WAVE SYSTEMS CORP, S-3/A, 1997-03-07

WAVE SYSTEMS CORP
S-3/A, 1997-03-07
COMPUTER PERIPHERAL EQUIPMENT, NEC

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As filed with the Securities and Exchange Commission on March 7, 1997

Registration No. 333-20017

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1

FORM S-3

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933
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WAVE SYSTEMS CORP.
(Exact name of registrant as specified in its charter)

DELAWARE 13-3477246
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

480 PLEASANT STREET
LEE, MASSACHUSETTS 01238
(413) 243-1600

(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

STEVEN SPRAGUE
PRESIDENT AND CHIEF OPERATING OFFICER
WAVE SYSTEMS CORP.

480 PLEASANT STREET
LEE, MASSACHUSETTS 01238

(212) 755-3282
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)

Copy to:
JEFFREY N. OSTRAGER, ESQ.
CURTIS, MALLET-PREVOST, COLT & MOSLE
101 PARK AVENUE
NEW YORK, NEW YORK 10178-0061
(212) 696-6000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: AT SUCH
TIME OR TIMES AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE AS THE SELLING
HOLDERS MAY DETERMINE.

If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /

If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. /X/

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ________

If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / / ________

If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.

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PROSPECTUS

3,115,577 SHARES

WAVE SYSTEMS CORP.

CLASS A COMMON STOCK

This Prospectus relates to 3,115,577 shares of the Class A Common
Stock, par value $.01 per share (the "Class A Common Stock") of Wave Systems
Corp. (the "Company" or "Wave") to be offered and sold from time to time by
certain stockholders of the Company (the "Selling Security Holders"). The
Company will not receive any proceeds from the sale of the shares offered
hereby. The Company's Class A Common Stock trades on the Nasdaq National Market
tier of The Nasdaq Stock Market under the Symbol: "WAVX." The last reported
sales price of the Company's Class A Common Stock on the Nasdaq National Market
on March 6, 1997 was $2.56 per share.

The shares of Class A Common Stock offered hereby by the Selling
Security Holders consist of (i) up to 3,000,000 shares issuable upon conversion
of 150,000 shares of the Company's Series C Convertible Preferred Stock, par
value $.01 per share (the "Series C Preferred Stock") and as dividends on the
Series C Preferred Stock, (ii) 37,500 shares issuable upon the exercise of
warrants issued in connection with the placement of the Series C Preferred Stock
(the "Placement Warrants"), and (iii) an aggregate of 78,077 shares held by five
stockholders who acquired such shares in private transactions with the Company.
The Series C Preferred Stock was sold on December 27, 1996 for an aggregate
purchase price of $3,000,000 in a transaction exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act").
The Registration Statement of which this Prospectus is a part has been filed
with the Securities and Exchange Commission (the "Commission") pursuant to a
Registration Rights Agreement, dated as of December 27, 1996 (the "Registration
Agreement") between the Company and the purchaser of the Series C Preferred
Stock.

The Series C Preferred Stock is convertible into shares of Class A
Common Stock upon the earlier of (i) March 12, 1997 and (ii) the later of (a)
February 10, 1997 and (b) the effective date of the Registration Statement of
which this Prospectus is a part. The conversion price for the Series C Preferred
Stock is the lower of (i) $2.31 per share and (ii) 80% of the average closing
bid price on the Nasdaq National Market of the Class A Common Stock for the five
(5) trading days immediately preceding the date of conversion subject to
adjustment under certain circumstances. Holders of the Series C Preferred Stock
are entitled to receive quarterly dividends at a rate of 6% per annum, payable
in cash or, subject to certain conditions, shares of Class A Common Stock.
Pursuant to the terms of the Registration Agreement, the Registration Statement
of which this Prospectus is a part registers 3,000,000 shares of Class A Common
Stock with respect to shares issuable upon conversion of the Series C Preferred
Stock and as dividends on the Series C Preferred Stock. The number of shares of
Class A Common Stock issuable in relation to the Series C Preferred Stock will
depend on the conversion price which, in turn, will depend on the average
closing bid price of the Class A Common Stock for the five (5) trading days
prior to the date of conversion, as well as the number of shares issuable as
dividends on the Series C Preferred Stock. Pursuant to the terms of the Series C
Preferred Stock, the minimum number of shares issuable upon conversion (without
taking into account shares issuable as dividends) would be 1,298,701 shares,
assuming a conversion price of $2.31 per share. The actual number of shares
issuable upon conversion of the Series C Preferred Stock and available for
resale under this Prospectus could be materially greater based upon the market
price of the Class A Common Stock at the time or times of conversion.
<PAGE> 3

The Placement Warrants have an exercise price of $2.54 per share, and
expire on December 27, 1999. The shares issuable upon exercise of the Placement
Warrants are included in this Prospectus pursuant to the terms of the
Registration Agreement.

The shares of Class A Common Stock offered hereby may be offered for
resale by the Selling Security Holders (or their donees) from time to time in
transactions for their own account (which may include block transactions) on any
national securities exchange or quotation service on which the Class A Common
Stock may be listed at the time of sale, in the over-the-counter market, in
negotiated transactions, through the writing of options on the shares, or a
combination of such methods of sale, at fixed prices (which may be changed), at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. The Selling Security Holders
may effect such transactions by selling the shares of Class A Common Stock to or
through broker-dealers, and such broker-dealers may receive compensation in the
form of discounts, concessions or commissions from the Selling Security Holders
and/or the purchasers of shares for whom such broker-dealers may act as agent or
to whom they sell as principal, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions). See "Plan of
Distribution."

The Company has two classes of outstanding common stock. Class A Common
Stock, which is offered hereby, has one vote per share. Class B Common Stock
also has one vote per share, except that Class B Common Stock will have five
votes per share in cases where one or more directors are nominated for election
by persons other than the Company's Board of Directors and where there is a vote
on any merger, consolidation or other similar transaction which is not
recommended by the Company's Board of Directors. In addition, the Class B Common
Stock will have five votes per share on all matters submitted to a vote of the
stockholders in the event that any person or group of persons acquires
beneficial ownership of 20% or more of the outstanding voting securities of the
Company. Both classes vote together as a single class on all matters, except
where class voting is required by the Delaware General Corporation Law.

THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.

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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

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The date of this Prospectus is March 7, 1997.

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AVAILABLE INFORMATION

The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy and information statements and other
information with the Commission. Such reports, proxy and information statements
and other information may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Commission's Regional Offices
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and at
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials also can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission also maintains a site on the World Wide Web (the "Web")
that contains reports, proxy and information statements and other information
regarding registrants (including Wave) that file electronically with the
Commission. The address of this site is http://www.sec.gov.

The Company has filed with the Commission a Registration Statement on
Form S-3 (herein, together with all amendments and exhibits thereto, called the
"Registration Statement") under the Securities Act with respect to the
securities offered by this Prospectus. This Prospectus does not contain all of
the information set forth or incorporated by reference in the Registration
Statement and the exhibits and schedules relating thereto, certain portions of
which have been omitted as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the
securities offered by this Prospectus, reference is made to the Registration
Statement and the exhibits filed or incorporated as a part thereof, which are on
file at the offices of the Commission and may be obtained upon payment of the
fee prescribed by the Commission, or may be examined without charge at the
offices of the Commission. Statements contained in this Prospectus as to the
contents of any documents referred to are not necessarily complete, and, in each
such instance, are qualified in all respects by reference to the applicable
documents filed with the Commission.

EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THIS REGISTRATION STATEMENT
CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE U.S. SECURITIES
LITIGATION REFORM ACT OF 1995. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS
AND UNCERTAINTIES THAT MAY CAUSE THE COMPANY'S ACTUAL RESULTS OR OUTCOMES TO BE
MATERIALLY DIFFERENT FROM THOSE ANTICIPATED AND DISCUSSED HEREIN. FURTHER, THE
COMPANY OPERATES IN AN INDUSTRY SECTOR WHERE SECURITIES VALUES MAY BE VOLATILE
AND MAY BE INFLUENCED BY REGULATORY AND OTHER FACTORS BEYOND THE COMPANY'S
CONTROL. IMPORTANT FACTORS THAT THE COMPANY BELIEVES MIGHT CAUSE SUCH
DIFFERENCES ARE DISCUSSED IN THE CAUTIONARY STATEMENTS ACCOMPANYING THE
FORWARD-LOOKING STATEMENTS AND IN THE RISK FACTORS CONTAINED IN THIS PROSPECTUS
AND IN THE RISK FACTORS DETAILED IN THE COMPANY'S OTHER FILINGS WITH THE
COMMISSION DURING THE PAST 12 MONTHS. IN ASSESSING FORWARD-LOOKING STATEMENTS
CONTAINED HEREIN, READERS ARE URGED TO READ CAREFULLY ALL RISK FACTORS AND
CAUTIONARY STATEMENTS CONTAINED IN THIS PROSPECTUS AND IN THOSE OTHER FILINGS
WITH THE COMMISSION.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents filed by the Company with the Commission (File
No. 0-24752) pursuant to the Exchange Act are incorporated herein by reference:

1. The Company's Proxy Statement for its 1996 Annual Meeting of
Stockholders, dated May 23, 1996.

2. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.

