Datakey Announces Second Quarter Results

Second Quarter Revenues Increase 77 Percent Over Last Year

MINNEAPOLIS, July 23, 2002 – Datakey Inc. Nasdaq: DKEY, a leading developer of smart card technology for securing government and business, today reported revenue of $1,870,000 for the second quarter ended June 29, 2002, an increase of 77 percent over revenue of $1,055,000 for the second quarter of last year. The net loss from continuing operations for the second quarter was $528,000, or 5 cents per share, compared to a net loss from continuing operations of $934,000, or 9 cents per share, in last year’s second quarter. The company also reported a profit of $362,000, or 4 cents per share, from discontinued operations in the current quarter.

Revenue for the six-month period ended June 29, 2002 was $4,362,000, an increase of 85 percent over revenue of $2,352,000 in the six-month period ended June 30, 2001. Net loss from continuing operations in the six-month period ended June 29, 2002 was $1,184,000, or 12 cents per share, compared to $1,931,000, or 20 cents per share, in the six-month period ended June 30, 2001. Income from discontinued operations was $351,000, or 3 cents per share, in the six-month period. There was no income or loss from discontinued operations in the first six months of 2001.

“In addition to continuing our revenue growth in a weak information security marketplace, Datakey achieved a significant additional milestone in the second quarter,” said Carl Boecher, president & chief executive officer. “We announced and released our first software-only products designed to provide additional customer value and support for our Datakey family of smart token products. Initial customer deployments were accomplished in the second quarter. Importantly, the new products are expected to improve our overall gross margin in future quarters as sales grow. While we will continue to aggressively manage our expenses in the upcoming quarters, we intend to continue to develop new products that allow us to remain the technology leader in our marketplace,” Boecher said.

“New evaluation and pilot sites, our best indicators of future business opportunities, continue their strong growth. In the second quarter, we added 107 evaluation sites and 18 pilot programs and increased production conversions to 69 with the addition of 9 new sites. We also closed the books on the divestiture of Electronic Products (EP) with the completion of the contract that we retained after the sale. Profit of $362,000 from the sale of EP allowed us to increase our cash balance to $3.7M which should allow us to fund development of our technology and expand Datakey’s share of the information security market for at least the next 12 months,” said Boecher.

Second Quarter Highlights

We announced new client software supporting the U.S Department of Defense Common Access Card
We announced CIP Desktop and Datakey Card Management System (CMS) products
We delivered production Datakey CMS, CIP and USB products to a major US Bank
We delivered an initial production order to supply production Datakey CIP products to a foreign government for a business registration application
We delivered initial production orders of Datakey products to two new Canadian government agencies and delivered add-on quantities to an existing Canadian government production customer
We delivered initial orders converting four European pilots to production status
We delivered an initial production order to a foreign Identrus bank
We delivered follow-on production units to a U.S. Government military agency

Outlook
“While many suppliers to the information security marketplace have expressed a continuing concern about economic recovery timing, our pipeline analysis has made us cautiously optimistic about future prospects for Datakey’s business. As the result of our analysis, we are affirming our guidance of $10 to $12 million for 2002 revenue and an expectation of profitability in the second half of this year,” Boecher said.



About Datakey Inc.
Datakey Inc. (http://www.datakey.com) focuses on delivering reliable smart card-based solutions for securing enterprise-wide personal identification. Datakey smart card technology is trusted to:

Safeguard a user’s digital identity.
Authenticate and control user access to enterprise networks, applications and resources. Protect the integrity and privacy of data shared over corporate networks and the Internet. Customers and partners alike rely on Datakey technology in a full range of enterprise applications, including password management, host authentication, Windows log-on, VPN access, web authorization, desktop security, corporate badge and building access, biometric integration, public key encryption, digital certificates and digital signatures.

Forward-Looking Statements
Statements in this press release to the effect that Datakey’s new software products are expected to increase gross margins, that Datakey will continue to develop new products, that our $3.7M cash balance is expected to allow us to continue to develop our technology and expand Datakey’s share of the information security market for at least the next 12 months, that Datakey will achieve revenue ranging between $10 million and $12 million and will achieve profitability in the second half of 2002, are forward-looking statements subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. In order for Datakey to generate revenues of $10 million or more in 2002, it must continue to offer information security products as good or better from a technological prospective than those of competitors and at competitive prices. Revenues will also be impacted if customer delivery schedules are extended or order activity from new customers does not meet projections.
The ability of Datakey to improve margins, attain profitability in the second half of 2002 and generate revenues of at least $10 million will depend on increasing sales of standard products, generating significant revenues from the sale of new software products and, to a lesser extent, getting better pricing from suppliers on the products resold by Datakey.

The expectation that the current cash balance will be sufficient to continue to develop its technology and expand Datakey’s share of the information security market for at least the next 12 months depends, to a great extent, on the Company’s success in significantly increasing revenues, controlling expenses and improving its gross margins. If the Company is unsuccessful in this regard the cash balance may not be sufficient to fund its operations for the next 12 months.

Shares of Datakey’s common stock are traded on Nasdaq under the symbol DKEY. Web address is http://www.datakey.com.




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