of Indiana may, as a matter of corporate law and, in particular, with respect to those aspects of corporate law concerning corporate governance, constitutionally disqualify a potential acquiror from voting on the affairs of a target corporation without the prior approval of the remaining stockholders. The state law before the Supreme Court was by its terms applicable only to corporations that had a substantial number of stockholders in the state and were incorporated there.

      Certain provisions of Minnesota law described below could have an anti-takeover effect.

      Section 302A.671 of the MBCA applies, with certain exceptions, to any acquisition of a corporation’s voting stock from a person, other than the corporation and other than in connection with certain mergers and exchanges to which the corporation is a party, that results in the acquiring person owning 20% or more of the corporation’s voting stock then outstanding. Similar triggering events occur at the one-third and majority ownership levels. Section 302A.671 requires approval of any such acquisition by a majority vote of the corporation’s disinterested stockholders and a majority vote of all the corporation’s stockholders. In general, shares acquired in excess of the applicable percentage threshold in the absence of such approval are denied voting rights and are redeemable at their then fair market value by the corporation

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during a specified time period. Because a committee of disinterested directors of Datakey approved the Offer, the shares acquired in the Offer will not be subject to Section 302A.671.

      Section 302A.673 of the Minnesota Business Corporation Act generally prohibits a corporation or any of its subsidiaries from entering into any business combination transaction with a shareholder for a period of four years after the shareholder acquires 10% or more of the corporation’s voting stock then outstanding. An exception is provided for circumstances in which, before the 10% share-ownership threshold is reached, either the transaction or the share acquisition is approved by a committee of the corporation’s board of directors composed of one or more disinterested directors. The Offer received the necessary approval to exempt the Purchaser, SafeNet, and their affiliates and associates from the four-year moratorium under Section 302A.673.

      The Minnesota Business Corporation Act contains a “fair price” provision in Section 302A.675. This provision provides that no person may acquire any shares of a corporation within two years following the person’s last purchase of the corporation’s shares in a takeover offer unless all stockholders are given the opportunity to dispose of their shares to the person on terms that are substantially equivalent to those in the earlier takeover offer. This provision does not apply if the acquisition is approved by a committee of disinterested directors before any shares are acquired in the takeover offer. Because the requisite approval was obtained, Section 302A.675 does not apply to the Merger.

      Section 302A.553, subdivision 3, of the Minnesota Business Corporation Act prohibits a corporation from purchasing any voting shares owned for less than two years from a holder of more than 5% of the corporation’s outstanding voting stock for more than the market value of the shares. Exceptions to this provision are provided if the share purchase is approved by a majority of the corporation’s stockholders or if the corporation makes a repurchase offer of equal or greater value to all stockholders.

      Antitrust. Neither the Offer nor the Merger are subject to the Hart-Scott-Rodino Antitrust Improvements Act, which provides that certain acquisition transactions may not be consummated unless certain information has been furnished to the Antitrust Division of the Department of Justice and the Federal Trade Commission and a waiting period has elapsed.

      Federal Reserve Board Regulations. Regulations G, U and X (the “Margin Regulations”) of the Federal Reserve Board restrict the extension or maintenance of credit for the purpose of buying or carrying margin stock, including the Shares, if the credit is secured directly or indirectly by margin stock. Such secured credit may not be extended or maintained in an amount that exceeds the maximum loan value of all the direct and indirect collateral securing the credit, including margin stock and other collateral. All financing for the Offer has been structured so as to be in full compliance with the Margin Regulations.

Potential Litigation

      On September 14, 2004, certain holders of Datakey promissory notes asserted to Datakey’s counsel that the note holders are owed a $500,000 payment under the Secured Convertible Promissory Note Purchase Agreement dated October 17, 2003. In addition to demanding this payment, these note holders also threaten to bring legal action against Datakey for claims based on alleged denial of board observation rights and failure to “maximize value to all equity holders.” The note holders threaten to seek monetary damages or injunctive relief from Datakey and its directors. Datakey denies all such claims and intends to defend all actions taken against it by the note holders.

16. Fees and Expenses

      Except as set forth below, neither SafeNet nor the Purchaser will pay any fees or commissions to any broker, dealer or other person for soliciting tenders of Shares pursuant to the Offer.

      The Purchaser has retained Innisfree M & A Incorporated to act as the Information Agent and Wells Fargo Bank, N.A. to act as the Depositary in connection with the Offer. Such firms each will receive reasonable and customary compensation for their services. The Purchaser has also agreed to reimburse each such firm for certain reasonable out-of-pocket expenses and to indemnify each such firm against certain liabilities in connection with their services, including certain liabilities under federal securities laws.

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      The Purchaser will not pay any fees or commissions to any broker or dealer or other person (other than the Information Agent) for making solicitations or recommendations in connection with the Offer. Brokers, dealers, banks and trust companies will be reimbursed by the Purchaser for customary mailing and handling expenses incurred by them in forwarding material to their customers.

17. Miscellaneous

      The Offer is being made to all holders of Shares. The Purchaser is not aware of any jurisdiction in which the making of the Offer or the tender of shares in connection therewith would not be in compliance with the laws of such jurisdiction. If the Purchaser becomes aware of any jurisdiction in which the making of the Offer would not be in compliance with applicable law, the Purchaser will make a good faith effort to comply with any such law. If, after such good faith effort, the Purchaser cannot comply with any such law, the Offer will not be made to (nor will tenders be accepted from or on behalf of) the holders of shares residing in such jurisdiction. In any jurisdiction where the securities, blue sky or other laws require the Offer to be made by a licensed broker or dealer, the Offer will be deemed to be made on behalf of the Purchaser by one or more registered brokers or dealers licensed under the laws of such jurisdiction.

      NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION ON BEHALF OF SAFENET OR THE PURCHASER NOT CONTAINED HEREIN OR IN THE LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.

      SafeNet and Purchaser have filed with the SEC the Tender Offer Statement on Schedule TO pursuant to Rule 14d-3 under the Exchange Act, together with the exhibits thereto, furnishing certain additional information with respect to the Offer, and may file amendments thereto. In addition, Datakey has filed the Schedule 14D-9 pursuant to Rule 14d-9 under the Exchange Act, together with exhibits thereto, setting forth its recommendation and furnishing certain additional related information. Such Schedule and any amendments thereto, including exhibits, may be examined and copies may be obtained in the manner set forth in Section 8 — “Certain Information Concerning Datakey.”

Snowflake Acquisition Corp.,

a wholly-owned subsidiary of

SafeNet, Inc.

September 21, 2004

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SCHEDULE I

DIRECTORS AND EXECUTIVE OFFICERS OF SAFENET AND THE PURCHASER

      The names of the directors and executive officers of SafeNet, Inc. and Snowflake Acquisition Corp. and their present principal occupations or employment and material employment history for the past five years are set forth below. Unless otherwise indicated, each director and executive officer has been so employed for a period in excess of five years. Unless otherwise indicated, each individual is a citizen of the United States; his or her business address is 4690 Millennium Drive Belcamp, Maryland 21017.

SafeNet, Inc.

Name	Age		Office and Principal Occupation	Director Since
Anthony A. Caputo		62	Chairman and Chief Executive Officer		1986
Carole D. Argo		43	President and Chief Operating Officer		n/a
Ken Mueller		51	Chief Financial Officer and Treasurer
Chris S. Fedde		53	Senior Vice President and General Manager, Enterprise Security Division		n/a
David Potts		35	Senior Vice President and General Manager, Embedded Security Division		n/a
Thomas A. Brooks		67	Director, Rear Admiral, U.S. Navy, Retired		1998
Andrew E. Clark		42	Director, Chairman and President of Wheatfield Ventures, LLC		2001
Shelley A. Harrison		61	Director, Executive Consultant and Venture Capitalist		1999
Ira A. Hunt, Jr.		79	Director, Major General, U.S. Army, Retired		1990
Arthur L. Money		64	Director, President of ALM Consulting		2004
Walter W. Straub		61	Director, Retired		2004
Bruce R. Thaw		51	Director, President and Chief Executive Officer of Bulbtronics, Inc.		1990

      Anthony A. Caputo, the Chairman and Chief Executive Officer of SafeNet, has served as the Chief Executive Officer since 1987 and a director of SafeNet since November 1986. Until 1986, Mr. Caputo was CEO of TACT Technology, a network security firm that he founded in 1982. Mr. Caputo has over 30 years experience in the computer industry, in Marketing and management capacities. In June 1993, Mr. Caputo was named Maryland’s High Tech Entrepreneur of the Year.

      Carole D. Argo joined SafeNet in July 1999 as Senior Vice President and Chief Financial Officer. Ms. Argo was appointed Secretary and Treasurer in January 2000. In 2004, Ms. Argo was appointed President and Chief Operating Officer. Prior to joining SafeNet, Ms. Argo was Chief Financial Officer of Optelecom, Inc., a public company focusing on providing fiber optic equipment for video transmission, from August 1998 to July 1999. Previously, Ms. Argo was the Vice President of Finance and Operations for Byk Gardner, a color and appearance instrumentation company, for eight years. Ms. Argo has seven years of public accounting experience as an audit professional, most recently as an Audit Manager at Deloitte and Touche, LLP. She is a Certified Public Accountant and holds a Masters of Business Administration from Loyola College of Maryland and a Bachelor of Science in Accounting from the University of Arizona.

      Ken Mueller joined SafeNet from Microsoft Corp. where he held the position of chief financial officer, Microsoft Business Solutions. Mueller has over 20 years of senior finance experience working in high growth tech companies like Platinum Technology, Galileo International, Apple Computer, and Digital Equipment. In addition, he helped build two start-up companies. Mueller received a Bachelor of Science degree from Northwestern University and a Masters in Business Administration from DePaul University. He is also a Certified Public Accountant.

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      Chris S. Fedde joined SafeNet in February 2001 as Director of Corporate Product Management and Business Development Director for VPN Products. He was appointed Vice President and General Manager, Enterprise Security Division in January 2002 and Senior Vice President in January 2003. Prior to joining Datakey, Mr. Fedde was Director of Secure Products at Harris Corporation from 1997 to February 2001, where he established and directed the security business unit. He was responsible for the general management of the custom ASIC security business and turnkey secure systems and managed the business development and engineering departments. Before his employment at Harris, Mr. Fedde was the Engineering Manager at Motorola, developing wireless two-way products for the global markets. Mr. Fedde holds several patents related to wireless technologies. Mr. Fedde received his Bachelor of Science in Engineering from the University of Iowa.

      David Potts joined SafeNet in April 2003 as Senior Vice President and General Manager, Embedded Security Division. Prior to joining Datakey, Mr. Potts was Worldwide Director of Applications at Texas Instruments, where he led the formation of the OMAPTM business unit. He was responsible for creating key software development and applications teams, as well as driving numerous business, investment and operations activities. Prior to his position as Worldwide Director of Applications, Mr. Potts led the formation of design and product engineering teams in four different business startups at Texas Instruments over the last ten years. Mr. Potts received his Masters of Business Administration from the University of Texas at Austin and his Bachelor of Science in Electrical Engineering from Kansas State University.

      Thomas A. Brooks has served as a director of SafeNet since July 1998. Mr. Brooks held various executive positions with AT&T from 1991 through 1999. He retired from AT&T in 1999 and continues as a consultant to AT&T Government Markets. Mr. Brooks served 32 years as a U.S. Navy Intelligence officer, retiring from active military service as a Rear Admiral and Director of Naval Intelligence in 1991. In 1995, President Clinton appointed Mr. Brooks as one of three members of the Security Policy Advisory Board, where he served through the end of the Clinton Administration. From 1994 to 1997, Mr. Brooks was a member of the Defense Policy Board. He also served on advisory boards for the Defense Policy Board. He also served on advisory boards for the Defense Intelligence Agency and the Office of Naval Intelligence. From 1999 to 2000, he was a member of the Federal Government Joint Security Commission. Mr. Brooks is a graduate of Fordham University, with a Master’s degree from Fairleigh Dickenson University. He has done post Master’s studies at George Washington University and the University of California and has published several articles on cryptography in various technical publications. He serves on the Board of Directors of the Navy Mutual Aid Association and several intelligence professional associations.

      Andrew E. Clark has served as a director of SafeNet since 2001. He is Chairman and President of Wheatfield Ventures, LLC, a private equity firm concentrating on early stage investing within the technology sector. Mr. Clark sits on The Advisory Board of Spring Capital Partners, L.P., a small business investment company providing subordinated mezzanine debt financing in the Mid-Atlantic region. From October 1997 through December 2000, Mr. Clark held various executive positions with Verio, Inc., including President of the eBusiness/ Custom Web Development and East Regional business units. Mr. Clark began his career as a professional at KPMG Peat Marwick. He received his B.S. degree in Accounting from Washington and Lee University and is a Certified Public Accountant in the State of Maryland.

      Shelley A. Harrison has served as a director of SafeNet since 1999. Since May 1, 2003, he has served as a part-time employee of SafeNet. From May 1, 2003 through December 2003, Dr. Harrison provided services relating to SafeNet’s Embedded Security Division and business combination strategy. Since January 1, 2004, he has also provided assistance to SafeNet relating to its growth and capital markets strategies and the operations of SafeNet generally. Dr. Harrison has been Chairman of SPACEHAB Inc. (NASDAQ: SPAB) since August 1993, and served as Chief Executive Officer from April 1996 to March 2003. Dr. Harrison co-founded and served as Chairman and Chief Executive Officer of Symbol Technologies Inc. (NYSE: SBL) from 1973 to 1982. Dr. Harrison is a founder and Managing General Partner of PolyVentures I & II, high-technology venture capital funds organized in 1987 and 1991, respectively. Dr. Harrison was a Member of Technical Staff at Bell Telephone Laboratories and a Professor of Electrical Sciences at the State University of New York at Stony Brook. Dr. Harrison holds a Ph.D. and Master of Science degree in Electrophysics from Polytechnic University and a Bachelor’s Degree of Electrical Engineering from New York University. Dr. Harrison is also a member of the Board of NetManage, Inc., as well as several private technology companies.

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      Ira A. Hunt, Jr. has served as a director of SafeNet since December 1990. Mr. Hunt is a graduate of the U.S. Military Academy, West Point, New York. He served 33 years in various command and staff positions in the U.S. Army, retiring from active military service as a Major General in 1978. Subsequently, Mr. Hunt was President of Pacific Architects and Engineers in Los Angeles, California and a Vice President of Frank E. Basil, Inc. in Washington, D.C. Mr. Hunt has a Master of Science degree in civil engineering from the Massachusetts Institute of Technology; a Master of Business Administration degree from the University of Detroit; a Doctor of the University degree from the University of Grenoble, France; and a Doctor of Business Administration degree from George Washington University.

      Arthur L. Money was appointed to SafeNet’s Board of Directors on March 16, 2004. He was a director of Rainbow Technologies, Inc. from September 2002 until the consummation of the merger of SafeNet and Rainbow in March 2004. He is currently president of ALM Consulting, specializing in command control and communications, intelligence, signal processing, and information processing. From 1999 to 2001, Mr. Money was the assistant secretary of defense (C31) and Department of Defense CIO. Prior to 1999, Mr. Money served as the assistant secretary of the Air Force for Research, Development, and Acquisition, and was vice president and deputy general manager of TRW. Mr. Money graduated from the University of Santa Clara and San Jose State University where he earned his MSME and BSME, respectively. He has received distinguished public service awards from the U.S. Department of Defense (Bronze Palm), the U.S. Air Force, and the U.S. Navy.

      Walter W. Straub was appointed to SafeNet’s Board of Directors on March 16, 2004. A co-founder of Rainbow Technologies, Inc., Mr. Straub was a director of Rainbow from its inception in 1982 until the consummation of the merger of Datakey and Rainbow in March 2004, and served as President and Chief Executive Officer of Rainbow from 1983 through March 2004. Since 1989, Mr. Straub has served as director of CAM Commerce Solutions, a manufacturer of computerized point of sale and inventory management systems. Mr. Straub received a BSEE and an MBA in Finance from Drexel University. In May 1993, Mr. Straub was elected to the Board of Trustees of Drexel University.

      Bruce R. Thaw has served as a director of SafeNet since December 1990. From 1987 to March 31, 2000, Mr. Thaw served as general counsel to SafeNet. Mr. Thaw is currently President and Chief Executive Officer of Bulbtronics, Inc., a national distributor of specialty light sources and related products. Mr. Thaw was admitted to the bar of the State of New York in 1978 and the California State Bar in 1983. Mr. Thaw is also a director of Amtech Systems, Inc., a publicly-traded company engaged in the semiconductor industry, and Nastech Pharmaceutical Company, Inc., a publicly-traded company engaged in drug delivery technology.

Snowflake Acquisition Corp.

Name	Age		Office or Position Held	Director Since
Anthony A. Caputo		62	Chief Executive Officer and Director		2004
Carole D. Argo		43	President and Director		2004
Ken Mueller		51	Chief Financial Officer and Treasurer		n/a
Kevin Hicks		32	Secretary		n/a

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Annex I

Minnesota Anti-Takeover Approval

      The Minnesota anti-takeover statutes impose various restrictions, prohibitions, and other potentially delaying effects on acquisitions of Minnesota corporations. These statutory provisions do not apply in certain circumstances:

•  Section 302A.671 of the Minnesota Business Corporation Act does not apply to a tender offer for all voting shares of a corporation if two conditions are met. First, the offer must have been approved by a committee of disinterested directors of the corporation. Second, at the completion of the offer, the acquiring person must have become the owner of a majority of the outstanding voting shares of the corporation.

•  Section 302A.673 of the Minnesota Business Corporation Act does not apply if, before a person acquires 10% or more of the corporation’s outstanding voting shares, either the share acquisition or the subsequent business combination is approved by a committee of disinterested directors of the corporation.

•  Similarly, Section 302A.675 of the Minnesota Business Corporation Act does not apply if the share acquisition is approved by a committee of disinterested directors of the corporation.

      Under the Minnesota Business Corporation Act, “disinterested directors” are those who are not then employees of the corporation and who were not employees of the corporation within the preceding five years.

      In order to cause these statutes to be inapplicable to the Offer, the Merger, or the transactions contemplated thereby, Datakey’s board of directors appointed a special committee, which was composed of Messrs. Courtney and Glarner, both of whom are disinterested directors under the Minnesota Business Corporation Act. The special committee approved each of those transactions.

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ANNEX II

MINNESOTA BUSINESS CORPORATION ACT

DISSENTERS’ RIGHTS PROVISIONS

302A.471 Rights of dissenting stockholders.

      Subdivision 1. Actions creating rights. A shareholder of a corporation may dissent from, and obtain payment for the fair value of the shareholder’s shares in the event of, any of the following corporate actions:

      (a) unless otherwise provided in the articles, an amendment of the articles that materially and adversely affects the rights or preferences of the shares of the dissenting shareholder in that it:

      (1) alters or abolishes a preferential right of the shares;

      (2) creates, alters, or abolishes a right in respect of the redemption of the shares, including a provision respecting a sinking fund for the redemption or repurchase of the shares;

      (3) alters or abolishes a preemptive right of the holder of the shares to acquire shares, securities other than shares, or rights to purchase shares or securities other than shares;

      (4) excludes or limits the right of a shareholder to vote on a matter, or to cumulate votes, except as the right may be excluded or limited through the authorization or issuance of securities of an existing or new class or series with similar or different voting rights; except that an amendment to the articles of an issuing public corporation that provides that section 302A.671 does not apply to a control share acquisition does not give rise to the right to obtain payment under this section; or

      (5) eliminates the right to obtain payment under this subdivision;

      (b) a sale, lease, transfer, or other disposition of property and assets of the corporation, that requires shareholder approval under section 302A.661, subdivision 2, but not including a disposition in dissolution described in section 302A.725, subdivision 2, or a disposition pursuant to an order of a court, or a disposition for cash on terms requiring that all or substantially all of the net proceeds of disposition be distributed to the stockholders in accordance with their respective interests within one year after the date of disposition;

      (c) a plan of merger, whether under this chapter or under chapter 322B, to which the corporation is a constituent organization, except as provided in subdivision 3, and except for a plan of merger adopted under section 302A.626;

      (d) a plan of exchange, whether under this chapter or under chapter 322B, to which the corporation is a party as the corporation whose shares will be acquired by the acquiring corporation, except as provided in subdivision 3;

      (e) a plan of conversion adopted by the corporation; or

      (f) any other corporate action taken pursuant to a shareholder vote with respect to which the articles, the bylaws, or a resolution approved by the board directs that dissenting stockholders may obtain payment for their shares.

Subd. 2. Beneficial owners.

      (a) A shareholder shall not assert dissenters’ rights as to less than all of the shares registered in the name of the shareholder, unless the shareholder dissents with respect to all the shares that are beneficially owned by another person but registered in the name of the shareholder and discloses the name and address of each beneficial owner on whose behalf the shareholder dissents. In that event, the rights of the dissenter shall be determined as if the shares as to which the shareholder has dissented and the other shares were registered in the names of different stockholders.

      (b) A beneficial owner of shares who is not the shareholder may assert dissenters’ rights with respect to shares held on behalf of the beneficial owner, and shall be treated as a dissenting shareholder under the terms of this section and

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section 302A.473, if the beneficial owner submits to the corporation at the time of or before the assertion of the rights a written consent of the shareholder.

Subd. 3. Rights not to apply.

      (a) Unless the articles, the bylaws, or a resolution approved by the board otherwise provide, the right to obtain payment under this section does not apply to a shareholder of (1) the surviving corporation in a merger with respect to shares of the shareholder that are not entitled to be voted on the merger and are not canceled or exchanged in the merger or (2) the corporation whose shares will be acquired by the acquiring corporation in a plan of exchange with respect to shares of the shareholder that are not entitled to be voted on the plan of exchange and are not exchanged in the plan of exchange.

      (b) If a date is fixed according to section 302A.445, subdivision 1, for the determination of stockholders entitled to receive notice of and to vote on an action described in subdivision 1, only stockholders as of the date fixed, and beneficial owners as of the date fixed who hold through stockholders, as provided in subdivision 2, may exercise dissenters’ rights.

      (c) Notwithstanding subdivision 1, the right to obtain payment under this section, other than in connection with a plan of merger adopted under section 302A.621, is limited in accordance with the following provisions:

      (1) The right to obtain payment under this section is not available for the holders of shares of any class or series of shares that is listed on the New York Stock Exchange or the American Stock Exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc.

      (2) The applicability of clause (1) is determined as of:

      (i) the record date fixed to determine the stockholders entitled to receive notice of, and to vote at, the meeting of stockholders to act upon the corporate action described in subdivision 1; or

      (ii) the day before the effective date of corporate action described in subdivision 1 if there is no meeting of stockholders.

      (3) Clause (1) is not applicable, and the right to obtain payment under this section is available pursuant to subdivision 1, for the holders of any class or series of shares who are required by the terms of the corporate action described in subdivision 1 to accept for such shares anything other than shares, or cash in lieu of fractional shares, of any class or any series of shares of the corporation, or any other proprietary interest of any other entity, that satisfies the standards set forth in clause (1) at the time the corporate action becomes effective.

      Subd. 4.     Other rights. The stockholders of a corporation who have a right under this section to obtain payment for their shares do not have a right at law or in equity to have a corporate action described in subdivision 1 set aside or rescinded, except when the corporate action is fraudulent with regard to the complaining shareholder or the corporation.

302A.473 Procedures for asserting dissenters’ rights.

Subdivision 1. Definitions.

      (a) For purposes of this section, the terms defined in this subdivision have the meanings given them.

      (b) “Corporation” means the issuer of the shares held by a dissenter before the corporate action referred to in section 302A.471, subdivision 1 or the successor by merger of that issuer.

      (c) “Fair value of the shares” means the value of the shares of a corporation immediately before the effective date of the corporate action referred to in section 302A.471, subdivision 1.

      (d) “Interest” means interest commencing five days after the effective date of the corporate action referred to in section 302A.471, subdivision 1, up to and including the date of payment, calculated at the rate provided in section 549.09 for interest on verdicts and judgments.

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      Subd. 2.     Notice of action. If a corporation calls a shareholder meeting at which any action described in section 302A.471, subdivision 1 is to be voted upon, the notice of the meeting shall inform each shareholder of the right to dissent and shall include a copy of section 302A.471 and this section and a brief description of the procedure to be followed under these sections.

      Subd. 3.     Notice of dissent. If the proposed action must be approved by the stockholders and the corporation holds a shareholder meeting, a shareholder who is entitled to dissent under section 302A.471 and who wishes to exercise dissenters’ rights must file with the corporation before the vote on the proposed action a written notice of intent to demand the fair value of the shares owned by the shareholder and must not vote the shares in favor of the proposed action.

      Subd. 4.     Notice of procedure; deposit of shares.

      (a) After the proposed action has been approved by the board and, if necessary, the stockholders, the corporation shall send to (i) all stockholders who have complied with subdivision 3, (ii) all stockholders who did not sign or consent to a written action that gave effect to the action creating the right to obtain payment under section 302A.471, and (iii) all stockholders entitled to dissent if no shareholder vote was required, a notice that contains:

      (1) the address to which a demand for payment and certificates of certificated shares must be sent in order to obtain payment and the date by which they must be received;

      (2) any restrictions on transfer of uncertificated shares that will apply after the demand for payment is received;

      (3) a form to be used to certify the date on which the shareholder, or the beneficial owner on whose behalf the shareholder dissents, acquired the shares or an interest in them and to demand payment; and

      (4) a copy of section 302A.471 and this section and a brief description of the procedures to be followed under these sections.

      (b) In order to receive the fair value of the shares, a dissenting shareholder must demand payment and deposit certificated shares or comply with any restrictions on transfer of uncertificated shares within 30 days after the notice required by paragraph (a) was given, but the dissenter retains all other rights of a shareholder until the proposed action takes effect.

Subd. 5. Payment; return of shares.

      (a) After the corporate action takes effect, or after the corporation receives a valid demand for payment, whichever is later, the corporation shall remit to each dissenting shareholder who has complied with subdivisions 3 and 4 the amount the corporation estimates to be the fair value of the shares, plus interest, accompanied by:

      (1) the corporation’s closing balance sheet and statement of income for a fiscal year ending not more than 16 months before the effective date of the corporate action, together with the latest available interim financial statements;

      (2) an estimate by the corporation of the fair value of the shares and a brief description of the method used to reach the estimate; and

      (3) a copy of section 302A.471 and this section, and a brief description of the procedure to be followed in demanding supplemental payment.

      (b) The corporation may withhold the remittance described in paragraph (a) from a person who was not a shareholder on the date the action dissented from was first announced to the public or who is dissenting on behalf of a person who was not a beneficial owner on that date. If the dissenter has complied with subdivisions 3 and 4, the corporation shall forward to the dissenter the materials described in paragraph (a), a statement of the reason for withholding the remittance, and an offer to pay to the dissenter the amount listed in the materials if the dissenter agrees to accept that amount in full satisfaction. The dissenter may decline the offer and demand payment under subdivision 6. Failure to do so entitles the dissenter only to the amount offered. If the dissenter makes demand, subdivisions 7 and 8 apply.

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      (c) If the corporation fails to remit payment within 60 days of the deposit of certificates or the imposition of transfer restrictions on uncertificated shares, it shall return all deposited certificates and cancel all transfer restrictions. However, the corporation may again give notice under subdivision 4 and require deposit or restrict transfer at a later time.

      Subd. 6.     Supplemental payment; demand. If a dissenter believes that the amount remitted under subdivision 5 is less than the fair value of the shares plus interest, the dissenter may give written notice to the corporation of the dissenter’s own estimate of the fair value of the shares, plus interest, within 30 days after the corporation mails the remittance under subdivision 5, and demand payment of the difference. Otherwise, a dissenter is entitled only to the amount remitted by the corporation.

      Subd. 7.     Petition; determination. If the corporation receives a demand under subdivision 6, it shall, within 60 days after receiving the demand, either pay to the dissenter the amount demanded or agreed to by the dissenter after discussion with the corporation or file in court a petition requesting that the court determine the fair value of the shares, plus interest. The petition shall be filed in the county in which the registered office of the corporation is located, except that a surviving foreign corporation that receives a demand relating to the shares of a constituent domestic corporation shall file the petition in the county in this state in which the last registered office of the constituent corporation was located. The petition shall name as parties all dissenters who have demanded payment under subdivision 6 and who have not reached agreement with the corporation. The corporation shall, after filing the petition, serve all parties with a summons and copy of the petition under the rules of civil procedure.

      Nonresidents of this state may be served by registered or certified mail or by publication as provided by law. Except as otherwise provided, the rules of civil procedure apply to this proceeding. The jurisdiction of the court is plenary and exclusive. The court may appoint appraisers, with powers and authorities the court deems proper, to receive evidence on and recommend the amount of the fair value of the shares. The court shall determine whether the shareholder or stockholders in question have fully complied with the requirements of this section, and shall determine the fair value of the shares, taking into account any and all factors the court finds relevant, computed by any method or combination of methods that the court, in its discretion, sees fit to use, whether or not used by the corporation or by a dissenter. The fair value of the shares as determined by the court is binding on all stockholders, wherever located. A dissenter is entitled to judgment in cash for the amount by which the fair value of the shares as determined by the court, plus interest, exceeds the amount, if any, remitted under subdivision 5, but shall not be liable to the corporation for the amount, if any, by which the amount, if any, remitted to the dissenter under subdivision 5 exceeds the fair value of the shares as determined by the court, plus interest.

Subd. 8. Costs; fees; expenses.

      (a) The court shall determine the costs and expenses of a proceeding under subdivision 7, including the reasonable expenses and compensation of any appraisers appointed by the court, and shall assess those costs and expenses against the corporation, except that the court may assess part or all of those costs and expenses against a dissenter whose action in demanding payment under subdivision 6 is found to be arbitrary, vexatious, or not in good faith.

      (b) If the court finds that the corporation has failed to comply substantially with this section, the court may assess all fees and expenses of any experts or attorneys as the court deems equitable. These fees and expenses may also be assessed against a person who has acted arbitrarily, vexatiously, or not in good faith in bringing the proceeding, and may be awarded to a party injured by those actions.

      (c) The court may award, in its discretion, fees and expenses to an attorney for the dissenters out of the amount awarded to the dissenters, if any.

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      Facsimile copies of the Letter of Transmittal, properly completed and duly signed, will be accepted. The Letter of Transmittal, certificates for shares and any other required documents should be sent or delivered by each stockholder of Datakey or his broker, dealer, commercial bank, trust company or other nominee to the Depositary, at one of the addresses set forth below.

The Depositary for the Offer is:

Wells Fargo Bank, N.A.

By Mail:	By Facsimile Transmission:	By Hand or Overnight Courier:
Wells Fargo Bank, N.A.	For Eligible Institutions Only:	Wells Fargo Bank, N.A.
Shareowner Services		Shareowner Services
Corporate Actions Department	(651) 450-2452	Corporate Actions Department
P.O. Box 64858	For Confirmation Only Telephone:	161 North Concord Exchange
St. Paul, Minnesota 55164-0858	(651) 450-4110	South St. Paul, Minnesota 55075

      Questions and requests for assistance or additional copies of this Offer to Purchase, the Letter of Transmittal, the Notice of Guaranteed Delivery and the Guidelines for Certification of Taxpayer Identification on Substitute Form W-9 may be directed to the Information Agent at the location and telephone number set forth below. Stockholders may also contact their broker, dealer, commercial bank or trust company for assistance concerning the Offer.

The Information Agent for the Offer is:

Innisfree M & A Incorporated

501 Madison Avenue

New York, NY 10022

(212) 750-5833

EX-99.A.2

LETTER OF ELECTION AND TRANSMITTAL

TO

TENDER SHARES OF

COMMON STOCK AND CONVERTIBLE PREFERRED STOCK

OF

DATAKEY, INC. — COMMON STOCK CUSIP #237909 10 6

CONVERTIBLE PREFERRED STOCK CUSIP # None

Pursuant to the Offer to Purchase

dated September 21, 2004

by Snowflake Acquisition Corp.,

a wholly-owned subsidiary of SafeNet, Inc.

THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT MIDNIGHT, NEW YORK

CITY TIME, ON OCTOBER 19, 2004, UNLESS THE OFFER IS EXTENDED.

The Exchange Agent for the Offer is:

Wells Fargo Bank, N.A.

By Mail:	By Hand or Overnight Courier:
Wells Fargo Bank, N.A. Shareowner Services Corporate Actions Department P.O. Box 64858 St. Paul, Minnesota 55164-0858	Wells Fargo Bank, N.A. Shareowner Services Corporate Actions Department 161 North Concord Exchange South St. Paul, Minnesota 55075

      Delivery of this Letter of Election and Transmittal to an address other than as set forth above will not constitute a valid delivery to the Exchange Agent. You must sign this Letter of Election and Transmittal in the appropriate space provided below, with signature guarantee if required, and complete the Substitute Form W-9 set forth below.

      The instructions contained within this Letter of Election and Transmittal should be read carefully before this Letter of Election and Transmittal is completed.

DESCRIPTION OF SHARES OF COMMON STOCK TENDERED
Name(s) and Address(es) of Registered Holder(s)	Share Certificate(s) and Share(s) Tendered
(Please Fill in, if blank)	(Please attach additional signed list, if necessary)
		Total Number of
		Shares of Common	Number of
	Common Stock	Stock Represented	Shares of
	Share Certificate	by Share	Common Stock
	Number(s)(1)	Certificate(s)(1)	Tendered(2)
	Total Shares Tendered

DESCRIPTION OF SHARES OF CONVERTIBLE PREFERRED STOCK TENDERED
Name(s) and Address(es) of Registered Holder(s)	Share Certificate(s) and Share(s) Tendered
(Please Fill in, if blank)	(Please attach additional signed list, if necessary)
		Total Number of
		Shares of
		Convertible	Number of
	Convertible	Preferred Stock	Shares of
	Preferred Stock	Represented	Convertible
	Share Certificate	by Share	Preferred Stock
	Number(s)(1)	Certificate(s)(1)	Tendered(2)
	Total Shares Tendered
(1) Need not be completed by shareholders who deliver Shares by book-entry transfer (“Book-Entry Shareholders”).
(2) Unless otherwise indicated, all Shares represented by Share Certificates delivered to the Exchange Agent will be deemed to have been tendered. See Instruction 4.
o  Check here if Share Certificates have been lost or mutilated See Instruction 11

      The names and addresses of the registered holders of the tendered Shares should be printed, if not already printed above, exactly as they appear on the Share Certificates (as defined below) tendered hereby.

      This Letter of Election and Transmittal is to be used by shareholders of Datakey, Inc. if certificates for Shares (as defined herein) are to be forwarded herewith or, unless an Agent’s Message (as defined in Section 3 — “Procedure for Tendering Shares” of the Offer to Purchase) is utilized, if delivery of Shares is to be made by book-entry transfer, to an account maintained by the Exchange Agent at the Book-Entry Transfer Facility (as defined in Section 3 — “Procedure for Tendering Shares” of the Offer to Purchase) and pursuant to the procedures set forth therein.

      Holders of Shares whose certificates for such Shares (the “Share Certificates”) are not immediately available, or who cannot complete the procedure for book-entry transfer on a timely basis, or who cannot deliver all other required documents to the Exchange Agent prior to the Expiration Date (as defined in Section 1 — “Terms of the Offer” of the Offer to Purchase), must tender their Shares according to the guaranteed delivery procedure set forth in Section 3 — “Procedure for Tendering Shares” of the Offer to Purchase. See Instruction 2. Delivery of documents to the Book-Entry Transfer Facility will not constitute delivery to the Exchange Agent.

ELECTION

(See Instructions 2, 12 and 13)

Please list the total number of Shares held by you: 

Number of Shares tendered for cash: 

2

TENDER OF SHARES

o  Check here if tendered Shares are being delivered by book-entry transfer to the Exchange Agent’s account at the Book-Entry Transfer Facility and complete the following (only participants in the Book-Entry Transfer Facility may deliver Shares by book-entry transfer):

Name of Tendering Institution: 

Account Number: 

Transaction Code Number: 

o  Check here if tendered Shares are being delivered pursuant to a Notice of Guaranteed Delivery previously sent to the Exchange Agent and complete the following:

Name(s) of Registered Holder(s): 

Window Ticket Number (if any): 

Date of Execution of Notice of Guaranteed Delivery: 

Name of Eligible Institution that Guaranteed Delivery: 

3

IMPORTANT

SHAREHOLDER: SIGN HERE

(Please Complete Substitute Form W-9 Included Herein)

(Signature(s) of Owner(s))

Name(s) 

Capacity (Full Title) 

(See Instructions)

Address 

(Include Zip Code)

(Must be signed by the registered holder(s) exactly as name(s) appear(s) on stock certificate(s) or on a security position listing or by the person(s) authorized to become registered holder(s) by certificates and documents transmitted herewith. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, please set forth full title and see Instruction 5.)

GUARANTEE OF SIGNATURE(S)

(If required—See Instructions 1 and 5)

Authorized Signature(s) 

Name 

Name of Firm 

Address 

(Include Zip Code)

4

SPECIAL PAYMENT INSTRUCTIONS

(See Instructions 1, 5, 6 and 7)

To be completed ONLY if certificates representing Shares not tendered or accepted for payment and/or the check for the purchase price of Shares accepted for payment are to be issued in the name of someone other than the undersigned

Issue:  o Check and/or

o Certificate(s) to

Name 

(Please Print)

Address 

(Include Zip Code)

(Taxpayer Identification or Social Security Number)

(Also complete Substitute Form W-9 below)

SPECIAL DELIVERY INSTRUCTIONS

(See Instructions 1, 5, 6 and 7)

To be completed ONLY if certificates representing Shares not tendered or accepted for payment and/or the check for the purchase price of Shares accepted for payment are to be sent to someone other than the undersigned or to the undersigned at an address other than that shown under “Description of Shares Tendered.”

Mail:  o Check and/or

o Certificate(s) to

Name 

(Please Print)

Address 

(Include Zip Code)

(Tax Identification or Social Security Number)

(See Substitute Form W-9 below)

5

PAYER’S NAME: WELLS FARGO BANK, N.A.
Important Tax Information SUBSTITUTE FORM W-9	Please provide the Taxpayer Identification Number (“TIN”) of the person or entity receiving payment for the above described shares. This box must be signed by that person or entity, thereby making the following certification:	Tax ID OR      Social Security Number

CERTIFICATION – Under penalties of perjury, the undersigned hereby certifies the following:

(1) The TIN shown above is the correct TIN of the person who is submitting this Letter of Transmittal and who is required by law to provide such TIN, or such person is waiting for a TIN to be issued, and

(2) The person who is submitting this Letter of Transmittal and who is required by law to provide such TIN is not subject to backup withholding because such person has not been notified by the Internal Revenue Service (“IRS”) that such person is subject to backup withholding, or because the IRS has notified such person that he or she is no longer subject to backup withholding, or because such person is an exempt payee;

(3) I am a US citizen or US resident alien

SIGNATURE    DATE 

NOTICE TO NON-RESIDENT ALIENS (SHAREHOLDERS WHOSE CITIZENSHIP IS IN A COUNTRY OTHER THAN THE UNITED STATES): THE ENCLOSED W-8BEN FORM MUST BE COMPLETED AND RETURNED FOR CERTIFICATION OF FOREIGN STATUS. FAILURE TO DO SO WILL SUBJECT YOU TO WITHHOLDING UP TO 30% OF ANY PAYMENT DUE.

