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EXHIBIT 10.7

                                WAVE SYSTEM CORP.
                       1996 PERFORMANCE STOCK OPTION PLAN

I.   PURPOSE AND SCOPE OF PLAN

     Under this 1996 performance Stock Option Plan (the "Plan") of Wave Systems
Corp. (the "Company"), options shall be granted to employees of the Company or
any of its subsidiaries, consultants and others to purchase shares of the
Company's capital stock. The Plan is designed to enable the Company to attract
and retain the best available personnel, to provide additional incentive to
employees, consultants and others and to promote the success of the Company.
These objectives will be promoted through the granting to employees equity
instruments including (i) incentive stock options ("Incentive Options") which
are intended to qualify under Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code") and (ii) options which are not intended to so qualify
("NQSOs"). Vesting of the performance options granted under the Plan shall be in
accordance with the criteria established by the Compensation Committee (the
"Committee"), or the Board of Directors of the Company (the "Board of
Directors") if there is no Committee, as provided in Article V, Section 1 of
this Agreement.

The options offered pursuant to this Plan are a matter of separate inducement
and are not in lieu of any salary or other compensation for services.

II.  AMOUNT OF STOCK SUBJECT TO THE PLAN

     The total number of shares of common stock of the Company reserved and
available for distribution pursuant to options granted hereunder shall not
exceed, in the aggregate, 800,000 shares of the authorized Class A common stock,
$0.01 par value, per share, of the Company (the "Shares"), subject to adjustment
described below.

     Shares, which may be acquired under the Plan, may be either authorized but
unissued Shares or Shares of issued stock held in the Company's treasury, or
both, at the discretion of the Company. Whenever any outstanding option or
portion thereof expires, is canceled, if forfeited or is otherwise terminated
for any reason without having been exercised or payment having been made in
respect of the entire option, the Shares allocable to the expired, canceled,
forfeited or otherwise terminated portion of the option may again be the subject
of options granted hereunder.

         In the event of any stock dividend, stock split, combination of
exchange of Shares, recapitalization of other change in the capital structure of
the Company, corporate separation of division (including, but not limited to,
split-up, spin-off or distribution to Company shareholders other than a normal
cash dividend), sale by the Company of all or a substantial portion 9 of its
assets, rights offering, merger, consolidation, reorganization or partial or
complete liquidation, or any other corporate transaction or event having an
effect similar to any of the foregoing, the aggregate number of Shares reserved
for issuance under the Plan, the number and option price of

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Shares subject to outstanding options and any other characteristics or terms of
the options as the Committee shall deem necessary or appropriate to reflect
equitably the effects of such changes to the holders of options, shall be
appropriately substituted for new shares or adjusted, as determined by the
Committee in its discretion. Notwithstanding the foregoing, (i) each such
adjustment with respect to an Incentive Option shall comply with the rules of
Section 424(a) of the Code, and (ii) in no event shall any adjustment be made
which would render any Incentive Option granted hereunder other than an
incentive stock option for purposed of Section 422 of the Code without the
consent of the grantee.

III. ADMINISTRATION

     The Committee, or the Board of Directors if there is no Committee, will
have sole and exclusive authority to administer the Plan. The Committee shall
consist of no fewer than two (2) members of the Board of Directors, each of whom
shall be a "Non-Employee Director" within the meaning of Rule 16b-3 or any
successor rule or regulation ("Rule 16b-3") promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Committee shall
administer the Plan so as to comply at all times with Rule 16b-3. A majority of
the members of the Committee shall constitute a quorum, and the act of a
majority of the members of the Committee shall be the act of the Committee. Any
member of the Committee may be removed at any time, either with or without
cause, by resolution adopted by a majority of the Board of Directors, and any
vacancy on the Committee may at any time be filled by resolution adopted by a
majority of the Board of Directors.

     Any or all powers and functions of the Committee may at any time, and from
time to time be exercised by the Board of Directors, subject to compliance with
Rule 16b-3.

     Subject to the express provisions of the Plan, the Board of Directors or
the Committee, as the case may be, shall have authority, in its discretion, to
(i) select employees of the Company, consultants, and others as recipients of
options; (ii) determine the number and type of options to be granted; (iii)
determine the terms and conditions, not inconsistent with the terms hereof, of
any options granted; (iv) adopt, alter and repeal such administrative rules,
guidelines and practices governing the Plan as it shall, from time to time, deem
advisable; (v) interpret the terms and provisions of the Plan and any option
granted and any agreements relating thereto; and (vi) otherwise supervise the
administration of the Plan.

