Datakey Announces Third Quarter Results

MINNEAPOLIS, Oct. 22, 2002 – Datakey Inc. (Nasdaq: DKEY; www.datakey.com), a trusted developer of smart card solutions for securing e-business, today reported revenue of $1,388,000 for the third quarter ended Sept. 28, 2002, compared to revenue of $2,714,000 for the third quarter of last year. The net loss from continuing operations for the third quarter was $723,000, or 7 cents per share, compared to a net loss from continuing operations of $163,000, or 2 cents per share, in last year’s third quarter. Third quarter results are in line with a forecast issued by Datakey on Oct. 9.

Revenue for the nine-month period ended Sept. 28, 2002 was $5,750,000, an increase of 14 percent over revenue of $5,066,000 in the nine-month period ended Sept. 29, 2001. Net loss from continuing operations in the six-month period ended Sept. 28, 2002 was $1,907,000, or 19 cents per share, compared to $2,093,000, or 22 cents per share, in the nine-month period ended Sept. 29, 2001.

“We are obviously disappointed in third quarter results,” said Carl Boecher, president and chief executive officer. “Our revenue this quarter was adversely affected by stretch-outs in deliveries caused by the slowdown in Information Technology spending. This was in contrast to last year’s same quarter results that were favorably affected by a very large award that was rapidly deployed over the third quarter and fourth quarters of 2001.

“Many of our production customers in all sectors are responding to budgetary constraints by extending implementation timetables for our products. We do not expect a recovery in Information Technology spending until sometime in 2003,” Boecher said.

“We continue to remain optimistic about our future. Datakey’s new pilots and production conversions, the programs that fuel our growth, are at record high levels demonstrating the market acceptance of our solutions. Information security remains at the top of planned IT spending, and we continue to develop and sell security solutions needed to meet market needs. We have a conservative business structure including tight expense budgets, no long-term debt and more than $3.2 million in cash on our balance sheet that is expected to enable us to weather this slowdown in IT spending for at least the next 12 months,” Boecher said.

Third Quarter Highlights

We announced a competitive award for middleware supporting the U.S. Department of Defense Common Access Card.
We announced a follow-on production award from a U.S. government customer for an ID badge and physical access control application.
We announced a follow-on production award from a U.S. government customer for a laptop security application.
We received initial orders for 11 new production programs for customers including one new U.S. government agency, 7 non-U.S. government agencies, two banks, and a foreign corporation.
We initiated 20 new pilot programs that included 14 government and 2 financial services customers.

Outlook
“Given the current IT business slowdown and our reduced expectations for a near-term recovery, we expect to attain revenue in the range of $7 to $8 million for 2002, and will not post a profit in the second half of this year,” Boecher said.

About Datakey Inc.
Datakey Inc. focuses on delivering smart card-based solutions that assure identity and protect the integrity and privacy of data shared over public and private networks. Datakey cryptographic smart cards, client software, desktop applications and card management products enable organizations to reliably identify users and open doors in both the physical and online worlds.

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 related to anticipated financial results for the year 2002 are forward-looking statements subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. The revenue projection of $7 to $8 million for the year 2002 is dependent primarily on customer delivery schedules not being extended farther than they have been extended to date and order activity from new customers not falling below current levels.

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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