6

PLEASE READ THE INSTRUCTIONS SET FORTH

IN THIS LETTER OF ELECTION AND TRANSMITTAL CAREFULLY

Ladies and Gentlemen:

      The undersigned hereby tenders to Snowflake Acquisition Corp., a Minnesota corporation (“Purchaser”), pursuant to the Offer to Purchase, dated September 21, 2004 (the “Offer to Purchase”), the above-described shares of common stock, par value $0.05 per share, of Datakey, Inc., a Minnesota corporation (“Datakey”), including the associated preferred stock purchase and other rights issued pursuant to the Rights Agreement, dated October 26, 2001, by and between Datakey and Wells Fargo Bank Minnesota, N.A., as amended from time to time (together, the “Common Stock”), and the above-described shares of convertible preferred stock, liquidation value $2.50 per share, of Datakey (the “Convertible Preferred Stock” and, together with the Common Stock, the “Shares” and each a “Share”), upon the terms and subject to the conditions set forth in the Offer to Purchase and this Letter of Election and Transmittal (which, together with any amendments or supplements thereto, collectively constitute the “Offer”). Receipt of the Offer is hereby acknowledged. The undersigned elects to have each of his or her Shares tendered in the manner indicated in the “Election” box above.

      Upon the terms and subject to the conditions of the Offer (and if the Offer is extended or amended, the terms of any such extension or amendment), and effective upon acceptance for payment of the Shares tendered herewith in accordance with the terms of the Offer, the undersigned hereby sells, assigns and transfers to or upon the order of Purchaser all right, title and interest in and to all of the Shares that are being tendered hereby, distributions, rights, other Shares or other securities issued or issuable in respect thereof on or after September 21, 2004 (collectively, “Distributions”) and irrevocably constitutes and appoints Wells Fargo Bank, N.A. (the “Exchange Agent”) the true and lawful agent and attorney-in-fact of the undersigned with respect to such Shares (and all Distributions), with full power of substitution (such power of attorney being deemed to be an irrevocable power coupled with an interest), to (i) deliver certificates for such Shares (and any and all Distributions) or transfer ownership of such Shares (and any and all Distributions) on the account books maintained by the Book-Entry Transfer Facility, together, in any such case, with all accompanying evidences of transfer and authenticity, to or upon the order of Purchaser, (ii) present such Shares (and any and all Distributions) for transfer on the books of Datakey, and (iii) receive all benefits and otherwise exercise all rights of beneficial ownership of such Shares (and any and all Distributions), all in accordance with the terms of the Offer.

      By executing this Letter of Election and Transmittal, the undersigned hereby irrevocably appoints the designees of Purchaser, in their respective capacities as officers of Purchaser, and any individual who shall thereafter succeed to any such office of Purchaser, and each of them, and any other designees of Purchaser, the attorneys-in-fact and proxies of the undersigned, each with full power of substitution, to vote at any annual or special meeting of Datakey’s shareholders or any adjournment or postponement thereof or otherwise in such manner as each such attorney-in-fact and proxy or his or her substitute shall in his or her sole discretion deem proper with respect to, to execute any written consent concerning any matter as each such attorney-in-fact and proxy or his or her substitute shall in his or her sole discretion deem proper with respect to, and to otherwise act as each such attorney-in-fact and proxy or his or her substitute shall in his or her sole discretion deem proper with respect to, all of the Shares (and any and all Distributions) tendered hereby and accepted for payment by Purchaser. This appointment will be effective if and when, and only to the extent that, Purchaser accepts such Shares for payment pursuant to the Offer. This power of attorney and proxy are irrevocable and are granted in consideration of the acceptance for payment of such Shares in accordance with the terms of the Offer. Such acceptance for payment shall, without further action, revoke any prior powers of attorney and proxies granted by the undersigned at any time with respect to such Shares (and any and all Distributions), and no subsequent powers of attorney, proxies, consents or revocations may be given by the undersigned with respect thereto (and, if given, will not be deemed effective). Purchaser reserves the right to require that, in order for the Shares or other securities to be deemed validly tendered, immediately upon acceptance for payment of such Shares, Purchaser must be able to exercise full voting, consent and other rights with respect to such Shares (and any and all Distributions), including voting at any meeting of Datakey’s shareholders.

      The undersigned hereby represents and warrants that the undersigned has full power and authority to tender, sell, assign and transfer the Shares tendered hereby and all Distributions and that, when the same are accepted for payment by Purchaser, Purchaser will acquire good, marketable and unencumbered title thereto and to all Distributions, free and clear of all liens, restrictions, charges and encumbrances and the same will not be subject to

7

any adverse claims. The undersigned will, upon request, execute and deliver any additional documents deemed by the Exchange Agent or Purchaser to be necessary or desirable to complete the sale, assignment and transfer of the Shares tendered hereby and all Distributions. In addition, the undersigned shall remit and transfer promptly to the Exchange Agent for the account of Purchaser all Distributions in respect of the Shares tendered hereby, accompanied by appropriate documentation of transfer, and, pending such remittance and transfer or appropriate assurance thereof, Purchaser shall be entitled to all rights and privileges as owner of each such Distribution and may withhold the entire purchase price of the Shares tendered hereby or deduct from such purchase price, the amount or value of such Distribution as determined by Purchaser in its sole discretion.

      All authority herein conferred or agreed to be conferred shall survive the death or incapacity of the undersigned, and any obligation of the undersigned hereunder shall be binding upon the heirs, executors, administrators, personal representatives, trustees in bankruptcy, successors and assigns of the undersigned. Except as stated in the Offer, this tender is irrevocable.

      The undersigned understands that the valid tender of the Shares pursuant to any one of the procedures described in Section 3 — “Procedure for Tendering Shares” of the Offer to Purchase and in the Instructions hereto will constitute a binding agreement between the undersigned and Purchaser upon the terms and subject to the conditions of the Offer (and if the Offer is extended or amended, the terms or conditions of any such extension or amendment). Without limiting the foregoing, if the price to be paid in the Offer is amended in accordance with the Agreement and Plan of Merger, dated September 9, 2004 (the “Merger Agreement”), by and among Purchaser, a wholly owned subsidiary of SafeNet, Inc., a Delaware corporation (“SafeNet”), SafeNet and Datakey, the price to be paid to the undersigned will be the amended price notwithstanding the fact that a different price is stated in this Letter of Election and Transmittal. The undersigned recognizes that under certain circumstances set forth in the Offer to Purchase, Purchaser may not be required to accept for payment any of the Shares tendered hereby.

      Unless otherwise indicated under “Special Payment Instructions,” please issue any certificates for the Shares not tendered or accepted for payment and/or the check for the purchase price of all of the Shares exchanged in the name(s) of the registered holder(s) appearing above under “Description of Shares Tendered.” Similarly, unless otherwise indicated under “Special Delivery Instructions,” please mail any certificates for the Shares not tendered or not accepted for payment and/or the check for the purchase price of all of the Shares exchanged (and any accompanying documents, as appropriate) to the address(es) of the registered holder(s) appearing above under “Description of Shares Tendered.” In the event that the boxes entitled “Special Payment Instructions” and “Special Delivery Instructions” are both completed, please return any certificates evidencing Shares not tendered or not accepted for payment and/or the check for the purchase price of all Shares exchanged (and any accompanying documents, as appropriate) in the name(s) of, and return any such certificates and/or check (and any accompanying documents, as appropriate) to, the person(s) so indicated. Unless otherwise indicated herein in the box entitled “Special Payment Instructions,” please credit any Shares tendered herewith by book-entry transfer that are not accepted for payment by crediting the account at the Book-Entry Transfer Facility designated above. The undersigned recognizes that Purchaser has no obligation, pursuant to the “Special Payment Instructions,” to transfer any Shares from the name of the registered holder thereof if Purchaser does not accept for payment any of the Shares so tendered.

INSTRUCTIONS

FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER

      1. Guarantee of Signatures. No signature guarantee is required on this Letter of Election and Transmittal (a) if this Letter of Election and Transmittal is signed by the registered holder(s) (which term, for purposes of this Section, includes any participant in the Book-Entry Transfer Facility’s systems whose name appears on a security position listing as the owner of the Shares) of Shares tendered herewith, unless such registered holder(s) has completed either the box entitled “Special Payment Instructions” or the box entitled “Special Delivery Instructions” on the Letter of Election and Transmittal or (b) if such Shares are tendered for the account of a financial institution (including most commercial banks, savings and loan associations and brokerage houses) that is a participant in the Security Transfer Agents Medallion Program, the New York Stock Exchange Medallion Signature Guarantee Program or the Stock Exchange Medallion Program or by any other “eligible guarantor institution,” as such term is defined in Rule 17Ad-

8

15 under the Securities Exchange Act of 1934, as amended (each, an “Eligible Institution”). In all other cases, all signatures on this Letter of Election and Transmittal must be guaranteed by an Eligible Institution. See Instruction 5.

      2. Requirements of Tender. This Letter of Election and Transmittal is to be completed by shareholders if certificates are to be forwarded herewith or, unless an Agent’s Message (or client letter) is utilized, if tenders are to be made pursuant to the procedure for tender by book-entry transfer set forth in Section 3 — “Procedure for Tendering Shares” in the Offer to Purchase. Share Certificates evidencing tendered Shares, or timely confirmation (a “Book-Entry Confirmation”) of a book-entry transfer of Shares into the Exchange Agent’s account at the Book-Entry Transfer Facility, as well as this Letter of Election and Transmittal (or a facsimile hereof), properly completed and duly executed, with any required signature guarantees, or an Agent’s Message in connection with a book-entry transfer, and any other documents required by this Letter of Election and Transmittal, must be received by the Exchange Agent at its address set forth herein prior to the Expiration Date (as defined in Section 1 — “Terms of Offer” of the Offer to Purchase). Shareholders whose Share Certificates are not immediately available, or who cannot complete the procedure for delivery by book-entry transfer on a timely basis or who cannot deliver all other required documents to the Exchange Agent prior to the Expiration Date, may tender their Shares by properly completing and duly executing a Notice of Guaranteed Delivery pursuant to the guaranteed delivery procedure set forth in Section 3 — “Procedure for Tendering Shares” in the Offer to Purchase. Pursuant to such procedure: (i) such tender must be made by or through an Eligible Institution; (ii) a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form made available by the Information Agent, must be received by the Exchange Agent prior to the Expiration Date; and (iii) the Share Certificates (or a Book-Entry Confirmation) evidencing all tendered Shares, in proper form for transfer, in each case together with the Letter of Election and Transmittal (or a facsimile thereof), properly completed and duly executed, with any required signature guarantees (or, in the case of a book-entry delivery, an Agent’s Message) and any other documents required by this Letter of Election and Transmittal, must be received by the Exchange Agent within three New York Stock Exchange trading days after the date of execution of such Notice of Guaranteed Delivery. If Share Certificates are forwarded separately to the Exchange Agent, a properly completed and duly executed Letter of Election and Transmittal must accompany each such delivery.

      The method of delivery of this Letter of Election and Transmittal, Share Certificates and all other required documents, including delivery through the Book-Entry Transfer Facility, is at the option and the risk of the tendering shareholder and the delivery will be deemed made only when actually received by the Exchange Agent (including, in the case of book-entry transfer, receipt of a book-entry confirmation). If delivery is by mail, registered mail with return receipt requested, properly insured, is recommended. In all cases, sufficient time should be allowed to ensure timely delivery.

      No alternative, conditional or contingent tenders will be accepted and no fractional Shares will be exchanged. All tendering shareholders, by execution of this Letter of Election and Transmittal (or a facsimile hereof), waive any right to receive any notice of the acceptance of their Shares for payment.

      3. Inadequate Space. If the space provided herein is inadequate, the certificate numbers and/or the number of Shares and any other required information should be listed on a separate signed schedule attached hereto.

      4. Partial Tenders (not applicable to shareholders who tender by book-entry transfer). If fewer than all of the Shares evidenced by any Share Certificate are to be tendered, fill in the number of Shares that are to be tendered in the box entitled “Number of Shares Tendered.” In this case, new Share Certificates for the Shares that were evidenced by your old Share Certificates, but were not tendered by you, will be sent to you, unless otherwise provided in the appropriate box on this Letter of Election and Transmittal, as soon as practicable after the Expiration Date. All Shares represented by Share Certificates delivered to the Exchange Agent will be deemed to have been tendered unless indicated.

      5. Signatures on Letter of Election and Transmittal, Stock Powers and Endorsements. If this Letter of Election and Transmittal is signed by the registered holder(s) of the Shares tendered hereby, the signature(s) must correspond with the name(s) as written on the face of the certificate(s) without alteration, enlargement or any change whatsoever.

      If any of the Shares tendered hereby are held of record by two or more joint owners, all such owners must sign this Letter of Election and Transmittal.

9

      If any of the tendered Shares are registered in different names on several certificates, it will be necessary to complete, sign and submit as many separate Letters of Transmittal as there are different registrations.

      If this Letter of Election and Transmittal or any certificates or stock powers are signed by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, such person should so indicate when signing, and proper evidence satisfactory to the Exchange Agent of the authority of such person so to act must be submitted. If this Letter of Election and Transmittal is signed by the registered holder(s) of the Shares listed and transmitted hereby, no endorsements of certificates or separate stock powers are required unless payment is to be made or certificates for Shares not tendered or not accepted for payment are to be issued in the name of a person other than the registered holder(s). Signatures on any such Share Certificates or stock powers must be guaranteed by an Eligible Institution.

      If this Letter of Election and Transmittal is signed by a person other than the registered holder(s) of the certificate(s) listed and transmitted hereby, the certificate(s) must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name(s) of the registered holder(s) appear(s) on the certificate(s). Signature(s) on any such Share Certificates or stock powers must be guaranteed by an Eligible Institution.

      6. Stock Transfer Taxes. Except as otherwise provided in this Instruction 6, the stockholder will pay all stock transfer taxes with respect to the transfer and sale of any Shares to Purchaser or its order pursuant to the Offer. If, however, payment of the cash is to be made to, and/or if certificate(s) for Shares not tendered or not accepted for payment are to be registered in the name of, any person other than the registered holder(s), or if tendered certificate(s) are registered in the name of any person other than the person(s) signing this Letter of Election and Transmittal, the amount of any stock transfer taxes (whether imposed on the registered holder(s) or such other person) payable on account of the transfer to such other person will be deducted from the purchase price of such Shares exchanged unless evidence satisfactory to the Exchange Agent of the payment of such taxes, or exemption therefrom, is submitted.

      Except as provided in this Instruction 6, it will not be necessary for transfer tax stamps to be affixed to the certificate(s) evidencing the Shares tendered hereby.

      7. Special Payment and Delivery Instructions. If a check is to be issued in the name of and/or certificates for Shares not tendered or not accepted for payment are to be issued to, a person other than the signer of this Letter of Election and Transmittal or if a check and/or such certificates are to be returned to a person other than the person(s) signing this Letter of Election and Transmittal or to an address other than that shown in this Letter of Election and Transmittal, the appropriate boxes on this Letter of Election and Transmittal must be completed.

      8. Substitute Form W-9. A tendering shareholder is required to provide the Exchange Agent with a correct Taxpayer Identification Number (“TIN”) on Substitute Form W-9, which is provided under “Important Tax Information” above, and to certify, under penalties of perjury, that such number is correct and that such shareholder is not subject to backup withholding of federal income tax or, alternatively, to establish another basis for exemption from backup withholding. If a tendering shareholder is subject to backup withholding, the shareholder must cross out Item (2) of Part 3 of the Certification Box of the Substitute Form W-9. Failure to provide the information on the Substitute Form W-9 may subject the tendering shareholder to a $50 penalty imposed by the Internal Revenue Service and to federal income tax backup withholding at the applicable federal withholding rate of any payments made to the shareholder or other payee, but such withholdings will be refunded if the tendering shareholder provides a TIN within 60 days.

      Certain shareholders (including, among others, all corporations and certain foreign individuals and entities) are not subject to backup withholding. Noncorporate foreign shareholders should submit an appropriate and properly completed IRS Form W-8, a copy of which may be obtained from the Exchange Agent, in order to avoid backup withholding. See the enclosed “Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9” for more instructions.

      9. Requests for Assistance or Additional Copies. Questions and requests for assistance or additional copies of the Offer to Purchase, this Letter of Election and Transmittal, the Notice of Guaranteed Delivery, IRS Form W-8 and the Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 may be directed to Innisfree M & A Incorporated, the information agent for the offer, at (212) 750-5833, or from brokers, dealers, commercial banks or trust companies.

10

      10. Waiver of Conditions. Subject to the terms and conditions of the Merger Agreement, Purchaser reserves the right, in its sole discretion, to waive, at any time or from time to time, any of the specified conditions of the Offer, in whole or in part, in the case of any Shares tendered.

      11. Lost, Destroyed or Stolen Certificates. If any certificate representing Shares has been lost, destroyed or stolen, the shareholder should promptly notify the Exchange Agent in its capacity as transfer agent for the Shares (toll-free telephone number: (800) 380-1372. The shareholder will then be instructed as to the steps that must be taken in order to replace the certificate. This Letter of Election and Transmittal and related documents cannot be processed until the procedures for replacing lost or destroyed certificates have been followed.

      12. Revocation or Change of Election. An election is irrevocable, except that Shares tendered pursuant to the Offer may be withdrawn at any time prior to the Expiration Date. After an effective withdrawal you may change your election by submitting to the Exchange Agent a completed replacement of this document and any other documents required by the Offer for properly tendering Shares prior to the Expiration Date.

      13. Election Procedure. To properly complete the “Election” box you must indicate the number of Shares owned by you and whether, with respect to such Shares, you are electing to tender some or all of your Shares to receive cash and your name and address must be set forth in the column under the heading “Name(s) and Address(es) of Registered Holder(s)” and either (i) the number of each Share Certificate that you are surrendering with this document must be written in the column under the heading “Share Certificate Number(s)” or (ii) if you are using the guarantee of delivery procedures, the number of Shares represented by your stock certificates to be delivered pursuant to such procedures must be written in the column under the heading “Total Number of Shares Represented by Certificate(s).”

      Important: This Letter of Election and Transmittal together with any required signature guarantees, or, in the case of a book-entry transfer, an Agent’s Message, and any other required documents, must be received by the Exchange Agent prior to the Expiration Date and either certificates for tendered Shares must be received by the Exchange Agent or Shares must be delivered pursuant to the procedures for book-entry transfer, in each case prior to the Expiration Date, or the tendering shareholder must comply with the procedures for guaranteed delivery.

11

IMPORTANT TAX INFORMATION

      Under the federal income tax law, unless an exemption applies, a shareholder whose tendered Shares are accepted for payment is required to provide the Exchange Agent with such shareholder’s correct TIN on the Substitute Form W-9 above. If such shareholder is an individual, the TIN is such shareholder’s Social Security Number. If a tendering shareholder is subject to backup withholding, such shareholder must cross out Item (2) of Part 3 on the Substitute Form W-9. If the Exchange Agent is not provided with the correct TIN, the shareholder may be subject to a $50 penalty imposed by the Internal Revenue Service. In addition, payments that are made to such shareholder may be subject to backup withholding at the fourth lowest rate of tax applicable to unmarried individuals (the “Withholding Rate”).

      Certain shareholders (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. In order for a foreign individual to qualify as an exempt recipient, such individual must submit an appropriate and properly completed IRS Form W-8, attesting to that individual’s exempt status. Such a Form W-8 may be obtained from the Exchange Agent. Exempt shareholders, other than foreign individuals, should furnish their TIN, write “Exempt” in Part 2 of the Substitute Form W-9 below and sign, date and return the Substitute Form W-9 to the Exchange Agent. See the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional instructions.

      If backup withholding applies, the Exchange Agent is required to withhold a percentage of any reportable payments made to the shareholder at the Withholding Rate. Backup withholding is not an additional tax. Rather, the federal income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If backup withholding results in an overpayment of taxes, a refund may be obtained from the Internal Revenue Service.

Purpose of Substitute Form W-9

      To prevent backup withholding on payments that are made to a shareholder with respect to Shares exchanged pursuant to the Offer, the shareholder is required to notify the Exchange Agent of such shareholder’s correct TIN (or the TIN of another payee) by completing the form below certifying that the TIN provided on Substitute Form W-9 is correct (or that such shareholder is awaiting a TIN).

What Number to Give the Exchange Agent

      The shareholder is required to give the Exchange Agent the TIN (e.g., Social Security Number or Employer Identification Number) of the record holder of the Shares. If the Shares are in more than one name, or are not in the name of the actual owner, consult the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional guidelines on which number to report. If the tendering shareholder has not been issued a TIN and has applied for a number or intends to apply for a number in the near future, the shareholder should check the box in Part 1(b) and sign, date and return the Substitute Form W-9. If the box in Part 1(b) is checked, the Exchange Agent will withhold from the reportable payments made to the shareholder at the Withholding Rate, but such withholdings will be refunded if the tendering shareholder provides a TIN within 60 days.

      The Letter of Election and Transmittal, Share Certificates for Shares and any other required documents should be sent or delivered by each shareholder of Datakey or such shareholder’s broker, dealer, commercial bank, trust company or other nominee to the exchange agent at one of its addresses set forth on the first page.

      Questions and requests for assistance or for additional copies of the Offer to Purchase, the Letter of Election and Transmittal, the Notice of Guaranteed Delivery and other exchange offer materials may be directed to the Information Agent at their number and location listed on the Offer to Purchase, and will be furnished promptly at Datakey’s expense. You may also contact your broker, dealer, commercial bank, trust company or other nominee for assistance concerning the Offer.

12 EX-99.A.3 4 w01967iexv99waw3.htm EXHIBIT (A)(3)

NOTICE OF GUARANTEED DELIVERY

for tender of shares of

Common Stock

and

Convertible Preferred Stock

of

DATAKEY, INC.

at

$0.65 Net Per Share of Common Stock

and

$2.50 Net Per Share of Convertible Preferred Stock

Pursuant to the Offer to Purchase

Dated September 21, 2004

to

Snowflake Acquisition Corp.

a wholly owned subsidiary of

SafeNet, Inc.

(Not to be used for Signature Guarantees)

      This Notice of Guaranteed Delivery, or a form substantially equivalent hereto, must be used to accept the Offer (as defined below) if certificates representing shares of common stock, par value $0.05 per share, of Datakey, Inc., a Minnesota corporation (“Datakey”), including the associated preferred stock purchase and other rights issued pursuant to the Rights Agreement, dated as of October 26, 2001, by and between Datakey and Wells Fargo Bank Minnesota, N.A., as amended from time to time (together, the “Common Stock”), or certificates representing shares of convertible preferred stock, liquidation value $2.50 per share, of Datakey (the “Preferred Stock” and, together with the Common Stock, the “Shares,” and each a “Share”), are not immediately available, if the procedure for book-entry transfer cannot be completed on a timely basis, or if time will not permit all required documents to reach Wells Fargo Bank, N.A. (the “Depositary”) prior to the Expiration Date (as defined in the Offer to Purchase). This form may be delivered by hand or transmitted by telegram, facsimile transmission or mail to the Depositary AND MUST INCLUDE A GUARANTEE BY AN ELIGIBLE INSTITUTION (as defined in Section 3 — “Procedure for Tendering Shares” of the Offer to Purchase).

The Depositary for the Offer is:

Wells Fargo Bank, N.A.

By Mail:	By Facsimile Transmission:	By Hand or Overnight Courier:
Wells Fargo Bank, N.A. Shareowner Services Corporate Actions Department P.O. Box 64858 St. Paul, Minnesota 55164-0858	For Notice of Guaranteed Delivery For Eligible Institutions Only: (651) 450-2452 For Confirmation Only Telephone: (651) 450-4110	Wells Fargo Bank, N.A. Shareowner Services Corporate Actions Department 161 North Concord Exchange South St. Paul, Minnesota 55075

      DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN ONE SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TO A NUMBER OTHER THAN THE FACSIMILE NUMBER SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.

      THIS NOTICE OF GUARANTEED DELIVERY TO THE DEPOSITARY IS NOT TO BE USED TO GUARANTEE SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE GUARANTEED BY AN ELIGIBLE INSTITUTION UNDER THE INSTRUCTIONS THERETO, SUCH SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED IN THE SIGNATURE BOX ON THE LETTER OF TRANSMITTAL.

      THE GUARANTEE INCLUDED HEREIN MUST BE COMPLETED.

Ladies and Gentlemen:

      The undersigned represents that the undersigned owns and hereby tenders to Snowflake Acquisition Corp., a Minnesota corporation (“Purchaser”) and a wholly owned subsidiary of SafeNet, Inc., a Delaware corporation, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated September 21, 2004 (the “Offer to Purchase”), and in the related Letter of Transmittal (which, together with any amendments or supplements thereto, collectively constitute the “Offer”), receipt of which is hereby acknowledged, the number of Shares set forth below, all pursuant to the guaranteed delivery procedures set forth in the Offer to Purchase.

Name(s) of Record Holder(s): 

Number of Shares of Common Stock Tendered: 

Certificate Number(s) (if available): 

(please print)

Number of Shares of Convertible Preferred Stock Tendered: 

Certificate Number(s) (if available): 

Address(es): 

(Zip Code)            

o  Check if securities will be tendered by book-entry transfer

Name of Tendering Institution: 

Area Code and Telephone No.(s): 

Signature(s): 

Account No.: 

Transaction Code No.: 

Dated: ________________________ , 2004

2

GUARANTEE

(Not to be used for signature guarantee)

      The undersigned, a financial institution that is a participant in the Security Transfer Agent Medallion Program, or any other “eligible guarantor institution,” as such term is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, hereby guarantees to deliver to the Depositary either the certificates representing the Shares tendered hereby, in proper form for transfer, or to deliver Shares pursuant to the procedure for book-entry transfer into the Depositary’s account at Depository Trust Company (the “Book-Entry Transfer Facility”), in any such case together with a properly completed and duly executed Letter of Transmittal (or facsimile thereof), with any required signature guarantees or an Agent’s Message (as defined in Section 3 — “Procedure for Tendering Shares” of the Offer to Purchase), and any other documents required by the Letter of Transmittal, all within three trading days after the date hereof.

      The Eligible Institution that completes this form must communicate the guarantee to the Depositary and must deliver the properly completed and duly executed Letter of Transmittal (or facsimile thereof) or an Agent’s Message and certificates for Shares to the Depositary within the time period shown herein. Failure to do so could result in a financial loss to such Eligible Institution.

Name of Firm:  (Authorized Signature) Name:  (Please type or print) Title:	Address:  (Zip Code)
Area Code and Tel. No.	Dated:                                                                            , 2004

NOTE: DO NOT SEND CERTIFICATES FOR SHARES WITH THIS NOTICE. CERTIFICATES FOR SHARES SHOULD BE SENT WITH YOUR PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL.

3 EX-99.A.4 5 w01967iexv99waw4.htm EXHIBIT (A)(4)

OFFER TO PURCHASE FOR CASH

All Outstanding Shares of Common Stock

(Including the Associated Preferred Stock Purchase Rights)

and

All Outstanding Shares of Convertible Preferred Stock

of

Datakey, Inc.

at

$0.65 Net Per Share of Common Stock and

$2.50 Net Per Share of Convertible Preferred Stock

Pursuant to the Offer to Purchase

Dated September 21, 2004

by

Snowflake Acquisition Corp.

a wholly owned subsidiary of

SafeNet Inc.

THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT,

NEW YORK CITY TIME, ON TUESDAY, OCTOBER 19, 2004, UNLESS THE OFFER IS EXTENDED.

      To Brokers, Dealers, Banks, Trust Companies and other Nominees:

      Snowflake Acquisition Corp., a Minnesota corporation (the “Purchaser”) and a wholly owned subsidiary of SafeNet, Inc., a Delaware corporation (“SafeNet”), have agreed that Purchaser offer to purchase all outstanding shares of common stock, par value $0.05 per share, of Datakey, Inc., a Minnesota corporation (“Datakey”), including all preferred stock purchase rights issued pursuant to the Rights Agreement, dated as of October 26, 2001, by and between Datakey and Wells Fargo Bank Minnesota N.A., as amended from time to time (together, the “Common Stock”), and all outstanding shares of convertible preferred stock, liquidation value $2.50 per share, of Datakey (the “Preferred Stock,” and together with the Common Stock, the “Shares”) at $0.65 per share of Common Stock and $2.50 per share of Convertible Preferred Stock, net to the seller in cash (the “Offer Price”), without interest thereon (subject to applicable withholding tax), upon the terms and subject to the conditions set forth in the Purchaser’s Offer to Purchase dated September 21, 2004 (the “Offer to Purchase”), and in the related Letter of Transmittal (which, together with any amendments or supplements thereto, collectively constitute the “Offer”).

      Please furnish copies of the enclosed materials to those of your clients for whom you hold Shares registered in your name or in the name of your nominee.

      Enclosed herewith are copies of the following documents:

1.	Offer to Purchase dated September 21, 2004;
2.	Letter of Transmittal to be used by stockholders of Datakey in accepting the Offer (manually signed facsimile copies of the Letter of Transmittal may be used to tender the Shares);
3.	Datakey’s Solicitation/Recommendation Statement on Schedule 14D-9;
4.	A printed form of letter that may be sent to your clients for whose account you hold Shares in your name or in the name of a nominee, with space provided for obtaining such clients’ instructions with regard to the Offer;
5.	Notice of Guaranteed Delivery with respect to Shares;
6.	Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9; and
7.	Return envelope addressed to Wells Fargo Bank, N.A., as the Depositary.

      THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS THE FOLLOWING NOT OCCURRING:

•  a court or other governmental authority entering or threatening any judgment, order, action, or decree that would require any significant change in the terms of the acquisition of Datakey by the Purchaser and SafeNet or would in any way limit the operation of Datakey by Purchaser after the closing of the Merger;

•  any law or interpretation of existing law being proposed which would require any significant change in the terms of the acquisition of Datakey by the Purchaser and SafeNet or would in any way limit the operation of Datakey by SafeNet after the closing of the Merger;

•  any events occurring that are reasonably likely to have a material adverse effect on the business of Datakey except for effects resulting from (i) general business or economic conditions, (ii) conditions generally affecting the industry in which Datakey competes, or (iii) the taking of any action contemplated by the Merger Agreement;

•  (i) any suspension of, or limitation on prices for, trading in securities on the New York Stock Exchange or NASDAQ, (ii) a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (iii) any limitation on the extension of credit by banks in the United States, (iv) the commencement of a war, armed hostilities or any other international or national calamity involving the United States or (v) in the case of any of the foregoing existing at the time of the commencement of the offer, a material acceleration or worsening thereof;

•  any person other than Purchaser or SafeNet, having acquired or entered into an agreement to acquire 50% or more of the then outstanding Shares, or (ii) the Board of Directors of Datakey having (A) withdrawn or modified, in a manner adverse to Purchaser or SafeNet, the Board of Directors of Datakey’s recommendation of the Offer, the Merger or the Merger Agreement, (B) approved or recommended, or proposed publicly to approve or recommend, a Company Takeover Proposal (as defined in the Offer), (C) caused Datakey to enter into any agreement relating to any Company Takeover Proposal, or (D) resolved to do any of the foregoing;

•  the representations and warranties of Datakey set forth in the Merger Agreement not being true and correct in all material respects;

•  Datakey failing to perform any obligation to be performed with by it under the Merger Agreement;

•  all material consents required from third parties (other than governmental authorities) in connection with the Merger or the Offer not being obtained by Datakey and Purchaser has not waived this requirement;

•  the Merger Agreement being terminated in accordance with its terms;

•  Purchaser and SafeNet having agreed that Purchaser shall terminate the Offer or postpone the acceptance for payment of or payment for Shares thereunder;

•  any one or more of the representations and warranties related to legal requirements applicable to the Offer and the Merger or the amendment of the Datakey’s Rights Plan to facilitate the Merger being breached in any respect or are inaccurate in any respect; or

•  any non-competition or similar obligations of Datakey being reasonably expected to prohibit or restrict SafeNet or any of SafeNet’s subsidiaries from developing, manufacturing, marketing or selling any of the current products of SafeNet or its subsidiaries or any products of SafeNet or its subsidiaries currently in design or development.

      We urge you to contact your clients promptly. Please note that the Offer and withdrawal rights will expire at 12:00 midnight, New York City time, on October 19, 2004, unless extended. The Board of Directors of Datakey has unanimously approved and adopted the Merger Agreement (as defined herein) and the transactions contemplated thereby and determined that the Offer and the Merger (as defined herein) are advisable and fair to and in the best interests of Datakey and its stockholders. Accordingly, the Board of Directors of Datakey unanimously recommends that the stockholders tender their Shares pursuant to the Offer.

2

      The Offer is being made pursuant to the Agreement and Plan of Merger, dated as of September 9, 2004 (the “Merger Agreement”), by and among SafeNet, the Purchaser and Datakey pursuant to which, following the consummation of the Offer and the satisfaction or waiver of certain conditions, the Purchaser will be merged with and into Datakey, with Datakey surviving the Merger as a wholly owned subsidiary of SafeNet (the “Merger”). At the effective time of the Merger, each outstanding Share (other than Shares owned by SafeNet, the Purchaser or Datakey or any subsidiary of SafeNet or by stockholders, if any, who are entitled to and properly exercise dissenters’ rights under Minnesota law) will be converted into the right to receive the price per Share paid pursuant to the Offer in cash, without interest thereon, as set forth in the Merger Agreement and as described in the Offer to Purchase. The Merger Agreement provides that the Purchaser may assign any or all of its rights and obligations (including the right to purchase Shares in the Offer) to SafeNet, to SafeNet and one or more direct or indirect wholly owned subsidiaries of SafeNet, or to one or more direct or indirect wholly owned subsidiaries of SafeNet.

      In all cases, payment for Shares accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of (a) Share Certificates (or a timely Book-Entry Confirmation) (as defined in the Offer to Purchase), (b) a properly completed and duly executed Letter of Transmittal (or facsimile thereof), with any required signature guarantees (or, in the case of a book-entry transfer effected pursuant to the procedures set forth in Section 3 of the Offer to Purchase, an Agent’s Message (as defined in the Offer to Purchase) in lieu of a Letter of Transmittal) and (c) any other documents required by the Letter of Transmittal. Accordingly, tendering shareholders may be paid at different times depending upon when Share certificates or Book-Entry Confirmations with respect to Shares are actually received by the Depositary. Under no circumstances will interest be paid on the purchase price to be paid by the Purchaser for the Shares, regardless of any extension of the Offer or any delay in making such payment.

      Neither the Purchaser nor SafeNet will pay any fees or commissions to any broker or dealer or other in connection with the solicitation of tenders of Shares pursuant to the Offer. You will be reimbursed by the Purchaser upon request for customary mailing and handling expenses incurred by you in forwarding the enclosed Offering materials to your customers.

      Questions may be directed to us at our address and telephone number set forth on the back cover of the enclosed Offer to Purchase.

      NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL RENDER YOU OR ANY OTHER PERSON THE AGENT OF THE PURCHASER, SAFENET, THE DEPOSITARY OR THE INFORMATION AGENT OR AUTHORIZE YOU OR ANY OTHER PERSON TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION ON BEHALF OF ANY OF THEM WITH RESPECT TO THE OFFER NOT CONTAINED IN THE OFFER TO PURCHASE OR THE LETTER OF TRANSMITTAL.

3 EX-99.A.5 6 w01967iexv99waw5.htm EXHIBIT (A)(5)

OFFER TO PURCHASE FOR CASH

All Outstanding Shares of Common Stock

(Including the Associated Preferred Stock Purchase Rights)

and

All Outstanding Shares of Convertible Preferred Stock

of

Datakey, Inc.

at

$0.65 Net Per Share of Commons Stock and

$2.50 Net Per Share of Convertible Preferred Stock

Pursuant to the Offer to Purchase

Dated September 21, 2004

by

Snowflake Acquisition Corp.

a wholly owned subsidiary of

SafeNet, Inc.

THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON OCTOBER 19, 2004, UNLESS THE OFFER IS EXTENDED.

September 21, 2004

To Our Clients:

      Enclosed for your consideration is an Offer to Purchase dated September 21, 2004 (the “Offer to Purchase”) and the related Letter of Transmittal (which, together with amendments or supplements thereto, collectively constitute the “Offer”) relating to the Offer by Snowflake Acquisition Corp., a Minnesota corporation (“Purchaser”) and a wholly owned subsidiary of SafeNet, Inc., a Delaware corporation (“SafeNet”), to purchase all outstanding shares of common stock, par value $0.05 per share, of Datakey, Inc., a Minnesota corporation (“Datakey”), together with any associated preferred stock purchase or other rights issued pursuant to the Rights Agreement, dated as of October 26, 2001, between Datakey and Wells Fargo Bank Minnesota N.A. as amended from time to time (together, the “Common Stock”) and all outstanding shares of convertible preferred stock, liquidation value $2.50 per share, of Datakey (the “Convertible Preferred Stock,” and together with the Common Stock, the “Shares,” and each a “Share”), at a purchase price of $0.65 per share of Common Stock and $2.50 per share of Convertible Preferred Stock, net to seller in cash, without interest thereon (subject to applicable withholding tax), upon the terms and subject to the conditions set forth in the Offer.

      Also enclosed is Datakey’s Solicitation/Recommendation Statement on Schedule 14D-9.

      WE (OR OUR NOMINEES) ARE THE HOLDER OF RECORD OF SHARES HELD BY US FOR YOUR ACCOUNT. A TENDER OF SUCH SHARES CAN BE MADE ONLY BY US AS THE HOLDER OF RECORD AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED TO TENDER SHARES FOR OUR ACCOUNT.

      We request instructions as to whether you wish to tender any of or all the Shares held by us for your account pursuant to the terms and conditions set forth in the Offer.

      Your attention is directed to the following:

      1.     The offer price is $0.65 per share of Common Stock and $2.50 per share of Convertible Preferred Stock, net to the seller in cash, without interest thereon (subject to applicable withholding tax), upon the terms and subject to the conditions of the Offer.

      2.     The Offer is being made for all outstanding Shares.

      3.     Datakey’s board of directors has unanimously approved the Offer, the Merger (as defined below), and the Merger Agreement (as defined below) and determined that the terms of each are fair to, and in the best interests of, Datakey’s stockholders. Accordingly, Datakey’s board of directors recommends that the stockholders accept the Offer and tender their Shares pursuant to the Offer.

      4.     The Offer is being made pursuant to the Agreement and Plan of Merger, dated as of September 9, 2004 (the “Merger Agreement”), by and among SafeNet, the Purchaser and Datakey pursuant to which, following the consummation of the Offer and the satisfaction or waiver of certain conditions, the Purchaser will be merged with and into Datakey with Datakey surviving the merger as a wholly owned subsidiary of SafeNet (the “Merger”). At the effective time of the Merger, each outstanding share of Common Stock and of Convertible Preferred Stock (other than Shares owned by SafeNet, the Purchaser, or any other wholly-owned subsidiary of SafeNet) will be converted into the right to receive, respectively the price per share of Common Stock or the price per share of Convertible Preferred Stock paid pursuant to the Offer in cash, without interest (subject to applicable withholding taxes), as set forth in the Merger Agreement and described in the Offer to Purchase. The Merger Agreement provides that the Purchaser may assign any or all of its rights and obligations (including the right to purchase Shares in the Offer) to SafeNet, to SafeNet and one or more direct or indirect wholly owned subsidiaries of SafeNet, or to one or more direct or indirect wholly owned subsidiaries of SafeNet.