     The determination of the Board of Directors or the Committee, as the case
may be, on matters referred to in this Article III shall be conclusive.

     The Board of Directors or the Committee, as the case may be, may employ
such legal counsel, consultants and agents as it may deem desirable for the
administration of the Plan and may rely upon any opinion received from any such
counsel or consultant and any computation received from any such consultant or
agent. Expenses incurred by the Board of Directors or the Committee in the
engagement of such counsel, consultant or agent shall be paid by the Company. No
member or former member of the Committee or of the Board of Directors shall be
liable for any action or determination made in good faith with respect to the
Plan or any option granted hereunder.

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     The Company shall indemnify each member of the Committee for all costs and
expenses and, to the extent permitted by applicable law, any liability incurred
in connection with defending against, responding to, negotiation for the
settlement of, or otherwise dealing with any claim, cause of action or dispute
of any kind arising in connection with any actions in administering the Plan or
in authorizing or denying authorization to any transaction hereunder.

IV.  ELIGIBILITY

     Options may be granted only to employees of the Company and its
subsidiaries, consultants and others who are not members of the Committee;
provided that no person shall be eligible for any award id the granting of such
aware to such person would prevent the satisfaction by the Plan of the general
exemptive conditions of Rule 16b-3. The Plan shall not confer upon any employee,
consultant or other any right with respect to continuation of employment or
services by the Company, nor shall it interfere in any way with his or her right
or the Company's right to terminate his or her employment or services at any
time, with or without cause.

V.   STOCK OPTIONS

     1. GENERAL. Any options granted under the Plan shall be in such form as the
        Committee may from time to time approve and the provisions of the option
        grants need not be the same with respect to each optionee. Options
        granted under the Plan may be either Incentive Options or NQSOs. The
        Committee may grant to any optionee Incentive Options, NQSOs or both
        types of options.

        Options granted under the Plan shall be subject to the following terms
        and conditions and shall contain such additional terms and conditions
        not consistent with the terms of the Plan, as the Committee deems
        appropriate. Each option grant shall be evidenced by an agreement
        executed on behalf of the Company by an officer designated by the
        Committee and accepted by the optionee. Such agreement shall describe
        the options and state that such options are subject to all the terms and
        provisions of the Plan and shall contain such other terms and
        provisions, consistent with the Plan, as the Committee may approve.

     2. EXERCISE PRICE AND PAYMENT. The price per Share under any option granted
        hereunder shall be such amount as the Board of Directors or the
        Committee, as the case may be, shall determine, provided, however, that
        such price shall not be less than one hundred percent (100%) of the fair
        market value of the Shares subject to such option, as determined below,
        at the date the option is granted (110% in the case of an Incentive
        Option granted to any person who, at the time the option is granted,
        owns stock of the Company or any subsidiary or parent of the Company
        possessing more than ten percent (10%) of the total combined voting
        power of all classes of stock of the Company or of any subsidiary or
        parent of the Company (a "10% Shareholder")).

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        If the Shares are listed on a national securities exchange in the United
        States on the date any option is granted, the fair market value per
        Share shall be deemed to be the average of the high and low sale price
        on such national securities exchange in the United States on the date
        upon which the option is granted, bit if the Shares are not traded on
        such date, or such national securities exchange is not open for business
        on such date, the fair market value per Share shall be the average of
        the high and low sale price determined as of the closet preceding date
        on which such exchange shall have been open for business and the Shares
        were traded. If the Shares are listed on more than one national
        securities exchange in the United States on the date any such option is
        granted, the Board of Directors or the Committee, as the case may be,
        shall determine which national securities exchange shall be used for the
        purpose of determining the fair market value per Share. If the Shares
        are not listed on a national securities exchange, but are reported on
        the National Association of Securities Dealers, Inc. Automated Quotation
        System ("Nasdaq"), the fair market value per Share shall be deemed to be
        the average of the high bid and low sale prices on the date upon which
        the option is granted as reported by Nasdaq or, if the Shares are not
        traded on such date or Nasdaq is not open for business on such date, the
        fair market value per Share shall be the average of the high and low
        sale priced determined as of the closest preceding date on which Nasdaq
        shall have reported the Shares.