3. The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1996, June 30, 1996 and September 30, 1996.

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4. The Company's Current Reports on Form 8-K filed on June 6, 1996 and
January 8, 1997.

5. The description of the Class A Common Stock contained in the
Company's Registration Statement on Form 8-A.

In addition, all reports and other documents subsequently filed by the
Company pursuant to Sections 13(a), 13(c), 14 or 15 of the Exchange Act after
the date of this Prospectus and prior to the termination of the offering of
securities hereunder shall be deemed to be incorporated by reference in this
Prospectus from the date of filing of such documents. Any statement contained in
a document incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed document that is also or is deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus. The Company
will provide without charge to each person, including any beneficial owner, to
whom this Prospectus is delivered, upon the written or oral request of such
person, a copy of any and all of the documents that are incorporated herein by
reference (other than exhibits to such documents, unless such exhibits are
specifically incorporated by reference into such documents). Requests for such
documents should be directed to James Stokes Hatch, Wave Systems Corp., 480
Pleasant Street, Lee, Massachusetts 01238, telephone number: (413)243-1600.

NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN
THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING
SECURITY HOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE ANY
SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE IMPLY THAT THERE HAS BEEN NO CHANGE
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.

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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and the financial information and statements incorporated by
reference in this Prospectus. Prospective investors should carefully consider
the factors set forth under the caption "Risk Factors." Capitalized terms not
defined in this Summary have the meanings given them elsewhere in this
Prospectus.

THE COMPANY

Wave Systems Corp. ("Wave" or the "Company") is in transition from a
company focused principally on research and development of new technology to a
company focused on the commercialization of its technology through licensing and
product sales. Since its inception in February of 1988, the Company has devoted
substantially all of its efforts and resources to research, feasibility studies,
design, development, and market testing of a system which meters the usage of
electronic content (the "Wave System"). Electronic content refers to any data,
graphic, software, video or audio sequence that can be digitally transmitted.
Concurrent with its research and development activities, the Company has devoted
increased resources to market research, market development and other related
activities.

The Company believes that the market for electronic content is
unnecessarily burdened by inflexible pricing, insecure delivery systems, and
limited information on content usage. For electronic content delivered by
subscription, the customer is generally required to pay up front for access to
all of the content, although actual usage may be for only a small portion of the
content. Distribution systems currently in use which permit consumers to
purchase electronic content on a pay-per-use basis are inefficient, not secure,
and costly. In the case of "on-line" delivery systems, the customer's price for
electronic content generally reflects the operating costs of the on-line
distribution system and also includes on-line "connect time." Existing
distribution systems provide limited data pertaining to usage patterns.

The Company believes that the Wave System can fundamentally change how
electronic content is consumed by providing more efficient and flexible pricing,
greater protection against unauthorized usage, and secure, low-cost, and
accurate data on the usage of the electronic content. The currently operational
Wave System enables the merchandising of electronic content at the point of
purchase, increasing the probability that consumers will sample and consume the
electronic content that they want. The Wave System accurately and securely
records information pertaining to the usage of the electronic content. This
facilitates the payment of royalties to content owners and the customized
distribution of content to customers. The Company is currently attempting to
incorporate persistent encryption technology for executable electronic content
into the Wave System. This would permit consumers to rent or rent-to-own
executable electronic content through the Wave System. There can be no assurance
that persistent software encryption technology will be successfully incorporated
into the Wave System.

The Wave System consists of many uniquely identified distributed
processors (the "WaveMeter"). These devices decrypt content on demand from end
users. The WaveMeter is a proprietary application-specific integrated circuit,
mounted on a printed circuit board, or used as an add-in device in a stand-alone
PC. The WaveMeter allows transactions to occur without the expense of a
real-time network connection for every transaction. The WaveMeter securely
stores electronic funds and information about the usage of electronic content
(who, what, when, where, how much) to be securely transmitted to a central
transaction processing center ("WaveNet"). WaveNet manages encryption and
decryption keys, processes credit and usage charges, automatically obtains
credit authorization, calculates royalty distributions, and can provide user and
usage data to electronic content owners. The Wave System is compatible with
existing electronic content delivery systems such as CD-ROM and the Internet.

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The Company has made the Wave System compatible with the distribution
of electronic content on the Internet. In 1996 the Company developed a
production software version of the WaveMeter which offers a subset of the
features of the hardware version of the WaveMeter and has been implemented as
part of the Company's Internet commerce server (the "WaveMeter server"). The
WaveMeter server supports a publishing service called WINPublish and a
purchasing function called WINPurchase. Through WINPublish, an electronic
content owner can sell encrypted content from its site on the Web to purchasers
using the WINPurchase function.

The Company's strategy is to achieve broad market acceptance of the
Wave System as a standard platform for commerce in electronic content. To
achieve this goal the Company pursues strategic relationships with hardware
manufacturers and companies involved in electronic content commerce, and
promotes the use of the Wave System by electronic content owners, particularly
among developers and distributors of entertainment and educational software. The
compatibility with the Web provides the foundation for the broad acceptance of
the Wave System. The Company views the acceptance by developers, distributors
and consumers of entertainment and educational software as an important factor
in the development of a broad installed base of WaveMeters. The Company further
believes that once there is a broad installed base of WaveMeters, electronic
content owners from other market segments are likely to be attracted to the Wave
System.

The Company was incorporated in Delaware under the name Indata Corp. on
August 12, 1988. The Company changed its name to Cryptologics International,
Inc. on December 4, 1989. The Company further changed its name to Wave Systems
Corp. on January 22, 1993. The Company's principal executive offices are located
at 480 Pleasant Street, Lee, Massachusetts 01238 and the telephone number of the
Company is (413)243-1600.

The Company is a development stage company and has realized minimal
operating revenues since its inception. At September 30, 1996, the Company had
an accumulated deficit of approximately $28.8 million. There can be no assurance
that the Company will be successful in achieving commercial acceptance of the
Wave System.

RECENT DEVELOPMENTS

On December 30, 1996 Wave Interactive Network, Inc., a Delaware
corporation ("WIN"), a former subsidiary of Wave which was spun out of Wave in
November 1995, was merged with and into Wave. Pursuant to the Plan and Agreement
of Merger between Wave and WIN, dated as of October 18, 1996 (the "Merger
Agreement"), the Company issued to the shareholders of WIN, other than the
Company (the "WIN Shareholders"), a total of 375,000 unregistered shares of the
Company's Class A Common Stock based upon a conversion ratio of 37.88 shares of
Wave Stock for each share of common stock, par value $.01, of WIN held by the
WIN Shareholders. Under the Merger Agreement, the Company also agreed to issue
to the WIN Shareholders 325,000 shares of unregistered Class A Common Stock
contingent upon the achievement of a specified operating milestone prior to
December 30, 1999. On October 18, 1996, as part of the merger the Company
assumed a debt obligation of WIN owed to a third party by issuing a fixed-rate
convertible note in the principal amount of $455,910.96 due on April 18, 1998
(the "Note"). The Note is convertible after April 1, 1997 at the rate of 80% of
the fair market value of the Class A Common Stock, as defined in the Note, and
the conversion of the Note is subject to a certain minimum number of Class A
Common Stock. Pursuant to the merger, the holders also received a warrant to
purchase at an exercise price of $1.25 per share, a quantity of Class A Common
Stock calculated by dividing $170,000 by the product of 80% and the fair market
value of the Class A Common Stock, as defined in the Note. This warrant may be
exercised upon the earlier of the conversion of the Note or April 18, 1998. The
Company has accounted for this merger under the purchase method of accounting,
and has valued the cost to the Company of the merger of WIN with and into the
Company at approximately one million dollars.

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RISK FACTORS

An investment in the Class A Common Stock involves the following risks,
which, together with other matters set forth in this Prospectus, should be
carefully considered by investors prior to any purchase of the Class A Common
Stock.

MINIMAL REVENUES; GOING CONCERN REPORTS

The Company has only recognized minimal revenues to date, has incurred
significant losses and has substantial negative cash flow since its inception.
At September 30, 1996, the Company had an accumulated deficit of $28,843,993.
The Company's independent auditors have included an explanatory paragraph in
their report on the Company's consolidated financial statements as of December
31, 1994 and 1995, and for each of the years in the three year period ended
December 31, 1995, and for the period from February 12, 1988 (inception) to
December 31, 1995 which paragraph expresses substantial doubt about the
Company's ability to continue as a going concern.

DEVELOPMENT STAGE COMPANY; NEED FOR ACCEPTANCE OF THE COMPANY'S TECHNOLOGY

The Company is a development stage company and is subject to all of the
risks inherent in the establishment of a new business enterprise. To address
these risks, the Company must, among other things, establish technical
feasibility and complete development of its technology, respond to competitive
developments, continue to attract, retain and motivate qualified personnel, and
successfully market its technology.

The Company's licensed technology is incorporated into the WaveMeter
which has the capability to retrieve encrypted electronic data and record each
usage. The Company is in the early stages of product introduction. Transaction
processing of all transactions recorded by the WaveMeter will be conducted by
WaveNet. There can be no assurance that WaveNet will be able to successfully
process all of its transactions.