      5.     THE OFFER AND WITHDRAWAL RIGHTS EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON TUESDAY, OCTOBER 19, 2004 (THE “EXPIRATION DATE”), UNLESS THE OFFER IS EXTENDED BY THE PURCHASER, IN WHICH EVENT THE TERM “EXPIRATION DATE” SHALL MEAN THE LATEST TIME AT WHICH THE OFFER, AS SO EXTENDED BY THE PURCHASER, WILL EXPIRE.

      6.     The offer is conditioned upon, among other things the following not occurring:

• a court or other governmental authority entering or threatening any judgment, order, action, or decree that would require any significant change in the terms of the acquisition of Datakey by the Purchaser and SafeNet or would in any way limit the operation of Datakey by Purchaser after the closing of the Merger;

• any law or interpretation of existing law being proposed which would require any significant change in the terms of the acquisition of Datakey by the Purchaser and SafeNet or would in any way limit the operation of Datakey by SafeNet after the closing of the Merger;

• any events occurring that are reasonably likely to have a material adverse effect on the business of Datakey except for effects resulting from (i) general business or economic conditions, (ii) conditions generally affecting the industry in which Datakey competes, or (iii) the taking of any action contemplated by the Merger Agreement;

• (i) any suspension of, or limitation on prices for, trading in securities on the New York Stock Exchange or NASDAQ, (ii) a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (iii) any limitation on the extension of credit by banks in the United States, (iv) the commencement of a war, armed hostilities or any other international or national calamity involving the United States or (v) in the case of any of the foregoing existing at the time of the commencement of the offer, a material acceleration or worsening thereof;

• any person other than Purchaser or SafeNet, having acquired or entered into an agreement to acquire 50% or more of the then outstanding Shares, or (ii) the Board of Directors of Datakey having (A) withdrawn or modified, in a manner adverse to Purchaser or SafeNet, the Board of Directors of Datakey’s recommendation of the Offer, the Merger or the Merger Agreement, (B) approved or recommended, or proposed publicly to approve or recommend, a Company Takeover Proposal (as defined

2

	in the Offer), (C) caused Datakey to enter into any agreement relating to any Company Takeover Proposal, or (D) resolved to do any of the foregoing;
•	the representations and warranties of Datakey set forth in the Merger Agreement not being true and correct in all material respects;
•	Datakey failing to perform any obligation to be performed with by it under the Merger Agreement;
•	all material consents required from third parties (other than governmental authorities) in connection with the Merger or the Offer not being obtained by Datakey and Purchaser has not waived this requirement;
•	the Merger Agreement being terminated in accordance with its terms;
•	Purchaser and SafeNet having agreed that Purchaser terminate the Offer or postpone the acceptance for payment of or payment for Shares thereunder;
•	any one or more of the representations and warranties related to legal requirements applicable to the Offer and the Merger or the amendment of the Datakey’s Rights Plan to facilitate the Merger being breached in any respect or are inaccurate in any respect; or
•	any non-competition or similar obligations of Datakey being reasonably expected to prohibit or restrict SafeNet or any of SafeNet’s subsidiaries from developing, manufacturing, marketing or selling any of the current products of SafeNet or its subsidiaries or any products of SafeNet or its subsidiaries currently in design or development.

      7.     Tendering stockholders will not be obligated to pay brokerage fees or commissions to the Depositary or the Information Agent or, except as set forth in Instruction 6 of the Letter of Transmittal, transfer taxes on the purchase of Shares by Purchaser pursuant to the Offer. However, federal income tax backup withholding (currently 28%), may be required, unless an exemption is provided or unless the required taxpayer identification information is provided. See Instruction 9 of the Letter of Transmittal.

      Your instructions to us should be forwarded promptly to permit us to submit a tender on your behalf prior to the Expiration Date.

      If you wish to have us tender any of or all the Shares held by us for your account, please so instruct us by completing, executing, detaching and returning to us the instruction form on the detachable part hereof. An envelope to return your instructions to us is enclosed. If you authorize the tender of your Shares, all such Shares will be tendered unless otherwise specified on the detachable part hereof. YOUR INSTRUCTIONS SHOULD BE FORWARDED TO US IN AMPLE TIME TO PERMIT US TO SUBMIT A TENDER ON YOUR BEHALF PRIOR TO THE EXPIRATION DATE.

      Payment for Shares accepted for payment pursuant to the Offer will in all cases be made only after timely receipt by Wells Fargo Bank, N.A. (the “Depositary”) of (a) Share certificates (or a timely Book-Entry Confirmation) (as defined in the Offer to Purchase), (b) a properly completed and duly executed Letter of Transmittal (or manually signed facsimile thereof), with any required signature guarantees (or, in the case of a book-entry transfer effected pursuant to the procedures set forth in Section 3 of the Offer to Purchase, an Agent’s Message (as defined in the Offer to Purchase) in lieu of a Letter of Transmittal), and (c) any other documents required by the Letter of Transmittal. Accordingly, tendering shareholders may be paid at different times depending upon when certificates for Share certificates or Book-Entry Confirmations with respect to Shares are actually received by the Depositary. UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID ON THE PURCHASE PRICE OF THE SHARES TO BE PAID BY THE PURCHASER, REGARDLESS OF ANY EXTENSION OF THE OFFER OR ANY DELAY IN MAKING SUCH PAYMENT.

      The Offer is not being made to (nor will tenders be accepted from or on behalf of) holders of Shares in any jurisdiction in which the making of the Offer or the acceptance thereof would not be in compliance with the laws of such jurisdiction or any administrative or judicial action pursuant thereto. However, the Purchaser may, in its discretion, take such action as it deems necessary to make the Offer in any jurisdiction and extend the Offer to holders of such Shares in such jurisdiction. In any jurisdiction where the securities, Blue Sky or other laws require the Offer to be made by a licensed broker or dealer, the Offer shall be deemed to be made on behalf of the Purchaser by one or more registered brokers or dealers that are licensed under the laws of such jurisdiction.

3

INSTRUCTIONS WITH RESPECT TO THE

OFFER TO PURCHASE FOR CASH

All Outstanding Shares of Common Stock

(Including the Associated Preferred Stock Purchase Rights)

and

All Outstanding Shares of Convertible Preferred Stock

of

Datakey, Inc.

by

Snowflake Acquisition Corp.

a Wholly Owned Subsidiary of

SafeNet, Inc.

      The undersigned acknowledge(s) receipt of your letter, the Offer to Purchase of Snowflake Acquisition Corp., dated September 21, 2004 (the “Offer to Purchase”), and the related Letter of Transmittal relating to shares of common stock, par value $0.05 per share of Datakey Inc., a Minnesota corporation (“Datakey”) (including the associated preferred stock purchase or other rights issued pursuant to the Rights Agreement, dated as of October 26, 2001, between Datakey and Wells Fargo Bank Minnesota N.A. as amended from time to time) and the shares of convertible preferred stock, liquidation value $2.50 per share, of Datakey (collectively, the “Shares,” and each a “Share”).

      This will instruct you to tender the number of Shares indicated below held by you for the account of the undersigned, on the terms and subject to the conditions set forth in the Offer to Purchase and related Letter of Transmittal.

NUMBER OF SHARES TO BE TENDERED:(1)	SIGN HERE
---------- Shares
	(Signature(s))
	Please Type or Print Names(s)
	Please Type or Print Address(es)
	Area Code and Telephone Number
	Tax Identification Number or Social Security Number
Dated:             , 2004

(1)  Unless otherwise indicated, it will be assumed that all your Shares are to be tendered.

4 EX-99.A.6 7 w01967iexv99waw6.htm EXHIBIT (A)(6)

GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION

NUMBER ON SUBSTITUTE FORM W-9

Guidelines for Determining the Proper Identification Number to Give the Payor — Social Security numbers have nine digits separated by two hyphens, e.g., 000-00-0000. Employer identification numbers have nine digits separated by only one hyphen, e.g., 00-0000000. The table below will help determine the number to give the payor.

			Give the name*
			SOCIAL SECURITY OR EMPLOYER IDENTIFICATION
For this type of account:			number of —
1.	An individual’s account		The individual
2.	Two or more individuals (joint account)		The actual owner of the account or, if combined funds, the first individual on the account(1)
3.	Custodian account of a minor (Uniform Gift to Minors Act)		The minor(2)
4.	a.	A revocable savings trust account (in which grantor is also trustee)	The grantor-trustee(1)
	b.	Any “trust” account that is not a legal or valid trust under state law	The actual owner(1)
5.	Sole proprietorship account		The owner(3)
6.	A valid trust, estate, or pension trust		The legal entity (do not furnish the identifying number of the personal representative or trustee unless the legal entity itself is not designated in the account title)(4)
7.	Corporate account		The corporation
8.	Religious, charitable, or educational organization account		The organization
9.	Partnership account held in the name of the business		The partnership
10.	Association, club, or other tax-exempt organization		The organization
11.	A broker or registered nominee		The broker or nominee
12.	Account with the Department of Agriculture in the name of a public entity (such as a State or local government, school district, or prison) that receives agricultural program payments		The public entity

*  If you are an individual, you must generally enter the name shown on your social security card. However, if you have changed your last name, for instance, due to marriage, without informing the Social Security Administration of the name change, enter your first name, the last name shown on your social security card, and your new last name.

(1)	List first and circle the name of the person whose number you furnish.
(2)	Circle the minor’s name and furnish the minor’s social security number.
(3)	Show the name of the owner. If the owner does not have an employer identification number, furnish the owner’s social security number.
(4)	List first and circle the name of the legal trust, estate or pension trust.

Note: If no name is circled when there is more than one name, the number will be considered to be that of the first name listed.

GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION

NUMBER ON SUBSTITUTE FORM W-9

Obtaining a Number

     If you do not have a taxpayer identification number (or “TIN”) or you do not know your number, obtain form SS-5, Application for a Social Security Number Card (for resident individuals), Form SS-4, Application for Employer Identification Number (for businesses and all other entities), Form W-7 Application for IRS Individual Taxpayer Identification Number (for alien individuals required to file U.S. tax returns). You may obtain Form SS-5 from your local Social Security Administration Office and Forms SS-4 and W-7 from the IRS by calling
1-800-TAX-FORM (1-800-829-3676) or from the IRS’s Internet Web Site at www.irs.gov.

     To complete the Substitute Form W-9, if you do not have a taxpayer identification number, write “Applied For” in the space for the taxpayer identification number in Part 1, sign and date the Form, and give it to the requester. Generally, you will then have 60 days to obtain a taxpayer identification number and furnish it to the requester. If the payor does not receive your TIN within 60 days, backup withholding, if applicable, will begin and will continue until you furnish your TIN to the payor. Note: Writing “Applied For” means that you have already applied for a TIN OR that you intend to apply for one soon.

Payees Exempt from Backup Withholding Penalties

     Payees specifically exempted from backup withholding on ALL payments include the following:*

•  An organization exempt from tax under section 501(a), or an individual retirement plan, or a custodial account under section 403(b)(7) if the account satisfies the requirements of section 401(f)(2).

•  The United States or any agency or instrumentality thereof.

•  A State, the District of Columbia, a possession of the United States, or any political subdivision or instrumentality thereof.

•  A foreign government or a political subdivision, agency or instrumentality thereof.

•  An international organization or any agency or instrumentality thereof.

     Payments of dividends and patronage dividends not generally subject to backup withholding include the following:

•  Payments to nonresident aliens subject to withholding under section 1441.

•  Payments to partnerships not engaged in a trade or business in the United States and which have at least one nonresident partner.

•  Payments of patronage dividends where the amount received is not paid in money.

•  Payments made by certain foreign organizations.

•  Section 404(k) distributions made by an ESOP.

     Payments of interest not generally subject to backup withholding include the following:

•  Payments of interest on obligations issued by individuals. Note: You may be subject to backup withholding if (i) this interest is $600 or more, (ii) the interest is paid in the course of the payor’s trade or business and (iii) you have not provided your correct taxpayer identification number to the payor.

•  Payments of tax-exempt interest (including exempt-interest dividends under section 852).

•  Payments described in section 6049(b)(5) to non-resident aliens.

•  Payments on tax-free covenant bonds under section 1451.

•  Payments made by certain foreign organizations.

•  Mortgage or student loan interest paid to you.

     Exempt payees described above should file a Substitute Form W-9 to avoid possible erroneous backup withholding. FILE THIS FORM WITH THE PAYOR, FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE “EXEMPT” IN PART 2, SIGN AND DATE THE FORM AND RETURN IT TO THE PAYOR.

     Certain payments other than interest, dividends and patronage dividends that are not subject to information reporting are also not subject to backup withholding. For details, see the regulations under sections 6041, 6041A(a), 6045, and 6050A.

     Privacy Act Notices. Section 6109 requires you to give your correct TIN to persons who must file information returns with the IRS to report interest, dividends and certain other payments. The IRS uses the numbers for identification purposes and to help verify the accuracy of your tax return. The IRS also may provide this information to the Department of Justice for civil and criminal litigation, and to cities, states and the District of Columbia to carry out their tax laws.

     You must provide your TIN to the payor whether or not you are required to file a tax return. Payors must generally withhold 28% of taxable interest, dividends, and certain other payments to a payee who does not give a TIN to a payor. Certain penalties also may apply.

Penalties

     (1) Penalty for Failure to Furnish Taxpayer Identification Number. — If you fail to furnish your taxpayer identification number to a payor, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect.

     (2) Civil Penalty for False Statements With Respect to Withholding. — If you make a false statement with no reasonable basis which results in no imposition of backup withholding, you are subject to a penalty of $500.

     (3) Criminal Penalty for Falsifying Information. — If you falsify certifications or affirmations, you are subject to criminal penalties including fines and/or imprisonment.

     FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE.

* Unless otherwise noted herein, all references below to section numbers or to regulations are references to the Internal Revenue Code of 1986, as amended and the regulations promulgated thereunder. EX-99.A.8 8 w01967iexv99waw8.htm EXHIBIT (A)(8)

Exhibit (a)(8)

This announcement is neither an offer to purchase nor a solicitation of an offer to sell Shares (as defined below). The Offer (as defined below) is made solely by the Offer to Purchase, dated September 21, 2004 (the “Offer to Purchase”), and the related Letter of Transmittal and any amendments or supplements to the Offer to Purchase or Letter of Transmittal. The Offer is not being made to (nor will tenders be accepted in from or on behalf of) holders of Shares in any jurisdiction in which the making of the Offer or the acceptance thereof would not in compliance with the laws of such jurisdiction or any administrative or judicial action pursuant thereto. However, the Purchaser (as defined below) may, in its discretion, take such action as it deems necessary to make the Offer in any jurisdiction and extend the Offer to holders of such Shares in such jurisdiction. In any jurisdiction where securities, Blue Sky or other laws require the Offer to be made by a licensed broker or dealer, the Offer shall be deemed to be made on behalf of the Purchaser (as defined below) by one or more registered brokers or dealers licensed under the laws of such jurisdiction.

Notice of Offer to Purchase for Cash
All Outstanding Shares of Common Stock
(Including the Associated Preferred Stock Purchase Rights)
and
All Outstanding Shares of Convertible Preferred Stock
of

Datakey, Inc.

at
$0.65 per share of Common Stock
$2.50 per share of Convertible Preferred Stock
by

Snowflake Acquisition Corp.

a wholly owned subsidiary of

SafeNet, Inc.

     Snowflake Acquisition Corp., a Minnesota corporation (the “Purchaser”) and a wholly owned subsidiary of SafeNet, Inc., a Delaware corporation (“SafeNet”), is offering to purchase all issued and outstanding shares of common stock, par value $0.05 per share, of Datakey, Inc., a Minnesota corporation (“Datakey”), including the associated preferred stock or other rights issued pursuant to the Rights Agreement, dated as of October 26, 2001, between Datakey and Wells Fargo Bank Minnesota, N.A., as amended from time to time (together, the “Common Stock”), and all issued and outstanding shares of convertible preferred stock, liquidation value $2.50 per share, of Datakey (the “Convertible Preferred Stock,” and together with the Common Stock, the “Shares” and each share thereof a “Share”), at a price of $0.65 per share of Common Stock and $2.50 per share of Convertible Preferred Stock, net to the seller in cash (the “Offer Price”), without interest thereon (subject to applicable withholding taxes), upon the terms and subject to the conditions set forth in the Offer to Purchase and in the related Letter of Transmittal (which, together with any amendments or supplements thereto, collectively constitute the “Offer”). Tendering stockholders who have Shares registered in their names and who tender directly to Wells Fargo Bank, N.A., which is acting as the depositary (the “Depositary”), will not be obligated to pay brokerage fees or commissions or, except as set forth in the Letter of Transmittal. Stockholders who hold their Shares through a broker, bank or other nominee should consult such institution as to whether it charges any service fees. The Purchaser will pay all fees and expenses of the Depositary and Innisfree M& A Incorporated, which is acting as the information agent (the “Information Agent”), incurred in connection with the Offer. The Purchaser is offering to acquire all Shares as a first step in acquiring the entire equity interest in Datakey. Following consummation of the Offer, the Purchaser intends to seek representation on Datakey’s Board of Directors and to seek to have Datakey consummate the merger described below.

THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT., NEW YORK CITY TIME, ON TUESDAY, OCTOBER 19, 2004, UNLESS THE OFFER IS EXTENDED.

     The Offer is conditioned upon, among other things, there being validly tendered and not withdrawn prior to the expiration of the Offer (a) that number of shares of Common Stock which, together with any shares of Common Stock then owned by SafeNet or Purchaser (without giving effect to shares subject to purchase under the Purchaser Option (as defined below) or the Stockholders Agreement (as defined below)), represents greater than 90% of the shares of Common Stock outstanding and (b) and that number of shares of Convertible Preferred Stock which (without giving effect to shares subject to purchase under the Purchaser Option or the Stockholders Agreement) represents 100% of the Convertible Preferred Stock outstanding. The Offer is also conditioned upon, among other things following not occurring: (a) a court or other governmental authority entering or threatening any judgment, order, action, or decree that (i) would require any significant change in the terms of the acquisition of Datakey by the Purchaser and SafeNet, (ii) would in any way make the offer illegal or materially more costly, limit the offer or limit the operation of Datakey by Purchaser or require divestiture of any of the assets of the Company by Purchaser after the closing of the Merger; (iii) would limit the ability of the Purchaser to exercise full rights of ownership of the Shares, (iv) would require the divestiture of the Shares by Purchaser, or (v) which otherwise would have a material adverse effect on the Company or Purchaser, (b) any law or interpretation of existing law being proposed which would result in any of the consequences in (a)(i)-(v), (c) any events occurring that would be reasonably likely to have a material adverse effect on the business of Datakey except for effects resulting from (i) general business or economic conditions, (ii) conditions generally affecting the industry in which Datakey competes, or (iii) the taking of any action contemplated by the Merger Agreement; (d)(i) any suspension of, or limitation of prices for, trading in securities on the New Stock Exchange or NASDAQ, (ii) a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (iii) any limitation on the extension of credit by banks in the United States, (iv) the commencement of a war, armed hostilities or any other international or national calamity involving the United States, or (v) in the case of any of the foregoing existing at the time of the commencement of the offer, a material acceleration or worsening thereof; (e)(i) any person other than Purchaser or SafeNet, having acquired or entered into an agreement to acquire 50% or more of the then outstanding Shares, or (ii) the Board of Directors of Datakey (or Special Committee thereof) having (A) withdrawn or modified, in a manner adverse to Purchaser or SafeNet, the Board of Directors’ (or such special committee’s) approval and recommendation of the Offer, the Merger or the Merger Agreement, (B) approved or recommended, or proposed publicly to approve or recommend, a Company Takeover Proposal (as defined in the Offer), (C) caused Datakey to enter into an agreement relating to any Company Takeover Proposal, or (D) resolved to do any of the foregoing; (f) the representations and warranties of Datakey set forth in the Merger Agreement not being true and correct in all material respects; (g) Datakey failing to perform any obligation to be performed with by it under the Merger Agreement; (h) all material consents required from third parties (other than governmental authorities) in connection with the Merger or the Offer not being obtained by Datakey and Purchaser has not waived this requirement; (i) the Merger Agreement being terminated in accordance with its terms; (j) Purchaser and SafeNet having agreed that Purchaser shall terminate the Offer or postpone the acceptance for payment of or payment for Shares thereunder; (k) any one or more of the representations and warranties related to legal requirements applicable to the Offer and the Merger or the amendment of the Datakey’s Rights Plan to facilitate the Merger being breached in any respect or are inaccurate in any respect; or (l) any non-competition or similar obligations of Datakey being reasonably expected to prohibit or restrict SafeNet or any of SafeNet’s subsidiaries from developing, manufacturing, marketing or selling any of the current products of SafeNet or its subsidiaries or any products of SafeNet or its subsidiaries currently in design or development.

     The Offer is being made pursuant to an Agreement and Plan of Merger, dated as of September 9, 2004 (the “Merger Agreement”), by and among SafeNet, the Purchaser and Datakey, pursuant to which, as soon as practicable after the completion of the Offer and satisfaction or waiver of all conditions to the Merger (as defined below), the Purchaser will be merged with and into Datakey and the separate corporate existence of the Purchaser will thereupon cease. The merger of the Purchaser with and into Datakey, as effected pursuant to the immediately preceding sentence, is referred to herein as the “Merger.” At the effective time of the Merger (the “Effective Time”), each Share (other than Shares held by SafeNet, the Purchaser or any other wholly owned subsidiary of SafeNet and Shares held by a holder who has not voted in favor of the Merger or consented thereto in writing and who complies with Section 302A.471 of the Minnesota Business Corporation Act (“Minnesota Law”)) will be canceled and retired and converted into the right to receive the $0.65 per share of Common Stock or $2.50 per share of Convertible Preferred Stock, as the case may be, (or any greater amount per Share paid pursuant to the Offer) in cash, without interest.

     The Board of Directors of Datakey has unanimously determined that the terms of the Offer, the Merger and the Merger Agreement are fair to and in the best interests of Datakey’s stockholders and has unanimously recommended that the holders of such Shares accept the Offer and tender their Shares pursuant to the Offer.

     As a condition and inducement to SafeNet’s and the Purchaser’s willingness to enter into the Merger Agreement, certain stockholders of Datakey (each a “Stockholder”) entered into a Stockholders Agreement, dated as of September 9, 2004, with SafeNet and the Purchaser (the “Stockholders Agreement”). The Stockholders Agreement provides for the tender into the Offer of all Shares held by the Stockholders (subject to any limitations arising out of Minnesota law), which as of September 9, 2004 represented approximately 23% of the issued and outstanding Shares, including any Shares acquired after the date of the Stockholders Agreement, whether upon the exercise of warrants or options to acquire Shares or otherwise. The Stockholder Agreement also requires the Stockholders to vote such Shares (1) in favor of approval and adoption of the Merger Agreement (as the same may have been amended or revised) and any action required in furtherance thereof, (2) against any agreement or transaction to an acquisition proposal other than as proposed by SafeNet or the Purchaser and (3) against any proposal, action or transaction that would prevent, or materially impede or delay, the consummation of the Offer or Merger. Shares subject to the Stockholders Agreement, and warrants and stock options held by the Stockholders, are also subject to certain restrictions on transfer under the Stockholders Agreement. Also as a condition and inducement to SafeNet’s and the Purchaser’s willingness to enter into the Merger Agreement, Datakey entered into a Purchaser Option Agreement, dated September 9, 2004, by and between SafeNet, the Purchaser and Datakey, pursuant to which Datakey granted the Purchaser an irrevocable option (the “Purchaser Option”) to purchase, for the Offer Price, shares of Common Stock and Convertible Preferred Stock, in such relative amounts as determined by the Purchaser in its discretion up to such number of Shares, which upon exercise, would result in Purchaser owning at least 90% of the outstanding shares of Common Stock. For purposes of the Offer, the Purchaser will be deemed to have accepted for payment, and thereby purchased, Shares properly tendered to the Purchaser and not validly withdrawn as, if and when the Purchaser gives oral or written notice to the Depositary of the Purchaser’s acceptance for payment of such Shares. Payment for Shares accepted for payment pursuant to the Offer will be made by deposit of the Offer Price therefor with the Depositary, which will act as agent for tendering stockholders for the purpose of receiving payment from Purchaser and transmitting payment to validly tendering stockholders. Under no circumstances will interest be paid on the Offer Price to be paid by the Purchaser for the Shares, regardless of any extension of the Offer or any delay in making such payment. In all cases, payment for Shares accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary at one of its addresses appearing on the back cover of the Offer to Purchase of (1) certificates representing, or a timely Book-Entry Confirmation with respect to, such Shares into the Depositary’s account at the Depositary Trust Company (the “Book-Entry Transfer Facility”) pursuant to the procedures described in Section 3-“Procedure for Tendering Shares” of the Offer to Purchase, (2) a Letter of Transmittal (or a facsimile thereof), properly completed and duly executed, with any required signature guarantees, or, in the case of a book-entry transfer, an Agent’s Message (as defined in Section 3-“Procedure for Tendering Shares” of the Offer to Purchase), and (3) any other documents required by the Letter of Transmittal.

     The Purchaser may, without the consent of Datakey, (1) if at any scheduled expiration of the Offer any of the conditions to the Purchaser’s obligation to accept Shares for payment shall not be satisfied or waived, extend the Offer beyond the Expiration Date (defined below) for a time period reasonably necessary to permit such condition to be satisfied, and (2) extend the Offer for any period required by any rule, regulation or interpretation of the United States Securities and Exchange Commission, or the staff thereof, applicable to the Offer. The Purchaser may, without the consent of Datakey, also extend the Offer in accordance with Rule 14d-11 under the Exchange Act of 1934, as amended (the “Exchange Act”). In addition, the Offer Price may be increased and the Offer may be extended to the extent required by law in connection with such increase, in each case without the consent of Datakey. The term “Expiration Date” shall mean 12:00 midnight, New York City time, on October 19, 2004, unless and until the Purchaser extends the period of time for which the Offer is open, in which event the term “Expiration Date” shall mean the latest time and date at which the Offer, as so extended by the Purchaser, shall expire.

     Any extension, amendment or termination of the Offer will be followed as promptly as practicable by public announcement thereof, the announcement in the case of an extension to be issued no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date in accordance with the public announcement requirements of Rule 14d-4(c) under the Exchange Act.

     Shares tendered pursuant to the Offer may be withdrawn (pursuant to the procedures set forth below) at any time prior to the Expiration Date. Thereafter, such tenders are irrevocable, except that they may be withdrawn after November 19, 2004, unless such Shares have been accepted for payment as provided in the Offer to Purchase. No withdrawal rights will apply to Shares tendered into a subsequent offering period under Rule 14d-11 of the Exchange Act and no withdrawal rights apply during a “subsequent offering period” under Rule 14d-11 with respect to Shares tendered in the Offer and accepted for payment. For a withdrawal to be effective, a written, telegraphic or facsimile transmission notice of withdrawal must be timely received by the Depositary at its address set forth on the back cover of the Offer to Purchase and must specify the name of the person who tendered the Shares to be withdrawn, the number and class of Shares to be withdrawn and the name of the registered holder of the Shares to be withdrawn, if different from the name of the person who tendered the Shares. If certificates representing Shares have been delivered or otherwise identified to the Depositary, then, prior to the physical release of such certificates, the serial numbers shown on such certificates must be submitted to the Depositary and, unless such Shares have been tendered by an Eligible Institution (a financial institution, including most commercial banks, savings and loan associations and brokerage houses, that is a participant in the Security Transfer Agent’s Medallion Program, or any other “eligible guarantor institute,” as such term is defined in Rule 17Ad-15 under the Exchange Act), the signatures on the notice of withdrawal must be guaranteed by an Eligible Institution. If Shares have been tendered pursuant to the procedures for book-entry transfer as contained in Section 3-“Procedure for Tendering Shares” of the Offer to Purchase, any notice of withdrawal must also specify the name and number of the account at the appropriate Book-Entry Transfer Facility to be credited with the withdrawn Shares and otherwise comply with such Book-Entry Transfer Facility’s procedures. Withdrawals of tendered Shares may not be rescinded, and any Shares properly withdrawn will thereafter be deemed not validly tendered for purposes of the Offer. However, withdrawn Shares may be retendered by again following one of the procedures described in Section 3-“Procedure for Tendering Shares” of the Offer to Purchase any time prior to the Expiration Date. All questions as to the form and validity (including time of receipt) of notices of withdrawal will be determined by the Purchaser, in its sole discretion, and its determination will be final and binding.

     The receipt of cash for Shares pursuant to the Offer or the Merger will be a taxable transaction for United States federal income tax purposes and may also be a taxable transaction under applicable state, local or foreign tax laws. Stockholders should consult with their tax advisors as to the particular tax consequences of the Offer and the Merger to them, including the applicability and effect of the Alternative Minimum Tax and any state, local or foreign income and other tax laws and of changes in such tax laws. For a more complete description of certain U.S. federal income tax consequences of the Offer and the Merger see Section 5-“Certain United States Federal Income Tax Consequences” of the Offer to Purchase.

     The information required to be disclosed by paragraph (d)(1) of Rule 14d-6 of the General Rules and Regulations under the Exchange Act is contained in the Offer to Purchase and is incorporated herein by reference.

     Datakey has provided the Purchaser with Datakey’s stockholder lists and security position listings for the purpose of disseminating the Offer to holders of Shares. The Offer to Purchase, the related Letter of Transmittal and other relevant documents will be mailed by the Purchaser to record holders of Shares, and will be furnished by the Purchaser to brokers, dealers, banks and similar persons whose names, or the names of whose nominees, appear on the stockholder lists, or, if applicable, who are listed as participants in a clearing agency’s security position listing, for subsequent transmittal to beneficial owners of Shares.

     The Offer to Purchase and the Letter of Transmittal contain important information and should be read in their entirety before any decision is made with respect to the Offer.

     Questions and requests for assistance may be directed to the Information Agent at their respective addresses and telephone numbers as set forth below. Requests for additional copies of the Offer to Purchase, Letter of Transmittal and other tender offer documents may be directed to the Information Agent at its address and telephone number set forth below, and copies will be furnished at the Purchaser’s expense. The Purchaser will not pay any fees or commissions to any broker or dealer or other person (other than to the Depositary and the Information Agent) for soliciting tenders of Shares pursuant to the Offer.

The Information Agent for the Offer is:

[INNISFREE M&A INCORPORATED LOGO]

501 Madison Avenue, 20th Floor
New York, New York 10022
Banks and Brokers Call Collect: (212) 750-5833
All Others Please Call Toll-Free: (888) 750-5834

September 21, 2004

21106     Taylor & Ives     Howard Balley
Farrington & Favia Inc.     (212) 685-4909
Taylor & Ives (212) 921-9300
September04/TaylorIves/21106-D-01
9/20/04     jn     Proof     5     4

[TAYLOR & IVES INCORPORATED LOGO]

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EX-99.A.9

DRAFT NEWS RELEASE

SafeNet Contact:	Maureen Kolb
	(443) 327-1238
	mkolb@safenet-inc.com
	www.safenet-inc.com

SafeNet Commences Tender Offer for Acquisition of Datakey, Inc.

BALTIMORE, Maryland, September 21, 2004 – SafeNet, Inc. (NASDAQ: SFNT) today announced that Snowflake Acquisition Corp., its wholly-owned subsidiary, has commenced a cash tender offer for all of the outstanding shares of common stock of Datakey, Inc. (OTC BB: DKEY.OB) for $0.65 net per share and all of the outstanding shares of convertible preferred stock of Datakey for $2.50 net per share.

SafeNet and Datakey announced on September 9, 2004 that they had signed a definitive agreement for SafeNet to acquire Datakey in an all cash tender offer. The board of directors of Datakey has unanimously approved the acquisition and voted to recommend that Datakey’s shareholders tender their Datakey shares in the offer. In addition, the officers and directors of Datakey and two of Datakey’s principal shareholders have agreed to tender shares representing in the aggregate approximately 23% of the outstanding shares of common stock and all of the shares of convertible preferred stock in support of the transaction (provided that, if SafeNet enforces this agreement, it will not compel the tender of more than 19.9% of the outstanding shares of capital stock of Datakey).

Following completion of the tender offer, SafeNet intends to merge its acquisition subsidiary with and into Datakey to acquire all Datakey shares not tendered in the offer. Pursuant to this merger, any remaining Datakey shareholders will receive $0.65 per share for each share not tendered in the offer.

The tender offer is subject to regulatory approvals and certain closing conditions, including the tender of 90% of the shares of common stock and 100% of the shares of convertible preferred stock of Datakey.

Unless the offer is extended, the offer and withdrawal rights will expire at 12:00 midnight, New York city time, on October 19, 2004. Questions and requests for assistance may be directed to Innisfree M & A Incorporated, the Information Agent for the tender offer, at (212) 750-5833.

About SafeNet, Inc.
SafeNet is a global leader in information security. Founded more than 20 years ago, the company provides complete security utilizing its encryption technologies to protect communications, intellectual property and digital identities, and offers a full spectrum of products including hardware, software, and chips. ARM, Bank of America, NetGear, the Departments of Defense and Homeland Security, Adobe, Samsung, Texas Instruments, the U.S. Internal Revenue Service and scores of other customers entrust their security needs to SafeNet. For more information, visit www.safenet-inc.com.

About Datakey

Datakey focuses on delivering comprehensive token-based solutions that simplify enterprise-wide access and identity management. Their solutions make it easier to administer digital identities and to manage access to information technology resources. The core components of Datakey’s solution set – its Axis system, a PKI enablement product, and its credential management system – equip enterprises to more securely identify users and permit access in both the network and physical worlds. Datakey’s customers include the Bank of England, Canadian Department of National Defence, Clearstream Banking Luxembourg, Rabobank Netherlands, Federal Deposit Insurance Corp. (FDIC), U.S. Department of State, U.S. Bureau of Labor Statistics, and Wells Fargo.

Additional Information
This announcement is neither an offer to purchase nor a solicitation of an offer to sell shares of any class of stock of Datakey, Inc. On September 21, 2004, SafeNet and its acquisition subsidiary, Snowflake Acquisition Corp., commenced a cash tender offer for all of the outstanding shares of common stock of Datakey (including associated preferred stock purchase rights) for $0.65 net per share and all of the outstanding shares of convertible preferred stock of Datakey for $2.50 net per share. This tender offer is scheduled to expire at 12:00 midnight, New York city time, on October 19, 2004, unless it is extended as provided in the related offer to purchase. SafeNet, Inc. and Snowflake Acquisition Corp. will file with the U.S. Securities and Exchange Commission, or “SEC,” a tender offer statement on Schedule TO and related exhibits, including the offer to purchase, letter of transmittal and other related documents. Shareholders and other interested parties should read the offer to purchase and the tender offer statement on Schedule TO and related exhibits because they contain important information that should be read carefully before any decision is made with respect to the offer. By the close of the business day on September 21, 2004, shareholders and other interested parties can obtain these documents free of charge from the SEC’s website at www.sec.gov or from SafeNet, by directing a request to SafeNet, Inc., 4690 Millennium Drive, Belcamp, Maryland 21017, Attention: Investor Relations.

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995

The statements contained in this release, which are not historical facts, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. These risks and uncertainties include, among others: the willingness of Datakey shareholders to tender their shares in the tender offer and the number and timing of shares tendered; the receipt of regulatory approvals and third party consents to the extent required for the acquisition; and satisfaction of the various closing conditions. Other important factors that could cause actual results to differ materially are included but are not limited to those listed in SafeNet’s and Datakey’s periodic reports and registration statements filed with the Securities and Exchange Commission. Neither SafeNet nor Datakey assume any obligation to update information concerning its expectations.

Editor’s Note: SafeNet is a registered trademark of SafeNet, Inc. All other trademarks are the property of their
respective owners.

EX-99.D.1

EXECUTION COPY

AGREEMENT AND PLAN OF MERGER

By

and

Among

DATAKEY, INC.,

SNOWFLAKE ACQUISITION CORP.

and

SAFENET, INC.

Dated as of September 9, 2004

TABLE OF CONTENTS

		Page
	ARTICLE I TERMS OF THE MERGER
1.1	The Offer		2
1.2	Company Action		4
1.3	Directors of the Company		5
1.4	The Merger		6
1.5	The Closing; Effective Team		7
1.6	Conversion of Securities		7
1.7	Exchange of Certificates		8
1.8	Options		9
1.9	Warrants		11
1.10	Dissenting Shares		12
1.11	Articles of Incorporation and Bylaws		12
1.12	Directors and Officers		13
1.13	Others Effects of Merger		13
1.14	Additional Actions		13
1.15	Section 16		13
	ARTICLE II REPRESENTATIONS AND WARRANTIES
2.1	Due Incorporation and Good Standing		14
2.2	Capitalization		14
2.3	Subsidiaries		16
2.4	Authorization; Binding Agreement		16
2.5	Governmental Approvals		17
2.6	No Violations		17
2.7	SEC Filings; Company Financial Statements		18
2.8	Absence of Certain Changes		19
2.9	Absence of Undisclosed Liabilities		21
2.10	Compliance with Laws		21
2.11	Permits		21
2.12	Litigation		22
2.13	Restrictions on Business Activities		22
2.14	Contracts		22
2.15	Government Contracts		23
2.16	Technology and Intellectual Property		24
2.17	Employee Benefit Plans		27
2.18	Taxes and Returns		29
2.19	Finders and Investment Bankers		30
2.20	Fairness Opinion		31
2.21	Insurance		31

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		Page
2.22	Vote Required; Ownership of Purchaser Capital Stock; State Takeover Statutes		31
2.23	Title to Properties		32
2.24	Employee Matters		32
2.25	Customers and Suppliers		34
2.26	Orders, Commitments and Returns		34
2.27	Inventory		34
2.28	Accounts Receivable		35
2.29	Environmental Matters		35
2.30	Rights Plan		36
2.31	Schedule 14D-9; offer Documents; and Proxy Statement		36
2.32	Absence of Questionable Payments		36
2.33	Representations Complete		37
	ARTICLE III REPRESENTATIONS AND WARRANTIES OF PURCHASER
3.1	Due Incorporation and Good Standing		37
3.2	Authorization; Binding Agreement		38
3.3	Governmental Approvals		38
3.4	No Violations		38
3.5	Finders and Investment Bankers		39
3.6	Schedule TO; Offer Documents; Proxy Statement; Schedule 14D-9		39
3.7	Financing		39
3.8	Representations Complete		39
	ARTICLE IV ADDITIONAL COVENANTS OF THE COMPANY
4.1	Conduct of Business of the Company		40
4.2	Notification of Certain Matters		43
4.3	Access and Information		43
4.4	Special Meeting; Proxy Statement		45
4.5	Reasonable Best Efforts		46
4.6	Public Announcements		46
4.7	Compliance		47
4.8	No Solicitation		47
4.9	SEC and Shareholder Filings		50
4.10	State Takeover Laws		50
4.11	Actions Regarding the Rights		50
	ARTICLE V ADDITIONAL COVENANTS PURCHASER
5.1	Notification of Certain Matters		50

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		Page
5.2	Reasonable Best Efforts		51
5.3	Compliance		51
5.4	SEC and Shareholder Filings		51
5.5	Indemnification		51
5.6	Benefit Plans and Employee Matters		53
	ARTICLE VI CONDITIONS
6.1	Conditions of Each Party’s Obligations		53
6.2	Conditions to Obligations of Purchaser		54
6.3	Frustration of Conditions		55
	ARTICLE VII TERMINATION AND ABANDONMENT
7.1	Termination		55
7.2	Effect of Termination and Abandonment		56
	ARTICLE VIII MISCELLANEOUS
8.1	Confidentiality		58
8.2	Amendment and Modification		59
8.3	Waiver of Compliance; Consents		59
8.4	Survival		59
8.5	Notices		60
8.6	Binding Effect; Assignment		61
8.7	Expenses		61
8.8	Governing Law		61
8.9	Counterparts		61
8.10	Interpretation		61
8.11	Entire Agreement		62
8.12	Severability		62
8.13	Specific Performance		62
8.14	Third Parties		63
8.15	Disclosure Schedules		63
8.16	Obligation of Purchaser		63

iii

AGREEMENT AND PLAN OF MERGER

     This Agreement and Plan of Merger (this “Agreement”) is made and entered into as of September 9, 2004, by and among DataKey, Inc., a Minnesota corporation (the “Company”), SafeNet, Inc., a Delaware corporation (“Purchaser”), and Snowflake Acquisition Corp., a Minnesota corporation and wholly owned subsidiary of Purchaser (“Merger Sub”).