        For purposes of this Plan, the determination by the Board of Directors
        or the Committee, as the case may be, of the fair market value of a
        Share shall be conclusive.

     3. TERM OF OPTIONS AND LIMITATION ON THE RIGHT OF EXERCISE. The term of
        each option will be for such period as the Board of Directors or the
        Committee, as the case may be, shall determine, provided that, except as
        otherwise provided herein, in no event may any option granted hereunder
        be exercisable more than ten (10) years from the date of grant of such
        option (five years in the case of an Incentive Option granted to a 10%
        Shareholder). Each option shall become exercisable in such installments
        and at such times as may be designated by the Board of Directors or the
        Committee, as the case may be, and set forth in the agreement related to
        the grant of options. To the extent not exercised, installments shall
        accumulate and be exercisable, in whole or in part, at any time after
        becoming exercisable, but not later than the date the option expires.

        The Board of Directors or the Committee, as the case may be, shall have
        the right to limit, restrict or prohibit, in whole or in part, from time
        to time, conditionally or unconditionally, rights to exercise any option
        granted hereunder.

        To the extent that an option is not exercised within the period of
        exercisability specified therein, it shall expire as to the then
        unexercised part.

     4. EXERCISE OF OPTIONS. Options granted under the Plan shall be exercised
        by the optionee as to all or part of the Shares covered thereby giving
        written notice of the

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        exercise thereof to the Secretary of the Company at the principal
        business office of the Company, specifying the number of Shares to be
        purchased, accompanied by payment therefore made to the Company for the
        full purchase price of such Shares. The date of actual receipt by the
        Company o9f such notice shall be deemed the date of exercise of the
        option with respect to the Shares being purchased.

        Upon the exercise of an option granted hereunder, the Company shall
        cause the purchased Shares to be issued only when it shall have received
        the full purchase price for the Shares in cash; provided, however, that
        in lieu of cash, the holder of an option may, to the extend permitted by
        applicable law, exerciser an option in while or in part by delivering to
        the Company unrestricted Shares (in proper form for transfer and
        accompanied by all requisite stock transfer tax stamps or cash in lieu
        thereof) owned by such holder having a fair market value equal to the
        cash exercise price applicable to that portion of the option being
        exercised. The fair market value of the Shares so delivered shall be
        determined as of the date immediately preceding the date on which the
        option is exercised, or as may be required in order to comply with or
        conform to the requirements of any applicable laws or regulations. For
        purposes of this paragraph, the provisions of Section 2 hereof relating
        to the fair market value of Shares shall apply in all respects.

        Notwithstanding the foregoing, the Company, in its sole discretion, may
        establish cashless exercise procedures whereby an option holder, subject
        to the requirements of Rule 16b-3, Regulation T, federal income tax
        laws, and other federal, state and local tax and securities laws, can
        exercise an option or a portion thereof without making a direct payment
        of the option price to the Company, including a program whereby option
        shares would be sold on behalf of and at the request of an option holder
        by a designated broker and the exercise price would be satisfied out of
        the sale proceeds and delivered to the Company. If the Company so elects
        to establish a cashless exercise program, the Company shall determine,
        in its sole discretion and form time to time, such administrative
        procedures and policies as it deems appropriate and such procedures and
        policies shall be binding on any option holder wishing to utilize the
        cashless exercise program.

     5. NONTRANSFERABILITY OF OPTIONS. An option granted hereunder shall not be
        transferable, whether by operation of law or otherwise, other than by
        will or the laws of descent and distribution, and any option granted
        hereunder shall be exercisable, during the lifetime of the holder, only
        by such holder.

        The option of any person to acquire hares and all his rights thereunder
        shall terminate immediately if the holder: (a) attempts to or does sell,
        assign, transfer, pledge, hypothecate or otherwise dispose of the option
        or any rights thereunder to any other person except as permitted above;
        or (b) becomes insolvent or bankrupt or becomes involved in any manner
        so that the option or any rights thereunder becomes subject to being
        taken from him to satisfy his debt or liabilities.