The Company will depend upon a number of strategic partners to adapt
their technology to the Wave System and market the Wave System to consumers of
electronic content. The Company must therefore be successful in achieving
acceptance of its technology by its strategic partners. Even if the Company's
technology is accepted by its strategic partners, the ultimate success of the
Wave System will depend upon its acceptance by consumers of electronic content.
There can be no assurance that the Wave System will be accepted by consumers or
that, if accepted, it will be accepted at a sufficient level.

There are a number of commercial and technological objectives that the
Company must meet in order for the Company's systems to achieve commercial
feasibility. These include, without limitation, formalizing strategic
relationships with hardware producers to include the WaveMeter in their product
lines, to build a sufficient base of WaveMeters to achieve average revenue per
home sufficient to maintain operations and to attract content owners to the Wave
System. The Company is currently attempting to incorporate persistent encryption
technology for executable electronic content into the Wave System. This would
permit consumers to rent or rent- to-own executable electronic content through
the Wave System. There can be no assurance that the Company will be successful
in achieving any or all of these objectives.

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING

The Company anticipates that its existing capital resources will be
adequate to satisfy its capital requirements through the second quarter. The
Company's long-term capital requirements beyond the second quarter will depend
on many factors, including, but not limited to, the rate at which the Company's
strategic partners incorporate the Wave System into their products, the market
acceptance of such products, the levels of promotion and advertising required to
launch such products and attain a competitive position in the marketplace, the
extent to which the Company invests in technology, and the response of
competitors to the products

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based on the Company's technology. In order to continue operations, the Company
will need to raise additional funds through public or private financings. The
Company has no current commitment to obtain additional funds and is unable to
state the amount or potential source of such additional funds. If additional
funds are raised through the issuance of equity securities, the
percentage ownership of then current stockholders of the Company will be reduced
and such equity securities may have rights, preferences or privileges senior to
those of the holders of the Company's Class A Common Stock. No assurance can be
given that additional financing will be available or that, if available, it will
be available on terms favorable to the Company or its stockholders. If adequate
funds are not available to satisfy either short- or long-term capital
requirements, the Company may be required to curtail its operations
significantly or to obtain funds through arrangements with strategic partners or
others that may require the Company to relinquish material rights to certain of
its technologies or potential markets.

RISK OF LOSING NASDAQ NATIONAL MARKET LISTING

On November 26, 1996, the Company received a notice from Nasdaq that
the Company no longer met the requirements for continued listing on the Nasdaq
National Market and that as a result the Company's eligibility to be listed on
the Nasdaq National Market is under review. Such notice was precipitated by the
disclosure in the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996 that the Company had net tangible assets of $3,616,300. To be
listed on the Nasdaq National Market, the Company is required, among other
things, to maintain net tangible assets at or above $4,000,000. The Company was
required to submit to Nasdaq a definitive plan to meet all Nasdaq National
Market listing requirements. The Company submitted a plan which included the
Company's intention to raise funds through the sale of the Series C Preferred
Stock. The Company informed Nasdaq that it had successfully raised approximately
$2,700,000 net of expenses through the sale of the Series C Preferred Stock on
December 27, 1996. The Company is currently waiting for further instructions
from Nasdaq.

The Company has continued to incur losses, however, and there can be no
assurance that the Company will continue to meet the net tangible asset, capital
and surplus, or other listing requirements of the Nasdaq National Market in the
future. Should the Company fail to meet such listing standards, it may be
delisted from the Nasdaq National Market. This would likely have a material and
adverse effect on the market price of the Company's Class A Common Stock and on
the Company's ability to raise additional capital.

RAPID TECHNOLOGICAL CHANGE; NEW PRODUCT INTRODUCTIONS

The market for the Company's technology is characterized by rapidly
changing technology and frequent new product introductions. Even if the
Company's technology gains initial market acceptance, the Company's success will
depend, among other things, upon its ability to enhance its product offerings
and to develop and introduce new products and services that keep pace with
technological developments, respond to evolving customer requirements and
achieve market acceptance. There can be no assurance that the Company will be
able to identify, develop, manufacture, market or support new products or deploy
new services successfully, that such new products or services will gain market
acceptance, or that the Company will be able to respond effectively to
technological changes or product announcements by competitors. Any failure by
the Company to anticipate or respond adequately to technological developments
and customer requirements or any significant delays in product development or
introductions could result in a loss of market share or revenues.

DEPENDENCE ON CD-ROM, INTERNET AND BROADBAND MARKETS

Although the Company believes that its system is adaptable to all
significant present modes for the delivery of electronic content, the Company
believes that its technology is particularly well-suited for the CD-ROM,
Internet and broadband markets and that growth in the CD-ROM, Internet and
broadband markets will facilitate and enhance the acceptance of the Company's
technology. There can be no assurance that the CD-ROM, Internet and broadband

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markets will continue to grow or that the CD-ROM, Internet and broadband
technologies will not be replaced by other information and software distribution
and access technologies.

COMPETITION

The Company operates in a highly competitive and fragmented environment
that is characterized by rapidly evolving technology. Many of the Company's
competitors and potential competitors have substantially greater financial and
technical resources than the Company. Also, many current and potential
competitors have greater name recognition and more extensive customer bases that
could be leveraged, thereby gaining market share or product acceptance to the
Company's detriment. The Wave System competes with conventional information
delivery systems, such as on-line services, subscription services on CD-ROM, and
services on the Internet. However, the Company believes that its metering
capability is competitive with other electronic content delivery systems in a
number of applications due to its superior protection against unauthorized
usage, accurate and detailed information on content usage, and transparent
operation. Further, provided that the Company is successful in incorporating the
rental and rent-to-own functionality into the Wave System, the Company believes
that it will be competitive with existing distribution systems, including
traditional retail outlets for entertainment and educational software, due to
its ability to offer these innovative merchandising mechanisms.

The Company is aware of other metering systems which compete directly
with Wave, and other current and evolving technologies which provide some of the
functionality of the Wave System. There are other companies that have developed
or are in the process of developing technologies that are, or in the future may
be, the basis for competitive products in the field of electronic content
distribution. Some of those technologies may have an entirely different approach
or means of accomplishing the desired effects of the products being developed by
the Company. There can be no assurance that either existing or new competitors
will not develop products that are superior to or that otherwise achieve greater
market acceptance than the Company's products.

The Wave System is subject to competition from producers of
hardware-based controllers such as dongles and software unlocking systems. The
Company will compete with well-established producers of dongle-based software
unlocking systems such as Rainbow Technologies, Inc. The Company also competes
with developers of software unlocking systems such as Portland Software. The
Company believes that the Wave System is superior to existing hardware-based and
software unlocking systems in several ways. These systems control the use of
electronic content but are very limited in their ability to measure and record
usage information. The Company believes that the Wave System offers superior
protection from unauthorized usage, low operating costs (because it does not
require constant communication with and authorization from a centralized
processor), and fast operation which is convenient and essentially transparent
to the end user. Both hardware controllers and software unlocking systems offer
only part of the functionality of the Wave System. Distinct from the existing
software unlocking systems, WaveNet provides centralized back-office support to
owners of electronic content.

Many large information industry players are forming alliances and
attempting to capitalize on the information delivery options offered by the
Internet. In electronic content delivery via the Internet, the Wave System
competes with electronic commerce payment technologies developed and offered by
IBM infoMarket(R) Service, Broadvision Inc., Connect, Inc., CyberCash, Inc.,
DigiCash and Open Market, Inc. However, the Company believes that many of the
electronic commerce payment technologies may be used as acceptable currency
through the Wave System and may be complementary to, rather than competitive
with, the Wave System. The Company is also aware of other companies, such as
TestDrive Corporation, Release Software Corporation and IBM Cryptolope(R), that
provide electronic content encryption functionality for transmission of
electronic content over the Internet. The Company believes that the Wave System
is superior to currently available electronic content encryption technologies
due to the high level of security and usage reporting capabilities of the
WaveMeter.

The Company believes that the interoperability of the Wave System with
currently available and developing distribution media makes the Wave System
attractive to both distributors

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and consumers of electronic content. A consumer with an installed WaveMeter will
be able to purchase Wave-enabled content from sources on CD-ROM and/or the
Internet, as well as from sources distributing electronic content on other
developing media such as broadband. In addition, with the incorporation of the
rental and rent-to-own functionality, the Wave System will offer greater
merchandising flexibility than is possible using currently available electronic
commerce solutions. There can be no assurance that the Wave System will achieve
the broad-based acceptance necessary to make the system a viable competitor with
currently existing and developing electronic commerce solutions.

DEPENDENCE ON STRATEGIC PARTNERS

The Company is dependent on strategic partners in the development of a
sufficient installed base of WaveMeters to attract content providers to the Wave
System. The Company is dependent on semiconductor companies to manufacture
functioning WaveMeters in sufficient numbers and at a low enough cost to enable
the Company to convince hardware manufacturers to incorporate the WaveMeters
into hardware they manufacture or retrofit. The Company is dependent on hardware
manufacturers to incorporate WaveMeters into hardware they manufacture or
retrofit. The Company is dependent on electronic content owners to modify their
products to be used with the WaveMeters and to charge for their products on a
per-use basis. Such companies may choose not to utilize the Company's technology
and could develop or market products or technologies that compete directly with
the Company. Moreover, there can be no assurance that these third parties will
commit the resources necessary to the successful commercialization of the
Company's technology. The Company expects that these strategic partners will
develop their products on schedule. However, any delay would have a material
adverse impact on the ability of the Company to introduce and achieve
commercialization of its systems. The Company has not concluded definitive
agreements with many of its strategic partners, and there can be no assurance
that the Company will be successful in entering into definitive agreements or
that the terms of such agreements will be satisfactory to the Company. Most of
these agreements will provide for the sharing by the Company of its revenues
with its strategic partners.