WITNESSETH:

     A. The respective Boards of Directors of Merger Sub, Purchaser and the Company deem it advisable and in the best interests of their respective shareholders that Purchaser acquire the Company upon the terms and subject to the conditions provided for in this Agreement.

     B. In furtherance thereof it is proposed that the acquisition be accomplished by Merger Sub commencing a cash tender offer (as it may be amended from time to time as permitted by this Agreement, the “Offer”) to purchase and acquire (i) all shares of the issued and outstanding common stock, par value $0.05 per share (the “Common Stock”), of the Company (together with any associated preferred stock or other rights (the “Rights”) issued pursuant to the Rights Agreement, dated as of October 26, 2001, between the Company and Wells Fargo Bank Minnesota, N.A. (as the same has been amended through the date hereof, the “Rights Agreement”)) for $0.65 per share of Common Stock (such amount or any greater amount per share of Common Stock paid pursuant to the Offer being hereinafter referred to as the “Common Stock Offer Price”) and (ii) all shares of the issued and outstanding convertible preferred stock, liquidation value $2.50 per share (the “Convertible Preferred Stock” and, together with the Common Stock and the associated Rights, the “Shares”), for $2.50 per share of Convertible Preferred Stock (such amount or any greater amount per share of Convertible Preferred Stock paid pursuant to the Offer being hereinafter referred to as the “Convertible Preferred Offer Price” and together with the Common Stock Offer Price, the “Offer Prices”), subject to any applicable withholding Taxes (as such term is defined in Section 2.18(g)), net to the seller in cash, upon the terms and subject to the conditions set forth in this Agreement.

     C. The Board of Directors of the Company has unanimously approved the Offer and the Merger, this Agreement and the transactions contemplated by this Agreement, the Stockholders Agreement and the Stock Option Agreement, and has determined that Offer and the Merger, this Agreement and the transactions contemplated by this Agreements, the Stockholders Agreement and the Stock Option Agreement are fair to and in the best interests of the Company and its shareholders, and has resolved to recommend that holders of Shares accept the Offer, tender their Shares to Merger Sub pursuant to the Offer and approve and adopt this Agreement and the Merger.

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     D. The Board of Directors of each of Purchaser (on its own behalf and as the sole shareholder of Merger Sub), Merger Sub and the Company have each approved this Agreement and the merger of the Merger Sub with and into the Company (the “Merger”) with the Company continuing as the surviving corporation in the Merger, in the case of Purchaser, in accordance with the General Corporation Law of the State of Delaware (the “DGCL”) and, in the case of the Company and Merger Sub, in accordance with the Minnesota Business Corporation Act (“MBCA”) and, in each such case, upon the terms and conditions set forth in this Agreement.

     E. The Board of Directors of the Company and a special committee of the Company’s Board of Directors formed in accordance with Section 302A.673 of the MBCA have unanimously approved the Offer and the Merger, this Agreement and the transactions contemplated by this Agreement, and such approvals are sufficient to render Sections 302A.671, 302A.673 and 302A.675 of the MBCA inapplicable to the Offer and the Merger, this Agreement and the transactions contemplated by this Agreement.

     F. Contemporaneously with the execution and delivery of this Agreement, and as a condition and inducement to Purchaser’s and Merger Sub’s willingness to enter into this Agreement, certain shareholders of the Company (each, a “Shareholder”) are entering into a Stockholders Agreement (the “Stockholders Agreement”) in the form attached hereto as Exhibit A, pursuant to which each such Shareholder has agreed, among other things, to tender his, her or its Shares in the Offer and to grant Purchaser a proxy with respect to the voting of such Shares in favor of the Merger upon the terms and subject to the conditions set forth therein.

     G. As a condition and further inducement to Purchaser and Merger Sub to enter into this Agreement and incur the obligations set forth herein, concurrently with the execution and delivery of this Agreement, Merger Sub and the Company are entering into a Stock Option Agreement in the form of Exhibit B hereto (the “Stock Option Agreement”), pursuant to which, among other things, the Company has granted Merger Sub an option to purchase certain newly-issued shares of Common Stock, subject to certain conditions.

     NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreements contained in this Agreement and intending to be legally bound hereby, the parties hereto agree as follows:

ARTICLE I
TERMS OF THE MERGER

1.1. The Offer.

     (a) Provided that this Agreement shall not have been terminated in accordance with Section 7.1 and none of the events set forth in Annex A hereto shall have occurred and

2

be continuing (and shall not have been waived by Purchaser or Merger Sub), Merger Sub shall commence (within the meaning of Rule 14d-2 under the Securities Exchange Act of 1934, as amended (together with the rules and regulations promulgated thereunder, the “Exchange Act”)) the Offer as promptly as reasonably practicable after the date hereof, but in no event later than five (5) business days from the date of this Agreement, and the Offer shall remain open at least twenty (20) business days (as defined in Rule 14d-1(g)(3) of the Exchange Act) from commencement of the Offer (the “Initial Expiration Date”). The obligation of Merger Sub to accept for payment and to pay for any Shares validly tendered and not withdrawn prior to the expiration of the Offer (as it may be extended in accordance with requirements of this Section 1.1(a)) shall be subject only to the satisfaction or the waiver by Purchaser or Merger Sub of the following conditions: (i) there being validly tendered and not withdrawn prior to the expiration of the Offer (x) that number of shares of Common Stock which, together with any shares of Common Stock then owned by Purchaser or Merger Sub (without giving effect to shares subject to purchase under the Stock Option Agreement or the Stockholders Agreement), represents greater than 90% of the shares of Common Stock outstanding and (y) there being validly tendered and not withdrawn prior to the expiration of the Offer that number of shares of Convertible Preferred Stock which, together with any shares of Convertible Preferred Stock then owned by Purchaser or Merger Sub (without giving effect to shares subject to purchase under the Stock Option Agreement the Stockholders Agreement), represents 100% of the Convertible Preferred Stock outstanding (clauses (x) and (y) together, the “Minimum Condition”); and (ii) the other conditions set forth in Annex A hereto. Subject to the prior satisfaction or waiver by Purchaser or Merger Sub of the Minimum Condition and the other conditions of the Offer set forth in Annex A hereto, Merger Sub shall consummate the Offer in accordance with its terms and accept for payment and pay for all Shares tendered and not withdrawn promptly following the acceptance of Shares for payment pursuant to the Offer. The Offer shall be made by means of an offer to purchase (the “Offer to Purchase”) that contains the terms set forth in this Agreement, the Minimum Condition and the other conditions set forth in Annex A hereto. Purchaser expressly reserves the right to waive any of such conditions, to increase either or both of the Offer Prices and to make any other changes in the terms of the Offer; provided, however, that Merger Sub shall not, and Purchaser shall cause Merger Sub not to, decrease either of the Offer Prices, change the form of consideration payable in the Offer, decrease the number of Shares sought in the offer, impose additional conditions to the Offer, extend the Offer beyond the Initial Expiration Date except as set forth below, or amend any other condition of the Offer in any manner adverse to the holders of the Shares, in each case without the prior written consent of the Company (such consent to be authorized by the Company Board of Directors or a duly authorized committee thereof). Notwithstanding the foregoing, Merger Sub may, without the consent of the Company, (i) if, at any scheduled expiration of the Offer any of the conditions to Merger Sub’s obligation to accept Shares for payment shall not be satisfied or waived, extend the Offer beyond the Initial Expiration Date for a time period reasonably necessary to permit such condition to be satisfied, or (ii) extend the Offer for any period required by any rule, regulation or interpretation of the United States Securities and Exchange Commission (“SEC”), or the staff thereof, applicable to the Offer. Merger

3

Sub may, without the consent of the Company, extend the Offer in accordance with Rule 14d-11 under the Exchange Act. In addition, either or both of the Offer Prices may be increased and the Offer may be extended to the extent required by law in connection with such increase, in each case without the consent of the Company.

     (b) As promptly as practicable on the date of commencement of the Offer, Merger Sub shall file with the SEC a Tender Offer Statement on Schedule TO (together with all amendments and supplements thereto, the “Schedule TO”) with respect to the Offer. The Schedule TO shall contain or incorporate by reference an offer to purchase (the “Offer to Purchase”) and forms of the related letter of transmittal and all other ancillary Offer documents (collectively, together with all amendments and supplements thereto, the “Offer Documents”). Purchaser and Merger Sub shall cause the Offer Documents to be disseminated to the holders of the Shares as and to the extent required by applicable federal securities laws. Purchaser and Merger Sub, on the one hand, and the Company, on the other hand, will promptly correct any information provided by it for use in the Offer Documents if and to the extent that it shall have become false or misleading in any material respect, and Merger Sub will cause the Offer Documents as so corrected to be filed with the SEC and to be disseminated to holders of the Shares, in each case as and to the extent required by applicable federal securities laws. The Company and its counsel shall be given a reasonable opportunity to review and comment upon the Schedule TO before it is filed with the SEC. In addition, Purchaser and Merger Sub agree to provide the Company and its counsel with any comments, whether written or oral, that Purchaser or Merger Sub or their counsel may receive from time to time from the SEC or its staff with respect to the Offer Documents promptly after the receipt of such comments and to consult with the Company and its counsel prior to responding to any such comments.

     (c) Purchaser and Merger Sub will file with the Commissioner of Commerce of the State of Minnesota and disseminate to the shareholders of the Company any registration statement relating to the Offer required to be filed pursuant to Chapter 80B of the Minnesota Statutes.

1.2. Company Actions.

     (a) The Company hereby approves of and consents to the Offer and represents and warrants that the Company’s Board of Directors and a special committee of the Company’s Board of Directors formed in accordance with Section 302A.673 of the MBCA (the “Special Committee”), each at a meeting duly called and held, have (i) determined that the terms of the Offer and the Merger are fair to and in the best interests of the shareholders of the Company, (ii) approved this Agreement and the transactions contemplated hereby, including the Offer and the Merger, the Stockholders Agreement and the Stock Option Agreement, and such approvals are sufficient to comply with Sections 302A.671, 302A.673 and 302A.675 of the MBCA as they apply to this Agreement and the transactions contemplated by this Agreement and (iii) resolved to recommend that the

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shareholders of the Company accept the Offer, tender their Shares to Merger Sub thereunder and approve and adopt this Agreement and the Merger. The Company hereby consents to the inclusion in the Offer Documents of the recommendation of the Board and the approval of the Special Committee described in the immediately preceding sentence, and the Company shall not permit the recommendation of the Company’s Board or the disclosure regarding the approval of the Special Committee or any component thereof to be modified in any manner adverse to Purchaser or Merger Sub or to be withdrawn by the Company’s Board or the Special Committee, except as provided in Section 4.8(b) hereof.

     (b) As promptly as practicable on the date of commencement of the Offer, the Company shall file with the SEC a Solicitation/Recommendation Statement on Schedule 14D-9 (together with all amendments and supplements thereto, the “Schedule 14D-9”) which shall contain the recommendation referred to in clause (iii) of Section 1.2(a) hereof. The Company further agrees to take all steps necessary to cause the Schedule 14D-9 to be disseminated to holders of the Shares as and to the extent required by applicable federal securities laws. The Company, on the one hand, and each of Purchaser and Merger Sub, on the other hand, will promptly correct any information provided by it for use in the Schedule 14D-9 if and to the extent that it shall have become false or misleading in any material respect, and the Company will cause the Schedule 14D-9 as so corrected to be filed with the SEC and to be disseminated to holders of the Shares, in each case as and to the extent required by applicable federal securities laws. Purchaser and its counsel shall be given a reasonable opportunity to review and comment upon the Schedule 14D-9 before it is filed with the SEC. In addition, the Company agrees to provide Purchaser, Merger Sub and their counsel with any comments, whether written or oral, that the Company or its counsel may receive from time to time from the SEC or its staff with respect to the Schedule 14D-9 promptly after the receipt of such comments and to consult with Purchaser, Merger Sub and their counsel prior to responding to any such comments.

     (c) The Company shall promptly furnish Merger Sub with mailing labels containing the names and addresses of all record holders of Shares and with security position listings of Shares held in stock depositories, each as of a recent date, together with all other available listings and computer files containing names, addresses and security position listings of record holders and non-objecting beneficial owners of Shares. The Company shall furnish Merger Sub with such additional information, including, without limitation, updated listings and computer files of holders of Shares, mailing labels and security position listings, and such other assistance as Purchaser, Merger Sub or their agents may reasonably require in communicating the Offer to the record and beneficial holders of Shares.

1.3. Directors of the Company.

     (a) Immediately upon the purchase of and payment for Shares by Merger Sub or any of its affiliates pursuant to the Offer, Purchaser shall be entitled to designate such number of directors, rounded up to the next whole number, on the Board of Directors of the

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Company as is equal to the product obtained by multiplying the total number of directors on such Board by the percentage that the number of Shares so purchased and paid for bears to the total number of Shares then outstanding. In furtherance thereof, the Company and its Board of Directors shall, after the purchase of and payment for Shares by Merger Sub or any of its affiliates pursuant to the Offer, upon request of Merger Sub, immediately increase the size of its Board of Directors, secure the resignations of such number of directors or remove such number of directors, or any combination of the foregoing, as is necessary to enable Purchaser’s designees to be so elected to the Company’s Board and shall cause Purchaser’s designees to be so elected and shall comply with Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder in connection therewith. In the event that Merger Sub requests the resignation of directors of the Company pursuant to the immediately preceding sentence, the Company shall cause such directors of the Company to resign as may be designated by Merger Sub in a writing delivered to the Company. Immediately upon the first purchase of and payment for Shares by Merger Sub or any of its affiliates pursuant to the Offer, the Company shall, if requested by Purchaser, also cause directors designated by Purchaser to constitute at least the same percentage (rounded up to the next whole number) of each committee of the Company’s Board of Directors as is on the Company’s Board of Directors. Notwithstanding the foregoing, if Shares are purchased pursuant to the Offer, there shall be until the Effective Time at least two members of the Company’s Board of Directors who are directors on the date hereof and are not employees of the Company; each such director shall both be “disinterested” as defined in Section 302A.673, Subd. 1(d), of the MBCA. The Company and its Board of Directors shall promptly take all actions as may be necessary to comply with their obligations under this Section 1.3(a), including all actions as may be permitted under the MBCA and the Company’s Bylaws.

     (b) The Company shall immediately take all actions required pursuant to Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder in order to fulfill its obligations under Section 1.3(a), including mailing to shareholders together with the Schedule 14D-9 the information required by such Section 14(f) and Rule 14f-1 as is necessary to enable Purchaser’s designees to be elected to the Company’s Board of Directors. Purchaser and Merger Sub will supply the Company and be solely responsible for any information with respect to them and their nominees, officers, directors and affiliates required by such Section 14(f) and Rule 14f-1.

     (c) Following the election of Purchaser’s designees to the Company’s Board of Directors pursuant to this Section 1.3 and prior to the Effective Time, (i) any amendment or termination of this Agreement by the Company, (ii) any extension or waiver by the Company of the time for the performance of any of the obligations or other acts of Purchaser or Merger Sub under this Agreement, or (iii) any waiver of any of the Company’s rights hereunder shall, in any such case, require the concurrence of a majority of the directors of the Company then in office who neither were designated by Purchaser nor are employees of the Company (the “Independent Director Approval”).

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1.4. The Merger.

     Upon the terms and subject to the conditions of this Agreement, the Merger shall be consummated in accordance with the MBCA. At the Effective Time (as defined below), upon the terms and subject to the conditions of this Agreement, Merger Sub shall be merged with and into the Company in accordance with the MBCA and the separate existence of Merger Sub shall thereupon cease, and the Company, as the surviving corporation in the Merger (the “Surviving Corporation”), shall continue its corporate existence under the laws of the State of Minnesota as a wholly owned subsidiary of Purchaser.

1.5. The Closing; Effective Time.

     (a) The closing of the Merger (the “Closing”) shall take place at the offices of Venable LLP, 8010 Towers Crescent Drive, Suite 300, Vienna, Virginia 22182, at 10:00 a.m. local time on a date to be specified by the parties which shall be no later than the third business day after the date that all of the closing conditions set forth in Article VI have been satisfied or waived (if waivable) unless another time, date or place is agreed upon in writing by the parties hereto.

     (b) Effective Time. Subject to the provisions of this Agreement, on the Closing Date the parties shall file with the Secretary of State of the State of Minnesota articles of merger in accordance with Section 302A.615 or 302A.621 of the MBCA as applicable (as the case may be, the “Articles of Merger”) executed in accordance with the relevant provisions of the MBCA and shall make all other filings or recordings required under the MBCA in order to effect the Merger. The Merger shall become effective upon the filing of the Articles of Merger or at such other time as is agreed by the parties hereto and specified in the Articles of Merger. The time when the Merger shall become effective is herein referred to as the “Effective Time” and the date on which the Effective Time occurs is herein referred to as the “Closing Date.”

1.6. Conversion of Securities.

     At the Effective Time, by virtue of the Merger and without any action on the part of the holders of any securities of Merger Sub or the Company:

     (a) Each Share that is owned by Purchaser, the Company or any of their respective subsidiaries shall automatically be cancelled and retired and shall cease to exist, and no consideration shall be delivered in exchange therefor.

     (b) Each issued and outstanding Share (other than Shares to be cancelled in accordance with Section 1.6(a) hereof and Dissenting Shares) shall automatically be converted into the right to receive the Common Stock Offer Price in cash (the “Merger Consideration”), payable, without interest, to the holder of such Share upon surrender, in

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the manner provided in Section 1.7 hereof, of the certificate that formerly evidenced such Share. All such Shares, when so converted, shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist, and each holder of a certificate representing any such Shares shall cease to have any rights with respect thereto, except the right to receive the Merger Consideration therefor upon the surrender of such certificate in accordance with Section 1.7 hereof.

     (c) Each issued and outstanding share of common stock of Merger Sub shall be converted into one validly issued, fully paid and nonassessable share of common stock of the Surviving Corporation.

1.7. Exchange of Certificates.

     (a) Exchange Agent. Prior to the Effective Time, Purchaser shall designate a bank or trust company reasonably acceptable to the Company to act as agent for the holders of the Shares (other than Shares held by Purchaser, the Company and any of their respective subsidiaries and Dissenting Shares) in connection with the Merger (the “Exchange Agent”) to receive in trust, the aggregate Merger Consideration to which holders of Shares shall become entitled pursuant to Section 1.6(b) hereof. Purchaser shall deposit such aggregate Merger Consideration with the Exchange Agent promptly following the Effective Time. Such aggregate Merger Consideration shall be invested by the Exchange Agent as directed by Purchaser.

     (b) Exchange Procedures. Promptly after the Effective Time, Purchaser and the Surviving Corporation shall cause to be mailed to each holder of record, as of the Effective Time, of a certificate or certificates, which immediately prior to the Effective Time represented outstanding Shares (the “Certificates”), whose Shares were converted pursuant to Section 1.6(b) hereof into the right to receive the Merger Consideration, a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as Purchaser may reasonably specify) and instructions for use in effecting the surrender of the Certificates in exchange for the Merger Consideration. Upon surrender of a Certificate for cancellation to the Exchange Agent or to such other agent or agents as may be appointed by Purchaser, together with such letter of transmittal, properly completed and duly executed in accordance with the instructions thereto, the holder of such Certificate shall be entitled to receive in exchange therefor the Merger Consideration for each Share formerly represented by such Certificate, and the Certificate so surrendered shall forthwith be cancelled. No interest will be paid or accrued on the cash payable upon the surrender of the Certificates. If payment of the Merger Consideration is to be made to a person other than the person in whose name the surrendered Certificate is registered, it shall be a condition of payment that the Certificate so surrendered shall be properly endorsed or shall be otherwise in proper form for transfer and that the person requesting such payment shall have paid all transfer and other Taxes required by reason of the issuance to a person other than the registered

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holder of the Certificate surrendered or shall have established to the satisfaction of the Surviving Corporation that such Tax either has been paid or is not applicable. Until surrendered as contemplated by this Section 1.7, each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive the Merger Consideration for each Share in cash as contemplated by Section 1.6(b) hereof.

     (c) Transfer Books; No Further Ownership Rights in the Shares. At the Effective Time, the stock transfer books of the Company shall be closed, and thereafter there shall be no further registration of transfers of the Shares on the records of the Company. From and after the Effective Time, the holders of Certificates evidencing ownership of the Shares outstanding immediately prior to the Effective Time shall cease to have any rights with respect to such Shares, except as otherwise provided for herein or by applicable law. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be cancelled and exchanged as provided in this Article I.

     (d) Termination of Fund; No Liability. At any time following the six-month anniversary of the Effective Time, the Surviving Corporation shall be entitled to require the Exchange Agent to deliver to it any funds (including any interest received with respect thereto) which had been made available to the Exchange Agent, and holders shall be entitled to look to the Surviving Corporation (subject to abandoned property, escheat or other similar laws) only as general creditors thereof with respect to the Merger Consideration payable upon due surrender of their Certificates without any interest thereon. Notwithstanding the foregoing, neither the Surviving Corporation nor the Exchange Agent nor any party hereto shall be liable to any holder of a Certificate for Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar law.

     (e) Lost, Stolen or Destroyed Certificates. In the event any Certificates shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate(s) to be lost, stolen or destroyed and, if required by Purchaser, the posting by such person of a bond in such sum as Purchaser may reasonably direct as indemnity against any claim that may be made against any party hereto or the Surviving Corporation with respect to such Certificate(s), the Exchange Agent will issue the Merger Consideration pursuant to Section 1.6(b) deliverable in respect of the Shares represented by such lost, stolen or destroyed Certificates.

     (f) Withholding Taxes. Purchaser and Merger Sub shall be entitled to deduct and withhold, or cause the Exchange Agent to deduct and withhold, from the Offer Prices or the Merger Consideration payable to a holder of Shares pursuant to the Offer or the Merger any such amounts as are required under the Internal Revenue Code of 1986, as amended (the “Code”), or any applicable provision of state, local or foreign Tax law. To the extent that amounts are so withheld by Purchaser or Merger Sub, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the

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holder of the Shares in respect of which such deduction and withholding was made by Purchaser or Merger Sub.

1.8 Options.

     (a) Except as provided in paragraphs (b), (c) and (d) below with respect to the Company’s 1998 Employee Stock Purchase Plan, as amended (the “Company ESPP”), the Cash-Out Options (as defined in Section 1.8(d)) and certain options to purchase Common Stock at an exercise price greater than $0.82 per share, at the Effective Time, with respect to each then outstanding and unexercised option for Shares (the “Company Options”) granted under the Company’s 1987 Stock Option Plan, 1997 Stock Option Plan and 1994 Consultant Plan (collectively, the “Company Option Plans”) or otherwise, Purchaser shall cause each holder of a Company Option to receive, by virtue of the Merger and without any action on the part of the holder thereof, options (“Purchaser Replacement Options”) exercisable for shares of common stock, par value $.01 per share, of Purchaser (“Purchaser Stock”) having the same terms and conditions as the Company Options (including such terms and conditions as may be incorporated by reference into the agreements evidencing the Company Options pursuant to the plans or arrangements pursuant to which such Company Options were granted) except that the exercise price and the number of shares issuable upon exercise shall be divided and multiplied, respectively, by the Conversion Fraction, and rounded to the nearest whole cent or number, respectively. Purchaser shall use all reasonable efforts to ensure that any Company Options that qualified as incentive stock options under Section 422 of the Code prior to the Effective Time continue to so qualify after the Effective Time. Purchaser shall take all corporate action necessary to reserve for issuance a sufficient number of shares of Purchaser Stock for delivery upon the exercise of Purchaser Replacement Options after the Effective Time. Promptly after the Effective Time, Purchaser shall file or cause to be filed all registration statements on Form S-8 or other appropriate form as may be necessary in connection with the purchase and sale of Purchaser Stock contemplated by such Purchaser Replacement Options subsequent to the Effective Time, and shall maintain the effectiveness of such registration statements (and maintain the current status of the prospectus or prospectuses contained therein) for so long as any of the Purchaser Replacement Options registered thereunder remain outstanding. As soon as practicable after the Effective Time, Purchaser shall qualify under applicable state securities laws the issuance of such shares of Purchaser Stock issuable upon exercise of Purchaser Replacement Options. Purchaser’s Board of Directors shall take all actions necessary on the part of Purchaser to enable the acquisition of Purchaser Stock, Purchaser Replacement Options and subsequent transactions in Purchaser Stock after the Effective Time pursuant to Purchaser Replacement Options by persons subject to the reporting requirements of Section 16(a) of the Exchange Act to be exempt from the application of Section 16(b) of the Exchange Act, to the extent permitted thereunder. For purposes of this Agreement, the term “Conversion Fraction” shall mean the quotient determined by dividing (x) the Common Stock Offer Price by (y) the average closing prices of one (1) shares of the Purchaser Stock on The Nasdaq National Market (as reported in the Wall Street Journal or, if

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not reported therein, any other authoritative source) for the five (5) trading days ending two (2) days prior to the Effective Time.

     (b) The offerings under the Company ESPP shall be terminated as of the date hereof, and Shares shall not be issued to participants thereunder after the date hereof. As of the Effective Time, each participant under the Company ESPP shall receive a cash payment equal to the balance, if any, of any accumulated payroll deductions for which they did not receive Shares.

     (c) Each Company Option with an exercise price greater than $0.82 per share of Common Stock that is outstanding and unexercised at the Effective Time shall terminate at the Effective Time and shall not be assumed or replaced by Purchaser.

     (d) At the Effective Time, in exchange for the surrender and cancellation of the Company Options identified on Schedule 1.8(d) to this Agreement (the “Cash-Out Options”), Purchaser shall pay to the persons identified on Schedule 1.8(d) as the holders of such Cash-Out Options cash in the amount equal to, with respect to each Cash-Out Option, the product of (i) the number of shares of Common Stock to be acquired upon the exercise of such Cash-Out Option, multiplied by (ii) the amount equal to the difference between (A) the Merger Consideration, minus (B) the exercise price of such Cash-Out Option.

     (e) From and after the date hereof until the Effective Time, the Company shall, upon the request of Purchaser, grant to employees of the Company designated by Purchaser options to purchase Common Stock available for issuance under the Company’s 1997 Stock Option Plan in such amounts and at such exercise price(s) as the Company and Purchaser agree and upon such issuance, such options shall be treated as Company Options for purposes of this Agreement.

     (f) As of the Effective Time, except as provided in this Section 1.8, all rights under any provision of the Company Option Plans and any other plan, program or arrangement providing for the issuance or grant of any other interest in respect of the capital stock of the Company shall be cancelled. The Company shall take all action necessary to ensure that, as of and after the Effective Time, except as provided in this Section 1.8, no person shall have any right under the Company Option Plans or any other plan, program or arrangement with respect to equity securities of the Company, the Surviving Corporation or any subsidiary thereof.

     (g) At or before the Effective Time, the Company shall cause to be effected any necessary amendments to the Company Option Plans and any other resolutions, consents or notices, in such form reasonably acceptable to Purchaser, required under the Company Option Plans or any Company Options to give effect to the foregoing provisions of this Section 1.8.

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1.9 Warrants.

     If permitted under the terms of the applicable governing instruments, the Company shall take all necessary action such that, at the Effective Time, each holder of an outstanding warrant to purchase shares of Common Stock (collectively, the “Company Warrants”) shall have the right to receive, in lieu of the shares of Common Stock theretofore issuable upon exercise of such Company Warrant, an amount per share equal to the excess of the Merger Consideration over the exercise price per share of such Company Warrant; provided, however, that to the extent the foregoing is not permissible under the terms of any such Company Warrant, each such Company Warrant shall, at the Effective Time, be deemed to constitute a warrant to acquire, upon payment of the aggregate exercise price of such Company Warrant, and otherwise on the same terms and conditions as were applicable under such Company Warrant prior to the Effective Time, the aggregate Merger Consideration that the holder of such Company Warrant would have been entitled to receive pursuant to Article I of this Agreement had such holder exercised such Company Warrant in full immediately prior to the Effective Time. The Company shall deliver to each holder of a Company Warrant timely notice of the Merger in accordance with the provisions thereof. The Company shall take all necessary actions to provide that as of the Effective Time no holder of a Company Warrant will have the right to receive shares of common stock of the Surviving Corporation upon the exercise of any Company Warrant.

1.10 Dissenting Shares.

     Notwithstanding any provision of this Agreement to the contrary, each outstanding Share, the holder of which has demanded and perfected such holder’s right to dissent from the Merger and to be paid the fair value of such Shares in accordance with Sections 302A.471 and 302A.473 of the MBCA and, as of the Effective Time, has not effectively withdrawn or lost such dissenters’ rights (“Dissenting Shares”), shall not be converted into or represent a right to receive the Merger Consideration into which Shares are converted pursuant to Section 1.6(b) hereof, but the holder thereof shall be entitled only to such rights as are granted by the MBCA. Notwithstanding the immediately preceding sentence, if any holder of Shares who demands dissenters’ rights with respect to its Shares under the MBCA effectively withdraws or loses (through failure to perfect or otherwise) its dissenters’ rights, then as of the Effective Time or the occurrence of such event, whichever later occurs, such holder’s Shares will automatically be converted into and represent only the right to receive the Merger Consideration as provided in Section 1.6(b) hereof, without interest thereon, upon surrender of the certificate or certificates formerly representing such Shares. After the Effective Time, Purchaser shall cause the Company to make all payments to holders of Shares with respect to such demands in accordance with the MBCA. The Company shall give Purchaser (i) prompt written notice of any notice of intent to demand fair value for any Shares, withdrawals of such notices, and any other instruments served pursuant to the MBCA and received by the Company, and (ii) the opportunity to direct all negotiations and proceedings with respect to demands for fair value for Shares under the MBCA. The Company shall not, except with the prior written consent of Purchaser, voluntarily make

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any payment with respect to any demands for fair value for Shares or offer to settle or settle any such demands.

1.11 Articles of Incorporation and Bylaws.

     Subject to Section 5.5 hereof, at and after the Effective Time until the same have been duly amended, (i) the Articles of Incorporation of the Surviving Corporation shall be identical to the Articles of Incorporation of Merger Sub in effect at the Effective Time and (ii) and the Bylaws of the Surviving Corporation shall be identical to the Bylaws of Merger Sub in effect at the Effective Time.

1.12 Directors and Officers.

     At and after the Effective Time, the directors of Merger Sub immediately prior to the Effective Time shall be the directors of the Surviving Corporation, and the officers of Merger Sub immediately prior to the Effective Time shall be the officers of the Surviving Corporation, in each case until their successors are elected or appointed and qualified. If, at the Effective Time, a vacancy shall exist on the Board of Directors or in any office of the Surviving Corporation, such vacancy may thereafter be filled in the manner provided by law.

1.13 Other Effects of Merger.

     The Merger shall have all further effects as specified in the applicable provisions of the MBCA.

1.14 Additional Actions.

     If, at any time after the Effective Time, the Surviving Corporation shall consider or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Corporation its right, title or interest in, to or under any of the rights, properties or assets of Merger Sub or the Company or otherwise carry out this Agreement, the officers and directors of the Surviving Corporation shall be authorized to execute and deliver, in the name and on behalf of Merger Sub or the Company, all such deeds, bills of sale, assignments and assurances and to take and do, in the name and on behalf of Merger Sub or the Company, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right, title and interest in, to and under such rights, properties or assets in the Surviving Corporation or otherwise to carry out this Agreement.

1.15 Section 16.

     Purchaser, the Surviving Corporation and the Company shall each take all such steps as may be required to provide that, with respect to each Section 16 Affiliate (as

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defined below), (a) the transactions contemplated by this section, and (b) any other dispositions of Company equity securities (including derivative securities) or other acquisitions of Purchaser equity securities (including derivative securities) in connection with this Agreement, shall be exempt under Rule 16b-3 promulgated under the Exchange Act, in accordance with the terms and conditions set forth in that certain No-Action Letter, dated January 12, 1999, issued by the SEC to Skadden, Arps, Slate, Meagher & Flom LLP. For purposes of this Agreement, “Section 16 Affiliate” shall mean each individual who (a) immediately prior to the Effective Time is a director or officer of the Company or (b) at the Effective Time will become a director or officer of Purchaser or the Surviving Corporation.

ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY

     Except as set forth in the disclosure schedule to be delivered by the Company to Purchaser upon the execution of this Agreement, which sets forth certain disclosures concerning the Company and its business (the “Company Disclosure Schedule”), each section of which only qualifies the correspondingly numbered representation or warranty in this Article II, the Company hereby represents and warrants to Purchaser and Merger Sub as follows:

2.1. Due Incorporation and Good Standing.

     The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. The Company is duly qualified or licensed and in good standing to do business in each jurisdiction in which the character of the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so duly qualified or licensed and in good standing would not be reasonably likely to have a Company Material Adverse Effect. For purposes of this Agreement, the term “Company Material Adverse Effect” shall mean a material adverse effect on the business, assets, condition (financial or otherwise), liabilities or the results of operations of the Company, except in each case for any such effects resulting from, arising out of, or relating to (i) general business or economic conditions, (ii) conditions generally affecting the industry in which the Company competes, or (iii) the taking of any action contemplated by this Agreement. The Company has heretofore made available to Purchaser accurate and complete copies of the Restated Articles of Incorporation, as amended, and Bylaws, as currently in effect, of the Company.

2.2 Capitalization.

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     (a) The authorized capital stock of the Company consists of (i) 22,000,000 shares of Common Stock, (ii) 400,000 shares of Convertible Preferred Stock, (iii) 120,000 shares of preferred stock, par value $0.05 per share, designated as Series B Preferred Stock (the “Series B Preferred Stock”) and reserved for issuance in connection with the Rights Agreement, and (iv) 7,480,000 shares that are not designated (the “Undesignated Capital Stock” and together with the Common Stock, the Convertible Preferred Stock and the Series B Preferred Stock, the “Company Capital Stock”). As of the close of business on September 9, 2004, (i) 11,767,254 shares of Common Stock were issued and outstanding, (ii) 150,000 shares of Convertible Preferred Stock were issued and outstanding, (iii) no shares of Series B Preferred Stock were issued and outstanding, (iv) no shares of Undesignated Capital Stock were issued and outstanding, (v) 1,789,728 shares of Common Stock were reserved for issuance pursuant to outstanding Company Options, (vi) 6,593,823 shares of Common Stock were subject to issuance under Company Warrants and (vii) 83,876 shares of Common Stock were available for issuance in the purchase period ending December 31, 2004 under the Company ESPP. All of the outstanding shares of Company Capital Stock are, and all shares of Company Capital Stock which may be issued pursuant to the exercise of outstanding Company Options and Company Warrants will be, when issued in accordance with the respective terms thereof, duly authorized, validly issued, fully paid and non-assessable. The rights, preferences and privileges of the Convertible Preferred Stock and the Series B Preferred Stock are as set forth in the Restated Articles of Incorporation, as amended. None of the outstanding securities of the Company has been issued in violation of any federal or state securities laws.

     (b) Except as set forth above or as set forth in Section 2.2(b) of the Company Disclosure Schedule, as of the date hereof, (i) there are no shares of capital stock of the Company authorized, issued or outstanding, (ii) there are no existing options, warrants, calls, preemptive or similar rights, bonds, debentures, notes or other indebtedness having general voting rights or debt convertible into securities having such rights (“Voting Debt”) or subscriptions or other rights, agreements, arrangements or commitments of any character, relating to the issued or unissued capital stock of the Company obligating the Company to issue, transfer or sell or cause to be issued, transferred, sold or repurchased any options or shares of capital stock or Voting Debt of, or other equity interest in, the Company or securities convertible into or exchangeable for such shares or equity interests, or obligating the Company to grant, extend or enter into any such option, warrant, call, subscription or other right, agreement, arrangement or commitment and (iii) there are no outstanding contractual obligations of the Company to repurchase, redeem or otherwise acquire any Company Capital Stock, or other capital stock of the Company or to provide funds to make any investment (in the form of a loan, capital contribution or otherwise) in any other entity. Except for the Company’s obligations under the Rights Agreement (including the Rights) and except as otherwise expressly contemplated by this Agreement, as of the date hereof there are no outstanding rights, subscriptions, warrants, puts, calls, unsatisfied preemptive rights, options or other agreements of any kind relating to any of the issued, outstanding, authorized but unissued, or unauthorized shares of capital stock or any other security of the Company, and there is no authorized or issued security of any kind

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convertible into or exchangeable, for any such capital stock or other security. A true, correct and complete copy of the Rights Agreement has been delivered to Purchaser by the Company prior to the date hereof.

     (c) There are no voting trusts or other agreements or understandings to which the Company is a party with respect to the voting of the Company Capital Stock.

     (d) Following the Effective Time, no holder of Company Options or Company Warrants will have any right to receive shares of common stock of the Surviving Corporation upon exercise of Company Options or Company Warrants.

     (e) Except as disclosed in Section 2.2(e) of the Company Disclosure Schedule, no Indebtedness of the Company contains any restriction upon (i) the prepayment of any of such Indebtedness, (ii) the incurrence of Indebtedness by the Company, or (iii) the ability of the Company to grant any lien on its properties or assets. As used in this Agreement, “Indebtedness” means (A) all indebtedness for borrowed money or for the deferred purchase price of property or services (other than current trade liabilities incurred in the ordinary course of business and payable in accordance with customary practices), (B) any other indebtedness that is evidenced by a note, bond, debenture or similar instrument, (C) all obligations under financing leases, (D) all obligations in respect of acceptances issued or created, (E) all liabilities secured by any lien on any property and (F) all guarantee obligations.

     (f) Section 2.2(f) of the Company Disclosure Schedule lists all Company Options outstanding as of the date hereof, the name of the holder of each Company Option, the date of grant and the exercise price of such Company option, the number of shares of Common Stock as to which such Company Option has vested, the vesting schedule for such Company Option, a summary of any acceleration provisions or milestones, and whether the exercisability of such Company Option will be accelerated in any way by the transactions contemplated under this Agreement, and indicates the extent of acceleration, if any. Since July 30, 2004, the Company has not granted any Company Options to officers or directors of the Company.

     (g) No agreement or understanding requires consent or approval from the holder of any Company Option or Company Warrant to effectuate the terms of this Agreement. The Company has previously provided true and complete copies of each Company Warrant to Purchaser.

2.3 No Subsidiaries

     The Company has no subsidiaries and does not otherwise hold any equity, membership, partnership, joint venture or other ownership interest in any person.