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     6. TERMINATION OF EMPLOYMENT. Upon termination of employment of any option
        holder, any option previously granted to such option holder, unless
        otherwise specified by the Board of Directors or the Committee, as the
        case may be, shall, to the extent not theretofore exercised, terminate
        and become null and void three (3) months from the date of termination
        of employment, provided that:

          (a)  if the option holder shall die while in the employ of the Company
               or any subsidiary of the Company, and at a time when such
               employee, consultant or other was entitled to exercise an option
               as herein provided, his estate or the legatees or distributes of
               his estate or of the option, as the case may be, of such option
               holder, may, within one (1) year following the date of death, but
               not beyond that time and in no event later than the expiration
               date of the option, exercise such option, to the extent not
               theretofore exercised, in respect of any or all of such number of
               Shares which the option holder was entitled to purchase; and

          (b)  if the employment of any option holder to whom such option shall
               have been granted shall terminate by reason of the option
               holder's retirement on or after he reaches the age of 60 years in
               such manner as would entitle him to receive full Social Security
               benefits if he were then 65 years of age, or disability (as
               described in Section 22(e)(3) of the Code), and while such
               employee, consultant or other is entitled to exercise such option
               as herein provided, such option holder shall have the right to
               purchase under the option the number of Shares, if any, which he
               was entitled to purchase at the time of such termination, at any
               time up to and including three (3) months after the date of such
               termination of employment, but not beyond that time and in no
               event shall an option be exercised later than the expiration date
               of the option.

        In no event shall any person be entitled to exercise any option after
        the expiration of the period of exercisability of such option as
        specified therein,.

        Except as otherwise determined by the Board of Directors or the
        Committee, as the case may be, and other than as set forth above, if an
        option holder voluntarily terminates his or her employment, or is
        discharged, an option granted hereunder shall be canceled and the option
        holder shall have no further rights to exercise any such option and all
        of the option holder's rights there under shall terminate as of the
        effective date of such termination of employment.

        If an option granted hereunder shall be exercised by the legal
        representative of a deceased option holder or former option holder or by
        a person who acquired an option granted hereunder by bequest or
        inheritance or by reason of the death of an option holder or former
        option holder, written notice of such exercise shall be

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        accompanied by a certified copy of letters testamentary or equivalent
        proof of the right of such legal representative or other person to
        exercise such option.

        For the purposes of the Plan, an employment relationship shall be deemed
        to exist between an individual and a corporation if, at the time of the
        determination the individual was an "employee" of such corporation for
        purposed of Section 422(a) of the Code.

        A termination of employment shall not be deemed to occur by reason of
        (i) the transfer of an employee from employment by the Company to
        employment by a subsidiary of the Company or (ii) the transfer of an
        employee from employment by a subsidiary of the Company to employment by
        the Company or by another subsidiary of the Company.

     7. MAXIMUM ALLOTMENT OF INCENTIVE OPTIONS. If the aggregate fair market
        value of Shares with respect to which Incentive Options are exercisable
        for the first time by an employee, consultant or other during any
        calendar year (under all stock option plans of the Company and any
        parent or any subsidiary of the Company) exceeds $100,000, any options
        which otherwise qualify as Incentive Options, to the extent of the
        excess, will be treated as NQSOs.

VI.  CHANGE OF CONTROL

     Notwithstanding anything to the contrary contained herein, upon a Change
of Control (as defined below) of the Company, all options shall immediately vest
and become exercisable in full during the remaining term thereof, and shall
remain so, whether or not the option holder to whom such options have been
granted remains an employee of the Company or its subsidiaries.

     A change of Control shall be deemed to have taken place upon the occurrence
of any of the following events:

        (i)    any person (which shall mean and include an individual,
               corporation, partnership, group, association or other "person",
               as such term is used in Sections 13 and 14 of the Exchange Act)
               is, becomes, or has the right to become the beneficial owner,
               directly or indirectly, of securities of the Company representing
               30% or more of the Shares then outstanding, whether or not such
               Person continues to be the beneficial owner of securities
               representing 30% or more of such outstanding shares; or

        (ii)   as the result of, or in connection with, any tender or exchange
               offer, merger or other business combination, sales of assets or
               contested election, any announcement of an intention to make any
               of the foregoing transactions, or any combination of the
               foregoing transactions (a "Transaction"), those persons who were
               directors of the Company before the Transaction and were
               otherwise unaffiliated with any other party to the Transaction
               shall cease to constitute a majority of the Board of Directions

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               of the Company or any successor to the Company (a "Change in the
               Board"); or

        (iii)  the stockholders of the Company approve any merger,
               consolidation, reorganization, liquidation, dissolution, or sale
               of all or substantially all of the Company's assets in which
               neither the Company nor a successor resulting from a change in
               domicile or form of organization will survive as an independent,
               publicly owned corporation.