DEPENDENCE ON KEY PERSONNEL

The Company believes that its future success will be dependent upon the
continued service of its key technical and management personnel and on its
ability to attract and retain highly skilled technical, management, sales and
marketing personnel. The Company is particularly dependent on the skills and
contributions of several key individuals, including Peter J. Sprague and Steven
Sprague, each of whom may voluntarily terminate employment with the Company at
any time and whose departure would have a material adverse effect on the
Company's business. The Company does not have "key person" life insurance
policies on any of its employees. The industry is characterized by a high level
of employee mobility and aggressive recruiting of skilled personnel. There can
be no assurance that the Company's current employees will continue to work for
the Company or that the Company will be able to obtain the services of
additional personnel necessary for the Company's growth.

PROPRIETARY RIGHTS AND LICENSES AND INTELLECTUAL PROPERTY

The Company's success depends, in part, on its ability to enjoy or
obtain protection for its products and technologies under United States and
foreign patent laws, copyright laws and other intellectual property laws, to
preserve its trade secrets and to operate without infringing the proprietary
rights of third parties. There can be no assurance that any issued patent owned
or licensed by the Company affords adequate protection to the Company or will
not be challenged, invalidated, infringed or circumvented. Furthermore, there
can be no assurance that the Company's activities will not infringe patents
owned by others.

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Company, if at all. If the Company is required to and does not obtain such
licenses it would be prevented from, or encounter delays in the development and
marketing of, its products and technologies while it attempted to design around
such patents or other rights and there can be no assurance that such attempts
would be successful. Failure to obtain such licenses or to design around such
patents or other rights would have a material adverse effect on the Company.

The Company holds non-exclusive patent rights relating to the metered
use of encrypted data in local memory under a limited license (the "License
Agreement") from Titan Corporation ("Titan") to a patent (the "Licensed Patent")
jointly held by Titan and a third party. This License Agreement restricts Wave
from metering information produced and used solely by a government entity or
producing products which meter this information. In addition, the License
Agreement is subject to the rights of the joint owner of the Licensed Patent,
who has the right to exploit, or to license to third parties, the Licensed
Patent, including in a manner competitive with the Company.
There can be no assurance that the joint owner of the Licensed Patent will not
compete with the Company or license the Licensed Patent to a competitor of the
Company, or that the Company's business will not exceed the scope of the License
Agreement. Pursuant to the License Agreement, the Company is obligated to pay
certain royalties to Titan. Pursuant to the License Agreement, the Company has
granted to Titan the exclusive right to use the Company's patents for products
distributed to government entities. On February 28, 1997 the Company and Titan
executed an addendum to the License Agreement whereby the Company received a
sole license to the Licensed Patent to develop and distribute products to the
in-home consumer microcomputer market segment. Under this addendum to the
License Agreement, Titan waived any and all defaults by Wave under the License
Agreement occurring prior to February 28, 1997.

The Company is aware of four United States patents (the "Third Party
Patents") each having some claims that are similar to some of the claims in the
Licensed Patent. Based upon information currently known to the Company, some of
the claims of both the Licensed Patent and the Third Party Patents cover certain
material aspects of the Company's technology. Therefore, the commercialization
of the Company's technology would be subject to the rights of the holder of the
Third Party Patents unless the Company is able to invalidate or license such
claims. Also, the holder of the Third Party Patents or a licensee of the Third
Party Patents could seek to invalidate such claims of the Licensed Patent and
therefore be able to commercialize a technology similar to the Company's
technology. In either case, in order to invalidate the other party's patent
rights, the party claiming invalidity might need to prove that it invented the
claimed subject matter prior to the other party. There can be no assurance that
the Company would be successful in invalidating such claims of the Third Party
Patents or that the holder of the Third Party Patents or a licensee of the Third
Party Patents would not be successful in invalidating such claims of the
Licensed Patent. There also can be no assurance that the Third Party Patents
could be proven to be invalid on any other basis. Any proceeding involving the
validity of the Licensed Patent and the Third Party Patents would be protracted
and costly. In any suit contesting the validity of a patent, the patent being
contested would be entitled to a presumption of validity and the contesting
party would be required to demonstrate invalidity of such patent by clear and
convincing evidence.

If the Third Party Patents are not invalid insofar as their claims
relate to the Company's technology, then the Company would require a license
from the holder of the Third Party Patents to commercialize its technology and
make, use, or sell products or practice methods, or license others to sell
products or use methods, utilizing the technology in the United States. Due to
the uncertainty as to whether the Third Party Patents could be proved to be
invalid, the Company has engaged in preliminary negotiations with the holder of
the Third Party Patents to obtain a license under the Third Party Patents. The
negotiations have so far not produced any agreement and there can be no
assurance that a license will be obtainable on acceptable terms, if at all. The
inability to obtain a license, if needed, on commercially reasonable terms would
have a material adverse effect on the Company's business and its future
operations.

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<PAGE> 13
amended and restated in February 1994, from Mr. Peter J. Sprague, Chairman and
Chief Executive Officer of the Company, of his rights in the Wave Patents (the
"Amended License Agreement"), and several agreements with former officers of the
Company regarding their rights in the Wave Patents. The Amended License
Agreement provides for royalty payments to be made to Mr. Peter J. Sprague and
Mr. John R. Michener, a former officer of the Company, in the aggregate amount
of two percent of gross revenues less certain adjustments as defined in the
Amended License Agreement. The royalty payment is to be apportioned 75 percent
to Mr. Peter J. Sprague and 25 percent to Mr. John R. Michener. Payment of
royalties is secured by a security interest in and to the Wave Patents. The
Company believes that the agreements as a whole provide it with exclusive rights
under the Wave Patents. There can be no assurance that the Company will enjoy
exclusive rights to the Wave Patents under such agreements.

On January 26, 1996, the Company received notice from E-Data
Corporation (formerly Interactive Gift Express, Inc.), claiming that the
Company's practice of its technology infringes U.S. and foreign patents owned by
E-Data Corporation, and offering to license such patents to the Company. The
Company is currently obtaining information needed to investigate the merits of
this claim. The Company believes that there is a viable argument for
non-infringement. The patents owned by E-Data Corporation are currently being
litigated by third parties. The Company is not involved in these proceedings.

The Company relies on trade secrets and proprietary know-how, which it
protects, in part, by confidentiality agreements with its employees and contract
partners. However, there can be no assurance that the Company's confidentiality
agreements will not be breached or that the Company would have adequate remedies
for any breach. There can be no assurance that the Company's trade secrets will
not otherwise become known or be independently discovered by competitors.

The Company also relies on copyright to prevent the unauthorized
duplication of its software and hardware products. The Company has and will
continue to protect its software and its copyright interest therein through
agreements with its consultants. The Company also plans to seek protection for
its semiconductor integrated circuit designs under mask work laws. Existing
copyright and mask work laws afford only limited protection, particularly in
certain jurisdictions outside the United States where the Company may seek to
market its products and services. There can be no assurance that the copyright
laws or mask work laws will adequately protect the Company's technology.

The Company has registered trademark and service mark registrations
with the United States Patent and Trademark Office for the marks WaveMeter(R)
and WaveNet(R) and intends to apply for additional name and logo marks in the
United States and foreign jurisdictions as appropriate. No assurance can be
given that federal registration of any of these trademarks in the United States
will be granted. The Company has abandoned its prior applications for DataWave,
InfoWave, WaveTrac, and CreditChip.

CONFLICTS OF INTEREST

The Company's Board of Directors includes, and is expected to continue
to include, representatives of the Company's strategic partners. It is possible
that the corporations represented by such directors may be in direct or indirect
competition with the Company or among themselves, including competition with
respect to certain business strategies and transactions that the Company may
propose to undertake. Although the affected directors may abstain from voting on
matters in which the interests of the Company and the corporations they
represent are in conflict, the presence of potential or actual conflicts could
affect the process or outcome of Board deliberations and no policies, procedures
or practices have been adopted by the Company to reduce or avoid such conflicts.
There can be no assurance that such conflicts of interest will not materially
adversely affect the Company.

VOTING RIGHTS; CONTROL BY EXISTING STOCKHOLDERS

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The Company's Common Stock is divided into two classes with different
voting rights, which allows for the maintenance of control of the Company by the
holders of the Class B Common Stock. Holders of Class A Common Stock are
entitled to one vote per share on all matters submitted to a vote of the
stockholders of the Company. Holders of Class B Common Stock are entitled to one
vote per share on all matters submitted to a vote of the stockholders, except
that holders of Class B Common Stock will have five votes per share in cases
where one or more directors are nominated for election by persons other than the
Company's Board of Directors and where there is a vote on any merger,
consolidation or other similar transaction which is not recommended by the
Company's Board of Directors. In addition, holders of the Class B Common Stock
will have five votes per share on all matters submitted to a vote of the
stockholders in the event that any person or group of persons acquires
beneficial ownership of 20% or more of the outstanding voting securities of the
Company. Both classes vote together as a single class on all matters, except
where class voting is required by the Delaware General Corporation Law ("DGCL"),
which would apply, among other situations, to a vote on any proposal to modify
the voting rights of the Class B Common Stock. Upon conversion of the Series C
Preferred Stock and upon the exercise of the warrants, the Company's executive
officers and directors and entities affiliated with them will have approximately
18% of the combined voting power of the outstanding capital stock (42% in those
circumstances where holders of Class B Common Stock have five votes per share).