2.4 Authorization; Binding Agreement.

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     The Company has all requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, including, but not limited to, the Offer and the Merger, the Stockholders Agreement and the Stock Option Agreement have been duly and validly authorized by the Company’s Board of Directors, and no other corporate proceedings on the part of the Company are necessary to authorize the execution and delivery of this Agreement or to consummate the transactions contemplated hereby (other than the requisite approval of the Merger by the shareholders of the Company in accordance with the MBCA). This Agreement has been duly and validly executed and delivered by the Company and constitutes the legal, valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except to the extent that enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors’ rights generally and by principles of equity regarding the availability of remedies (“Enforceability Exceptions”). The Special Committee and the Company’s Board of Directors have approved the Offer, the Merger, this Agreement, the Stockholders Agreement and the Stock Option Agreement and the transactions contemplated hereby and thereby and such approvals are sufficient so that Sections 302A.671, 302A.673 and 302A.675 of the MBCA will not impede the Offer, the Merger, this Agreement and the other transactions contemplated by this Agreement.

2.5 Governmental Approvals.

     No consent, approval, waiver or authorization of, notice to or declaration or filing with (“Consent”), any nation or government, any state or other political subdivision thereof, any entity, authority or body exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including, without limitation, any governmental or regulatory authority, agency, department, board, commission, administration or instrumentality, any court, tribunal or arbitrator or any self regulatory organization (“Governmental Authority”) on the part of the Company is required in connection with the execution or delivery by the Company of this Agreement, the Offer, the Merger or the consummation by the Company of the other transactions contemplated hereby other than (i) the filing of the Articles of Merger with the Secretary of State of the State of Minnesota in accordance with the MBCA, (ii) filings with the SEC and state securities laws administrators (including the Commissioner of Commerce of the State of Minnesota), (iii) such filings as may be required in any jurisdiction where the Company is qualified or authorized to do business as a foreign corporation in order to maintain such qualification or authorization and (iv) those Consents that, if they were not obtained or made, would not be reasonably likely to have a Company Material Adverse Effect.

2.6 No Violations.

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     The execution and delivery of this Agreement, the Offer, the Merger, the consummation of the other transactions contemplated hereby and compliance by the Company with any of the provisions hereof will not (i) conflict with or result in any breach of any provision of the Articles of Incorporation or Bylaws or other governing instruments of the Company, (ii) except as set forth on Section 2.6 of the Company Disclosure Schedule, require any Consent under or result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under any of the terms, conditions or provisions of any agreement or other instrument to which the Company is a party or by which its assets are bound, (iii) result in the creation or imposition of any liens, charges, security interests, options, claims, mortgages, pledges, assessments, charges, adverse claims, rights of others or restrictions (whether on voting, sale, transfer, disposition or otherwise) or other encumbrances or restrictions of any nature whatsoever whether imposed by agreement, understanding, law or equity, or any conditional sale contract, title retention contract or other contract to give or refrain from giving any of the foregoing (“Encumbrances”) of any kind upon any of the assets of the Company or (iv) subject to obtaining the Consents from Governmental Authorities referred to in Section 2.5 hereof, contravene any applicable provision of any statute, law, rule or regulation or any order, decision, injunction, judgment, award or decree (“Law”) to which the Company or any of its assets or properties is subject.

2.7 SEC Filings; Company Financial Statements.

     (a) The Company has filed all forms, reports, schedules, statements and other documents required to be filed by the Company with the SEC since October 1, 1999 under the Exchange Act or the Securities Act of 1933, as amended (the “Securities Act”) and has made available to Purchaser such forms, reports and documents in the form filed with the SEC. All such required forms, reports and documents (including those that the Company may file subsequent to the date hereof) are referred to herein as the “Company SEC Reports.” As of their respective dates, the Company SEC Reports (i) complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, the Sarbanes-Oxley Act of 2002 and the rules and regulations of the SEC thereunder applicable to such Company SEC Reports and (ii) did not at the time they were filed (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact or disclose any matter or proceeding 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. Between the date of this Agreement and the Closing Date, the Company will timely file with the SEC all documents required to be filed by it under the Exchange Act.

     (b) Each of the consolidated financial statements (including, in each case, any related notes thereto) contained in the Company SEC Reports (the “Company Financials”),

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including each Company SEC Report filed after the date hereof until the Closing, (i) was prepared from, are in accordance with and accurately reflect in all material respects, the Company’s books and records as of the times and for the periods referred to therein, (ii) complied in all material respects with the published rules and regulations of the SEC with respect thereto, (iii) was prepared in accordance with United States generally accepted accounting principles (“GAAP”) applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto or, in the case of unaudited interim financial statements, as may be permitted by the SEC on Form 10-Q under the Exchange Act), (iv) fairly presented the consolidated financial position of the Company as at the respective dates thereof and the consolidated results of the Company’s operations and cash flows for the periods indicated, except that the unaudited interim financial statements may not contain footnotes and were or are subject to normal and recurring year-end adjustments and (v) was prepared from and in accordance with the Company’s books and records. The balance sheet of the Company contained in the Company SEC Reports as of June 30, 2004 (the “Balance Sheet Date”) as filed with the SEC before the date hereof is hereinafter referred to as the “Company Balance Sheet.”

     (c) The Company has heretofore furnished to Purchaser a complete and correct copy of any amendments or modifications, which have not yet been filed with the SEC but which are required to be filed, to agreements, documents or other instruments which previously had been filed by the Company with the SEC pursuant to the Securities Act or the Exchange Act. All public announcements in a news release issued by the Dow Jones news service, PR Newswire or any equivalent service made by the Company since the Balance Sheet Date did not and will not contain any untrue statement of a material fact or omit to state a material fact or disclose any matter or proceeding 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.

     (d) Section 2.7(d) of the Company Disclosure Schedule sets forth a complete list of all effective registration statements filed on Form S-3 or Form S-8 or otherwise relying on Rule 415 under the Securities Act.

     (e) The Company has established and maintains disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 promulgated under the Exchange Act) designed to ensure that material information relating to the Company is made known to the Chief Executive Officer and Chief Financial Officer. To the Company’s knowledge, there are no significant deficiencies or material weaknesses in the design or operation of Company’s internal controls which could adversely affect Company’s ability to record, process, summarize and report financial data. To the Company’s knowledge, there is no fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls.

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2.8 Absence of Certain Changes.

     Except as disclosed in Section 2.8 of the Company Disclosure Schedule, from the Balance Sheet Date to the date hereof, the Company has not:

     (a) suffered any Company Material Adverse Effect or any event or change which is reasonably expected to have or constitute a Company Material Adverse Effect;

     (b) incurred any liabilities or obligations (absolute, accrued, contingent or otherwise), except items incurred in the ordinary course of business and consistent with past practice, which exceed $50,000 in the aggregate;

     (c) paid, discharged or satisfied any claims, liabilities or obligations (absolute, accrued, contingent or otherwise) other than the payment, discharge or satisfaction in the ordinary course of business and consistent with past practice of liabilities and obligations reflected or reserved against in the Company Balance Sheet or incurred in the ordinary course of business and consistent with past practice since the Balance Sheet Date;

     (d) permitted or allowed any of their properties or assets (real, personal or mixed, tangible or intangible) to be subjected to any Encumbrances, except for liens for current taxes not yet due or liens the incurrence of which would not be reasonably expected to have a Company Material Adverse Effect;

     (e) cancelled any debts or waived any claims or rights of material value;

     (f) sold, transferred, or otherwise disposed of any of their material properties or assets (real, personal or mixed, tangible or intangible), except in the ordinary course of business, consistent with past practice;

     (g) granted any increase in the compensation or benefits of any director, officer, employee or consultant of the Company (including any such increase pursuant to any bonus, pension, profit sharing or other plan or commitment) or any increase in the compensation or benefits payable or to become payable to any director, officer, employee or consultant of the Company, except in the case of employees other than officers of the Company for such increases in compensation or benefits made in the ordinary course of business, consistent with past practice;

     (h) made any change in severance policy or practices;

     (i) made any capital expenditure or acquired any property, plant and equipment for a cost in excess of $50,000 in the aggregate;

     (j) declared, paid or set aside for payment any dividend or other distribution (whether in cash, stock or property) in respect of their respective capital stock or redeemed,

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purchased or otherwise acquired, directly or indirectly, any shares of capital stock or other securities of the Company;

     (k) (i) made any changes in any of the accounting methods used by it materially affecting its assets, liabilities or business, except for such changes required by GAAP; or (ii) made or changed any election relating to Taxes, adopted or changed any accounting method relating to Taxes, entered into any closing agreement relating to Taxes, filed any amended Tax Return, settled or consented to any claim or assessment relating to Taxes, incurred any obligation to make any payment of, or in respect of, any Taxes, except in the ordinary course of business, or agreed to extend or waive the statutory period of limitations for the assessment or collection of Taxes;

     (l) paid, loaned, modified or advanced any amount to, or sold, transferred or leased any material properties or assets (real, personal or mixed, tangible or intangible) to, or entered into any agreement or arrangement with, any of their respective officers, directors or shareholders or any affiliate or associate of any of their officers, directors or shareholders except for directors’ fees, expense reimbursements in the ordinary course and compensation to officers at rates not inconsistent with the Company’s past practice;

     (m) written-down the value of any inventory (including write-downs by reason of shrinkage or mark-down) or written off as uncollectible any notes or accounts receivable, except for write-downs and write-offs in the ordinary course of business consistent with past practice nor is any such write-down required;

     (n) suffered any impairment of any material Company Intellectual Property Rights (as defined in Section 2.16(a)) or any material adverse change in any material Intellectual Property Rights licensed from a third party, in each case, other than in the ordinary course of business consistent with past practice, or disposed of or disclosed (except as necessary in the conduct of its business) to a third party any Trade Secrets owned by the Company;

     (o) granted, issued, accelerated, paid, accrued or agreed to pay or make any accrual or arrangement for payments or benefits pursuant to, or adopted or amended, any Company Employee Plans except those made in the ordinary course of business consistent with past practice; or

     (p) agreed, whether in writing or otherwise, to take any action described in this Section 2.8.

2.9 Absence of Undisclosed Liabilities.

     Except (a) as disclosed in the Company Balance Sheet and (b) for liabilities and obligations incurred in the ordinary course of business consistent with past practice since the Balance Sheet Date, the Company has not incurred any material liabilities or

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obligations of any nature, whether or not accrued, contingent or otherwise required by GAAP to be recognized or disclosed on a consolidated balance sheet of the Company or in the notes thereto

2.10 Compliance with Laws.

     The business of the Company has been operated in compliance with all Laws applicable thereto, except for any instances of non-compliance which would not be reasonably likely to have a Company Material Adverse Effect.

2.11 Permits.

     (a) The Company has all permits (including signage permits), certificates, licenses, approvals and other authorizations required in connection with the operation of its business (collectively, “Company Permits”), (b) the Company is not in violation of any Company Permit and (c) no proceedings are pending or, to the knowledge of the Company, threatened, to revoke or limit any Company Permit, except, in each case, those the absence or violation of which would not be reasonably likely to have a Company Material Adverse Effect.

2.12 Litigation.

     Except as disclosed in the Company SEC Reports filed prior to the date hereof, there is no private or governmental action, suit, proceeding, claim, arbitration or investigation (“Litigation”) pending before any agency, court or tribunal, foreign or domestic or, to the knowledge of the Company, threatened against the Company or any of its properties or any of its officers or directors (in their capacities as such). There is no judgment, decree or order against the Company or, to the knowledge of the Company, any of its directors or officers (in their capacities as such), that could prevent, enjoin, or materially alter or delay any of the transactions contemplated by this Agreement, or that would reasonably be expected to have a Company Material Adverse Effect. Except as disclosed in the Company SEC Reports filed prior to the date hereof, there is no litigation that the Company has pending against other parties. The descriptions of all litigation in the Company SEC Reports are accurate in all material respects

2.13 Restrictions on Business Activities.

     Except as set forth in Section 2.13 of the Company Disclosure Schedule, there is no agreement, judgment, injunction, order or decree binding upon the Company which has or could reasonably be expected to have the effect of prohibiting or impairing any current business practice of the Company, any acquisition of property by the Company or the conduct of business by the Company as currently conducted.

2.14 Contracts.

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     (a) The Company is not a party and is not subject to any management, royalty, license, lease or joint venture agreement or any material note, bond, mortgage, indenture, contract, lease, license, agreement or instrument (“Company Material Contract”) that is not so listed in Section 2.14(a) of the Company Disclosure Schedule. All such Company Material Contracts are valid and binding and are in full force and effect and enforceable by the Company in accordance with their respective terms, subject to the Enforceability Exceptions. Neither the Company nor, to the knowledge of the Company, any other party thereto is in violation or breach of or default under any such Company Material Contract where such violation or breach would be reasonably likely to have a Company Material Adverse Effect.

     (b) Except as is listed in Section 2.14(b) of the Company Disclosure Schedule, the Company is not a party to, and none of its assets or properties is subject to, any agreement, arrangement or understanding (written or oral) with any other person (including an affiliate of the Company), which (i) provides capital, surplus, balance sheet or any other form of economic or financial support to such other person, (ii) guarantees the obligations of, or performance of any acts, by such other person, or (iii) imposes legal liability on the Company for any payments (contingent or otherwise) under any note, guarantee, debt, bond, mortgage, indenture, contract, lease, license, agreement or instrument.

2.15 Government Contracts.

     (a) Customers and Suppliers. The Company is not currently in, and the execution and delivery of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby will not result in, any material violation, breach or default of any term or provision or trigger automatic or optional termination of (i) any contract with any Governmental Authority, (ii) any subcontract issued at any tier under a prime contract with any Governmental Authority, or (iii) any bid, proposal, offer or quotation relating to a contract with any Governmental Authority or a subcontract issued under a contract with any Governmental Authority, except, in the case of each of (i), (ii) and (iii) above, that with respect to the execution and delivery of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby, for any violation, breach, default or automatic or optional termination right that arises as a result of Purchaser’s failure to comply with the terms of such contract, subcontract, bid, proposal, offer or quotation. The Company is not in any material violation, breach or default of any provision of any federal order, statute, rule or regulation (including the Federal Acquisition Regulation (“FAR”), agency supplements to the FAR, the Arms Export Control Act (22 U.S.C. 277 et seq.), and agency export regulations) or any similar state or local Law or regulation governing any contract, subcontract, bid, or proposal with any Governmental Authority, as applicable. The Company has not received a cure notice, a show cause notice or a stop work notice, nor has the Company been threatened with termination for default under any contract or subcontract with any Governmental Authority. To the Company’s knowledge, no request for equitable adjustment by any of its vendors, suppliers or subcontractors against it relating to contracts or subcontracts involving any Governmental Authority exists.

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     (b) Government Claims. No state of facts exists that would constitute valid grounds for the assertion of a material claim by a Governmental Authority against the Company for any of the following: (i) defective pricing, (ii) FAR and/or CAS noncompliance, (iii) fraud or (iv) false claims or false statements. To the Company’s knowledge, no state of facts exists that would constitute valid grounds for the assertion of a claim by a Governmental Authority against it for either (y) unallowable costs as defined in the FAR at Part 31, including those that may be included in indirect cost claims for prior years that have not yet been finally agreed to by the Governmental Authority; or (z) any other monetary claims relating to the performance or administration by the Company of contracts or subcontracts for any Governmental Authority.

     (c) Suspension or Debarment. The Company has not been suspended or debarred from bidding on contracts or subcontracts with any Governmental Authority in connection with the conduct of its business; no such suspension or debarment has been initiated or, to the Company’s knowledge, threatened. There is no ongoing investigation, audit, prosecution, civil or administrative proceeding or settlement negotiation, or internal investigation, relating to the contracts or subcontracts of the Company with any Governmental Authority or the violation of any federal, state or local order, statute, rule, or regulation relating to government contracts, subcontracts, or export controls.

2.16 Technology and Intellectual Property.

     (a) Definitions. The following terms shall have the meanings set forth below:

          “Company Intellectual Property Rights” means all Intellectual Property Rights in the Registered Company IP and all other Intellectual Property Rights in the Company Technology and Company Trademarks other than third party Intellectual Property Rights.

          “Company Technology” means all Technology used, or held for use, in the business of the Company, as currently conducted or contemplated to be conducted.

          “Company Trademarks” means all Trademarks used, or held for use, in the business of the Company, as currently conducted or contemplated to be conducted.

          “Computer Software” means all computer programs (whether in source code or object code form), databases, compilations and documentation (including, without limitation, user, operator and training manuals) related to the foregoing.

          “Copyrights” means U.S. and foreign copyrights (whether registered or unregistered).

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          “Intellectual Property Rights” means all rights in or under Copyrights, Patents, Trade Secrets, and Trademarks.

          “License Agreements” means all agreements to which the Company is a party or otherwise bound, under which the Company is granting or is granted any Intellectual Property Right.

          “Patents” means all U.S. and foreign patents and patent applications.

          “Registered Company IP” means all (i) Patents, (ii) registered Copyrights and Copyright registration applications, and (iii) registered Trademarks and Trademark registration applications, in which the Company has an ownership interest.

          “Technology” means all processes, formulae, algorithms, data, models, plans, methodologies, theories, ideas, techniques, discoveries, disclosures, inventions, Computer Software, information or know-how.

          “Trademarks” means all U.S. and foreign trademarks, service marks, trade names, designs, logos, and slogans that are used in commerce and have source-designating significance to the relevant consumers.

          “Trade Secrets” means trade secrets as defined in applicable state Laws regarding trade secrets.

     (b) Section 2.16(b) of the Company Disclosure Schedule sets forth a true and complete list of all Registered Company IP and Internet domain names registered in the name of the Company.

     (c) The Company is listed in the records of the appropriate U.S., state or foreign agency as the sole owner of record for each item of Registered Company IP. Subject to the rights and interests granted to third parties in the License Agreements and except as set forth in Section 2.16(c) of the Company Disclosure Schedule, the Company owns all right, title and interest in and to the Registered Company IP, and owns all other Company Intellectual Property Rights, free and clear of all Encumbrances. Except as set forth in Section 2.16(c) of the Company Disclosure Schedule, the Registered Company IP is subsisting in full force and effect and, to the knowledge of the Company, has not been cancelled, expired or abandoned, and, to the knowledge of the Company, the Company Intellectual Property Rights are valid and enforceable.

     (d) With respect to any Patents that are included in the Registered Company IP: (i) to the knowledge of the Company, each has been prosecuted in material compliance with all applicable rules, policies and procedures of the U.S. Patent and Trademark Office or applicable foreign agency; and (ii) except as set forth in Section 2.16(d) of the Company Disclosure Schedule or as disclosed in an Information Disclosure Statement filed with the

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U.S. Patent and Trademark Office, the Company is not aware of any prior art or other facts that could render any of the issued claims in the Patents invalid or unenforceable.

     (e) Section 2.16(e) of the Company Disclosure Schedule sets forth a true and complete list of all material License Agreements, except for software licensed under a clickthrough or shrinkwrap license or through any other written agreement for ready made software. Each License Agreement is valid and binding on the Company and, to the knowledge of the Company, each other party thereto and enforceable in accordance with its terms. Except as stated in Section 2.16(e) of the Company Disclosure Schedule, none of the License Agreements grants any third party exclusive rights to or under any Company Intellectual Property Rights or the right to sublicense any Company Intellectual Property Rights. The Company is in compliance with, and has not breached any material term of any of such License Agreements and, to the knowledge of the Company, all other parties to such License Agreements are in compliance with, and have not breached any material term of, such License Agreements.

     (f) Except as disclosed in Section 2.16(f) of the Company Disclosure Schedule, the Company has not received any written notice of infringement of any Intellectual Property Rights of a third party, received any offers for a license to a third party patent in connection with a claim of infringement, or obtained a written opinion of counsel relating to a third party patent. To the knowledge of the Company, there is no reasonable basis to allege that the Company has infringed upon, violated, misappropriated or is infringing upon, violating or misappropriating an Intellectual Property Right of a third party.

     (g) Except as disclosed in Section 2.16(g) of the Company Disclosure Schedule, the Company has not provided to a third party any notice of infringement of or conflict with any Company Intellectual Property Rights. Except as disclosed in Section 2.16(g) of the Company Disclosure Schedule, to the knowledge of the Company, no person has infringed upon, violated, misappropriated or is infringing upon, violating or misappropriating any of the Company Intellectual Property Rights.

     (h) Except as disclosed in the Company SEC Reports filed prior to the date hereof, to the knowledge of the Company, there is no pending or threatened claim, suit, arbitration or, except for pending patent applications before the U.S. Patent and Trademark Office, other adversarial proceeding before any court, agency, arbitral tribunal, or registration authority in any jurisdiction: (i) involving the Company Intellectual Property Rights; (ii) alleging that the Company is or may be infringing upon, violating or misappropriating an Intellectual Property Right of a third party; or (iii) challenging the ownership, use, validity, enforceability or registrability of any Company Intellectual Property Rights.

     (i) To the knowledge of the Company, no material Trade Secret of the Company has been disclosed to any third party in violation of confidentiality obligations to the Company, and, to the knowledge of the Company, no party to a nondisclosure agreement

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with the Company is in breach or default thereof. The Company has taken reasonable measures, consistent with customary industry practice, to protect, preserve and maintain the secrecy of its Trade Secrets.

     (j) Except as disclosed in Section 2.16(j) of the Company Disclosure Schedule, there are no settlements, forbearances to sue, consents, judgments, injunctions, releases, waivers, orders or similar obligations, other than the License Agreements, that: (i) restrict any Company Intellectual Property Rights or; (ii) restrict the conduct of the business of the Company in order to accommodate Intellectual Property Rights of a third party; or (iii) grant third parties any rights under Company Intellectual Property Rights.

     (k) Except as set forth in Section 2.16(k) of the Company Disclosure Schedule, all current employees of the Company and all former employees, contractors and consultants of the Company who have developed software created within the three (3) years preceding the date of this Agreement have executed an agreement that assigns to the Company their Intellectual Property Rights in the work product developed pursuant to their employment or relationship with the Company. No current or former director, officer or employee of the Company will, after giving effect to the transactions contemplated by this Agreement, own any of the Company Intellectual Property Rights.

     (1) The execution of, the delivery of, the consummation of the transactions contemplated by, and the performance of the Company’s obligations under, this Agreement will not result in any material loss or impairment of the Company Intellectual Property Rights or any Intellectual Property Rights licensed to the Company.

     (m) The Company has not used or will not use before the purchase of the Shares pursuant to the Offer any of the prior inventions disclosed in the proprietary information and inventions agreements of its employees, and, to the Company’s knowledge, no employees of the Company or have improperly brought to the Company or used at the Company any confidential information from their prior employers.

2.17 Employee Benefit Plans.

     (a) Section 2.17 of the Company Disclosure Schedule lists, with respect to the Company and any trade or business (whether or not incorporated) which is treated as a single employer with the Company within the meaning of Section 414(b), (c), (m) or (o) of the Code (an “ERISA Affiliate”), (i) all employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), (ii) each loan to a non-officer employee in excess of $10,000, loans to officers and directors and any stock option, stock purchase, phantom stock, stock appreciation right, supplemental retirement, severance, sabbatical, medical, dental, vision care, disability, employee relocation, cafeteria benefit (Code Section 125) or dependent care (Code Section 129), life insurance or accident insurance plans, programs, agreements or arrangements, (iii) all bonus, pension, profit sharing, savings, deferred compensation or

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incentive plans, programs, agreements or arrangements, (iv) other fringe or employee benefit plans, programs, agreements or arrangements of the Company and (v) any current or former employment, change of control, retention or executive compensation or severance agreements, written or otherwise, as to which unsatisfied obligations of the Company of greater than $10,000 remain for the benefit of, or relating to, any present or former employee, consultant or director of the Company (together, the “Company Employee Plans” ).

     (b) The Company has delivered to Purchaser a copy of each of the Company Employee Plans and related material plan documents (including trust documents, insurance policies or contracts, employee booklets, summary plan descriptions and other authorizing documents, and any material employee communications relating thereto) and has, with respect to each Company Employee Plan which is subject to ERISA reporting requirements, provided copies of the Form 5500 reports filed for 2003. Any Company Employee Plan intended to be qualified under Section 401(a) of the Code has either obtained from the Internal Revenue Service (“IRS”) a favorable determination letter as to its qualified status under the Code, including all amendments to the Code effected by the Tax Reform Act of 1986, or has applied to the IRS for such a determination letter prior to the expiration of the requisite period under applicable Treasury Regulations or IRS pronouncements in which to apply for such determination letter and to make any amendments necessary to obtain a favorable determination or has been established under a standardized prototype plan for which an IRS opinion letter has been obtained by the plan sponsor and is valid as to the adopting employer. The Company has also delivered to Purchaser the most recent IRS determination, notification, advisory, or opinion letter issued with respect to each such Company Employee Plan, and, to the Company’s knowledge, nothing has occurred since the issuance of each such letter which could reasonably be expected to cause the loss of the tax-qualified status of any Company Employee Plan subject to Code Section 401(a).

     (c) There has been no “prohibited transaction,” as such term is defined in Section 406 of ERISA and Section 4975 of the Code, with respect to any Company Employee Plan. Each Company Employee Plan has been administered in accordance with its terms and in compliance with the requirements prescribed by any and all applicable Laws (including ERISA and the Code), except as would not be reasonably expected to have, in the aggregate, a Company Material Adverse Effect, and the Company and each ERISA Affiliates have performed all obligations required to be performed by them under, are not in any material respect in default under or violation of, and have no knowledge of any material default or violation by any other party to, any of the Company Employee Plans. Neither the Company nor any ERISA Affiliates is subject to any liability or penalty under Sections 4976 through 4980 of the Code or ERISA with respect to any of the Company Employee Plans. All contributions and premiums required to be made by the Company or any ERISA Affiliates to any Company Employee Plan have been made on or before their due dates. Each Company Employee Plan can be amended, terminated or otherwise discontinued in accordance with its terms. With respect to each Company

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Employee Plan subject to ERISA as either an employee pension benefit plan within the meaning of Section 3(2) of ERISA or an employee welfare benefit plan within the meaning of Section 3(1) of ERISA, the Company has prepared in good faith and timely filed all requisite material governmental reports (which, to the Company’s knowledge, were true and correct as of the date filed) and has properly and timely filed and distributed or posted all material notices and reports to employees required to be filed, distributed or posted with respect to each such Company Employee Plan. No suit, administrative proceeding, action or other litigation has been brought, or to the best knowledge of the Company is threatened, against or with respect to any such Company Employee Plan, including any audit or inquiry by the IRS or United States Department of Labor other than routine claims for benefits.

     (d) With respect to each Company Employee Plan, the Company and its ERISA Affiliates have complied with (i) the applicable health care continuation and notice provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) and the regulations (including proposed regulations) thereunder, (ii) the applicable requirements of the Family Medical and Leave Act of 1993 and the regulations thereunder, and (iii) the applicable requirements of the Health Insurance Portability and Accountability Act of 1996 and the regulations (including proposed regulations) thereunder, except where the failure to comply with the applicable requirements of such laws and regulations would not be reasonably expected to have a Company Material Adverse Effect.

     (e) Except as disclosed in Section 2.17(e) of the Company Disclosure Schedule, the consummation of the transactions contemplated by this Agreement will not (i) entitle any current or former employee, director or consultant of the Company or any ERISA Affiliates to severance benefits or any other payment, or (ii) accelerate the time of payment or vesting of Company Options, or increase the amount of compensation due any such employee, director or consultant.

     (f) No amounts payable under any of the Company Employee Plans or any other contract, agreement or arrangement with respect to which the Company may have any liability could fail to be deductible for federal income tax purposes by virtue of Section 162(m) or Section 280G of the Code. None of the Company Employee Plans contains any provision requiring a gross-up pursuant to Section 280G of the Code or similar tax provisions.

     (g) No Company Employee Plan provides benefits, including without limitation death or medical benefits (whether or not insured), with respect to current or former employees of the Company or any ERISA Affiliate after retirement or other termination of service (other than (i) coverage mandated by applicable Laws, (ii) death benefits or retirement benefits under any “employee pension benefit plan,” as that term is defined in Section 3(2) of ERISA, or (iii) benefits, the full direct cost of which is borne by the current or former employee (or beneficiary thereof)).

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     (h) There has been no amendment to, written interpretation or announcement (whether or not written) by the Company or any ERISA Affiliates relating to, or change in participation or coverage under, any Company Employee Plan which would increase the expense of maintaining such Plan above the level of expense incurred with respect to that Plan for the most recent fiscal quarter included in the Company Financials.

     (i) Neither the Company nor any ERISA Affiliate currently maintains, sponsors, participates in or contributes to, nor have they ever maintained, established, sponsored, participated in, or contributed to, any employee pension benefit plan (within the meaning of Section 3(2) of ERISA) which is subject to Part 3 of Subtitle B of Title I of ERISA, Title IV of ERISA or Section 412 of the Code.

     (j) Neither the Company nor any ERISA Affiliate is a party to, or has ever made any contribution to or otherwise incurred any obligation to contribute to, any “multiemployer plan” as defined in Section 3(37) of ERISA.

     (k) Section 2.17(k) of the Company Disclosure Schedule sets forth for each Company Option, where applicable, the performance targets, design wins, thresholds or other measurement pursuant to which vesting or exercise of such option is contingent.

2.18 Taxes and Returns.

     (a) The Company has timely filed, or caused to be timely filed, all Tax Returns (as defined below) required to be filed by it, and has paid, collected or withheld, or caused to be paid, collected or withheld, all Taxes (as defined below) required to be paid, collected or withheld, other than such Taxes for which adequate reserves in the Company Financials have been established. There are no claims or assessments pending against the Company for any alleged deficiency in any Tax, and the Company has not been notified in writing of any proposed Tax claims or assessments against the Company (other than, in each case, claims or assessments for which adequate reserves in the Company Financials have been established or which are being contested in good faith or are immaterial in amount). The Company does not have any outstanding waivers or extensions of any applicable statute of limitations to assess any material amount of Taxes. There are no outstanding requests by the Company for any extension of time within which to file any Tax Return or within which to pay any Taxes shown to be due on any return. There are no liens for material amounts of Taxes on the assets of the Company except for statutory liens for current Taxes not yet due and payable.

     (b) The Company has not taken or agreed to take any action that would prevent the Merger from constituting a reorganization qualifying under the provisions of Section 368(a) of the Code.

     (c) Except as set forth in Section 2.18(c) of the Company Disclosure Schedule, the execution and delivery of this Agreement and the consummation of the transactions

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contemplated hereby (either alone or in combination with another event) will not result in any payment (whether of severance pay, unemployment compensation, golden parachute, bonus or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any employee or director of the Company.

     (d) The Company is not and has not been a member of any consolidated, combined, unitary or affiliated group of corporations for any Tax purposes other than a group of which the Company is or was the common parent corporation.

     (e) The Company has not made any change in accounting method or received a ruling from, or signed an agreement with, any taxing authority that could reasonably be expected to have a Company Material Adverse Effect following the Closing.

     (f) The Company is not currently being audited by any taxing authority and has not been notified by any tax authority that any such audit is contemplated or pending.

     (g) For purposes of this Agreement, the term “Tax” shall mean any tax, custom, duty, governmental fee or other like assessment or charge of any kind whatsoever, imposed by any Governmental Authority (including, but not limited to, any federal, state, local, foreign or provincial income, gross receipts, property, sales, use, license, excise, franchise, employment, payroll, alternative or added minimum, ad valorem, transfer or excise tax) together with any interest, addition or penalty imposed thereon. The term “Tax Return” shall mean a report, return or other information (including any attached schedules or any amendments to such report, return or other information) required to be supplied to or filed with a Governmental Authority with respect to any Tax, including an information return, claim for refund, amended return or declaration or estimated Tax.

2.19 Finders and Investment Bankers.

     Except as set forth in Section 2.19 of the Company Disclosure Schedule, neither the Company nor any of its officers or directors has employed any broker or finder or otherwise incurred any liability for any brokerage fees, commissions or finders’ fees in connection with the transactions contemplated hereby.

2.20 Fairness Opinion.

     The Company has received from Manchester Companies Inc., its financial advisor, a written opinion addressed to it for inclusion in the Schedule 14D-9 and the Proxy Statement to the effect that the consideration to be received in the Offer and the Merger by the Company’s shareholders is fair to the Company’s shareholders from a financial point of view.

2.21 Insurance.

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     Section 2.21 of the Company Disclosure Schedule sets forth a true and complete list of all insurance policies carried by, or covering, (i) the Company with respect to their to its business, assets and properties and with respect to which records are maintained at the Company’s principal executive offices, and (ii) the directors and officers of the Company, together with, in respect of each such policy, the amount of coverage and the deductible. The Company maintains insurance policies against all risk of a character, including without limitation, business interruption insurance, and in such amounts as are usually insured against by similarly situated companies in the same or similar businesses. Each insurance policy set forth on Section 2.21 of the Company Disclosure Schedule is in full force and effect and all premiums due thereon have been paid in full.

2.22 Vote Required; Ownership of Purchaser Capital Stock; State Takeover Statutes.

     (a) The affirmative vote of the holders (including Merger Sub following its acceptance of Shares for payment under the Offer) of a majority of the outstanding shares of Common Stock and of at least 90% of the outstanding shares of Convertible Preferred Stock (the “Company Shareholder Approval”) are the only votes of the holders of any class or series of the Company’s capital stock necessary to approve the Merger and the transactions contemplated hereunder (other than the Offer, in respect of which no approval is required from the holders of capital stock of the Company).

     (b) The Company does not beneficially own, either directly or indirectly, any shares of Purchaser capital stock.

     (c) The Company has taken all actions necessary under the MBCA to approve the Offer, the Merger and the other transactions contemplated by this Agreement and the transactions contemplated by each of the Stockholders Agreement and the Stock Option Agreement. The Company’s Board of Directors and the Special Committee, each at a meeting duly called and held, have approved the Offer, the Merger, this Agreement and the transactions contemplated by this Agreement, and each of the Stockholders Agreement and the Stock Option Agreement and the transactions contemplated thereby, and such approvals are sufficient so that Sections 302A.671, 302A.673 and 302A.675 of the MBCA will not impede the Offer, the Merger, this Agreement and the other transactions contemplated by this Agreement. No other “fair price,” “merger moratorium,” “control share acquisition” or other similar anti-takeover statute or regulation or charter provision applies or purports to apply to this Agreement, the Offer or the Merger or the other transactions contemplated by this Agreement (other than Chapter 80B of the Minnesota Statutes).

2.23 Title to Properties.

     Section 2.23 of the Company Disclosure Schedule sets forth a complete list of all material real property owned in fee by Company and sets forth all material real property

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leased by Company as lessee as of the date hereof (such owned and leased material real property, including all improvements thereon, referred to collectively as the “Company Real Property”). The Company Real Property set forth in Section 2.23 of the Company Disclosure Schedule comprises all of the material real property necessary and/or currently used in the operations of the business of the Company. The Company has good and valid title to, or, as to Company Real Property designated as leased, a valid leasehold interest in, all of the Company Real Property. The Company Real Property is free of Encumbrances, except for: (a) liens with respect to Taxes either not delinquent or being diligently contested in appropriate proceedings; (b) mechanics’, material men’s or similar statutory liens for amounts not yet due or being diligently contested in appropriate proceedings; and (c) other exceptions with respect to title to Company Real Property (including easements of public record) that do not and would not materially interfere with the current and intended use of such Company Real Property (clauses, (a), (b), and (c) being referred to herein as “Permitted Encumbrances”); and the consummation of the transactions contemplated hereby will not create any Encumbrance (other than Permitted Encumbrances) on any of the Company Real Property. The Company enjoys peaceful and undisturbed possession under all leases of Company Real Property, except for such breaches of the right to peaceful and undisturbed possession that do not materially interfere with the ability of the Company to conduct its business on such property.

2.24 Employee Matters.

     (a) There are no actions, suits, claims, charges, labor disputes, grievances or controversies pending, or to the Company’s knowledge, threatened involving the Company and any of its employees or former employees. To the Company’s knowledge, no Governmental Authority responsible for the enforcement of labor or employment laws intends to conduct an investigation with respect to or relating to the Company and no such investigation is in progress. To the Company’s knowledge, no employee of the Company has violated any employment contract, nondisclosure agreement or noncompetition agreement by which such employee is bound due to such employee being employed by the Company and disclosing to the Company or using Trade Secrets of any other person. There has been: (i) no labor union organizing or attempting to organize any employees of the Company into one or more collective bargaining units; and (ii) no labor dispute, strike, work slowdown, work stoppage or lock out or other collective labor action by or with respect to any employees of the Company pending, or, to the Company’s knowledge, threatened against or affecting the Company. The Company is not a party to, or bound by, any collective bargaining agreements or other agreement with any labor organization applicable to the employees of the Company and no such agreement is currently being negotiated.

     (b) The Company (i) is in compliance in all material respects with all applicable Laws respecting employment and employment practices, terms and conditions of employment, health and safety and wages and hours, and is not engaged in any unfair labor practice, (ii) has withheld all amounts required by Law or by agreement to be withheld

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from the wages, salaries and other payments to employees, (iii) is not liable in any material respect for any arrears of wages or any Taxes or any penalty for failure to comply with any of the foregoing and (iv) is not liable for any material payment to any trust or other fund or to any governmental or administrative authority, with respect to unemployment compensation benefits, social security or other benefits or obligations for employees (other than routine payments to be made in the ordinary course of business and consistent with past practice).

     (c) To the Company’s knowledge, no employee of the Company has provided or is providing information to any law enforcement agency regarding the commission or possible commission of any crime or the violation or possible violation of any applicable Law involving the Company. Neither the Company nor any officer, employee, contractor, subcontractor or agent of the Company has discharged, demoted, suspended, threatened, harassed or in any other manner discriminated against an employee of the Company in the terms and conditions of employment because of any act of such employee described in 18 U.S.C. Section 1514A(a).

     (d) Since June 30, 2004, the Company has not effectuated (i) a “plant closing” as defined in the Worker Adjustment and Retraining Notification Act (“WARN Act”), affecting any site of employment or one or more facilities or operating units within any site of employment or facility of the Company or (ii) a “mass layoff” (as defined in the WARN Act) affecting any site of employment or facility of the Company; nor has the Company been affected by any transaction or engaged in layoffs or employment terminations sufficient in number to trigger application of any state, local or foreign law or regulation similar to the WARN Act. To the Company’s knowledge, none of the Company’s employees has suffered an “employment loss” (as defined in the WARN Act) in the ninety (90) days prior to the date of this Agreement.

     (e) Section 2.24 of the Company Disclosure Schedule contains a true and complete list of (i) the names of all directors and elected and appointed officers of the Company, together with such person’s position or function, annual base salary and incentives or bonus arrangement, and (ii) the number of shares of Common Stock owned beneficially or of record, or both, by each such person and the family relationships, if any, among such persons. As of the date hereof, no key employee, director or officer of the Company has given notice to the Company, nor, is the Company otherwise aware of any information that would lead it to reasonably believe, that any such person will or may cease to be engaged by the Company for any reason prior to the Effective Time.

2.25 Customers and Suppliers.

     No single customer which individually accounted for more than 5% of the Company’s gross revenues during the 12-month period preceding the date hereof, and no single supplier of the Company, has canceled or otherwise terminated, or has advised the Company that it intends to cancel or otherwise terminate, its relationship with the

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Company. Except as disclosed in Section 2.25 of the Company Disclosure Schedule, no single customer which individually accounted for more than 5% of the Company’s gross revenues during the 12-month period preceding the date hereof decreased materially its use of the services or products of the Company or advised the Company that it intends to decrease materially its use of the services or products of the Company. No single supplier of the Company has, during the 12-month period preceding the date hereof, decreased materially its services or supplies to the Company or has advised the Company that it intends to decrease materially its services or supplies to the Company. The Company has not breached, so as to provide a benefit to the Company that was not intended by the parties, any agreement with, or engaged in any fraudulent conduct with respect to, any customer or supplier of the Company.