         Notwithstanding anything herein to the contrary, no Change of Control
(only with respect to the particular option holder or award grantee referred to
therein in the case of (i)(A) and (ii) below) shall be deemed to have occurred
by virtue of any event which results in any of the following:

        (i)    the acquisition, directly or indirectly, of 30% or more of the
               total outstanding shares by (A) the option holder or a person
               including the option holder, (B) the Company, (C) a subsidiary of
               the Company, or (D) any employee benefit plan of the Company or
               of a subsidiary, or any entity holding securities of the Company
               recognized, appointed, or established by the Company or by a
               subsidiary for or pursuant to the terms of such plan; or

        (ii)   a Change in the Board resulting from any Transaction in which the
               option holder or a Person including the option holder
               participates directly or indirectly with any party to the
               Transaction other than the Company.

VII. PURCHASE FOR INVESTMENT

     Except as hereafter provided, the Company may require the recipient of
Shares pursuant to an option granted hereunder, upon receipt thereof, to execute
and deliver to the Company a written statement, in form satisfactory to the
Company, in which such holder represents and warrants that such holder is
purchasing or acquiring the Shares acquired thereunder for such holder's own
account, for investment only and not with a view to the resale or distribution
thereof, and agrees that any subsequent offer for sale or sale or distribution
of any of such Shares shall be made only pursuant to either (a) a Registration
Statement on an appropriate form under the Securities Act of 1933, as amended
(the "Act"), which Registration Statement has become effective and is current
with regard to the Shares being offered or sold, or (b) a specific exemption
from the registration requirements of the Act, but in claiming such exemption
the holder shall, prior to any offer for sale or sale of such Shares, obtain a
prior favorable written opinion, in form and substance satisfactory to the
Company, from counsel f\for or approved by the Company, as to the applicability
of such exemption thereto. The foregoing restriction shall not apply to (i)
issuances by the Company so long as the Shares being issued are registered under
the Act and a prospectus in respect thereof is current or (ii) reofferings of
Shares by affiliates of the Company (as defined in Rule 405 or any successor
rule or regulation promulgated under the Act) if the Shares being reoffered are
registered under the Act and a prospectus in respect thereof is current.

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VIII.ISSUANCE OF CERTIFICATES: LEGENDS: PAYMENT OF EXPENSES

     The Company may endorse such legend or legends upon the certificates for
Shares issued pursuant to a grant hereunder and may issue such "stop transfer"
instructions to its transfer agent in respect of such Shares, as in its
discretion, determines to be necessary or appropriate to (i) prevent a violation
of, or to perfect an exemption from, the registration requirements of the Act,
(ii) implement the provisions of the Plan and any agreement between the Company
and the optionee with respect to such Shares, or (iii) permit the Company to
determine the occurrence of a disqualifying disposition, as described in Section
421(b) of the Code, of Shares transferred upon exercise of an Incentive Option
granted under the Plan.

     The Company shall pay all issue or transfer taxes with respect to the
issuance or transfer of Shares upon exercise of an option, as well as all fees
and expenses necessarily incurred by the Company in connection with such
issuance or transfer, except fees and expenses which may be necessitated by the
filing or amending of a Registration Statement under the Act, which fees and
expenses shall be borne by the recipient of the Shares unless such Registration
Statements has been filed by the Company for its own corporate purposes (and the
Company so states) in which event the recipient of the Shares shall bear only
such fees and expenses as are attributable solely to the inclusion of the Shares
he or she receives in the Registration Statement, provided that the Company
shall have no obligation to include any Shares in any Registration Statement.

     All Shares issued as provided herein shall be fully paid and non-assessable
to the extent permitted by law.