The disproportionate voting rights of Class A Common Stock relative to
the Class B Common Stock could have an adverse effect on the market price of the
Class A Common Stock. Such disproportionate voting rights may make the Company a
less attractive target for a takeover than it otherwise might be, or render more
difficult or discourage a merger proposal, a tender offer or a proxy contest,
even if such actions were favored by a majority of the holders of the Class A
Common Stock.

ANTI-TAKEOVER PROVISIONS

In addition to the voting rights granted to the holders of Class B
Common Stock, certain provisions of the Company's Restated Certificate of
Incorporation and Bylaws, as well as the ability of the Board of Directors to
issue shares of preferred stock without further vote or action by the
stockholders, may have the effect of delaying, deferring or preventing a change
in control of the Company. In addition, Section 203 of the DGCL restricts
certain business combinations with any "interested stockholder" as defined in
such law. This statute may delay, defer, or prevent a change in control of the
Company.

VOLATILITY OF STOCK PRICE

Factors such as announcements of the introduction of new products by
the Company or its competitors, market conditions in the technology and emerging
growth company sectors and rumors relating to the Company or its competitors may
have a significant impact on the market price of the Class A Common Stock. In
addition, the stocks of many technology companies have experienced extreme price
and volume fluctuations which reflect market conditions for technology and
emerging growth stocks generally and have often been unrelated to the operating
performance of specific companies. These market fluctuations may adversely
affect the price of the Class A Common Stock.

ABSENCE OF DIVIDENDS

The Company has never declared or paid any cash dividends and does not
anticipate paying dividends on its Common Stock for the foreseeable future.

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BUSINESS

INTRODUCTION

The Wave System consists of many uniquely identified distributed
processors (the "WaveMeter"). These devices decrypt content on demand from end
users. The WaveMeter is a proprietary application-specific integrated circuit,
mounted on a printed circuit board, and used as an add-in device in a
stand-alone PC. The WaveMeter allows transactions to occur without the expense
of a real-time network connection for every transaction. The WaveMeter securely
stores electronic funds and information about the usage of electronic content
(who, what, when, where, how much) to be securely transmitted to a central
transaction processing center ("WaveNet"). WaveNet manages encryption and
decryption keys, processes credit and usage charges, automatically obtains
credit authorization, calculates royalty distributions, and can provide user and
usage data to electronic content owners. The Wave System is compatible with
existing electronic content delivery systems such as CD-ROM and the Internet.

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purchasing function called WINPurchase. Through WINPublish an electronic content
owner can sell encrypted content from its site on the Web to purchasers using
the WINPurchase function.

THE WAVE SYSTEM

The Wave System is designed to create new revenue streams for owners of
electronic content by improving upon existing distribution systems for
electronic content. Using existing distribution systems such as CD-ROM and the
Internet, electronic content owners distribute their products to customers in
segmented and encrypted ("Wave-enabled") form so it can be offered for sale
through the Wave System. Customers are then able to purchase and decrypt the
electronic content on an as-needed basis. The Company believes that the Wave
System allows electronic content owners to deliver their products to a larger
market because the efficient and secure metering technology facilitates greater
flexibility in content distribution and pricing. The Company believes that
greater flexibility in electronic distribution and pricing makes the Wave System
particularly attractive to developers, distributors and consumers of
entertainment and educational software.

The Wave System consists of the WaveMeter, a subsystem that records and
communicates the usage of electronic content, and WaveNet, a central transaction
processing network. The WaveMeter controls and monitors the customer's access to
encrypted electronic information and software. Because the Wave System uses
asynchronous communication, it is well suited to low-cost processing of micro,
rental and rent-to-own transactions. The Company is currently attempting to
incorporate the rental and rent-to-own functionality into the Wave System.
Transactions are executed locally against a source of funds stored in the
WaveMeter. The WaveMeter retains pricing and tax information, downloaded from
WaveNet, for use in the execution of these transactions. Transactions are
securely stored in the usage log of the WaveMeter for eventual reporting to
WaveNet. The WaveMeters and WaveNet communicate using Wave's proprietary secure
communications protocol.

WaveNet is composed of the WaveNet Transaction Processing System
("TXP") and the WaveNet Information Clearing House ("ICH"). TXP acts as the
principal interface with the WaveMeter and accumulates data pertaining to the
consumer's usage. ICH provides interfaces to the Wave System for partners, such
as third-party distributors of WaveMeters and electronic content owners. It
contains the WaveNet security server which manages all the encryption and
decryption keys. ICH also does all the back-end processing of usage information
from the

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WaveMeter, calculating royalties, producing billing services, and ensuring that
all content owners are properly compensated. WaveNet is presently in operation.

The WaveMeter is installed into the customer's stand-alone PC. It is
based on a semiconductor device that uses proprietary integrated circuit
technology to store decryption keys, credit information, and usage data.
Presently, the WaveMeter is packaged on a half-size ISA board with a battery and
a clock and can be installed in the ISA slot of a PC. In 1996 the Company also
developed a production software version of the WaveMeter which has been
implemented as a component of the WaveMeter server. The WaveMeter server is
currently used to facilitate WINPublish and WINPurchase transactions on the Web.
The use of the software version of the WaveMeter is compatible with the use of
the hardware version of the WaveMeter.

The Company believes that the hardware version of the WaveMeter is the
most secure form of metering technology available today. Tampering with the
WaveMeter is easily detected because WaveNet manages all the decryption keys
("Keys"). Keys are loaded at the time of manufacture and are unique and specific
to each WaveMeter. Every piece of electronic content is protected using a unique
Key. The value of breaking an individual WaveMeter to ascertain the Keys is very
low since the Keys have no system-wide use.

Wave supplies the tools that developers need to build and successfully
supply applications to end users. Electronic content must be Wave-enabled to be
available to end users on the Wave System. A data preparation tool kit
structures data packages which are individual elements of electronic content
that are uniquely identified, encrypted, priced and formatted to use within the
Wave System. Once Wave-enabled, each data package can be delivered to the end
user in many electronic forms. Currently, the two primary mechanisms of delivery
of electronic content to the end user are the Internet and CD-ROM. The Wave
System, however, will work with point-to-multi-point data broadcasting via
satellite or FM sideband, magnetic media, cable modem, DVD and broadband.

MARKETS AND BUSINESS STRATEGY

The Company's long-term strategy is to achieve broad market acceptance
of the Wave System as a platform for commerce in electronic content. To achieve
this goal the Company pursues strategic relationships with hardware
manufacturers and companies involved in the development of commerce in
electronic content. In addition, the Company believes that, since the Wave
System permits greater flexibility in pricing and distribution of electronic
content, it is particularly well-suited for merchandising entertainment and
educational software. Therefore the Company is vigorously targeting this market
segment as a means of rapidly achieving the broad installed base of WaveMeters
and acceptance of the Wave System. The Company believes that once there is a
broad installed base of WaveMeters, electronic content owners from other market
segments are likely to be attracted to the Wave System.

The Company has focused on forming agreements with strategic partners
that will help the Company promote the broad-based acceptance of the Wave System
as a platform for commerce in electronic content. One such relationship was
announced in November 1996 when Wave and Creative Technologies, Ltd.
("Creative") executed a memorandum of understanding to incorporate the WaveMeter
into some of Creative's existing and future product lines.

Wave has also focused on pursuing strategic relationships with
companies seeking to distribute electronic content via the Internet. The
compatibility of the Wave System with the Web has provided the Company with a
product that has already attracted the attention of leaders in the development
of electronic commerce solutions and particularly commerce in electronic
content. Wave has executed a letter of intent with EarthLink Network, Inc. to
jointly promote the Wave System. Wave has also entered into a letter of intent
with IBM to work on the interoperability with the WaveMeter and Cryptolope(R), a
document security system technology built by IBM infoMarket(R) Service. Wave
will continue to focus on developing other strategic relationships to achieve
the broad acceptance of the Wave System as a platform for electronic commerce.

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As part of Wave's goal to achieve broad acceptance of the Wave System
as a platform for commerce in electronic content, the Company has made the Wave
System available to users of the Web through the WaveMeter server. The WaveMeter
server currently supports both WINPublish, a publishing service, and
WINPurchase, the purchasing component. WINPublish provides an easy-to-use system
so that anyone can publish electronic content on a Web site and offer it for
sale. Since its inception, WINPublish has registered over 400 publishers.
WINPurchase permits consumers to purchase electronic content that has been
published through WINPublish. WINPublish and WINPurchase transactions may be
executed using the WaveMeter server without the need to install a WaveMeter at
the consumer's site. WINPublish and WINPurchase, however, are fully compatible
with the use of the hardware version of the WaveMeter. The operation of the
WaveMeter server demonstrates the viability of the Wave System and therefore
enhances the ability of Wave to market the Wave System to the leading electronic
content distributors on the Web by offering them a standard platform for
commerce in electronic content that is designed to be compatible with the
Internet, CD-ROM and developing distribution media such as broadband.