2.26 Orders, Commitments and Returns.

     As of the date of this Agreement, there are no claims against the Company to return in excess of an aggregate of $100,000 of merchandise by reason of alleged overshipments, defective merchandise or otherwise, or of merchandise in the hands of customers under an understanding that such merchandise would be returnable.

2.27 Inventory.

     The inventories shown on the Company Financials or thereafter acquired by the Company, consisted of items of a quantity and quality usable or salable in the ordinary course of business (other than slow-moving, obsolete or unusable items which are adequately reserved for in the Company Financials to reflect realizable value). Since the Balance Sheet Date, the Company has continued to replenish inventories in a normal and customary manner consistent with past practices. The Company has not received written or oral notice that it will experience in the foreseeable future any material difficulty in obtaining, in the desired quantity and quality and at a reasonable price and upon reasonable terms and conditions, the raw materials, supplies or component products required for the manufacture, assembly or production of its products. The values at which inventories are carried reflect the inventory valuation policy of the Company, which is consistent with its past practice and in accordance with generally accepted accounting principles applied on a consistent basis. Since the Balance Sheet Date, due provision was made on the books of the Company in the ordinary course of business consistent with past practices, to provide for all slow-moving, obsolete, or unusable inventories to their estimated useful or scrap values and such inventory reserves are adequate to provide for such slow-moving, obsolete or unusable inventory and inventory shrinkage.

2.28 Accounts Receivable.

     Subject to any reserves set forth in the Company Financials, the accounts receivable shown in the Company Financials represent bona fide claims against debtors for sales and other charges, and are not subject to discount except for normal cash and immaterial trade

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discounts. The amount carried for doubtful accounts and allowances disclosed in the Company Financials is reasonably adequate and consistent with the Company’s past practice.

2.29 Environmental Matters.

     The Company has not, and no third party has, generated, treated, stored, released or disposed of, or otherwise placed, deposited in or located on the Company Real Property, any toxic or hazardous substances or wastes, pollutants or contaminants (including, without limitation, asbestos, urea formaldehyde, the group of organic compounds known as polychlorinated biphenyls, petroleum products including gasoline, fuel oil, crude oil and various constituents of such products, and any hazardous substance as defined in the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”), 42 U.S.C. (S) 9601-9657, as amended) (collectively, “Hazardous Substances”) except in material compliance with all applicable Laws, and no Hazardous Substances have been generated, treated, stored, released or disposed of, or otherwise placed, deposited in or located on the Company Real Property except in material compliance with all applicable Laws, nor has any activity been undertaken on the Company Real Property that would cause or contribute to (a) the Company Real Property becoming a treatment, storage or disposal facility in material violation of, the Resource Conservation and Recovery Act of 1976 (“RCRA”), 42 U.S.C. (S) 6901 et seq., or any similar state law or local ordinance, (b) a release or threatened release of toxic or hazardous wastes or substances, pollutants or contaminants from the Company Real Property in material violation of CERCLA or any similar state law or local ordinance, or (c) the discharge of pollutants or effluents into any water source or system, the dredging or filling of any waters or the discharge into the air of any emissions, for which the Company does not have all material required permits under the Federal Water Act, 33 U.S.C. (S) 1251 et seq., or the Clean Air Act, 42 U.S.C. (S) 7401 et seq., or any similar state law or local ordinance, in each case except for any such noncompliance, violations, or failures as would not be reasonably likely to have a Company Material Adverse Effect. There are no substances or conditions in or on the Company Real Property that may support a claim or cause of action under RCRA, CERCLA or any other federal, state or local environmental statutes, regulations, ordinances or other environmental regulatory requirements, except for any such claims or causes of action as would not be reasonably likely to have a Company Material Adverse Effect. There are no above ground or underground tanks that have been located under, in or about the Company Real Property which have been subsequently removed or filled. To the extent storage tanks exist on or under the Company Real Property, such storage tanks have been duly registered with all appropriate regulatory and governmental bodies and are otherwise in compliance with applicable federal, state and local statutes, regulations, ordinances and other regulatory requirements.

2.30 Rights Plan.

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     The Board of Directors of the Company has amended the Rights Agreement to provide that (i) so long as this Agreement has not been terminated pursuant to Section 7.1 hereof, a Distribution Date (as such term is defined in the Rights Agreement) shall not occur or be deemed to occur, and neither Purchaser nor Merger Sub shall become an Acquiring Person (as such term is defined in the Rights Agreement) as a result of the execution, delivery or performance of this Agreement, the announcement, making or consummation of the Offer, the acquisition of Shares pursuant to the Offer, or the consummation of the Merger and the other transactions contemplated by this Agreement and (ii) the Rights shall terminate and expire immediately preceding the time of Merger Sub’s acceptance of Shares for payment under the Offer. Such amendment to the Rights Agreement is valid and binding, has not been modified or waived in any respect and remains in full force and effect.

2.31 Schedule 14D-9; Offer Documents; and Proxy Statement.

     Neither the Schedule 14D-9 nor any information supplied by the Company for inclusion in the Offer Documents will, at the respective times the Schedule 14D-9, the Offer Documents or any amendments or supplements thereto are filed with the SEC or are first published, sent or given to shareholders of the Company, as the case may be, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they are made, not misleading. The Proxy Statement, if filed, will not, on the date the Proxy Statement (or any amendment or supplement thereto) is first mailed to shareholders of the Company, contain any untrue statement of a material fact, or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they are made, not misleading or will, at the time of the Special Meeting, omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the Special Meeting which shall have become false or misleading in any material respect. The Schedule 14D-9 and the Proxy Statement will, when filed by the Company with the SEC, comply as to form in all material respects with the applicable provisions of the Exchange Act and the rules and regulations thereunder. Notwithstanding the foregoing, the Company makes no representation or warranty with respect to information supplied by or on behalf of the Purchaser or Merger Sub which is contained in any of the foregoing documents.

2.32 Absence of Questionable Payments.

     Neither the Company nor any director, officer, agent, employee or other person acting on behalf of the Company, has used any corporate or other funds for unlawful contributions, payments, gifts, or entertainment, or made any unlawful expenditures relating to political activity to government officials or others or established or maintained any unlawful or unrecorded funds in violation of Section 30A of the Exchange Act. Neither the Company nor to the Company’s knowledge, any current director, officer, agent,

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employee or other person acting on behalf of the Company, has accepted or received any unlawful contributions, payments, gifts, or expenditures. The Company is in compliance with the provisions of Section 13(b) of the Exchange Act.

2.33 Representations Complete.

     None of the representations or warranties made by the Company herein or in any Schedule hereto, including the Company Disclosure Schedule, or in any certificate furnished by the Company pursuant to this Agreement, when all such documents are read together in their entirety, contains or will contain upon the consummation of the Offer any untrue statement of a material fact, or omits or will omit upon the consummation of the Offer to state any material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which made, not misleading.

ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURCHASER

     Purchaser hereby represents and warrants to the Company as follows:

3.1. Due Incorporation and Good Standing.

     Each of Purchaser and Merger Sub is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Purchaser is duly qualified or licensed and in good standing to do business in each jurisdiction in which the character of the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so duly qualified or licensed and in good standing would not be reasonably likely to have a material adverse effect on the business, assets, condition (financial or otherwise), liabilities or the results of operations of Purchaser and its subsidiaries taken as a whole, and except in each case for any such effects resulting from, arising out of, or relating to (i) general business or economic conditions, (ii) conditions generally affecting the industry in which Purchaser competes, or (iii) the taking of any action contemplated by this Agreement (“Purchaser Material Adverse Effect”). Purchaser has heretofore made available to the Company accurate and complete copies of the Certificate of Incorporation and Bylaws, as currently in effect, of Purchaser.

3.2. Authorization; Binding Agreement.

     Purchaser and Merger Sub have all requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions

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contemplated hereby, including, but not limited to, the offer and the Merger, have been duly and validly authorized by the respective Boards of Directors of Purchaser and Merger Sub, as appropriate, and no other corporate proceedings on the part of Purchaser or Merger Sub are necessary to authorize the execution and delivery of this Agreement or to consummate the transactions contemplated hereby (other than the requisite approval by the sole shareholder of Merger Sub of this Agreement and the Merger). This Agreement has been duly and validly executed and delivered by each of Purchaser and Merger Sub and constitutes the legal, valid and binding agreement of Purchaser and Merger Sub, enforceable against each of Purchaser and Merger Sub in accordance with its terms, subject to the Enforceability Exceptions.

3.3. Governmental Approvals.

     No Consent from or with any Governmental Authority on the part of Purchaser or Merger Sub is required in connection with the execution or delivery by Purchaser of this Agreement or the consummation by Purchaser of the transactions contemplated hereby other than (i) the filing of the Articles of Merger with the Secretary of State of the State of Minnesota in accordance with the MBCA, (ii) filings with the SEC, state securities laws administrators (including the Commissioner of Commerce of the State of Minnesota) and the National Association of Securities Dealers, Inc. (the “NASD”), (iii) such filings as may be required in any jurisdiction where Purchaser is qualified or authorized to do business as a foreign corporation in order to maintain such qualification or authorization, and (iv) those Consents that, if they were not obtained or made, would not be reasonably likely to have a Purchaser Material Adverse Effect.

3.4. No Violations.

     The execution and delivery of this Agreement, the Offer, the Merger, the consummation of the other transactions contemplated hereby and compliance by Purchaser and Merger Sub with any of the provisions hereof will not (i) conflict with or result in any breach of any provision of the Certificate of Incorporation or Bylaws or other governing instruments of Purchaser or Merger Sub, (ii) require any Consent under or result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under any of the terms, conditions or provisions of any agreement or other instrument to which Purchaser is a party or by which its assets are bound, (iii) result in the creation or imposition of any Encumbrance of any kind upon any of the assets of Purchaser or Merger Sub or (iv) subject to obtaining the Consents from Governmental Authorities referred to in Section 3.3 hereof, contravene any Law to which Purchaser or Merger Sub or its or any of their respective assets or properties are subject, except, in the case of clauses (ii), (iii) and (iv) above, for any deviations from the foregoing which would not be reasonably likely to have a Purchaser Material Adverse Effect.

3.5. Finders and Investment Bankers.

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     Neither Purchaser nor any of its officers or directors has employed any broker or finder or otherwise incurred any liability for any brokerage fees, commissions or finders, fees in connection with the transactions contemplated hereby.

3.6. Schedule TO; Offer Documents; Proxy Statement; Schedule 14D-9.

     Neither the Schedule TO nor any information supplied by Purchaser or Merger Sub for inclusion in the Schedule 14D-9 will, at the respective times the Schedule TO, the Schedule 14D-9, or any amendments or supplements thereto, are filed with the SEC or are first published, sent or given to shareholders of the Company, as the case may be, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they are made, not misleading. The information supplied by Purchaser for inclusion in the Proxy Statement will not, on the date the Proxy Statement (or any amendment or supplement thereto) is first mailed to shareholders of the Company, contain any untrue statement of a material fact or omit to state any 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 are made, not misleading or will, at the time of the Special Meeting, omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the Special Meeting which shall have become false or misleading in any material respect. The Schedule TO will, when filed by Merger Sub with the SEC, comply as to form in all material respects with the requirements of the Exchange Act and the rules and regulations thereunder. Notwithstanding the foregoing, Purchaser and the Merger Sub make no representation or warranty with respect to any information supplied by or on behalf of the Company which is contained in any of the Offer Documents, the Proxy Statement or any amendment or supplement thereto.

3.7. Financing.

     At or prior to the dates that Merger Sub becomes obligated to accept for payment and pay for Shares pursuant to the Offer, and at the Effective Time, Purchaser and Merger Sub will have sufficient cash resources available to pay for the Shares that the Merger Sub becomes so obligated to accept for payment and pay for pursuant to the Offer and to pay the aggregate Merger Consideration pursuant to the Merger.

3.8 Representations Complete.

     None of the representations or warranties made by Purchaser herein or in any Schedule hereto, or in any certificate furnished by Purchaser pursuant to this Agreement, when all such documents are read together in their entirety, contains or will contain upon the consummation of the Offer any untrue statement of a material fact, or omits or will

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omit upon the consummation of the Offer to state any material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which made, not misleading.

ARTICLE IV
ADDITIONAL COVENANTS OF THE COMPANY

4.1. Conduct of Business of the Company.

     (a) Unless Purchaser shall otherwise agree in writing and except as expressly contemplated by this Agreement or as set forth on Section 4.1 of the Company Disclosure Schedule (the inclusion of any item having been consented to by Purchaser), during the period from the date of this Agreement to the Effective Time, (i) the Company shall conduct its business in the ordinary course and consistent with past practice, and (ii) the Company shall use its reasonable best efforts to preserve intact its business organization, to keep available the services of its officers and employees, to maintain satisfactory relationships with all persons with whom it does business, and to preserve the possession, control and condition of all of its assets.

     (b) Without limiting the generality of the foregoing clause (a), the Company will not, without the prior written consent of Purchaser:

          (A) amend or propose to amend its Articles of Incorporation or Bylaws (or comparable governing instruments);

          (B) authorize for issuance, issue, grant, sell, pledge, dispose of or propose to issue, grant, sell, pledge or dispose of any shares of, or any options, warrants, commitments, subscriptions or rights of any kind to acquire or sell any shares of, the capital stock or other securities of or any Voting Debt of the Company including, but not limited to, any securities convertible into or exchangeable for shares of stock of any class of the Company, except for the issuance of Shares pursuant to the exercise of stock options outstanding on the date of this Agreement in accordance with their present terms. For purposes of this Agreement, the term “Voting Debt” shall mean indebtedness having general voting rights and debt convertible into securities having such rights;

          (C) split, combine or reclassify any shares of its capital stock or declare, pay or set aside any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of its capital stock, or directly or indirectly redeem, purchase or otherwise acquire or offer to acquire any shares of its capital stock or other securities and other than pursuant to commitments outstanding on the date of this Agreement in accordance with their present terms as set forth on Schedule 4.1(b)(C) of the Company Disclosure Schedule;

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          (D) (a) create, incur, assume, forgive or make any changes to the terms or collateral of any debt, receivables or employee or officer loans or advances, except incurrences that constitute refinancing of existing obligations on terms that are no less favorable to the Company than the existing terms; (b) assume, guarantee, endorse or otherwise become liable or responsible (whether directly, indirectly, contingently or otherwise) for the obligations of any person; (c) make any capital expenditures or incur any preopening expenses, other than as set forth in Section 4.1(a)(D) of the Company Disclosure Schedule; (d) make any loans, advances or capital contributions to, or investments in, any other person (other than customary travel, relocation or business advances to employees); (e) acquire the stock or assets of, or merge or consolidate with, any other person; (f) voluntarily incur any material liability or obligation (absolute, accrued, contingent or otherwise) other than in the ordinary course of business consistent with past practice; or (g) sell, transfer, mortgage, pledge, or otherwise dispose of, or encumber, or agree to sell, transfer, mortgage, pledge or otherwise dispose of or encumber, any assets or properties (real, personal or mixed) material to the Company other than to secure debt permitted under subclause (a) of this clause (D) or other than in the ordinary course of business consistent with past practice;

          (E) except as set forth in Section 4.1(b)(E) of the Company Disclosure Schedule, increase in any manner the wages, salaries, bonus, compensation or other benefits of any of its officers or employees or enter into, establish, amend or terminate any employment, consulting, retention, change in control, collective bargaining, bonus or other incentive compensation, profit sharing, health or other welfare, stock option or other equity, pension, retirement, vacation, severance, termination, deferred compensation or other compensation or benefit plan, policy, agreement, trust, fund or arrangement with, for or in respect of, any share holder, officer, director, other employee, agent, consultant or affiliate other than as required pursuant to the terms of agreements in effect on the date of this Agreement, or enter into or engage in any agreement, arrangement or transaction with any of its directors, officers, employees or affiliates except current compensation and benefits in the ordinary course of business, consistent with past practice;

          (F) (i) commence or settle any litigation or other proceedings with any Governmental Authority or other person, or (ii) make or rescind any election relating to Taxes, settle any claim, action, suit, litigation, proceeding, arbitration, investigation, audit or controversy relating to Taxes, file any amended Tax Return or claim for refund, change any method of accounting or make any other material change in its accounting or Tax policies or procedures.

          (G) adopt or amend any resolution or agreement concerning indemnification of its directors, officers, employees or agents;

          (H) transfer or license to any person or entity or otherwise extend, amend, modify, permit to lapse or fail to preserve any of the Company Intellectual Property Rights material to the Company’s business as presently conducted or proposed to be conducted,

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other than nonexclusive licenses in the ordinary course of business consistent with past practice, or disclose to any person who has not entered into a confidentiality agreement any Trade Secrets;

          (I) modify, amend or terminate any Company Material Contract, or waive, release or assign any material rights or claims thereunder, other than any such modification, amendment or termination of any such Company Material Contract or any such waiver, release or arrangement thereunder in the ordinary course of business consistent with past practice;

          (J) modify, amend or terminate, or waive, release or assign any material rights or claims with respect to any confidentiality agreement or non-competition agreement to which the Company is a party;

          (K) commit or omit to do any act which act or omission would cause a breach of any covenant contained in this Agreement or would cause any representation or warranty contained in this Agreement to become untrue, as if each such representation and warranty were continuously made from and after the date hereof;

          (L) fail to maintain its books, accounts and records in the usual manner on a basis consistent with that heretofore employed;

          (M) establish any subsidiary or enter into any new line of business;

          (N) enter into any lease, contract or agreement pursuant to which the Company is obligated to pay or incur obligations of more than $25,000 per year, other than the purchase of inventory in the ordinary course of business consistent with past practice;

          (O) make any changes to its current investment strategy, policy or practices;

          (P) permit any insurance policy naming the Company as a beneficiary or a loss payee to be cancelled or terminated without notice to and consent by Purchaser;

          (Q) revalue any of its assets or make any change in accounting methods, principles or practices, except as required by GAAP after notice to Purchaser;

          (R) fail to make in a timely manner any filings with the SEC required under the Securities Act or the Exchange Act or the rules and regulations promulgated thereunder;

          (S) discharge any obligations (including accounts payable) other than on a timely basis in the ordinary course of business consistent with past practice, or delay the

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making of any capital expenditures from the Company’s current capital expenditure schedule; or

          (T) authorize any of, or agree to commit to do any of, the foregoing actions.

     (c) The Company shall use its reasonable best efforts to comply in all material respects with all Laws applicable to it or any of its properties, assets or business and maintain in full force and effect all the Company Permits necessary for, or otherwise material to, such business.

4.2. Notification of Certain Matters.

     The Company shall give prompt notice to Purchaser if any of the following occur after the date of this Agreement: (i) any representation or warranty made by the Company in this Agreement is untrue or inaccurate in any material respect at any time from the date hereof to the Effective Time; (ii) there has been a material failure of the Company or any of its representatives to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it or them hereunder; (iii) receipt of any notice or other communication in writing from any third party alleging that the Consent of such third party is or may be required in connection with the transactions contemplated by this Agreement, provided that such Consent would have been required to have been disclosed in this Agreement; (iv) receipt of any material notice or other communication from any Governmental Authority (including, but not limited to, the NASD or any securities exchange) in connection with the transactions contemplated by this Agreement; (v) the occurrence of an event which would be reasonably likely to have a Company Material Adverse Effect; or (vi) the commencement or threat of any Litigation involving or affecting the Company, or any of their respective properties or assets, or, to its knowledge, any employee, agent, director or officer, in his or her capacity as such, of the Company which, if pending on the date hereof, would have been required to have been disclosed in this Agreement or which relates to the consummation of the Offer or the Merger. No such notice to Purchaser shall have any effect on the determination of whether or not any of the conditions to Closing or to the consummation of the offer have been satisfied or in determining whether or not any of the representations, warranties or covenants contained in this Agreement have been breached.

4.3. Access and Information.

     (a) Between the date of this Agreement and the Effective Time, the Company will give, and shall direct its accountants and legal counsel to give, Purchaser and its respective authorized representatives (including, without limitation, its financial advisors, accountants and legal counsel), at all reasonable times, access as reasonably requested to all offices and other facilities and to all contracts, agreements, commitments, books and records of or pertaining to the Company, will permit the foregoing to make such reasonable

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inspections as they may require and will cause its officers promptly to furnish Purchaser with (i) such financial and operating data and other information with respect to the business and properties of the Company as Purchaser may from time to time reasonably request, and (ii) a copy of each material report, schedule and other document filed or received by the Company pursuant to the requirements of applicable securities laws or the NASD; provided, however, that, between the date hereof and the time of first acceptance of Shares for payment under the Offer, (i) Purchaser may, with prior notice to the Company’s Chief Executive Officer, Chief Financial Officer or General Counsel, contact any employee of the Company directly, provided that such contact is for informational purposes only and does not unreasonably interfere with such employee’s ongoing responsibilities to the Company, and (ii) access to the Company’s offices and facilities shall only be with the sole and absolute, prior written consent of the Company’s Chief Executive Officer, Chief Financial Officer or General Counsel (provided that this Agreement shall not constitute prior written consent); and, following the time of first acceptance of Shares for payment under the Offer, Purchaser shall not be restricted in any manner in contacting employees of the Company or in accessing the Company’s offices and facilities. No such access, inspections or furnishment of information shall have any adverse effect on Purchaser or Merger Sub’s ability to assert that conditions to Closing or to the consummation of the Offer have not been satisfied.

     (b) The Chief Financial Officer of the Company shall deliver to the Purchaser immediately before the close of business on the day which is six (6) business days prior to the then-scheduled expiration date of the Offer and immediately before the close of business on the then-scheduled expiration date of the Offer, a certificate executed by such officer which sets forth the number of issued and outstanding Shares as of the date of the expiration of the Offer.

     (c) Without limiting any other provision of this Agreement, from time to time during the Offer upon the request of the Purchaser, immediately before the close of business on the day which is six (6) business days prior to the then scheduled expiration date of the Offer and immediately before the close of business on the expiration date of the Offer, the Company shall inform Purchaser orally and in writing as to the then-current status of satisfaction of the conditions to the Offer described in paragraphs (c), (e), (f), (g), (h), (i) and (1) on Annex A hereto. The President of the Company shall deliver to the Purchaser promptly following the close of business on the then-scheduled expiration date of the Offer a certificate executed by such officer to the effect that the conditions to the Offer specified in the immediately preceding sentence have been satisfied.

     (d) Prior to the execution and delivery of this Agreement, the Company shall have delivered to the Purchaser a copy of duly adopted resolutions of the Company’s Board of Directors approving the execution, delivery and performance of this Agreement and the other agreements contemplated hereby (including the Stockholders Agreement and the Stock Option Agreement) and, in each case, the transactions contemplated thereby, certified by the Secretary of the Company.

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4.4. Special Meeting; Proxy Statement.

     (a) As promptly as practicable following the purchase of Shares pursuant to the Offer, if required by applicable law in order to consummate the Merger, the Company, acting through its Board of Directors, shall, in accordance with applicable Law:

          (i) (A) duly call, give notice of, convene and hold a special meeting of its shareholders (the “Special Meeting”) for the purposes of considering and taking action upon the approval and adoption of the Merger and this Agreement;

               (B) subject to Section 4.8(b), the Company shall, through the Company’s Board of Directors, declare advisable and recommend to its shareholders that they approve the Merger and adopt this Agreement, and shall include disclosure regarding the approvals of the Company’s Board and the Special Committee referred to in Section 2.22(c) in the Proxy Statement;

               (C) without limiting the generality of the foregoing, the Company agrees that its obligations under clause (A) of this Section 4.4(a)(i) shall not be affected by the commencement, public proposal, public disclosure or communication to the Company or any other person of any Company Takeover Proposal (as such term is defined in Section 4.8(a)) or the withdrawal or modification by the Board of Directors or any committee thereof of such Board’s or committee’s approval or recommendation of the Offer, the Merger or this Agreement; and

          (ii) prepare and file with the SEC a preliminary proxy or information statement relating to the Merger and this Agreement and obtain and furnish the information required to be included by the SEC in the Proxy Statement and, after consultation with Purchaser, respond promptly to any comments made by the SEC with respect to the preliminary proxy or information statement and cause a definitive proxy or information statement, including any amendments or supplements thereto (the “Proxy Statement”) to be mailed to its shareholders at the earliest practicable date, provided that no amendments or supplements to the Proxy Statement will be made by the Company without consultation with Purchaser and its counsel.

     (b) Purchaser shall vote, or cause to be voted, all of the Shares acquired in the Offer or otherwise then owned by it, Merger Sub or any of Purchaser’s other subsidiaries in favor of the approval and adoption of the Merger and this Agreement.

     (c) Notwithstanding the provisions of paragraphs (a) and (b) above, in the event that Purchaser, Merger Sub and any other subsidiaries of Purchaser shall acquire in the aggregate at least 90% of the outstanding shares of each class of capital stock of the Company pursuant to the Offer or otherwise, the parties hereto shall, subject to Article VI

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hereof, take all necessary and appropriate action to cause the Merger to become effective as soon as practicable after such acquisition, without a meeting of shareholders of the Company, in accordance with Section 302A.621 of the MBCA.

4.5. Reasonable Best Efforts.

     (a) Subject to the terms and conditions herein provided, the Company agrees to use its reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective as promptly as practicable the Offer and the Merger and the other transactions contemplated by this Agreement, including, but not limited to, (i) obtaining all Consents from Governmental Authorities and other third parties required for the consummation of the Offer and the Merger and the other transactions contemplated hereby (provided that the Company shall not make any payment or amend the terms of any agreement in connection with obtaining any such Consent without the prior written approval of Purchaser) and (ii) consulting and cooperating with and providing assistance to Purchaser and Merger Sub in the preparation and filing with the SEC of the Offer Documents and all necessary amendments and supplements thereto. Upon the terms and subject to the conditions hereof, the Company agrees to use reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary to satisfy the conditions to the consummation of the Offer and the Closing set forth herein.

     (b) The Company agrees to inform Purchaser regularly, and to respond to requests of Purchaser, as to the status of whether or not each material Consent required from third parties (other than Governmental Authorities) in connection with this Agreement and the transactions contemplated hereby have been obtained. The Company shall promptly deliver to Purchaser in writing a reasonably detailed notice (the “Consent Notice”) as to the status of all such material Consents (i) immediately before the close of business on the thirteenth business day (such date, the “Consent Notice Date”) following the commencement of the Offer and (ii) immediately before the close of business on the day which is six (6) business days prior to the then-scheduled expiration date of the Offer. In the event that the Company has not obtained any one or more of such material Consents by the Consent Notice Date, then Purchaser shall have up to and including the date (the “Decision Date”) which is the actual expiration date of the Offer to (i) terminate this Agreement in accordance with Section 7.1(f) hereof or (ii) waive any such one or more material Consents by delivery of a reasonably detailed written notice to the Company (any such material Consents so waived in writing by Purchaser, collectively, the “Waived Consents”); provided, however, that in the event that Purchaser has not by or on the Decision Date either (i) terminated this Agreement in accordance with Section 7.1(f) hereof or (ii) waived all such material Consents, then this Agreement shall terminate without any action by any party hereto in accordance with Section 7.1(g) hereof. Notwithstanding any such waiver of material Consents, if Purchaser has not so terminated this Agreement, the Company shall continue to use its reasonable best efforts to actually obtain the Waived Consents pursuant to Section 4.5(a) hereof up to the Closing Date.

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4.6. Public Announcements.

     So long as this Agreement is in effect, the Company shall not, and shall cause its affiliates not to, (a) issue or cause the publication of any press release or any other announcement or communication with respect to the Offer or the Merger or the other transactions contemplated hereby without the written consent of Purchaser, or (b) discuss with the press or the media this Agreement, the Offer, the Merger or the other transactions contemplated hereby (and will refer any and all questions and inquiries to Purchaser), except in any case under (a) or (b) where such release or announcement is required by applicable Law or pursuant to any applicable listing agreement with, or rules or regulations of, the NASD, in which case the Company, prior to making such announcement, will consult with Purchaser regarding the same.

4.7. Compliance.

     In consummating the Offer, the Merger and the other transactions contemplated hereby, the Company shall comply in all material respects with the provisions of the Exchange Act and the Securities Act and shall comply in all material respects with all other applicable Laws.

4.8. No Solicitation.

     (a) For purposes of this Agreement, “Company Takeover Proposal” means any inquiry, proposal or offer from any person relating to (1) any direct or indirect acquisition or purchase of assets representing 10% or more of the assets of the Company, (2) any issuance, sale, or other disposition of (including by way of merger, consolidation, business combination, share exchange, joint venture, or any similar transaction) securities (or options, rights or warrants to purchase, or securities convertible into or exchangeable for, such securities) representing 10% or more of the voting power of the Company, (3) any tender offer, exchange offer or other transaction in which, if consummated, any person shall acquire beneficial ownership (as such term is defined in Rule 13d-3 under the Exchange Act), or the right to acquire beneficial ownership, or any “group” (as such term is defined under the Exchange Act) shall have been formed which beneficially owns or has the right to acquire beneficial ownership, of 10% or more of the outstanding voting capital stock of the Company, or (4) any merger, consolidation, share exchange, business combination, recapitalization, liquidation, dissolution or similar transaction involving the Company, other than the transactions contemplated by this Agreement. For purposes of this Agreement, a “Company Superior Offer” means a Company Takeover Proposal on terms that the Board of Directors of the Company determines, in good faith, based upon consultations with its outside legal counsel and its financial advisor, that if consummated, is more favorable to the Company’s shareholders from a financial point of view than the Offer, this Agreement or the Merger and is reasonably likely to be consummated, taking into account all legal, financial and regulatory aspects of the offer and the person making the offer and would, if consummated, be

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in the best interests of the shareholders of the Company; provided, however, that any such Company Takeover Proposal shall not be deemed to be a Company Superior Offer if any financing required to consummate the transaction contemplated by such offer is not committed.

     (b) Except as set forth in this Section 4.8, the Company shall not, directly or indirectly, and shall not, directly or indirectly, authorize or permit any officer or director of the Company, or authorize or knowingly permit any other employee, agent or consultant of the Company to (i) solicit, encourage, initiate or seek the making, submission or announcement of any Company Takeover Proposal, (ii) furnish any non-public information regarding the Company to any person (other than Purchaser or Merger Sub or their representatives) in connection with or in response to a Company Takeover Proposal or an inquiry that the Company believes in good faith could be expected to lead to a Company Takeover Proposal, (iii) engage in discussions or negotiations with any person with respect to any Company Takeover Proposal, except as to the existence of these provisions (iv) withdraw or modify, or propose publicly to withdraw or modify, in a manner adverse to Purchaser, the approval or recommendation by the Company’s Board of Directors of the Offer, this Agreement or the Merger, (v) approve or recommend, or propose publicly to approve or recommend, any Company Takeover Proposal or (vi) cause the Company to enter into any letter of intent, agreement in principle, acquisition agreement or other similar agreement (each, a “Company Acquisition Agreement”) related to any Company Takeover Proposal. Notwithstanding the foregoing, this Section 4.8(b) shall not prohibit (A) the Company, or the Board of Directors of the Company, prior to the time of the first acceptance of Shares for payment pursuant to the Offer, from furnishing nonpublic information regarding the Company to, or entering into discussions or negotiations with, any person in response to an unsolicited, bona fide written Company Takeover Proposal that the Board of Directors of the Company concludes in good faith could reasonably be expected to result in a Company Superior Offer that is submitted to the Company by such person (and not withdrawn) if (1) neither the Company nor any officer, director, employee, agent or consultant of the Company shall have violated any of the restrictions set forth in this Section 4.8(b) in connection with the receipt of such Company Takeover Proposal, (2) the Board of Directors of the Company concludes in good faith, after consultation with its outside legal counsel, that such action with respect to such Company Takeover Proposal is required to comply with the fiduciary duties of the Board of Directors of the Company to the Company shareholders under applicable Law, (3) the Company gives Purchaser prompt written notice of the Company’s intention to furnish nonpublic information to, or enter into discussions with, such person, and the Company receives from such person an executed confidentiality agreement with provisions no less favorable to the Company than those contain in the Mutual Non-Disclosure Agreement dated August 3, 2004 by and between the Company and Purchaser; and (4) the Company furnishes such nonpublic information to such person and to Purchaser at substantially the same time (to the extent such nonpublic information has not been previously furnished by the Company to Purchaser); or (B) the Company from complying with Rules 14d-9 and 14e-2 promulgated under the Exchange Act with regard to any Company Takeover Proposal.

     (c) The Company shall promptly (and in no event later than twenty-four (24) hours after the Company gains knowledge of its receipt of any Company Takeover Proposal), or any

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request for nonpublic information relating to it in connection with a response to a Company Takeover Proposal, advise Purchaser orally and in writing of such Company Takeover Proposal or request (including providing the identity of the person making or submitting such Company Takeover Proposal or request, and a summary of the material terms thereof, if the Company Takeover Proposal is not in writing, or a copy of the Company Takeover Proposal and any related draft agreements if it is in writing) that is made or submitted by any person during the time prior to the first acceptance of Shares for payment pursuant to the Offer. The Company shall keep Purchaser informed in all material respects on a prompt basis with respect to the status of any such Company Takeover Proposal or request and any material modification or proposed material modification thereto.

     (d) Upon the execution of this Agreement, the Company shall immediately cease and cause to be terminated any discussions existing as of the date of this Agreement with any person (other than Purchaser) that relate to any Company Takeover Proposal.

     (e) The Company agrees not to release any person (other than Purchaser) from or waive any provision of any confidentiality, “standstill” or similar agreement to which the Company is a party and which relates to a Company Takeover Proposal, and will use its commercially reasonable efforts to enforce each such agreement at the request of Purchaser.

     (f) Notwithstanding anything in this Agreement to the contrary, the Board of Directors of the Company may at any time prior to the first acceptance of Shares for payment pursuant to the Offer (subject to Company’s compliance with the provisions of this Section 4.8), (i) withdraw or modify its approval or recommendation of the Offer, this Agreement or the Merger or (y) approve or recommend a Company Superior Offer if: (A) an unsolicited, bona fide written offer is made to the Company by a third party for a Company Takeover Proposal, and such offer is not withdrawn; (B) the Company’s Board of Directors determines in good faith, after consultation with its financial advisor, that such offer constitutes a Company Superior Offer; (C) following consultation with outside legal counsel, the Company’s Board of Directors determines that the withdrawal or modification of its approval or recommendation of the Offer, this Agreement or the Merger is required to comply with the fiduciary duties of the Board of Directors of Company to the shareholders of the Company under applicable Law; (D) such approval or recommendation is not withdrawn or modified in a manner adverse to Purchaser at any time prior to three (3) business days after Purchaser receives written notice from the Company confirming that the Company’s Board of Directors has determined that such offer is a Company Superior Offer, and (E) at the end of such three (3) business day period, after taking into account any adjustment or modification of the terms of this Agreement proposed by Purchaser (and any adjustment or modification of the terms of such Company Takeover Proposal), the Board of Directors of the Company again makes the determination in good faith that the withdrawal or modification of such approval or recommendation of the Offer, this Agreement or the Merger is required to comply with the fiduciary duties of the Board of Directors of the Company to the shareholders of the Company under applicable Law.

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     (g) Notwithstanding anything to the contrary contained herein, this Agreement and the Merger shall be submitted to the shareholders of the Company, in accordance with Section 4.4(a), at the meeting of such shareholders for the purpose of approving this Agreement and the Merger, and, subject to termination of this Agreement in accordance with the terms of Article VII hereof, nothing in this Agreement to the contrary shall be deemed to relieve the Company of such obligation.

4.9. SEC and Shareholder Filings.

     The Company shall send to Purchaser a copy of all public reports and materials as and when it sends the same to its shareholders, the SEC or any state or foreign securities commission.

4.10 State Takeover Laws.

     Notwithstanding any other provision in this Agreement, unless this Agreement is terminated in accordance with the terms of Article VII hereof, in no event shall the Minnesota Anti-Takeover Approval be withdrawn, revoked or modified by the Board of Directors of the Company or the Special Committee. If any state takeover statute of the MBCA not rendered inapplicable or complied with by the Minnesota Anti-Takeover Approval becomes or is deemed to become applicable to this Agreement, the Offer, the acquisition of Shares pursuant to the Offer or the Merger or the other transactions contemplated by this Agreement, the Company shall take all reasonable action necessary to render such statute inapplicable to or comply with all of the foregoing. For purposes of this Agreement, the “Minnesota Anti-Takeover Approval” shall mean the actions taken by the Company’s Board of Directors and the Special Committee referred to in Section 2.22(c) hereof causing Sections 302A.671, 302A.673 and 302A.675 of the MBCA not to impede this Agreement, the Offer, the acquisition of Shares pursuant to the Offer or the Merger or the other transactions contemplated by this Agreement.

4.11 Actions Regarding the Rights.

     The Company shall not modify or waive, except as expressly provided herein, the terms of its Rights Agreement as amended as of the date hereof, or take any action to redeem the Rights, except in connection with its entering into a Company Superior Offer pursuant to and in accordance with Section 4.8 hereof.

ARTICLE V
ADDITIONAL COVENANTS OF PURCHASER

5.1. Notification of Certain Matters.

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     Purchaser shall give prompt notice to the Company if any of the following occur after the date of this Agreement: (i) any representation or warranty made by Purchaser in this Agreement is untrue or inaccurate in any material respect at any time from the date hereof to the Effective Time; (ii) there has been a material failure of Purchaser, Merger Sub or any of their representatives to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it or them hereunder; (iii) receipt of any notice or other communication in writing from any third party alleging that the Consent of such third party is or may be required in connection with the transactions contemplated by this Agreement, provided that such Consent would have been required to have been disclosed in this Agreement; (iv) receipt of any material notice or other communication from any Governmental Authority (including, but not limited to, the NASD) in connection with the transactions contemplated by this Agreement; (v) the occurrence of an event which would be reasonably likely to have a Purchaser Material Adverse Effect; or (vi) the commencement or threat of any Litigation involving or affecting Purchaser or any of its subsidiaries, or any of their respective properties or assets, or, to its knowledge, any employee, agent, director or officer, in his or her capacity as such, of Purchaser or any of its subsidiaries which, if pending on the date hereof, would have been required to have been disclosed in this Agreement or which relates to the consummation of the Offer or the Merger.

5.2. Reasonable Best Efforts.

     Subject to the terms and conditions herein provided, Purchaser agrees to use its reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective as promptly as practicable the Offer and the Merger and the other transactions contemplated by this Agreement, including, but not limited to, (i) obtaining all Consents from Governmental Authorities and other third parties required for the consummation of the offer and the Merger and the other transactions contemplated hereby and (ii) consulting and cooperating with and providing assistance to the Company in the preparation and filing with the SEC of the Schedule 14D-9 and the Proxy Statement and all necessary amendments and supplements thereto. Upon the terms and subject to the conditions hereof, Purchaser agrees to use reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary to satisfy the conditions to the consummation of the offer and the Closing set forth herein.

5.3. Compliance.

     In consummating the Offer, the Merger and the other transactions contemplated hereby, Purchaser shall comply in all material respects with the provisions of the Exchange Act and the Securities Act and shall comply, and/or cause its subsidiaries to comply or to be in compliance, in all material respects, with all other applicable Laws.

5.4. SEC and Shareholder Filings.

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     Purchaser shall send to the Company a copy of all public reports and materials as and when it sends the same to its shareholders, the SEC or any state or foreign securities commission.