IX.  WITHOLDING TAXES

     The Company may require an employee, consultant or other exercising an NQSO
or disposing of Shares acquired pursuant to the exercise of an Incentive Option
in a disqualifying disposition (within the meaning of Section 421(b) of the
Code) to reimburse the Company for any taxes required by any government to be
withheld or otherwise deducted and paid by the Company in respect of the
issuance or disposition of Shares. In lieu thereof, the Company shall have the
right to withhold the amount of such taxes from any other sums due or to become
due from the Company to the employee, consultant or other upon such terms and
conditions as the Board of Directions or the Committee, as the case may be,
shall prescribe. Notwithstanding the foregoing, the Committee may, by the
adoption of rules or otherwise, modify the provisions of this Article IX or
impose such other restrictions or limitations as may be necessary to ensure that
the withholding transactions described above will be exempt transactions under
Section 16(b) of the Exchange Act.

         If an optionee makes a disposition, within the meaning of Section
424(c) of the Code and regulations promulgated thereunder, of any Share or
Shares issued to such optionee pursuant to the exercise of an Incentive Option
within the two-year period commencing on the day after the date of the grant or
within the one-year period commencing on the day after the date of transfer of
such Share or Shares to the optionee pursuant to such exercise, the optionee
shall, within ten (10) days of such disposition, notify the Company thereof, by
delivery of written notice to the Company at its principal executive office.

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X.   LISTING OF SHARES AND RELATED MATTERS

     If at any time the Board of Directors or the Committee, as the case may be,
shall determine in its discretion that the listing, registration or
qualification of the Shares covered by the Plan upon any national securities
exchange or under any state or federal law of the consent or approval of any
governmental regulatory body, is necessary or desirable as a condition of, or in
connection with, the sales or purchase of Shares under the Plan, no hares shall
be issued unless and until such listing, registration, qualification, consent or
approval shall have been effected or obtained, or otherwise provided for, free
of any conditions not acceptable to the Board of Directions or the Committee, as
the case may be.

XI.  AMENDMENT OF THE PLAN

     The Board of Directors or the Committee, as the case may be, may from time
to time, amend the Plan, provided that no amendment shall be made, without the
approval of the stockholders of the Company, that will (i) increase the total
number of Shares which may be issued under the Plan (other than an increase
resulting from an adjustment provided for in Article II), (ii) modify the
provisions of the Plan relating to eligibility, (iii) materially increase the
benefits accruing to participants under the Plan, or (iv) extend the maximum
period of the Plan. The Board of Directors or the Committee, as the case may be,
shall be authorized to amend the Plan and the awards granted hereunder to permit
the Incentive Options granted hereunder to qualify as incentive stock options
within the meaning of Section 422 of the Code. The rights and obligations under
any option or award granted before amendment of the Plan or any unexercised
portion of such option shall not be adversely affected by amendment of the Plan
or the option without the consent of the holder of the option.

XII. TERMINATION OR SUSPENSION OF THE PLAN

     The Board of Directors or the Committee, as the case be, may at any time
suspend or terminate the Plan. The Plan, unless sooner terminated by action of
the Board of Directors of the Committee, as the case may be, shall terminate at
the close of business on the tenth anniversary of the grant of an option. An
option may be granted while the Plan is suspended or after it is terminated.
Rights and obligations under any option granted while the Plan is in effect
shall not be altered or impaired by suspension or termination of the Plan,
except upon the consent of the person to whom the option was granted. The power
of the Board of Directors or the Committee, as the case may be, to construe and
administer any options granted prior to the termination or suspension of the
Plan under Article III nevertheless shall continue after such termination or
during such suspension.

XIII.GOVERNING LAW

     The Plan, such options as may be granted thereunder and all related matters
shall be governed by, and construed and enforced in accordance with the laws of
the State of Delaware.

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XIV. PARTIAL INVALIDITY

     The invalidity or illegality of any provision herein shall not be deemed to
affect the validity of any other provision.

XV.  EFFECTIVE DATE

     The Plan shall become effective upon the adoption by the Board of
Directors, subject only to the approval by the affirmative vote of the holders
of a majority of the securities of the Company present or represented, and
entitled to vote at a meeting of stockholders duly held. Grants made prior to
such stockholder approval shall be contingent on such approval.