Wave has focused on promoting the acceptance of the Wave System by
electronic content owners. The initial target market is entertainment and
educational software developers and distributors. Wave believes that if it is
able to incorporate the rental or rent-to-own functionality into the Wave
System, that the Wave System will provide the home consumer with a new way of
acquiring interactive content and can offer electronic content developers and
distributors benefits similar to those provided by video rental in the film
industry. The Company has invested heavily in developing relationships with
major entertainment and educational software providers and approximately 20 of
such companies have executed content provider agreements and have expressed
their intention to distribute titles using the Wave System. No assurance can be
given that any or all of these companies will be successful in developing or
marketing products that apply the Wave System technology or that are
Wave-enabled.

COMPETITION

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The Company believes that the Wave System is superior to existing hardware-based
and software unlocking systems in several ways. These systems control the use of
electronic content but are very limited in their ability to measure and record
usage information. The Company believes that the Wave System offers superior
protection from unauthorized usage, low operating costs (because it does not
require constant communication with and authorization from a centralized
processor), and fast operation which is convenient and essentially transparent
to the end user. Both hardware controllers and software unlocking systems offer
only part of the functionality of the Wave System. Distinct from the existing
software unlocking systems, WaveNet provides centralized back-office support to
owners of electronic content.

The Company believes that the interoperability of the Wave System with
currently available and developing distribution media makes the Wave System
attractive to both distributors and consumers of electronic content. A consumer
with an installed WaveMeter will be able to purchase Wave-enabled content from
sources on CD-ROM and/or the Internet, as well as from sources distributing
electronic content on other developing media such as broadband. In addition,
with the incorporation of the rental and rent-to-own functionality, the Wave
System will offer greater merchandising flexibility than is possible using
currently available electronic commerce solutions. There can be no assurance
that the Wave System will achieve the broad-based acceptance necessary to make
the system a viable competitor with currently existing and developing electronic
commerce solutions.

INTERNATIONAL MARKET

The Company's technologies are controlled under various United States
export control laws and regulations and will require export licenses for certain
exports outside of the United States and Canada. The Company has received export
licenses from the U.S. Department of Commerce for the sale and export of the
Company's decrypt-only products. The Company is currently preparing to file for
additional licenses under the provisions of the 1996 Executive Order allowing
export of encryption systems providing key escrow capability. There can be no
assurance that such export license will be obtained. There can be no assurance
that the Company will have patent protection or that it will not infringe
patents of third parties in foreign jurisdictions. Because electronic monitoring
and the transmission of audited usage and financial information on end users or
payment instructions may be subject to varying statutory or regulatory controls
in foreign jurisdictions, there can be no assurance that the use of all portions
of the Wave System will be permitted in any particular foreign jurisdiction.

PROPRIETARY RIGHTS AND LICENSES AND INTELLECTUAL PROPERTY

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invalidated, infringed or circumvented. Furthermore, there can be no assurance
that the Company's activities will not infringe patents owned by others.

In addition, the Company may be required to obtain licenses to patents
or other proprietary rights of third parties. No assurance can be given that any
licenses required under any such patents or proprietary rights would be made
available on terms acceptable to the Company, if at all. If the Company is
required to and does not obtain such licenses it would be prevented from, or
encounter delays in the development and marketing of, its products and
technologies while it attempted to design around such patents or other rights
and there can be no assurance that such attempts would be successful. Failure to
obtain such licenses or to design around such patents or other rights would have
a material adverse effect on the Company.

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inability to obtain a license, if needed, on commercially reasonable terms would
have a material adverse effect on the Company's business and its future
operations.

The Company has acquired patent rights to the metered use of encrypted
serial data streams under a United States patent and a corresponding patent
application in the European Patent Office (together, the "Wave Patents"), which
are material to protecting certain of the Company's technology. The Company's
rights to the Wave Patent derive from a license, amended and restated in
February 1994, from Mr. Peter J. Sprague, Chairman and Chief Executive Officer
of the Company, of his rights in the Wave Patents (the "Amended License
Agreement"), and several agreements with former officers of the Company
regarding their rights in the Wave Patents. The Amended License Agreement
provides for royalty payments to be made to Mr. Peter J. Sprague and Mr. John R.
Michener, a former officer of the Company, in the aggregate amount of two
percent of gross revenues less certain adjustments as defined in the Amended
License Agreement. The royalty payment is to be apportioned 75 percent to Mr.
Peter J. Sprague and 25 percent to Mr. John R. Michener. Payment of royalties is
secured by a security interest in and to the Wave Patents. The Company believes
that the agreements as a whole provide it with exclusive rights under the Wave
Patents. There can be no assurance that the Company will enjoy exclusive rights
to the Wave Patents under such agreements.

RESEARCH AND DEVELOPMENT

The Wave System incorporates semiconductor, encryption/decryption,
software transaction processing and other technologies in which the Company has
made a substantial investment in research and development. The Company expects
that it will be required to continue to make substantial investments in the
design of the WaveMeter, WaveNet and software interfaces. For the years ended
December 31, 1993, 1994 and 1995, the Company expended $1,655,386, $1,761,366,
and $3,324,735, respectively, on research and development activities (which
amounts include the

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value of stock issued). From its inception in February 1988 through December
1995, the Company expended $9,290,664.

The success of the Wave System depends to a large extent on the
Company's ability to adapt the Wave System for use with various methods for the
distribution of electronic content, the ability of the Wave technology to
interface with various platform environments, and the ability of the Wave System
to work in many application environments. The Company believes that a
significant portion of its future research and development expenditures will be
used to adapt the Wave System accordingly.

The Company will also continue to expend a significant amount of
resources on the development of new iterations of the WaveMeter. The Company
believes that by providing various means of linking the WaveMeter to the
customer's computer or network, the Company will be more likely to achieve broad
acceptance of the Wave System. The Company is currently developing other forms
of the WaveMeter to target other market needs.

Wave is now focusing increased resources on developing the operational
infrastructure of the Company. Greater emphasis is placed on developing internal
production and fulfillment systems and marketing infrastructure to distribute
WaveMeters. The Company will also increase the resources available to WaveNet to
adapt to changing market requirements. The Company plans to expand WaveNet to
handle more end users, to develop interfaces for new kinds of partners, to
implement more sophisticated pricing methodologies and to add greater financial
system flexibility.

EMPLOYEES

As of December 31, 1996, the Company employed 49 full-time employees,
24 of whom are involved in marketing and administration and 25 of whom are
involved in research and development. The Company believes its employee
relations are satisfactory.

PROPERTIES

The Company leases a 9,433 square foot facility for its executive
offices and to house the WaveNet installation, administration, and customer
support operations in Lee, Massachusetts at a monthly rent of $3,025 with a
monthly charge of $1,767 for common costs. The Lee, Massachusetts lease will
expire during July 1998. The Company leases offices in New York, New York, at a
monthly rent of $16,666.67. The lease is scheduled to expire in February 1998.
The Company leases a 6,400 square foot facility in Princeton, New Jersey at a
monthly base rent of $3,733 with a monthly payment for taxes, insurance and
maintenance reimbursements and improvements which currently totals approximately
$1,653 per month. This lease is scheduled to expire during January 2001. The
Company's principal research and development activities are conducted at the
Princeton facility. The Company leases a 2,730 square foot facility in San Jose,
California for $5,050 per month. The San Jose, California lease will expire
during January 1999.

LEGAL PROCEEDINGS

On November 25, 1994, the Company commenced an action in the Supreme
Court of the State of New York, New York County, captioned Wave Systems Corp. v.
Infosafe Systems, Inc., Thomas H. Lipscomb and RAS Securities Corp. In this
action, the Company alleges that defendants have used technology and business
plans obtained from the Company by defendants Lipscomb or RAS in violation of
confidentiality agreements, and seeks injunctive relief and damages. The Supreme
Court denied defendants' motion to dismiss the complaint. The defendants have
answered and counterclaimed for $20 million in compensatory damages alleging
that, among other things, the Company has conducted a predatory campaign of
tortious interference against Infosafe Systems, Inc.'s business and financial
relationships, trademarks and employees. In September 1996, the Company moved
for permission to discontinue with prejudice and without costs and to dismiss
several of Infosafe Systems, Inc.'s counterclaims. That motion is currently
under consideration by the Supreme Court.

21
<PAGE> 23
USE OF PROCEEDS

The Selling Security Holders will receive all of the net proceeds from
the Class A Common Stock sold pursuant to this Prospectus.

SELLING SECURITY HOLDERS

The Selling Security Holders are (i) JNC Opportunity Fund Ltd., the
purchaser of the Series C Preferred Stock, (ii) Wharton Capital Partners, Ltd.,
who received the Placement Warrants (which are exercisable at $2.54 per share)
in connection with the placement of the Series C Preferred Stock, and (iii) five
stockholders of the Company. Except as otherwise disclosed herein, none of the
Selling Security Holders has had any position, office or other material
relationship with the Company or its predecessors or affiliates within the past
three years.