5.5. Indemnification.

     (a) As of the Effective Time, the indemnification and exculpation provisions contained in the Bylaws and the Articles of Incorporation of the Surviving Corporation shall be at least as favorable to individuals who immediately prior to the Closing Date were directors, officers, agents or employees of the Company or otherwise entitled to indemnification under the Company’s Bylaws or Articles of Incorporation (an “Indemnified Party”) as those contained in the Bylaws and the Articles of Incorporation of the Company, respectively, and shall not be amended, repealed or otherwise modified for a period of six (6) years after the Closing Date in any manner that would adversely affect the rights thereunder of any Indemnified Party; provided, however, that nothing contained herein shall limit Purchaser’s ability to merge the Company or the Surviving Corporation into Purchaser or any of its subsidiaries or any other person or otherwise eliminate the Company’s or the Surviving Corporation’s corporate existence. The Company hereby covenants that it shall, to the fullest extent permitted under Minnesota law and regardless of whether the Merger becomes effective, indemnify, defend and hold harmless, and after the Effective Time, the Surviving Corporation shall, to the fullest extent permitted under Minnesota law, indemnify, defend and hold harmless, each Indemnified Party against any costs or expenses (including reasonable attorneys’ fees), judgments, fines, losses, claims, damages, liabilities and amounts paid in settlement in connection with any claim, action, suit, proceeding or investigation, including, without limitation, liabilities arising out of this Agreement or under the Exchange Act, occurring through the Closing Date, and in the event of any such claim, action, suit, proceeding or investigation (whether arising before or after the Effective Time), (i) the Company or the Surviving Corporation shall pay the reasonable fees and expenses of counsel selected by the Indemnified Parties, which counsel shall be reasonably satisfactory to the Company or the Surviving Corporation, promptly as statements therefor are received, and (ii) the Company and the Surviving Corporation will cooperate in the defense of any such matter; provided, however, that neither the Company nor the Surviving Corporation shall be liable for any settlement effected without its written consent (which consent shall not be unreasonably withheld); and provided, further, that neither the Company nor the Surviving Corporation shall be obliged pursuant to this Section 5.5 to pay the fees and disbursements of more than one counsel for all Indemnified Parties in any single action except to the extent that, in the opinion of counsel for the Indemnified Parties, two or more of such Indemnified Parties have conflicting interests in the outcome of such action. Notwithstanding anything to the contrary in this Section 5.5 or in the Bylaws or Articles of Incorporation of the Surviving Corporation, the foregoing indemnification shall not be available to an Indemnified Party to the extent that a claim arises in connection with facts or circumstances which, if known by Purchaser prior to the Effective Time, would have constituted a breach of the Company’s representations,

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warranties, covenants or agreements made in this Agreement; the Article of Incorporation and Bylaws shall be amended as necessary to reflect this restriction on indemnification. The Surviving Corporation shall reimburse all expenses, including reason able attorney’s fees and expenses, incurred by any person to enforce the obligations of the Surviving Corporation under this Section 5.5. To the fullest extent permitted by law, the Surviving Corporation shall advance expenses in connection with the foregoing indemnification.

     (b) If the Surviving Corporation or any of its successors or assigns (i) consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers all or substantially all of its properties and assets to any person, then and in each such case, proper provision shall be made so that the successors and assigns of the Surviving Corporation assume the obligations set forth in this Section 5.5.

5.6. Benefit Plans and Employee Matters.

     (a) Purchaser shall to the extent practicable either maintain and provide to the Company’s employees the employee benefits and programs of the Company as substantially in effect as of the date hereof or cause the Surviving Corporation to provide employee benefits and programs to the Company’s employees that, in the aggregate, are substantially comparable to those of Purchaser. The Company shall provide Purchaser with such information as Purchaser may reasonably request regarding the Company’s employee benefits and programs in order to assist Purchaser in complying with its obligations under this Section 5.6(a). Nothing in this Section 5.6(a) shall be construed to prohibit or restrict Purchaser or the Surviving Corporation from amending, suspending or terminating any of its employee benefit plans or programs at any time.

     (b) From and after the Effective Time, the Surviving Corporation shall honor, in accordance with their terms, all employment and severance agreements in effect immediately prior to the Closing Date that are applicable to any current or former employees or directors of the Company.

ARTICLE VI
CONDITIONS

6.1. Conditions to Each Party’s Obligations.

     The respective obligations of each party to effect the Merger shall be subject to the fulfillment or waiver at or prior to the Effective Time of the following conditions:

     (a) Shareholder Approval. If required under the MBCA, the Company Shareholder Approval shall have been obtained.

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     (b) No Injunction or Action. No order, statute, rule, regulation, executive order, stay, decree, judgment or injunction shall have been enacted, entered, promulgated or enforced by any court or other Governmental Authority since the date of this Agreement which prohibits or prevents the consummation of the Merger which has not been vacated, dismissed or withdrawn prior to the Effective Time. The Company and Purchaser shall use their reasonable best efforts to have any of the foregoing vacated, dismissed or withdrawn by the Effective Time.

     (c) Purchase of Shares. Purchaser or Merger Sub or any affiliate of either of them shall have purchased Shares pursuant to the Offer.

6.2. Conditions to Obligations of Purchaser.

     The obligations of Purchaser to effect the Merger shall be subject to the fulfillment at or prior to the Effective Time of the following additional conditions, any one or more of which may be waived by Purchaser:

     (a) Company Representation and Warranties. The representations and warranties of the Company set forth in this Agreement shall be true and correct in all material respects (except that where any statement in a representation or warranty expressly includes a “material adverse effect”, “material” or other materiality qualifier, such representation or warranty shall be true and correct in all respects) as of the date hereof and as of the Closing Date as if made on and as of the Closing Date, except those representations and warranties that speak of an earlier date, which shall be true and correct as of such earlier date (it being understood that, for purposes of determining the accuracy of such representations and warranties, any update of or modification to the Company Disclosure Schedule made or purported to have been made after the date of this Agreement shall be disregarded).

     (b) Performance by the Company. The Company shall have performed and complied with all the covenants and agreements in all material respects and satisfied in all material respects all the conditions required by this Agreement to be performed or complied with or satisfied by the Company at or prior to the Effective Time.

     (c) No Material Adverse Change. There shall have been no changes, conditions, events, or developments (including but not limited to with respect to any matters described in this Agreement or in the Company SEC Reports or on the Company Disclosure Schedule) that have or would reasonably be expected to have a Company Material Adverse Effect since the date of this Agreement; provided, however, that for purposes of determining whether there shall have been any such Company Material Adverse Effect, (i) any adverse change resulting from or relating to general business or economic conditions shall be disregarded, (ii) any adverse change resulting from or relating to conditions generally affecting the industry in which the Company competes shall be disregarded, and

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(iii) any adverse change resulting from or relating to the taking of any action contemplated by this Agreement shall be disregarded.

     (d) Governmental Approval. All Consents of any Governmental Authority required for the consummation of the Merger and the transactions contemplated by this Agreement shall have been obtained, except as may be waived by Purchaser or those Consents the failure or which to obtain will not have a Company Material Adverse Effect or a Purchaser Material Adverse Effect.

     (e) Material Consents. Except with respect to any Waived Consents, any material Consents of any person to the Merger or the other transactions contemplated hereby shall have been obtained and be in full force and effect.

     (f) Employee Termination, Consulting and Non-Competition Agreements. Each Noncompetition Agreement shall be in full force and effect.

6.3. Frustration of Conditions.

     Neither Purchaser nor the Company may rely on the failure of any condition set forth in this Article VI to be satisfied if such failure was caused by such party’s failure to comply with or perform any of its covenants or obligations set forth in this Agreement.

ARTICLE VII
TERMINATION AND ABANDONMENT

7.1 Termination.

     This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of the shareholders of the Company described herein:

     (a) by mutual written consent of Purchaser and the Company;

     (b) by either Purchaser or the Company, if:

          (i) the Merger shall not have been consummated on or prior to December 31, 2004 (the “Drop Dead Date”), provided, however, that the right to terminate this Agreement pursuant to this Section 7.1(b)(i) shall not be available to any party whose failure to perform any of its obligations under this Agreement results in the failure of the Merger to be consummated by such time;

          (ii) if required under the MBCA, the vote of the Company’s shareholders shall have been taken at a meeting duly convened therefor or at any adjournment or postponement thereof and shall be insufficient to approve the Merger and this Agreement; or

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          (iii) any Governmental Authority shall have issued an order, decree or ruling or taken any other action permanently enjoining, restraining or otherwise prohibiting the consummation of the Offer or the Merger and such order, decree or ruling or other action shall have become final and nonappealable;

     (c) by Purchaser, if the Company shall have breached in any material respect any of its representations, warranties, covenants or other agreements contained in this Agreement, which breach or failure to perform is incapable of being cured or has not been cured within 20 business days after the giving of written notice to the Company;

     (d) by Purchaser, if (1) the Company shall have breached in any material respect its obligations set forth in Section 4.8 hereof, (2) the Board of Directors of the Company or the Special Committee, as the case may be, shall have withdrawn or modified in a manner adverse to Purchaser its approval or recommendation of the Offer, the Merger or this Agreement, or failed to reconfirm its recommendation within five (5) business days after a written request to do so, or approved or recommended any Company Superior Offer or (3) the Board of Directors of the Company or the Special Committee, as the case may be, shall have resolved to take any of the foregoing actions;

     (e) by the Company, if Purchaser shall have breached in any material respect any of its representations, warranties, covenants or other agreements contained in this Agreement, which breach or failure to perform is incapable of being cured or has not been cured within 20 business days after the giving of written notice to Purchaser;

     (f) by Purchaser on or before the Decision Date, if any one or more material Consents required from third parties (other than Governmental Authorities) in connection with this Agreement and the transactions contemplated hereby have not been obtained;

     (g) without any action on the part of any party hereto on the day immediately following the Decision Date in the event that all material Consents required from third parties (other than Governmental Authorities) in connection with this Agreement and the transactions contemplated hereby have not been obtained by the Company by or on the Decision Date and Purchaser (i) has not terminated this Agreement by or on the Decision Date pursuant to Section 7.1(f) or (ii) has not waived all such material Consents which have not been obtained by the Company by or on the Decision Date;

     (h) by the Purchaser, other than as a result of a breach by the Purchaser or Merger Sub of its obligations hereunder, if as a result of any condition set forth in Annex A hereto failing to be satisfied, the Purchaser shall have (i) failed to commence the Offer within 30 days following the date of this Agreement, or (ii) terminated the Offer without having accepted any Shares for payment thereunder; and

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     (i) by the Company, upon approval of its Board of Directors, if the Purchaser shall have terminated the Offer without having accepted any Shares for payment thereunder, other than as a result of a breach by the Company of its obligations hereunder.

     The party desiring to terminate this Agreement pursuant to the preceding paragraphs shall give written notice of such termination to the other party in accordance with Section 8.6 hereof.

7.2. Effect of Termination and Abandonment.

     (a) In the event of termination of this Agreement and the abandonment of the Merger pursuant to this Article VII, this Agreement (other than Sections 7.2, 8.1, 8.2, 8.3, 8.4, 8.5, 8.6, 8.7, 8.8, 8.9, 8.10, 8.11, 8.12, 8.13, 8.14, 8.15 and 8.16) shall become void and of no further force or effect with no liability on the part of any party hereto (or of any of its directors, officers, employees, agents, legal or financial advisors or other representatives); provided, however, that no such termination shall relieve any party hereto from any liability for any breach of this Agreement prior to termination. If this Agreement is terminated as provided herein, each party shall use its reasonable best efforts to redeliver all documents, work papers and other material (including any copies thereof) of any other party relating to the transactions contemplated hereby, whether obtained before or after the execution hereof, to the party furnishing the same.

     (b) In the event that prior to termination of this Agreement a bona fide Company Takeover Proposal shall have been made known to the Company or has been made directly to its shareholders generally or any person shall have publicly announced an intention (whether or not conditional) to make a bona fide Company Takeover Proposal (a “Competing Company Takeover Proposal”), and thereafter this Agreement is (x) terminated pursuant to Section 7.1(b)(i) or 7.1(b)(ii), or (y) terminated by Purchaser pursuant to Section 7.1(c), 7.1(d), 7.1(f) or 7.1(h) (provided the reason for termination under Section 7.1(h) relates to one or more of the conditions described in (e), (f), (g), (h) or (k) of Annex A), then the Company shall promptly, but in no event later than, in the case of termination by Purchaser, two days after, or in the case of termination by the Company, immediately prior to, termination of this Agreement giving rise to the Company’s payment obligation, pay Purchaser One Million Dollars ($1,000,000) (the “Company Termination Fee”), plus the reimbursement of any and all Purchaser Expenses (as defined below) incurred by Purchaser and Merger Sub up to Three Hundred Thousand Dollars ($300,000), payable by wire transfer of same day funds to an account designated by Purchaser (provided, however, that the Company Termination Fee shall not be payable if Purchaser terminates this Agreement pursuant to Section 7.1(h) and at the time of such termination more than 75% of the Shares (including all of the Convertible Preferred Stock) shall have been validly tendered and not withdrawn pursuant to the Offer). The Purchaser shall submit an accounting of the Purchaser Expenses to the Company. For purposes of this Agreement, the term “Purchaser Expenses” shall mean any and all costs, fees and expenses incurred by Purchaser and Merger Sub in connection with the preparation, negotiation, execution,

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performance and consummation of this Agreement, the Stockholders Agreement, the Stock Option Agreement and any other agreements executed in connection herewith or therewith or in connection with any of the transactions contemplated by any such agreements and documents (including, without limitation, attorneys’, information agent’s and accountants’ fees and expenses, Purchaser’s internal time allocation relating to its employees, Purchaser’s internal costs and expenses, governmental filing fees, and printing and mailing costs). The Company acknowledges that the agreements contained in this Section 7.2(b) are an integral part of the transactions contemplated by this Agreement and that, without these agreements, Purchaser would not have entered into this Agreement. Notwithstanding the foregoing, no fee or expense reimbursement shall be paid pursuant to this Section 7.2(b) if Purchaser shall be in material breach of its obligations hereunder.

     (c) In the event that (i) Purchaser terminates this Agreement solely pursuant to Section 7.1(h), (ii) at the time of such termination, Purchaser does not deliver to the Company a written certification signed by the Chief Executive Officer stating that such termination is based, in whole or in part, on the material unsatisfactory results, in Purchaser’s sole discretion, of Purchaser’s due diligence review of the Company, and (iii) at the time of such termination, more than 75% of the Shares (including all of the Convertible Preferred Stock) shall have been validly tendered and not withdrawn pursuant to the Offer, then Purchaser shall immediately prior to its termination of this Agreement pursuant to Section 7.1(h) pay the Company One Million Dollars ($1,000,000) (the “Purchaser Termination Fee”), plus the reimbursement of any and all Company Expenses (as defined below) incurred by the Company up to Three Hundred Thousand Dollars ($300,000), payable by wire transfer of same day funds to an account designated by the Company. The Company shall submit an accounting of the Company Expenses to Purchaser. For purposes of this Agreement, the term “Company Expenses” shall mean any and all costs, fees and expenses incurred by the Company in connection with the preparation, negotiation, execution, performance and consummation of this Agreement, the Stockholders Agreement, the Stock Option Agreement and any other agreements executed in connection herewith or therewith or in connection with any of the transactions contemplated by any such agreements and documents (including, without limitation, attorneys’, information agent’s and accountants’ fees and expenses, the Company’s internal time allocation relating to its employees, the Company ‘s internal costs and expenses, governmental filing fees, and printing and mailing costs). Purchaser acknowledges that the agreements contained in this Section 7.2(c) are an integral part of the transactions contemplated by this Agreement and that, without these agreements, the Company would not have entered into this Agreement. Notwithstanding the foregoing, no fee or expense reimbursement shall be paid pursuant to this Section 7.2(c) if the Company shall be in material breach of its obligations hereunder.

     (d) Purchaser acknowledges that payments made under Section 7.2(b) hereof shall constitute its exclusive remedy with respect to any termination of this Agreement that gives rise to such payment obligation. The Company acknowledges that payments made

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under Section 7.2(c) hereof shall constitute its exclusive remedy with respect to any termination of this Agreement that gives rise to such payment obligation.

ARTICLE VIII
MISCELLANEOUS

8.1. Confidentiality.

     Unless (i) otherwise expressly provided in this Agreement, (ii) required by applicable Law or any listing agreement with, or the rules and regulations of, any applicable securities exchange or the NASD, (iii) necessary to secure any required Consents as to which the other party has been advised or (iv) consented to in writing by Purchaser and the Company, any information or documents furnished in connection herewith shall be kept strictly confidential by the Company, Purchaser and their respective officers, directors, employees and agents. Prior to any disclosure pursuant to the preceding sentence, the party intending to make such disclosure shall consult with the other party regarding the nature and extent of the disclosure. Nothing contained herein shall preclude disclosures to the extent necessary to comply with accounting, SEC and other disclosure obligations imposed by applicable Law. To the extent required by such disclosure obligations, Purchaser or the Company, after consultation with the other party, may file with the SEC a Report on Form 8-K pursuant to the Exchange Act with respect to the Offer and the Merger, which report may include, among other things, financial statements and pro forma financial information with respect to the other party. Purchaser and the Company shall cooperate with the other and provide such information and documents as may be required in connection with any filings with the SEC. In the event the Merger is not consummated, each party shall return to the other any documents furnished by the other and all copies thereof any of them may have made and will hold in absolute confidence any information obtained from the other party except to the extent (i) such party is required to disclose such information by Law or such disclosure is necessary or desirable in connection with the pursuit or defense of a claim, (ii) such information was known by such party prior to such disclosure or was thereafter developed or obtained by such party independent of such disclosure or (iii) such information becomes generally available to the public other than by breach of this Section 8.1. Prior to any disclosure of information pursuant to the exception in clause (i) of the preceding sentence, the party intending to disclose the same shall so notify the party which provided the name in order that such party may seek a protective order or other appropriate remedy should it choose to do so.

8.2. Amendment and Modification.

     This Agreement may be amended, modified or supplemented only by a written agreement among the Company, Purchaser and Merger Sub.

8.3. Waiver of Compliance; Consents.

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     Any failure of the Company on the one hand, or Purchaser on the other hand, to comply with any obligation, covenant, agreement or condition herein may be waived by Purchaser on the one hand, or the Company on the other hand, only by a written instrument signed by the party granting such waiver, but such waiver or failure to insist upon strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. Whenever this Agreement requires or permits consent by or on behalf of any party hereto, such consent shall be given in writing in a manner consistent with the requirements for a waiver of compliance as set forth in this Section 8.3.

8.4. Survival.

     The respective representations, warranties, covenants and agreements of the Company and Purchaser contained herein or in any certificates or other documents delivered prior to or at the Closing shall survive the execution and delivery of this Agreement, notwithstanding any investigation made or information obtained by the other party, but shall terminate at the Effective Time, except for those covenants contained in Sections 1.6(b), 1.7, 1.8, 1.9, 1.12, 1.13, 5.5, 8.1 and 8.14 hereof, which shall survive beyond the Effective Time in accordance with their terms.

8.5. Notices.

     All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered in person, by facsimile, receipt confirmed, or on the next business day when sent by overnight courier or on the second succeeding business day when sent by registered or certified mail (postage prepaid, return receipt requested) to the respective parties at the following addresses (or at such other address for a party as shall be specified by like notice):

if to the Company, to:

DataKey, Inc.
407 West Travelers Trail
Minneapolis, Minnesota 55337
Attention: David A. Feste
Facsimile: (952) 890-6850

with a copy to (but which shall not constitute notice to the Company):

Fredrikson & Byron, P.A.
200 South 6^th Street, #400
Minneapolis, Minnesota 55402-1425
Attention: Thomas R. King, Esq.

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Facsimile: 612-492-7077

(ii)	if to Purchaser or Merger Sub, to:
	SafeNet, Inc. 4690 Millennium Drive Belcamp, Maryland 21017 Attention: Chief Executive Officer Facsimile: (443) 327-1207

with a copy to (but which shall not constitute notice to Purchaser)

Venable LLP
8010 Towers Crescent Drive
Suite 300
Vienna, Virginia 22182
Attention: Elizabeth R. Hughes, Esq.
Facsimile: 703-821-8949

8.6. Binding Effect; Assignment.

     This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto prior to the Effective Time without the prior written consent of the other parties hereto.

8.7. Expenses.

     All costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such costs or expenses; provided; however, that the parties hereto agree that the costs of printing the Offer to Purchase (and related documents) and the Schedule 14D-9 (and related documents), the costs of mailing all such documents to shareholders of the Company, and the fees and expenses of Innisfree M&A Incorporated shall be split equally between Purchaser, on the one hand, and the Company, on the other hand.

8.8. Governing Law.

     This Agreement shall be deemed to be made in, and in all respects shall be interpreted, construed and governed by and in accordance with the internal laws of, the State of Delaware (except to the extent that a particular matter is the proper subject of the MBCA, in which event the MBCA shall govern). Each of the Company, Purchaser and Merger Sub hereby irrevocably and unconditionally consents to submit to the jurisdiction

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of the federal and state courts located in Delaware for any litigation arising out of or relating to this Agreement and the transactions contemplated hereby (and agrees not to commence any litigation relating thereto except in such courts), waives any objection to the laying of venue of any such litigation in such courts and agrees not to plead or claim in any such court that such litigation brought therein has been brought in an inconvenient forum.

8.9. Counterparts.

     This Agreement may be executed in one or more counterparts, each of which together be deemed an original, but all of which together shall constitute one and the same instrument.

8.10. Interpretation.

     The article and section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or interpretation of this Agreement. As used in this Agreement, (i) the term “person” shall mean and include an individual, a partnership, a joint venture, a corporation, a limited liability company, a trust, an association, an unincorporated organization, a Governmental Authority and any other entity, (ii) unless otherwise specified herein, the term “affiliate,” with respect to any person, shall mean and include any person controlling, controlled by or under common control with such person, (iii) the term “subsidiary” of any specified person shall mean any corporation any of the outstanding voting power of which, or any partnership, joint venture, limited liability company or other entity any of the total equity interest of which, is directly or indirectly owned by such specified person, other than in any such case any entity which may be deemed to be a “subsidiary” of such specified person solely by reason of the ownership of equity securities of such entity which are registered under the Exchange Act and held by such specified person for investment purposes only, (iv) the term “knowledge,” when used with respect to the Company, shall mean the knowledge of the directors and executive officers of the Company and, when used with respect to Purchaser, shall mean the knowledge of the directors and executive officers of Purchaser, and (v) the term “including” shall mean “including, without limitation.” The parties have participated jointly in the negotiation and drafting of this Agreement. Consequently, in the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provision of this Agreement.

8.11. Entire Agreement.

     This Agreement and the documents or instruments referred to herein, including, but not limited to, the Exhibit(s) attached hereto and the Disclosure Schedules referred to herein, which Exhibit(s) and Disclosure Schedules are incorporated herein by reference,

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and any other written agreement entered into contemporaneously herewith embody the entire agreement and under standing of the parties hereto in respect of the subject matter contained therein. There are no restrictions, promises, representations, warranties, covenants, or undertakings, other than those expressly set forth or referred to therein. This Agreement and such other agreements supersede all prior agreements and the understandings between the parties with respect to such subject matter.

8.12. Severability.

     In case any provision in this Agreement shall be held invalid, illegal or unenforceable in a jurisdiction, such provision shall be modified or deleted, as to the jurisdiction involved, only to the extent necessary to render the same valid, legal and enforceable, and the validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby nor shall the validity, legality or enforceability of such provision be affected thereby in any other jurisdiction.

8.13. Specific Performance.

     The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. Accordingly, the parties further agree that each party shall be entitled to an injunction or restraining order to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction, this being in addition to any other right or remedy to which such party may be entitled under this Agreement, at law or in equity.

8.14. Third Parties.

     Nothing contained in this Agreement or in any instrument or document executed by any party in connection with the transactions contemplated hereby shall create any rights in, or be deemed to have been executed for the benefit of, any person or entity that is not a party hereto or thereto or a successor or permitted assign of such a party; provided however, that the parties hereto specifically acknowledge that the provisions of Sections 5.5 and 5.6(b) hereof are intended to be for the benefit of, and shall be enforceable by, the current or former employees, officers and directors of the Company affected thereby and their heirs and representatives.

8.15. Disclosure Schedules.

     The Company and Purchaser acknowledge that the Company Disclosure Schedule (i) relates to certain matters concerning the disclosures required and transactions contemplated by this Agreement, (ii) is qualified in their entirety by reference to specific provisions of this Agreement and (iii) is not intended to constitute and shall not be construed as indicating that such matter is required to be disclosed, nor shall such

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disclosure be construed as an admission that such information is material with respect to the Company, except to the extent required by this Agreement.

8.16. Obligation of Purchaser.

     Whenever this Agreement requires Merger Sub to take any action, such requirement shall be deemed to include an undertaking on the part of Purchaser to cause Merger Sub to take such action.

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     IN WITNESS WHEREOF, each of the parties hereto have caused this Agreement and Plan of Merger to be signed and delivered by their respective duly authorized officers as of the date first above written.

SAFENET, INC.
By:	/s/ Ken Mueller
	Name:	Ken Mueller
	Title:	Chief Financial Officer

DATAKEY, INC.
By:	/s/ Timothy L. Russell
	Name:	Timothy L. Russell
	Title:	President and Chief Executive Officer

SNOWFLAKE ACQUISITION CORP.
By:	/s/ Ken Mueller
	Name:	Ken Mueller
	Title:	Chief Financial Officer

[SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER]

ANNEX A
Conditions to the Offer

     The capitalized terms used but not defined in this Annex A and which are defined in the attached Agreement and Plan of Merger shall have the meanings ascribed to such terms in such attached agreement. Notwithstanding any other provision of the Offer, Merger Sub shall not be required to accept for payment or, subject to any applicable rules and regulations of the SEC, including Rule 14e-1(c) promulgated under the Exchange Act (relating to Merger Sub’s obligation to pay for or return tendered Shares promptly after termination or withdrawal of the offer), pay for, and may postpone the acceptance for payment of and payment for Shares tendered, and, except as set forth in the Agreement, terminate the Offer as to any Shares not then paid for if (i) the Minimum Condition shall not have been satisfied at the scheduled expiration date of the offer or (ii) immediately prior to the expiration of the Offer, any of the following conditions shall exist:

     (a) there shall have been entered, enforced, instituted, pending, threatened, or issued by any Governmental Authority, any judgment, order, injunction, ruling, proceeding, action, suit, charge or decree: (i) which could reasonably be expected to make illegal, restrain or prohibit or make materially more costly the making of the offer, the acceptance for payment of, or payment for, any Shares by Purchaser, the Merger Sub or any other affiliate of Purchaser, or the consummation of the Merger; (ii) which could reasonably be expected to prohibit or limit the ownership or operation by the Company, Purchaser or any of their subsidiaries of all or any material portion of the business or assets of the Company, Purchaser or any of their subsidiaries, or which could reasonably be expected to compel the Company, Purchaser or any of their subsidiaries to dispose of or hold separate all or any portion of the business or assets of the Company, Purchaser or any of their subsidiaries; (iii) which could reasonably be expected to impose or confirm limitations on the ability of Purchaser, the Merger Sub or any other affiliate of Purchaser to exercise full rights of ownership of any Shares, including, without limitation, the right to vote any Shares acquired by the Purchaser pursuant to the Offer or otherwise on all matters presented to the Company’s shareholders, including, without limitation, the approval and adoption of the Agreement and the Merger; (iv) which could reasonably be expected to require divestiture by Purchaser, Merger Sub or any other affiliate of Purchaser of any Shares; or (v) which otherwise could reasonably be expected to have a Company Material Adverse Effect or a Purchaser Material Adverse Effect;

     (b) there shall have been any statute, rule, regulation, judgment, order, legislation or interpretation of any nature pending, proposed, enacted, enforced, promulgated, amended or issued by any Governmental Authority or deemed by any Governmental Authority applicable to (i) Purchaser, the Company or any subsidiary or affiliate of Purchaser or the Company or (ii) any transaction contemplated by the Agreement, which is reasonably likely to result, directly or indirectly, in any of the consequences referred to in clauses (i) through (v) of paragraph (a) above;

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     (c) there shall have occurred any changes, conditions, events or developments that would have, or be reasonably likely to have, individually or in the aggregate, a Company Material Adverse Effect;

     (d) there shall have occurred (i) any general suspension of, or limitation on prices for, trading in securities on the New York Stock Exchange or NASDAQ other than a shortening of trading hours or any coordinated trading halt triggered solely as a result of a specified increase or decrease in a market index, (ii) a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (iii) any limitation (whether or not mandatory) on the extension of credit by banks or other lending institutions in the United States, (iv) the commencement of a war, armed hostilities or any other international or national calamity involving the United States or (v) in the case of any of the foregoing existing at the time of the commencement of the offer, a material acceleration or worsening thereof;

     (e) (i) it shall have been publicly disclosed or the Purchaser shall have otherwise learned that any person, other than Purchaser or Merger Sub, shall have acquired or entered into a definitive agreement or agreement in principle to acquire beneficial ownership (determined for the purposes of this paragraph as set forth in Rule 13d-3 promulgated under the Exchange Act) of 50% or more of the then outstanding Shares, or shall have been granted any option, right or warrant, conditional or otherwise, to acquire beneficial ownership 50% or more of any of the then outstanding Shares, or (ii) the Board of Directors of the Company, the Special Committee or any other committee thereof shall have (A) withdrawn, modified or changed, in a manner adverse to Purchaser or Merger Sub, the recommendation by such Board of Directors or approval by such committee of the Offer, the Merger or this Agreement, including, without limitation, the Minnesota Anti-Takeover Approval of the Special Committee, (B) approved or recommended, or proposed publicly to approve or recommend, a Company Takeover Proposal, (C) caused the Company to enter into any agreement relating to any Company Takeover Proposal, or (D) resolved to do any of the foregoing;

     (f) the representations and warranties of the Company set forth in the Agreement shall not be true and correct in all material respects (except that where any statement in a representation or warranty expressly includes a “material adverse effect”, “material” or other materiality qualifier, such representation or warranty shall not be true and correct in all respects) as of the date of the Agreement and as of such time on or after the date of the Agreement, except those representations and warranties that speak of an earlier date, which shall not be true and correct as of such earlier date (it being understood that, for purposes of determining the accuracy of such representations and warranties, any update of or modification to the Company Disclosure Schedule made or purported to have been made after the date of the Agreement shall be disregarded);

     (g) the Company shall have failed to perform in any material respect any obligation or to comply in any material respect with any agreement or covenant of the Company to be performed or complied with by it under the Agreement;

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     (h) all material Consents required from third parties (other than Governmental Authorities) in connection with the Agreement and the transactions contemplated thereby have not been obtained by the Company by or on the Decision Date and Purchaser has not waived all such unobtained material Consents;

     (i) the Agreement shall have been terminated in accordance with its terms;

     (j) Merger Sub and the Company shall have agreed that Merger Sub shall terminate the Offer or postpone the acceptance for payment of or payment for Shares thereunder; or

     (k) any one or more of the representations and warranties contained in any one or both of Sections 2.22(a), 2.22(c) or 2.30 of the Agreement shall have been breached in any respect or are inaccurate in any respect; which, in the good faith judgment of the Merger Sub in any such case, and regardless of the circumstances (including any action or inaction by Purchaser or any of its affiliates) giving rise to any such condition, makes it inadvisable to proceed with such acceptance for payment or payment; or

     (l) any non-competition or similar obligations of the Company could reasonably be expected to prohibit or restrict Purchaser or any of Purchaser’s subsidiaries from developing, manufacturing, marketing or selling any of the current products of Purchaser or its subsidiaries or any products of Purchaser or its subsidiaries currently in design or development.

     The foregoing conditions are for the benefit of Purchaser and Merger Sub and may be asserted by Purchaser or Merger Sub regardless of the circumstances giving rise to any such condition or may be waived by Purchaser or Merger Sub in whole or in part at any time and from time to time in their reasonable discretion. The failure by Purchaser or Merger Sub at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right; the waiver of any such right with respect to particular facts and other circumstances shall not be deemed a waiver with respect to any other facts and circumstances; and each such right shall be deemed an ongoing right that may be asserted at any time and from time to time.

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EX-99.D.2

STOCKHOLDERS’ AGREEMENT

     This Stockholders’ Agreement (this “Agreement”), is entered into as of September 9, 2004, and between SafeNet, Inc., a Delaware corporation (“Parent”), and Snowflake Acquisition Corp., a Minnesota corporation and wholly-owned subsidiary of Parent (“Purchaser”), on the one hand, and each of the stockholders of DataKey, Inc., a Minnesota corporation (the “Company”) set forth on Schedule 1 hereto (each a “Stockholder” and collectively, the “Stockholders”), on the other hand. Capitalized terms used herein without definition shall have the respective meanings ascribed to them in the Merger Agreement (as defined below).

R E C I T A L S

     WHEREAS, each Stockholder is, as of the date hereof, the record and beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) of (i) the number of shares of common stock, par value $0.05 per share, of the Company (together with any associated preferred stock or other rights issued pursuant to the Rights Agreement, dated as of October 26, 2001, between the Company and Wells Fargo Bank Minnesota N.A. as the same has been amended through the date hereof), (the “Common Stock”); (ii) the number of shares of convertible preferred stock, liquidation value $2.50 per share, of the Company (the “Convertible Preferred Stock”); (iii) the number of options to acquire Common Stock or Convertible Preferred Stock (the “Company Options”); and (iv) the number of warrants to acquire Common Stock or Convertible Preferred Stock (the “Company Warrants”) set forth opposite the name of such Stockholder on Schedule 1 hereto; and

     WHEREAS, Parent, Purchaser and the Company have entered into an Agreement and Plan of Merger, dated as of the date hereof (the “Merger Agreement”), which provides, among other things, for (a) Purchaser to commence a tender offer for all of the issued and outstanding shares of Common Stock and Convertible Preferred Stock (the “Offer”) and (b) the merger of Purchaser with and into the Company with the Company continuing as the surviving corporation (the “Merger”), in each case upon the terms and subject to the conditions set forth in the Merger Agreement; and

     WHEREAS, as a condition to the willingness of Parent and Purchaser to enter into the Merger Agreement and as an inducement and in consideration therefor, the Stockholders have agreed to enter into this Agreement.

     NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements set forth herein and in the Merger Agreement, and intending to be legally bound hereby, the parties hereto agree as follows:

     Section 1. Representations and Warranties of the Stockholders. Each Stockholder hereby represents and warrants to Parent, severally and not jointly, as set forth below:

     (a) Such Stockholder is the record and beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of the shares of Common Stock and/or Convertible Preferred Stock set forth opposite his or its name on Schedule 1 to this Agreement (such shares of Common Stock and/or Convertible Preferred Stock, together with any Common Stock and Convertible Preferred

Stock acquired by the Stockholder after the date of this Agreement, whether Shares acquired by way of exercise of Company Options, Company Warrants or other rights to purchase Common Stock or Convertible Preferred Stock or by way of dividend, distribution, exchange, merger, consolidation, grant of proxy or otherwise, but excluding shares owned by other Stockholders, all as may be adjusted from time to time pursuant to Section 6 hereof, the “Shares”). Schedule 1 to this Agreement lists separately all Company Options and Company Warrants issued to such Stockholder. Such Stockholder is the record and beneficial owner of the Company Options and Company Warrants set forth opposite such Stockholder’s name on Schedule 1 to this Agreement.

     (b) Such Stockholder has voting power, power of disposition, power of conversion (in respect of the Convertible Preferred Stock) and power to agree to all of the matters regarding such Stockholder set forth in this Agreement, in each case with respect to all of the Shares, with no limitations, qualifications or restrictions on such right. Such Stockholder is not the record or beneficial owner of any securities of the Company on the date hereof other than the Shares and the Company Options and Company Warrants set forth on Schedule 1.

     (c) Such Stockholder has the legal capacity to execute and deliver this Agreement and to consummate the transactions contemplated hereby regarding such Stockholder.

     (d) This Agreement has been validly executed and delivered by such Stockholder and, assuming due and valid authorization, execution and delivery thereof by Parent and Purchaser, constitutes the legal, valid and binding obligation of such Stockholder, enforceable against such Stockholder in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, and (ii) the availability of the remedy of specific performance or injunctive or other forms of equitable relief may be subject to equitable defenses and would be subject to the discretion of the court before which any proceeding therefor may be brought.

     (e) Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will result in a violation of, or constitute (with or without due notice or lapse of time or both) a default under, or conflict with, or give rise to any right of termination, cancellation or acceleration under any contract, trust, note, bond, mortgage, indenture, license, agreement, or material contractual restriction or obligation of any kind to which such Stockholder is a party or by which such Stockholder or his or its Shares are bound, which singularly or in the aggregate, would prevent or adversely affect the ability of such Stockholder to perform his or its obligations under this Agreement. The consummation of the transactions contemplated hereby will not violate, or require any consent, approval or notice (except those required under applicable securities laws) under, any provision of any judgment, order, injunction, decree, statute, law, rule or regulation applicable to such Stockholder which, singularly or in the aggregate, would prevent or adversely affect the ability of such Stockholder to perform his or its obligations under this Agreement.

     (f) In the case of any Stockholder that is a corporation, limited partnership or limited liability company, such Stockholder is an entity duly organized and validly existing under the laws of the jurisdiction in which it is incorporated or constituted, and each such Stockholder has

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all requisite power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby regarding such Stockholder, and has taken all necessary corporate action to authorize the execution, delivery and performance of this Agreement.

     (g) The Shares owned by such Stockholder are now, and at all times during the term hereof will be, held by such Stockholder or by a nominee or custodian for the benefit of such Stockholder, free and clear of all liens, claims, security interests, proxies, voting trusts, agreements, options, rights, understandings or arrangements or any other encumbrances whatsoever on title, transfer or exercise of any rights of a Stockholder in respect of such Shares (collectively, “Encumbrances”), except for any such Encumbrances arising hereunder, and the transfer of the Shares held by such Stockholders hereunder will effectively vest in Purchaser valid and marketable title to such Shares, free and clear of any Encumbrances.

     (h) Each Stockholder whose Shares are subject to community property interests under the laws of any jurisdiction has agreed to have executed and delivered to Parent such consents, waivers and approvals as are necessary for the execution of this Agreement and the approval and consummation of the transactions contemplated hereby regarding such Stockholder.

     (i) Such Stockholder understands and acknowledges that Parent and Purchaser are entering into the Merger Agreement in reliance upon such Stockholder’s execution and delivery of this Agreement.

     Section 2. Representations and Warranties of Parent and Purchaser. Each of Parent and Purchaser hereby represents and warrants to the Stockholders, jointly and severally, as follows:

     (a) Each of Parent and Purchaser is a corporation duly organized and validly existing under the laws of the State of Delaware and the State of Minnesota, respectively, has all requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby and has taken all necessary corporate action to authorize the execution, delivery and performance of this Agreement.

     (b) This Agreement has been duly authorized, executed and delivered by each of Parent and Purchaser and, assuming due and valid authorization, execution and delivery thereof by a Stockholder, constitutes the legal, valid and binding obligation of each of Parent and Purchaser, enforceable by such Stockholder against each of them in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally and (ii) the availability of the remedy of specific performance or injunctive or other forms of equitable relief may be subject to equitable defenses and would be subject to the discretion of the court before which any proceeding therefor may be brought.