The following table sets forth the names of the Selling Security
Holders, the number of shares of Class A Common Stock beneficially owned by each
of the Selling Security Holders, and the number of shares which may be offered
for resale pursuant to this Prospectus. For the purpose of calculating the
number of shares of Class A Common Stock beneficially owned by the holder of the
Series C Preferred Stock, the number of shares of Class A Common Stock
calculated to be issuable upon conversion is based on a conversion price of
$2.31 per share (without taking into account shares issuable as dividends). The
conversion price for the Series C Preferred Stock is the lower of (i) $2.31 per
share, and (ii) 80% of the average closing bid price on the Nasdaq National
Market of the Class A Common Stock for the five (5) trading days immediately
preceding the date of conversion. Holders of the Series C Preferred Stock are
entitled to receive quarterly dividends at a rate of 6% per annum, payable in
cash or, subject to certain conditions, shares of Class A Common Stock. The
actual number of shares issuable upon conversion of the Series C Preferred Stock
and available for resale under this Prospectus could be materially greater based
upon the market price of the Class A Common Stock at the time or times of
conversion. The number of shares shown as being offered hereunder by the holder
of the Series C Preferred Stock is the number of shares registered by the
Registration Statement of which this Prospectus is a part with respect to shares
issuable upon conversion of and as dividends on the Series C Preferred Stock,
pursuant to the terms of the Registration Agreement.

The information included below is based upon information provided by
the Selling Security Holders. Because the Selling Security Holders may offer
all, some or none of their shares, no definitive estimate as to the number of
shares that will be held by the Selling Security Holders after such offering can
be provided.

NUMBER OF SHARES OF
CLASS A COMMON STOCK NUMBER OF SHARES
BENEFICIALLY OWNED OF CLASS A COMMON
SELLING SECURITY HOLDER PRIOR TO THE OFFERING STOCK BEING OFFERED
----------------------- ----------------------- -------------------
<S> <C> <C>
JNC Opportunity Fund Ltd. 1,298,701(1) 3,000,000(3)
William C. Leigh 15,000 15,000
Strategic Executives 3,077 3,077
Charles Brofman 7,500 7,500
James D. Burchetta 7,500 7,500
Royalty Capital Partners, L.P. 45,000 45,000
Wharton Capital Partners, Ltd. 37,500(2) 37,500
--------- ---------
TOTAL 1,373,778 3,115,577
========= =========
</TABLE>

- ----------------
(1) Represents shares issuable upon a hypothetical conversion of 150,000 shares
of Series C Preferred Stock, with a stated value of $3,000,000 acquired on
December 27, 1996.

22
<PAGE> 24
(2) Represents shares issuable upon exercise of warrants.

(3) The number of shares of Class A Common Stock registered pursuant to the
registration statement of which this Prospectus is a part and the number of
shares of Class A Common Stock offered hereby have been determined by agreement
between the Company and JNC Opportunity Fund Ltd. ("JNC"). Because the number of
shares of Class A Common Stock that will ultimately be issued to JNC upon
conversion of the Series C Preferred Stock is dependent upon the conversion
formula described above, such number of shares (and therefore the number of
shares of Class A Common Stock offered hereby) cannot be determined at this
time.

23
<PAGE> 25
PLAN OF DISTRIBUTION

The shares of Class A Common Stock offered hereby may be offered for
resale by the Selling Security Holders (or their donees, transferees or
successors in interest) from time to time in transactions for their own account
(which may include block transactions) on any national securities exchange or
quotation service on which the Class A Common Stock may be listed or quoted at
the time of sale, in the over-the-counter market, in transactions otherwise than
on such exchanges (including privately negotiated transactions) or in the
over-the-counter market, through the writing of options, or a combination of
such methods of sale, at fixed prices (which may be changed), at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. The Selling Security Holders may effect such
transactions by selling the shares of Class A Common Stock to or through
broker-dealers, and such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Security Holders and/or
the purchasers of shares for whom such broker-dealers may act as agent or to
whom they sell as principal, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions). From time to time
the Selling Security Holder may engage in short sales against the box, puts and
calls and other transactions in securities of the Company or derivatives
thereof, and may sell and deliver the Class A Common Stock in connection
therewith. Further, except as set forth herein, the Selling Security Holders are
not restricted as to the number of shares which may be sold at any one time, and
it is possible that a significant number of shares could be sold at the same
time, which may have a depressive effect on the market price of the Company's
Class A Common Stock. The Selling Security Holders may also pledge shares of
Class A Common Stock as collateral for margin accounts, and such shares could be
resold pursuant to the terms of such accounts. The Selling Security Holders and
any dealers or agents participating in the distribution of the Class A Common
Stock may be deemed to be "underwriters" as defined in the Securities Act and
any profit on the sale of the Class A Common Stock by them and any discounts,
commissions or concessions received by any such dealers or agents might be
deemed to be underwriting discounts and commissions under the Securities Act.
The Company will not receive any proceeds of the sales of the Class A Common
Stock by the Selling Security Holders.

To comply with the securities laws of certain jurisdictions, if
applicable, the Class A Common Stock will be offered or sold in such
jurisdictions only through registered or licensed brokers or dealers. In
addition, in certain jurisdictions the Class A Common Stock may not be offered
or sold unless they have been registered or qualified for sale in such
jurisdictions or an exemption from registration or qualification is available
and is complied with.

Under applicable rules and regulations under the Exchange Act, any
person engaged in a distribution of the Class A Common Stock may not
simultaneously engage in market-making activities with respect to such
securities for a period of two to nine business days prior to the commencement
of such distribution. In addition to and without limiting the foregoing, each
Selling Security Holder and any other person participating in a distribution
will be subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including without limitation Rules 10b-6 and 10b-7,
which provisions may limit the timing of purchases and sales of any of the
securities by the Selling Security Holders or any such other person. All of the
foregoing may affect the marketability of the Class A Common Stock and the
brokers' and dealers' ability to engage in market-making activities with respect
to these securities.

Pursuant to the Registration Agreement, all expenses of the
registration of the Class A Common Stock will be paid by the Company, including,
without limitation, Commission filing fees and expenses of compliance with state
securities or "blue sky" laws; provided, however, that the Selling Security
Holders will pay all underwriting discounts and selling commissions, if any. The
Selling Security Holders will be indemnified by the Company against certain
civil liabilities, including certain liabilities under the Securities Act, or
will be entitled to contribution in connection therewith. The Company will be
indemnified by the Selling Security Holders against certain civil liabilities,
including certain liabilities under the Securities Act, or will be entitled to
contribution in connection therewith.

24
<PAGE> 26
LEGAL MATTERS

The validity of the securities offered hereby will be passed upon for
the Company by Curtis, Mallet-Prevost, Colt & Mosle, New York, New York.

EXPERTS

The consolidated financial statements and schedule of Wave Systems
Corp. and Subsidiaries as of December 31, 1995 and 1994, and for each of the
years in the three-year period ended December 31, 1995, and for the period from
February 12, 1988 (inception) to December 31, 1995 have been incorporated by
reference herein and in the registration statement in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants, incorporated
by reference herein, and upon the authority of said firm as experts in
accounting and auditing. The report of KPMG Peat Marwick LLP covering the
December 31, 1995 consolidated financial statements contains an explanatory
paragraph that states that the Company's recurring losses from operations since
inception raise substantial doubt about the Company's ability to continue as a
going concern. The consolidated financial statements and schedule do not include
any adjustments that might result from the outcome of that uncertainty.

25
<PAGE> 27
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the various expenses to be paid by the
Company in connection with the sale and distribution of the securities being
registered, other than underwriting discounts and commissions. All of the
amounts shown are estimated except the Commission registration fee and the
Nasdaq additional shares listing fee.

<TABLE>
<S> <C>
Commission registration fee............... $ 2,878
Nasdaq additional listing fee............. 17,500
Legal fees and expenses................... 30,000
Accounting fees and expenses.............. 10,000
Printing and engraving expenses........... 10,000
Miscellaneous expenses.................... 4,622
----------

Total.................................. $ 75,000
==========
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTOR AND OFFICERS.

In accordance with Section 102(b)(7) of the Delaware General
Corporation Law (the "DGCL"), the Restated Certificate of Incorporation of the
Company contains a provision to limit the personal liability of the directors of
the Company for violations of their fiduciary duties. This provision eliminates
each director's liability to the Company or its stockholders for monetary
damages except (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL providing for liability of directors for unlawful
payment of dividends or unlawful stock purchases or redemptions, or (iv) for any
transaction from which the director derived an improper personal benefit. The
effect of this provision is to eliminate the personal liability of directors for
monetary damages for actions involving a breach of their fiduciary duty of care,
including any such actions involving gross negligence. Also, there may be
certain liabilities, such as those under the federal securities laws or other
state or federal laws, which a court may hold are unaffected by the Restated
Certificate of Incorporation.

The Restated Certificate of Incorporation also provides that if the
DGCL is amended to further eliminate or limit the liability of directors, then
the liability of a director of the Company shall be so eliminated or limited,
without further stockholder action, to the fullest extent permissible under the
DGCL as so amended.

Section 145 of the DGCL provides that a corporation may indemnify any
person, including officers and directors, who are, or are threatened to be made,
parties to any threatened, pending or completed legal action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of such corporation), by reason of the fact that
such person was an officer, director, employee or agent of such corporation, or
is or was serving at the request of such corporation as a director, officer,
employee or agent of another corporation. The indemnity may include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, provided such officer, director, employee or agent acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
corporation's best interests and, for criminal proceedings, had no reasonable
cause to believe that his conduct was unlawful. A Delaware corporation may
indemnify officers and directors in an action by or in the right of the
corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation. Where an officer or director is successful on the
merits or otherwise in defense of any action referred to above, the corporation
must indemnify him against the expenses which such officer or director actually
or reasonably incurred. The Bylaws of the Company provide for indemnification of
the officers and directors to

II-1
<PAGE> 28
the fullest extent permitted by the DGCL. In addition, the Company maintains
officers' and directors' liability insurance which insures against liabilities
that officers and directors of the Company may incur in such capacities.

ITEM 16. EXHIBITS.

EXHIBIT NO. DESCRIPTION OF EXHIBIT

4.1 Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 3.1 of the Registrant's
Registration Statement on Form S-1, File No. 33-75286)

4.2 Bylaws of Registrant (incorporated by reference to Exhibit 3.2
of the Registrant's Registration Statement on Form S-1, File
No. 33-75286)

4.3 Form of Stock Certificate of Class A Common Stock
(incorporated by reference to Exhibit 4.1 of the Registrant's
Registration Statement on Form S-1, Registration No. 33-75286)

4.4 Certificate of Designation of Series C Preferred Stock of Wave
Systems Corp. as filed with the Delaware Secretary of State on
December 27, 1996 (incorporated by reference to Exhibit 3.1 of
the Registrant's Current Report on Form 8-K filed on January
8, 1997, File No. 0-24752)

4.5 Purchase Agreement between Wave Systems Corp. and JNC
Opportunity Fund Ltd., dated as of December 27, 1996
(incorporated by reference to Exhibit 4.1 of the Registrant's
Current Report on Form 8-K filed on January 8, 1997, File No.
0-24752)

4.6 Registration Rights Agreement between Wave Systems Corp. and
JNC Opportunity Fund Ltd., dated as of December 27, 1996
(incorporated by reference to Exhibit 4.2 of the Registrant's
Current Report on Form 8-K filed on January 8, 1997, File No.
0-24752)

*5.1 Opinion of Curtis, Mallet-Prevost, Colt & Mosle

*23.1 Consent of Curtis, Mallet-Prevost, Colt & Mosle (included as
part of Exhibit 5.1 hereto)

23.2 Consent of KPMG Peat Marwick LLP

- ----------------

ITEM 17. UNDERTAKINGS.

The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;

(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or

II-2
<PAGE> 29
decrease in the volume of securities offered (if the total dollar value
of securities offered would not exceed that which was registered) and
any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of a prospectus filed with
the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;

Provided, however, that paragraphs (1)(i) and (1)(ii) do not
apply if the registration statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the
registrant pursuant to Section 13 or Section 15(d) of the Exchange Act
that are incorporated by reference in the registration statement.

(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act, each
filing of the registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Exchange Act (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d)
of the Exchange Act) that is incorporated by reference in the
registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the Company has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than
payment by the Company of expenses incurred or paid by a director,
officer or controlling person of the Company in the successful defense
of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will
be governed by the final adjudication of such issue.

II-3
<PAGE> 30
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on the 7th day of March
1997.

Wave Systems Corp.

By: /S/ PETER J. SPRAGUE
------------------------------------
Name: Peter J. Sprague
Title: Chairman and Chief Executive
Officer

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ PETER J. SPRAGUE Chairman and Chief Executive March 7, 1997
- ----------------------------------- Officer (Chief Executive Officer
Peter J. Sprague and Principal Financial Officer)

/S/ STEVEN SPRAGUE President and Chief Operating Officer March 7, 1997
- -----------------------------------
Steven Sprague

/S/ GAIL S. TITUS Controller March 7, 1997
- -----------------------------------
Gail S. Titus

/S/ JOHN E. BAGALAY, JR.. Director March 7, 1997
- -----------------------------------
John E. Bagalay, Jr.

/S/ PHILIPPE BERTIN Director March 7, 1997
- -----------------------------------
Philippe Bertin

/S/ GEORGE GILDER Director March 7, 1997
- -----------------------------------
George Gilder

/S/ JOHN E. MCCONNAUGHY, JR. Director March 7, 1997
- -----------------------------------
John E. McConnaughy, Jr.

/S/ GENE W. RAY Director March 7, 1997
- -----------------------------------
Gene W. Ray
</TABLE>

<PAGE> 31
INDEX TO EXHIBITS

SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE
- ----------- ---------------------- ------------
<S> <C> <C>
4.1 Restated Certificate of Incorporation of Registrant (incorporated
by reference to Exhibit 3.1 of the Registrant's Registration
Statement on Form S-1, File No. 33-75286)

4.2 Bylaws of Registrant (incorporated by reference to Exhibit 3.2 of
the Registrant's Registration Statement on Form S-1, File No.
33-75286)

4.3 Form of Stock Certificate of Class A Common Stock (incorporated by
reference to Exhibit 4.1 of the Registrant's Registration
Statement on Form S-1, Registration No. 33-75286)

4.4 Certificate of Designation of Series C Preferred Stock of Wave
Systems Corp. as filed with the Delaware Secretary of State on
December 27, 1996 (incorporated by reference to Exhibit 3.1 of the
Registrant's Current Report on Form 8-K filed on January 8, 1997,
File No. 0- 24752)

4.5 Purchase Agreement between Wave Systems Corp. and JNC Opportunity
Fund Ltd., dated as of December 27, 1996 (incorporated by
reference to Exhibit 4.1 of the Registrant's Current Report on
Form 8-K filed on January 8, 1997, File No. 0-24752)

4.6 Registration Rights Agreement between Wave Systems Corp. and JNC
Opportunity Fund Ltd., dated as of December 27, 1996 (incorporated
by reference to Exhibit 4.2 of the Registrant's Current Report on
Form 8-K filed on January 8, 1997, File No. 0-24752)

5.1 Opinion of Curtis, Mallet-Prevost, Colt & Mosle

23.1 Consent of Curtis, Mallet-Prevost, Colt & Mosle (included as part
of Exhibit 5.1 hereto)

23.2 Consent of KPMG Peat Marwick LLP
</TABLE>

- ----------------

<PAGE> 1
Exhibit 5.1

Opinion of Curtis, Mallet-Prevost, Colt & Mosle

March 7, 1997

Wave Systems Corp.
480 Pleasant Street
Lee, MA 01238

Gentlemen:

We have acted as special counsel for Wave Systems Corp., a
Delaware corporation (the "Company"), with respect to the proposed registration
by the Company of 3,115,577 shares of the Company's Class A Common Stock, $0.01
par value per share (the "Shares"), covered by a Registration Statement on Form
S-3 (Registration Statement No. 333- 20017, hereinafter the "Registration
Statement") filed with the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Act"). The Shares consist of
(i) up to 3,000,000 Shares issuable upon conversion of 150,000 shares of the
Company's Series C Convertible Preferred Stock, par value $.01 per share (the
"Series C Preferred Stock") and as dividends on the Series C Preferred Stock,
(ii) 37,500 Shares issuable upon the exercise of warrants issued in connection
with the placement of the Series C Preferred Stock (the "Placement Warrants"),
and (iii) an aggregate of 78,077 Shares held by five stockholders who acquired
such shares in private transactions with the Company.

In connection herewith, we have examined the Restated
Certificate of Incorporation, the By-laws, and the Registration Statement and
all exhibits thereto (including those incorporated by reference), and such other
documents as we have considered necessary.

In rendering this opinion, we have assumed, without any
independent investigation or verification of any kind, the genuineness of all
signatures, the authenticity of all documents submitted to us as originals and
the conformity to authentic original documents of all documents submitted to us
as certified, conformed or photostatic or facsimile copies.

Based upon such examination, it is our opinion that (i) the
Shares issuable upon conversion of the Series C Preferred Stock and as dividends
on the Series C Preferred Stock, when issued in accordance with the terms of the
Series C Preferred Stock, (ii) the Shares issuable upon exercise of the
Placement Warrants, when issued in accordance with the terms of the Placement
Warrants, and (iii) the Shares held by the aforementioned stockholders, are or
will be, as the case may be, legally issued, fully paid and non-assessable.

We hereby consent to the reference to our name in the
Registration Statement and in the related Prospectus under the caption "Legal
Matters" and to the use of the foregoing opinion as an exhibit to the
Registration Statement. In giving this consent, we do not hereby
<PAGE> 2
admit that we are within the category of persons whose consent is required under
Section 7 of the Act, or the rules and regulations of the Commission thereunder.

We are giving this opinion to the Company, and no person other
than the Company may rely upon it.

Very truly yours,

/s/ Curtis, Mallet-Prevost, Colt & Mosle

-2-

<PAGE> 1
Exhibit 23.2

Consent of Independent Auditors
-------------------------------

The Board of Directors
Wave Systems Corp.

We consent to the use of our report incorporated herein by reference and to the
reference to our firm under the heading "Experts" in the prospectus.

Our report dated March 22, 1996, contains an explanatory paragraph that states
that the Company has suffered recurring losses from operations since inception
that raise substantial doubt about its ability to continue as a going concern.
The consolidated financial statements and financial statement schedule do not
include any adjustments that might result from the outcome of that uncertainty.

/s/ KPMG Peat Marwick LLP

New York, New York
March 7, 1997