     (c) Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will result in a violation of, or constitute (with or without due notice or lapse of time or both) a default under, or conflict with, or give rise to any right of termination, cancellation or acceleration under any material contract, trust, note, bond, mortgage,

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indenture, license, agreement or contractual restriction or obligation of any kind to which Parent and Purchaser is a party which, singularly or in the aggregate, would prevent or adversely affect the ability of Parent and Purchaser to perform its obligations under this Agreement. The consummation of the transactions contemplated hereby will not violate, or require any consent, approval or notice (except those required under applicable securities laws) under, any provision of any judgment, order, injunction, decree, statute, law, rule or regulation applicable to Parent and Purchaser which, singularly or in the aggregate, would prevent or materially adversely affect the ability of Parent and Purchaser to perform its obligations under this Agreement.

     Section 3. Tender of the Shares.

     (a) Each Stockholder hereby agrees that, subject to the terms and conditions of Section 8 hereof, (a) such Stockholder shall validly tender, or cause to be validly tendered, pursuant to and in accordance with the terms of the Offer, his or its Shares into the Offer as promptly as practicable, and in any event no later than the fifth business day following the commencement of the Offer pursuant to Section 1.1 of the Merger Agreement (except for those Shares issued upon the exercise of Company Options, Company Warrants or other rights to acquire shares of Common Stock or Convertible Preferred Stock after such date, which shall be validly tendered, or caused to be validly tendered, as promptly as practicable following such exercise, which exercise shall be effected by the holder within five business days following commencement of the Offer) and receipt of the applicable tender offer documentation and (b) such Stockholder shall not withdraw any Shares so tendered unless this Agreement is terminated or the Offer is terminated or has expired without Purchaser purchasing all Shares validly tendered in the Offer and not withdrawn. Notwithstanding the foregoing, each Stockholder may decline to tender, or may withdraw, any and all of such Stockholders’ Shares if, without the consent of such Stockholder, Purchaser amends the Offer to (i) reduce the Offer Price, (ii) reduce the number of Shares subject to the Offer, (iii) change the form of consideration payable in the Offer or (iv) amend or modify any term or condition of the Offer in a manner adverse to the stockholders of the Company (other than insignificant changes or amendments or other than to waive any condition other than the Minimum Condition). Each Stockholder shall give Purchaser at least two (2) business days’ prior notice of any withdrawal of its Shares pursuant to the immediately preceding proviso. Notwithstanding anything herein to the contrary, the holders of the Convertible Preferred Stock shall retain the option and right to instruct the tender agent to take all steps necessary to convert their shares into Common Stock at any time prior to the Purchase of such shares in the Offer.

     (b) Notwithstanding the foregoing, at no time and in no event shall the total number of shares restricted pursuant to Section 3(a) hereof exceed nineteen and nine-tenths percent (19.9%) of the outstanding capital stock of the Company, including but not limited to the Shares (the “Maximum Restricted Amount”). In the event that the total number of shares exceeds the Maximum Restricted Amount, Purchaser may, in its sole and absolute discretion determine which Shares shall be restricted pursuant to Section 3(a). Prior to any proposed transfer restricted by Section 3(a) hereof, each Stockholder shall provide written notice to Purchaser at least forty-eight (48) hours prior to the proposed transfer. Such notice shall include the number and class of Shares (including Company Options and Company Warrants) to be transferred, the price per share, and the proposed transferee. If the Shares so restricted have not yet exceeded the

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Maximum Restricted Amount, then Purchaser may restrict such proposed transfer as provided herein. If Shares upon which such restrictions have already been imposed equal or exceed the Maximum Restricted Amount, then Purchaser may not enforce the restrictions on transfer or voting imposed by this Agreement. Purchaser, in its reasonable discretion, shall make the determination of whether Shares subject to restriction pursuant to this Section 3 have equaled or exceeded the Maximum Restricted Amount. Regardless of whether the Maximum Restricted Amount has been reached, the notice provision of this Section 3(b) shall apply until termination of this Agreement.

     Section 4. Transfer of the Shares.

     (a) Prior to the termination of this Agreement and except as otherwise provided herein, each of the Stockholders agrees that it shall not: (i) transfer, assign, sell, gift-over, pledge, hypothecate, encumber or otherwise dispose of, or consent to any of the foregoing (“Transfer”), any or all of the Shares, Company Options, Company Warrants or other rights to acquire Common Stock or Convertible Preferred Stock or any right or interest therein; (ii) enter into any contract, option or other agreement, arrangement or understanding with respect to any Transfer; (iii) grant any proxy, power-of-attorney or other authorization or consent with respect to any of the Shares; (iv) deposit any of the Shares into a voting trust, or enter into a voting agreement or arrangement with respect to any of the Shares or (v) take any other action that would in any way restrict, limit or interfere with the performance of such Stockholder’s obligations hereunder or the transactions contemplated hereby or make any representation or warranty of such Stockholder untrue or incorrect.

     (b) Each Stockholder agrees, promptly following request of Parent, to surrender to the Company, or to the transfer agent for the Company, certificates evidencing the Shares, and shall cause the Company or the transfer agent for the Company to place the following legend on any and all certificates evidencing the Shares:

THE SHARES OF DATAKEY, INC. [COMMON STOCK][CONVERTIBLE PREFERRED STOCK] REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER PURSUANT TO THAT CERTAIN STOCKHOLDERS’ AGREEMENT, DATED AS OF SEPTEMBER 9, 2004, BY AND AMONG SAFENET, INC., SNOWFLAKE ACQUISITION CORP. AND CERTAIN STOCKHOLDERS OF DATAKEY, INC. ANY TRANSFER OF SUCH SHARES OF DATAKEY, INC. [COMMON STOCK] [CONVERTIBLE PREFERRED STOCK] IN VIOLATION OF THE TERMS AND PROVISIONS OF SUCH AGREEMENT SHALL BE NULL AND VOID AND OF NO EFFECT WHATSOEVER.

     Section 5. Voting Arrangements; Irrevocable Proxy.

     (a) Each Stockholder hereby agrees that, during the time this Agreement is in effect, at any meeting of the stockholders of the Company (a “Company Stockholders’ Meeting”), however called, and at every adjournment or postponement thereof, he, she or it shall (i) appear at the meeting or otherwise cause his or its Shares to be counted as present thereat for purposes of establishing a quorum; (ii) vote, or execute consents in respect of, his or its Shares, or cause

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his or its Shares to be voted, or consents to be executed in respect thereof, in favor of the approval and adoption of the Merger Agreement (including any revised or amended Merger Agreement that has been agreed to by the Company) and the Merger, and any action required in furtherance thereof and (iii) vote, or execute consents in respect of, his or its Shares, or cause his or its Shares to be voted, or consents to be executed in respect thereof, against (A) any agreement or transaction relating to any Acquisition Proposal (other than as proposed by Parent or Purchaser) or (B) any amendment of the Company’s Articles of Incorporation or Bylaws or other proposal, action or transaction involving the Company or any of its subsidiaries or any of its stockholders, which amendment or other proposal, action or transaction could reasonably be expected to prevent or materially impede or delay the consummation of the Offer or Merger or the other Transactions or the consummation of the transactions contemplated by this Agreement or to deprive Parent of any material portion of the benefits anticipated by Parent to be received from the consummation of the Merger or the other transactions contemplated by this Agreement or change in any manner the rights of the Common Stock or Convertible Preferred Stock (collectively, “Frustrating Transactions”) presented to the stockholders of the Company (regardless of any recommendation of the Board of Directors of the Company) or in respect of which vote or consent of the Stockholder is requested or sought, unless such transaction has been approved in advance by Parent or Purchaser. Notwithstanding the foregoing, at no time and in no event shall the Shares restricted pursuant to this Section 5 exceed 19.9% of the outstanding capital stock of the Company (the “Maximum Restricted Vote Amount”).

     (b) Subject to the provisions set forth in Section 8 hereof and as security for the Stockholders’ obligations under Section 5(a), each of the Stockholders hereby irrevocably constitutes and appoints Parent, Kevin Hicks and its or his designees as his or its attorney and proxy in accordance with the Minnesota Business Corporation Act (the “MBCA”), with full power of substitution and resubstitution, to cause the Stockholder’s shares to be counted as present at any Company Stockholders’ Meetings, to vote his or its Shares at any Company Stockholders’ Meeting, however called, and to execute consents in respect of his or its Shares as and to the extent provided in Section 5(a). SUBJECT TO THE PROVISIONS SET FORTH IN SECTION 8 HEREOF THIS PROXY AND POWER OF ATTORNEY IS IRREVOCABLE AND COUPLED WITH AN INTEREST. Each Stockholder hereby agrees not to grant any subsequent proxy or power of attorney with respect to such Stockholder’s Shares. In the event that the aforementioned attorney and proxy determines that the number of shares subject to this subparagraph exceeds the Maximum Restricted Vote Amount, then such attorney and proxy shall release the excess shares from the restrictions of this Section 5. The attorney and proxy shall determine, in his sole and absolute discretion, which shares shall be released and, upon its or his determination shall notify holders of released shares. Upon such release, such stockholders shall be entitled to vote such shares or to direct the attorney and proxy to vote such shares at their direction. Purchaser, in its reasonable discretion, shall make the determination of whether Shares subject to restriction pursuant to this Section 5 have equaled or exceeded the Maximum Restricted Vote Amount.

     (c) Each Stockholder represents that any proxies heretofore given in respect of the Shares, if any, are revocable, and have been revoked.

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     (d) Each Stockholder hereby affirms that the proxy set forth in this Section 5 is given in connection with the execution of the Merger Agreement, and that such proxy is given to secure the performance of the duties of such Stockholder under this Agreement. Such Stockholder hereby further affirms that the proxy is coupled with an interest and, except as set forth in this Section or in Section 8, is intended to be irrevocable in accordance with the provisions of Section 302A.449 of the MBCA. Each Stockholder hereby agrees that, if for any reason the proxy granted herein is not irrevocable (subject to the terms of this Agreement), then such Stockholder agrees to vote his or its Shares in accordance with Section 5(a) above as instructed by Parent in writing. The parties agree that the foregoing is a voting agreement created under Section 302A.455 of the MBCA.

     Section 6. Voting Provisions. To the extent that a stockholder has dispositive power, but not voting power, over any of its shares of Common Stock or Convertible Preferred Stock, Section 5 of this Agreement shall only apply to the shares of Common Stock or Convertible Preferred Stock held by such stockholder over which such stockholder retains voting power.

     Section 7. Certain Events. In the event of any change in the Common Stock, Convertible Preferred Stock by reason of a stock dividend, stock split, split-up, recapitalization, reorganization, business combination, consolidation, exchange of shares, or any similar transaction or other change in the capital structure of the Company affecting the Common Stock or Convertible Preferred Stock or the acquisition of additional shares of Common Stock, Convertible Preferred Stock or other securities or rights of the Company by any Stockholder, this Agreement and the obligations hereunder shall attach to any additional shares of Common Stock, Convertible Preferred Stock or other securities or rights of the Company issued to or acquired by each of the Stockholders.

     Section 8. Further Assurances. Each Stockholder shall, upon request of Parent or Purchaser, execute and deliver any additional documents and take such further actions as may reasonably be deemed by Parent or Purchaser to be necessary or desirable to carry out the provisions hereof and to vest in Parent the power to vote the Shares as contemplated by Section 5.

     Section 9. Termination. This Agreement, and all rights and obligations of the parties hereunder, shall terminate immediately upon the termination of the Merger Agreement by Parent or otherwise upon the earlier to occur of (a) termination of the Merger Agreement by the Company and (b) December 31, 2004; and provided, however, that Section 9 hereof shall survive any termination of this Agreement.

     Section 10. Expenses. All fees, costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such fees, costs and expenses.

     Section 11. Public Announcements. Each of the Stockholders agrees that it will not issue any press release or otherwise make any public statement with respect to this Agreement or the transactions contemplated hereby or by the Merger Agreement without the prior consent of Parent; provided, however, that such disclosure may be made without obtaining such prior

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consent if (i) the disclosure is required by law or is required by any regulatory authority, including but not limited to any Governmental Entity, or the Nasdaq National Market and any national securities exchange, trading market or inter-dealer quotation system on which the Shares trade and (ii) the Stockholder making such disclosure has first used all reasonable efforts to consult with Parent about the form and substance of such disclosure.

Section 12. Miscellaneous.

     (a) Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally, telecopied (which is confirmed) or sent by a nationally recognized overnight courier service, such as Federal Express (providing proof of delivery), to the parties at the following addresses (or at such other address for a party as shall be specified by like notice):

           If to any of the Stockholders, at the address set forth opposite the name of such Stockholder on Schedule 1 hereto:

With a copy (which shall not constitute notice) to:

If to Parent or Purchaser, to:

SafeNet, Inc.
4690 Millennium Drive
Belcamp, Maryland 21017
Attention: Kevin Hicks
Director of Legal Affairs
Telephone: (443) 327-1262
Facsimile: (443) 327-1223

With a copy (which shall not constitute notice) to:

Venable LLP
8010 Towers Crescent Drive, Suite 300
Vienna, VA 22182
Attention: Elizabeth R. Hughes
Telephone: (703) 760-1649
Facsimile: (703) 821-8949

     (b) Headings. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.

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     (c) Counterparts. This Agreement may be executed manually or by facsimile by the parties hereto in any number of counterparts, each of which shall be considered one and the same agreement.

     (d) Entire Agreement. This Agreement (together with the Merger Agreement and any other exhibits, annexes, schedules, documents and instruments referred to herein and therein or contemplated thereby or therein) constitutes the entire agreement among the parties with respect to the subject matter hereof and thereof and supersedes all other prior agreements and understandings, both written and oral, among the parties or any of them with respect to the subject matter hereof and thereof.

     (e) Governing Law; Venue. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to the principles of conflicts of law thereof. Each of the parties hereto (i) consents to submit itself to the personal jurisdiction of any federal court located in the State of Delaware or any Delaware state court in the event any dispute arises out of this Agreement or any of the Transactions, (ii) agrees that it shall not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court and (iii) agrees that it shall not bring any action relating to this Agreement or any of the Transactions in any court other than a federal or state court sitting in the State of Delaware.

     (f) Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties except that Parent or Purchaser may assign, in its sole discretion and without the consent of any other party, any or all of their rights, interests and obligations hereunder to each other or to one or more direct or indirect wholly owned subsidiaries of Parent (each, an “ASSIGNEE”). Any such Assignee may thereafter assign, in its sole discretion and without the consent of any other party, any or all of its rights, interests and obligations hereunder to one or more additional Assignees. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by, the parties and their respective successors and assigns, and the provisions of this Agreement are not intended to confer upon any person other than the parties hereto any rights or remedies hereunder.

     (g) Severability of Provisions. If any term or provision of this Agreement is invalid, illegal or incapable of being enforced by rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated by this Agreement is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions are fulfilled to the extent possible.

     (h) Specific Performance. The parties hereto acknowledge that money damages would be an inadequate remedy for any breach of this Agreement by any party hereto, and that

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the obligations of the parties hereto shall be enforceable by any party hereto through injunctive or other equitable relief.

     (i) Amendment. No amendment, modification or waiver in respect of this Agreement shall be effective against any party unless it shall be in writing and signed by such party.

     (j) Binding Nature. This Agreement is binding upon and is solely for the benefit of the parties hereto and their respective successors, legal representatives and assigns.

[SIGNATURE PAGE FOLLOWS]

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     IN WITNESS WHEREOF, Parent, Purchaser and the Stockholders have caused this Agreement to be duly executed and delivered as of the date first written above.

PARENT: SAFENET, INC.
By:	/s/ Ken Mueller
	Name:	Ken Mueller
	Title:	Chief Financial Officer

[SIGNATURE PAGE TO STOCKHOLDERS’ AGREEMENT]

     IN WITNESS WHEREOF, Parent, Purchaser and the Stockholders have caused this Agreement to be duly executed and delivered as of the date first written above.

PURCHASER: SNOWFLAKE ACQUISITION CORP.
By:	/s/ Ken Mueller
	Name:	Ken Mueller
	Title:	Chief Financial Officer

[SIGNATURE PAGE TO STOCKHOLDERS’ AGREEMENT]

     IN WITNESS WHEREOF, Parent, Purchaser and the Stockholders have caused this Agreement to be duly executed and delivered as of the date first written above.

STOCKHOLDER: NORWEST EQUITY PARTNERS V By: Itasca Partners I, LLP
By:	/s/ John Whaley
	Name:	John Whaley
	Title:	Partner

[SIGNATURE PAGE TO STOCKHOLDERS’ AGREEMENT]

     IN WITNESS WHEREOF, Parent, Purchaser and the Stockholders have caused this Agreement to be duly executed and delivered as of the date first written above.

STOCKHOLDER: PERKINS CAPITAL MANAGEMENT, INC.
By:	/s/ Richard C. Perkins
	Name:  Richard C. Perkins
	Title:    Vice President

[SIGNATURE PAGE TO STOCKHOLDERS’ AGREEMENT]

     IN WITNESS WHEREOF, Parent, Purchaser and the Stockholders have caused this Agreement to be duly executed and delivered as of the date first written above.

STOCKHOLDER:
 

/s/ Timothy L. Russell  

Timothy L. Russell 

[SIGNATURE PAGE TO STOCKHOLDERS’ AGREEMENT]

     IN WITNESS WHEREOF, Parent, Purchaser and the Stockholders have caused this Agreement to be duly executed and delivered as of the date first written above.

STOCKHOLDER:
 

/s/ Terrence W. Glarner  

Terrence W. Glarner 

[SIGNATURE PAGE TO STOCKHOLDERS’ AGREEMENT]

     IN WITNESS WHEREOF, Parent, Purchaser and the Stockholders have caused this Agreement to be duly executed and delivered as of the date first written above.

STOCKHOLDER:
 

/s/ Thomas R. King  

Thomas R. King 

[SIGNATURE PAGE TO STOCKHOLDERS’ AGREEMENT]

     IN WITNESS WHEREOF, Parent, Purchaser and the Stockholders have caused this Agreement to be duly executed and delivered as of the date first written above.

STOCKHOLDER:
 

/s/ Eugene W. Courtney  

Eugene W. Courtney 

[SIGNATURE PAGE TO STOCKHOLDERS’ AGREEMENT]

     IN WITNESS WHEREOF, Parent, Purchaser and the Stockholders have caused this Agreement to be duly executed and delivered as of the date first written above.

STOCKHOLDER:
 

/s/ Christopher A. Schwartzbauer  

Christopher A. Schwartzbauer 

[SIGNATURE PAGE TO STOCKHOLDERS’ AGREEMENT]

     IN WITNESS WHEREOF, Parent, Purchaser and the Stockholders have caused this Agreement to be duly executed and delivered as of the date first written above.

STOCKHOLDER:
 

/s/ David A. Feste  

David A. Feste 

[SIGNATURE PAGE TO STOCKHOLDERS’ AGREEMENT]

EX-99.D.3

STOCK OPTION AGREEMENT

     This Stock Option Agreement, is dated as of September 9, 2004, and entered into by and among SafeNet, Inc. a Delaware corporation (“Parent”), Snowflake Acquisition Corporation, a Minnesota corporation and a wholly-owned subsidiary of Parent (the “Purchaser”), and DataKey, Inc., a Minnesota corporation (the “Company”).

     WHEREAS, the Company, Parent and the Purchaser are entering into an Agreement and Plan of Merger (the “Merger Agreement”) of even date herewith providing for (a) a cash tender offer to purchase any and all outstanding shares of (i) common stock, par value $0.05 per share of the Company (the “Common Stock”), and (ii) Convertible Preferred stock, liquidation value $2.50 per share, of the Company (the “Convertible Preferred Stock” and, together with the Common Stock, the “Shares”) at a price of $0.65 per Share for the Common Stock and $2.50 per Share for the Convertible Preferred Stock, net to the seller in cash without interest thereon, upon the terms and subject to the conditions set forth in the Merger Agreement (the “Offer”); and (b) the merger (the “Merger”) of the Purchaser with and into the Company; and

     WHEREAS, as a condition to the willingness of Parent and the Purchaser to enter into the Merger Agreement and commence the Offer, Parent and Purchaser have requested, and the Company has agreed to grant the Purchaser, the option to purchase, as described herein, authorized but unissued shares of Common Stock and/or Convertible Preferred Stock.

     NOW THEREFORE, in consideration of the foregoing and the mutual covenants and agreements set forth herein, and for other good and valuable consideration the sufficiency of which is hereby acknowledged, the parties agree as follows:

     1. Grant of Option. On the terms and subject to the conditions of this Agreement, the Company hereby grants to the Purchaser an irrevocable option (the “Option”) to purchase for the Offer Price, as defined in the Merger Agreement (the “Purchase Price”), shares of Common Stock and/or Convertible Preferred Stock, in such relative amounts as shall be determined by Purchaser in its discretion, up to such number of shares which, upon exercise, would result in Purchaser owning in excess of ninety percent (90%) of the then-outstanding shares of Common Stock and Convertible Preferred Stock on as-converted, fully-diluted basis (collectively, the “Optioned Shares”); provided, that the number of shares of Convertible Preferred Stock issuable under the Option may not exceed the number of authorized shares of Convertible Preferred Stock available for issuance.

     2. Exercise of Option. Subject to the immediately succeeding sentence, the Option may be exercised by the Purchaser, in whole or in part, at any time or from time to time after Purchaser has purchased Shares pursuant to the Offer and until the earlier of (a) immediately following the Closing Date (as defined in the Merger Agreement) and (b) the termination of the Merger Agreement in accordance with its terms. The exercise of the Option for Common Stock is conditioned upon the Purchaser and the Parent owning in the aggregate, immediately following such exercise, at least ninety percent (90%) of the outstanding shares of Common Stock, and the exercise of the Option for Convertible Preferred Stock is conditioned upon the

Purchaser and Parent owning in the aggregate, immediately following such exercise, at least ninety percent (90%) of the outstanding shares of Convertible Preferred Stock. In the event the Purchaser wishes to exercise the Option, the Purchaser shall give a written notice (the “Notice”) to the Company of its intention to exercise the Option, specifying the number of Optioned Shares to be purchased. Such notice shall be delivered to the Company in accordance with the requirements of Section 7(d), and shall specify a date (which may be the date of such notice) not more than ten (10) business days from the date such Notice is given for the purchase of the Optioned Shares. The closing (the “Closing”) of the purchase of the Optioned Shares shall take place at the offices of Venable LLP, 8010 Towers Crescent Drive, Suite 300, Vienna, Virginia 22182, or at such other location as the Purchaser shall elect. If any decree, injunction, order, law or regulation shall not permit the purchase of the Optioned Shares to be consummated on the date specified in such Notice, the date for the Closing shall be as soon as practicable following the cessation of such restriction on consummation, but in any event within two (2) business days thereof.

     3. Payment and Delivery of Certificate(s). At any Closing hereunder, (a) the Purchaser shall make payment to the Company of the aggregate price for the par value (or for preferred stock the liquidation value) of the Optioned Shares so purchased in official bank check or by wire transfer to a bank designated in writing by the Company; (b) the Purchaser shall deliver to the Company a Promissory Note substantially in the form attached hereto as Exhibit A (the “Note”) for the aggregate price for the Optioned Shares so purchased less the amount paid in accordance with clause 3(a); and (c) the Company shall deliver to the Purchaser a certificate or certificates representing the number of Optioned Shares so purchased registered in the name of the Purchaser. Certificates for Optioned Shares delivered at the Closing may be endorsed with a restrictive legend that shall read substantially as follows:

“THE SECURITIES OFFERED HEREBY ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.”

     It is understood and agreed that the reference to the resale restrictions of the Securities Act of 1933, as amended (the “Act”), in the above legend shall be removed by delivery of substitute certificate(s) without such reference if Parent shall have delivered to the Company a copy of a letter from the staff of the Securities and Exchange Commission, or an opinion of counsel or other evidence reasonably satisfactory to the Company, to the effect that registration of the future resale of the Optioned Shares is not required and that such legend is not required for purposes of the Act.

     4. Representations and Warranties of the Company. The Company hereby represents and warrants (such representations and warranties being deemed repeated at and as of any Closing hereunder) to Parent and the Purchaser as follows:

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          (a) Due Incorporation. 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 enter into and perform this Agreement.

          (b) Due Authorization, etc. This Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company. This Agreement has been duly executed and delivered by a duly authorized officer of the Company and constitutes the valid and binding obligation of the Company, enforceable against the Company in accordance with its terms.

          (c) Company’s Capital Stock. The Company has taken all necessary corporate action to authorize and reserve for issuance upon exercise of the Option the Optioned Shares, and at all times from the date hereof through the date of termination of this Agreement will keep reserved for issuance upon exercise of the Option that number of shares of Common Stock that the Purchaser is then entitled to purchase pursuant to the Option. The shares of Common Stock and/or Convertible Preferred Stock to be issued upon due exercise, in whole or in part, of the Option shall, when issued, be validly issued, fully-paid and non-assessable, and shall be delivered free and clear of all claims, liens, encumbrances and security interests, including any preemptive right of any of the stockholders of the Company.

     5. Representations and Warranties of the Purchaser and Parent. Parent and the Purchaser hereby jointly and severally represent and warrant (such representations and warranties being deemed repeated at and as of any Closing hereunder) to the Company as follows:

          (a) Due Incorporation. Each of Parent and the Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and the State of Minnesota, respectively, and has the requisite corporate power and authority to enter into and perform this Agreement.

          (b) Due Authorization, etc. This Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Purchaser and Parent. This Agreement has been duly executed and delivered by a duly authorized officer of the Purchaser and of Parent, and constitutes the valid and binding obligation of the Purchaser and of Parent, enforceable against each in accordance with its terms.

          (c) Distribution. The Purchaser acknowledges and agrees that the Optioned Shares have not been registered, and that the Company is under no obligation to register, the Optioned Shares under the Act or any state securities laws. The Purchaser is acquiring the Option and will acquire the Optioned Shares to be purchased upon exercise of the Option for its own account and not with a view to the distribution thereof within the meaning of the Act. The foregoing representation and warranty shall be made by any assignee under Section 7(a) and shall be binding upon such assignee.

     6. Adjustment Upon Changes in Capitalization. In the event of any change in the shares of the Company’s capital stock by reason of any stock dividend, stock split, merger,

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recapitalization, combination, conversion, exchange of shares, issuance of shares (or agreements or commitments to issue shares) or the like, the number of Optioned Shares subject to the Option and the purchase price per Optioned Share shall be appropriately and equitably adjusted.

     7. Miscellaneous.

          (a) Assignment; Guarantee of the Purchaser’s Obligations. This Agreement shall not be assigned by the Purchaser, except to Parent or a wholly-owned subsidiary of Parent, without the prior written consent of the Company. Parent hereby unconditionally guarantees the full and punctual performance by Purchaser of all of the obligations of Purchaser or any of its assignees hereunder and under the Note. In connection with the obligations of Parent under the immediately preceding sentence, Parent hereby waives any and all rights, notices and defenses to which it otherwise would be entitled solely in its capacity as a guarantor under this Agreement or the Note.

          (b) Amendments. This Agreement may not be modified, amended, altered or supplemented except upon the execution and delivery of a written agreement executed by the parties hereto.

          (c) Survival of Representations, etc. All representations, warranties and agreements in this Agreement shall survive the Closing.

          (d) Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly received if so given) by delivery, by cable, telegram or telex, or by mail (registered or certified mail, postage prepaid, return receipt requested) to the respective parties as follows:

If to the Company:

DataKey, Inc.
407 West Travelers Trail
Minneapolis, Minnesota 55337
Attention: David A. Feste
Facsimile: (952) 890-6850

With a copy (which shall not constitute notice) to:

Fredrikson & Byron, P.A.
200 South 6^th Street, #400
Minneapolis, Minnesota 55402-1425
Attention: Tom King, Esq.
Facsimile: 612-492-7077

If to Parent or Purchaser, to:

SafeNet, Inc.

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4690 Millennium Drive
Belcamp, Maryland 21017
Attention: Kevin Hicks
Director of Legal Affairs
Telephone: (443) 327-1262
Facsimile: (443) 327-1223

With a copy (which shall not constitute notice) to:

Venable LLP
8010 Towers Crescent Drive, Suite 300
Vienna, VA 22182
Attention: Elizabeth R. Hughes
Telephone: (703) 760-1649
Facsimile: (703) 821-8949

or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt.

          (e) Governing Law. This Agreement shall be governed by and construed in accordance with the substantive law of the State of Delaware without giving effect to the principles of conflict of laws thereof. Each of the parties hereto (i) consents to submit itself to the personal jurisdiction of any federal court located in the State of Delaware or any Delaware state court in the event any dispute arises out of this Agreement or any of the transactions related hereto, (ii) agrees that it shall not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court and (iii) agrees that it shall not bring any action relating to this Agreement or any of the transactions related hereto in any court other than a federal or state court sitting in the State of Delaware.

          (f) Counterparts. This Agreement may be executed in several counterparts, each of which shall be an original, but all of which together shall constitute one and the same agreement.

          (g) Effect on Headings. The Section headings herein are for convenience only and shall not effect the construction hereof.

          (h) Entire Agreement. This Agreement constitutes the entire agreement among the parties with respect to the matters referred to herein and supersedes all prior agreements or understandings, both written or oral, among the parties, or any of them, with respect to the subject matter hereof.

          (i) Specific Performance. Purchaser, Parent and the Company each acknowledge and agree that the other would be irreparably damaged in the event any of the provisions of this Agreement were not performed by it in accordance with the specific terms or

5

were otherwise breached. The Company agrees that if for any reason the Company shall have failed to issue Optioned Shares or to perform any of its other obligations under the Agreement, then the Purchaser and Parent shall be entitled to specific performance and injunctive and other equitable relief and the Company agrees to waive any requirement for the securing or posting of a bond in connection with the obtaining of any such injunctive or other equitable relief. This provision is without prejudice to any other rights the Purchaser and Parent may have against the Company for any failure to perform its obligations under this Agreement.

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          IN WITNESS WHEREOF, Parent, the Purchaser and the Company have caused this Purchaser Option Agreement to be duly executed on the day and year first above written.

SAFENET, INC.
By:	/s/ Ken Mueller
	Name:	Ken Mueller
	Title:	Chief Financial Officer

SNOWFLAKE ACQUISITION CORP.
By:	/s/ Ken Mueller
	Name:	Ken Mueller
	Title:	Chief Financial Officer

DATAKEY, INC.
By:	/s/ Timothy L. Russell
	Name:	Timothy L. Russell
	Title:	President and Chief Executive Officer

[SIGNATURE PAGE TO STOCK OPTION AGREEMENT]

EXHIBIT A
NON-TRANSFERABLE PROMISSORY NOTE

     FOR VALUE RECEIVED, Snowflake Acquisition Corporation, a Minnesota corporation (“the Maker”), hereby promises to pay to DataKey, Inc., a Minnesota corporation, the principal amount of [   ] ($                   )], with no interest, on [six months after the date of exercise] by wire transfer of immediately available funds to an account designated by the payee. The amount due hereunder shall be payable in money of the United States of America lawful at such time for the payment of public and private debts.

     The Maker hereby waives presentment, diligence, protest and demand, notice of protest, demand, dishonor and nonpayment of this Note, and all other notices of any kind in connection with the delivery, acceptance, performance, default or enforcement of this Note.

     This Note shall be governed by and construed in accordance with the laws of the State of Delaware without giving effect to the principles of conflicts of laws thereof.

     IN WITNESS WHEREOF, the Maker has caused this Note to be executed as of the     day of                    , 2004.

SNOWFLAKE ACQUISITION CORPORATION
 

By:  

Name:

Title:

EX-99.D.4

DATAKEY, INC.
MUTUAL NONDISCLOSURE AGREEMENT

EFFECTIVE DATE: August 3, 2004

PARTIES:

           SafeNet, Inc (the “Company”)
           4690 Millennium Drive
           Belcamp, MD 21017

           Datakey, Inc. (“Datakey”)
           407 West Travelers Trail
           Burnsville, MN 55337-2558

RECITALS:

     A. The Company and Datakey are commencing discussions regarding a potential corporate transaction (the “Transaction”).

     B. In order to facilitate the negotiations regarding such Transaction, each party may disclose to the other party certain information, including confidential information, owned by the disclosing party which the disclosing party is willing to disclose to the other party in reliance on the execution of this Agreement.

AGREEMENT:

     In consideration of the covenants contained herein and the disclosure of the confidential information, the parties agree as follows:

     1. Definition of Confidential Information. For purposes of this Agreement, the term “Confidential Information” includes, but is not limited to, any information of the disclosing party, whether disclosed orally, in writing, on computer disc or tape or any other method, including any formula, pattern, compilation, program, device, method, technique or process that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts by the disclosing party that are reasonable under the circumstances to maintain its secrecy. The receiving party acknowledges that such Confidential Information specifically includes, but is not limited to, trade secrets and information contained in or relating to computer software programs, technical information, know-how, other confidential processes, information which relates to the disclosing party’s future products, marketing plans or proposals, financial and sales information, subcontractor and employee lists, existing, inactive or potential customer lists, and all other customer information. All information which the disclosing party identifies in a conspicuous place as being “confidential” or “trade secret” shall be presumed to be Confidential Information, unless such information meets one or more of the tests set forth below in subparagraphs a.-d.

The term Confidential Information as used in this Agreement shall not include any information:

     a. which was in the public domain at the time of disclosure by the disclosing party to the receiving party;

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     b. which is published or otherwise comes into the public domain after its disclosure to the receiving party through no violation of this Agreement by the receiving party;

     c. which is disclosed to the receiving party by a third party not under an obligation of confidence to the disclosing party;

     d. which was already in the possession of the receiving party without restriction and prior to disclosure hereunder;

     e. which, as evidenced by contemporaneous documentation, is developed by the receiving party independently of Confidential Information disclosed by disclosing party and without breach of this Agreement; or

     f. which is required to be disclosed by any law or governmental regulation or produced under order of a court of competent jurisdiction; provided, however, that the receiving party provides the disclosing party written notice of such request or order as soon as reasonably practicable so that the disclosing party may attempt to limit such disclosure.

     This Agreement shall govern disclosure of Confidential information for a period of one year from the date hereof, and the obligations of confidentiality and non-use set forth below shall survive for a period of THREE (3) years from the effective date of this Agreement.

     2. Warranties. The receiving party agrees and warrants to the disclosing party as follows with respect to all Confidential Information received or learned by it, regardless whether or not a contract is ultimately executed between the parties:

     a. The receiving party will treat as confidential all Confidential Information made available to the receiving party or to any employee, agent or representative of the receiving party.

     b. The receiving party shall protect the Confidential Information from unauthorized use or disclosure by using the same degree of care as the receiving party uses to protect its own confidential information of a like nature, but no less than a reasonable degree of care.

     c. The receiving party will maintain the Confidential Information in a secure place and limit access to the Confidential Information to those employees, agents and representatives of the receiving party to whom it is necessary to disclose the Confidential Information in furtherance of the receiving party’s investigations and negotiations regarding the potential acquisition of the disclosing party and from whom the receiving party has received a written agreement in which the employee promises to maintain the confidentiality of and not to wrongfully use the Confidential Information.

     d. The receiving party and its employees, agents and representatives will not copy, disclose to unauthorized parties or use any Confidential Information for any purpose other than to further the receiving party’s investigations regarding the potential business relationship with the disclosing party.

     e. If negotiations are terminated and no contract is executed, the receiving party will promptly deliver to the disclosing party all copies of documents containing Confidential

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          Information disclosed to the receiving party, whether or not such documents were prepared by the disclosing party.

     f. The receiving party assumes all liability for any breach of the terms of this Agreement by it or any of its employees, agents or representatives.

     g. The receiving party will use Confidential Information solely for the purpose of discussing and evaluating the Transaction, and for no other purpose.

     3. No License. Nothing contained in this Agreement shall be construed as creating any licenses to use the Confidential Information or other intellectual property of the disclosing party except as expressly stated in this Agreement.

     4. Each party understands that each party is a publicly-held company and that all or part of each party’s Confidential Information may constitute material non-public information under the United States securities laws, and each party acknowledges that it is aware that the United States securities laws prohibit any person who is in the possession of material non-public information about a company from purchasing or selling that company’s securities in reliance upon such information or from communicating such information to any other person or entity under circumstances in which it is reasonably foreseeable that such person or entity is likely to purchase or sell such securities in reliance upon such information. Each party represents that, as of the date of this agreement, neither party nor its controlled affiliates, nor anyone acting on its or their behalf in connection with the Transaction, has acquired record or beneficial ownership of any voting securities of the other party or of any securities convertible or exchangeable into or exercisable for voting securities of the other party, and each Party agrees that neither it, nor any of its directors, officers or employees who have been provided with the Confidential Information will perform any purchase, sale or other transfer of any of the securities of the other party in violation of United States securities laws.

     5. Nonsolicitation of Employees. The receiving party agrees for a period of one year (a) from end of discussions between the parties if no written agreement is ultimately entered into between the parties, or (b) from the expiration or termination of the written agreement ultimately entered into between the parties, to refrain from directly soliciting or seeking to hire any employee of the disclosing party about whom receiving party received Confidential Information hereunder. Nothing herein shall prohibit either party from hiring or seeking to hire any employee of disclosing party who independently responds to a general advertisement placed by the receiving party; provided that such receiving party does not have any contact or conversations with such employee relating to such advertisement or employment prior to his or her response to such advertisement.

     6. Remedy Upon Violation. The receiving party agrees and understands that any unauthorized use or disclosure of the Confidential Information or improper solicitation of the disclosing party’s employees shall cause substantial harm to the disclosing party and that the disclosing party would not have an adequate remedy at law for such breach of the terms of this Agreement by the receiving party or any of the disclosing party’s employees, agents or representatives. The receiving party agrees that the disclosing party shall be entitled to an injunction with the posting of the minimum allowable bond, enjoining or restraining the receiving party from any violation or violations of this Agreement and the receiving party hereby consents to the issuance of such injunction. The disclosing party’s rights to such equitable remedies shall be in addition to all other rights or remedies which the disclosing party may have under this Agreement or under applicable law.

     7. Binding Effect. The failure of the parties to enter into a contractual arrangement or the return by the receiving party of documents containing Confidential Information in accordance with Paragraph 2(e) shall not relieve the receiving party of its obligations under this Agreement. This

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Agreement shall be binding upon and inure to the benefit of the parties, their respective successors and assigns. Neither this Agreement nor the disclosure or receipt of Confidential Information shall constitute or imply a commitment by either party with respect to the Transaction, present or future business agreements, or any other subject matter not expressly set forth herein.

     8. Modification and Waiver. No purported amendment, modification or waiver of any provision of this Agreement shall be binding unless set forth in a written document signed by all parties (in the case of amendments and modifications) or by the party to be charged thereby (in the case of waivers). Any waiver shall be limited to the circumstance or event specifically referenced in the written waiver document and shall be deemed to be a waiver or any other term of this Agreement or of the same circumstance or event upon any recurrence thereof.

     9. Governing Law. This Agreement shall be construed and enforced in accordance with the laws of the State of Delaware, without application of its conflict of laws provisions.

     The parties have caused this Agreement to be executed in a manner appropriate to each to be effective as of the date set forth on the first page of this Agreement.

DATAKEY, INC.		SafeNet, Inc.
(“Datakey”)		(the “Company”)
By	/s/ David A. Feste	By	/s/ Carole D. Argo
Name	David A. Feste	Name	Carole D. Argo
Its	Chief Financial Officer	Its	President

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