WAVE SYSTEMS CORP, S-3, 1997-01-17

WAVE SYSTEMS CORP
S-3, 1997-01-17
COMPUTER PERIPHERAL EQUIPMENT, NEC

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<PAGE> 1
As filed with the Securities and Exchange Commission on January 17, 1997
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------

FORM S-3

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933
----------------------------------

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.)

540 MADISON AVENUE
NEW YORK, NEW YORK 10022
(212) 755-3282
(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.
540 MADISON AVENUE
NEW YORK, NEW YORK 10022
(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. / /

CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===============================================================================================================================
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM OFFERING PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION FEE
SHARE(2) PRICE(2)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock, $.01 par value 3,453,077 Shares $2.75 $9,495,961.75 $2,878.00
===============================================================================================================================
</TABLE>

(1) Includes (i) up to 3,000,000 shares issuable upon conversion of and as
dividends on outstanding Series C Convertible Preferred Stock, (ii) 75,000
shares issuable upon exercise of warrants issued in connection with the
placement of the Series C Convertible Preferred Stock, (iii) 360,000 shares
issuable upon exercise of warrants issued in connection with the Company's
initial public offering, and (iv) an aggregate of 18,077 shares held by two
stockholders. (2) Estimated solely for the purpose of calculating the amount of
the registration fee pursuant to Rule 457(c), based on the average of the high
and low prices reported in the Nasdaq National Market on January 16, 1997.

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.

<PAGE> 2
SUBJECT TO COMPLETION, DATED JANUARY 17, 1997

PROSPECTUS

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.

3,453,077 SHARES

WAVE SYSTEMS CORP.

CLASS A COMMON STOCK

This Prospectus relates to 3,453,077 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 Class A Common Stock of the Company is quoted on the Nasdaq National
Market under the symbol "WAVX." The last reported sales price of the Company's
Class A Common Stock on the Nasdaq National Market on January 16, 1997 was $2.88
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) 75,000 shares issuable upon the exercise of
warrants issued in connection with the placement of the Series C Preferred Stock
(the "Placement Warrants"), (iii) 360,000 shares issuable upon the exercise of
warrants issued in connection with the Company's initial public offering in
August 1994 (the "IPO Warrants"), and (iv) an aggregate of 18,077 shares held by
two 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
<PAGE> 3
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.

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 IPO Warrants have an exercise price of $6.50 per
share, and expire on August 31, 1999. The shares issuable upon exercise of the
IPO Warrants are included in this Prospectus pursuant to the terms of the
Warrant Agreement under which the IPO Warrants were issued.

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 Delaware General Corporation Law.

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

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

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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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 Securities and Exchange Commission (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 Web
site 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 of 1933, as amended (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.

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

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<PAGE> 5
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., 540
Madison Avenue, New York, New York 10022, telephone number: (212) 755-3282.

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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<PAGE> 6
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
fees, royalties 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 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 and modified data pertaining to usage
patterns.

The Company believes that the Wave System can fundamentally change how
electronic content is purchased and 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 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 Wave System consists of many uniquely identified
distributed processors (the "WaveMeter"). These devices decrypt content on
demand from end users. The WaveMeter allows transactions to occur without the
expense of a real-time network connection for every transaction and also
provides the technology necessary to deliver electronic content on a rental or
rent-to-own basis. 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"). The WaveMeter is currently a proprietary application-specific
integrated circuit, mounted on a printed circuit board, and used as an add-in
device in a stand-alone PC or in a server on a LAN. WaveNet manages encryption
and decryption keys, processes credit and usage charges, automatically obtains
credit authorization, calculates royalty distributions, and provides user and
usage data to electronic content owners.

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

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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 the development of commerce in
electronic content through the Web, 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 entertainment and educational software developers,
distributors and consumers 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 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. The Wave System's
compatibility with the Web has provided the Company with a leading-edge product
which has attracted the attention of leaders in the development of electronic
commerce solutions and particularly commerce in electronic content. As a result,
Wave has entered into agreements with IBM and EarthLink Network, Inc. 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.

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 540 Madison Avenue, New York, New York, 10022 and the telephone number of the
Company is (212) 755-3282.

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.

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<PAGE> 8
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 the 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 technological and commercial 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. 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 for at least the next 6 months. The
Company's long-term capital requirements beyond the next 6 months 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 based on the Company's technology. To the extent
that the existing resources are insufficient to fund the Company's activities in
the short or long term, the Company may 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

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<PAGE> 9
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
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.

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COMPETITION

The market for electronic content distribution and access technologies
is intensely competitive and rapidly changing. In information delivery, the
Company's technology will compete with payment services such as Intertrust
Technologies Corporation, CyberCash, Inc., e-cash, Visa(R) and Mastercard(R).
In software delivery, the Company will compete with traditional retail and
discount outlets and with software delivered to consumers via currently used
"software unlocking" systems, such as those developed by Portland Software,
TestDrive Corporation and Cyberservice. Although the Company is not aware of any
other companies that are developing systems directly competitive to the
Company's, it is possible that other companies may be developing comparable
systems. If the Company's technology gains market acceptance, it can be expected
that other companies, including companies with substantially greater financial
and technical resources than the Company, will compete with the Company. It is
possible that such competition will come from hardware manufacturers or
information providers and software developers who will wish to bypass the
payment of fees to the Company. There can be no assurance that either existing
or new competitors will not develop products that are superior to or more
competitive than the Company's products or that otherwise achieve greater market
acceptance. Increased competition could result in price reductions and loss of
market share for the Company. There can be no assurance that the Company will be
able to compete successfully or that competition will not have a material
adverse effect on the Company's business, operating results and financial
condition.

The Company does not believe that its intellectual property rights
present a substantial barrier to potential competitors, and it is possible that
potential competitors may replicate or otherwise develop similar technologies.
Accordingly, the Company's prospects of attaining commercial success will depend
upon its ability to develop its system and market it to customers before other
competitors rather than on its ability to prevent potential competitors from
replicating portions of its system.

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

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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.

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.

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. The License Agreement is terminable by Titan if the
Company fails to satisfy certain minimum royalty payments and production levels.
Pursuant to the License Agreement, the Company has granted to Titan the
exclusive right to use the Company's patents in government entities from which
Wave is restricted. The Company is currently in default of its obligation to
pay royalties under the terms of the License Agreement. The Company is in
negotiations with Titan and Titan has waived its right to terminate the License
Agreement until January 24, 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 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.

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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.

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.

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

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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

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 existing stockholders
will have approximately __% of the combined voting power of the outstanding
capital stock (__% in those circumstances where holders of Class B Common Stock
have five votes per share); the Company's executive officers and directors and
entities affiliated with them will have approximately __% of the combined voting
power of the outstanding capital stock (__% in those circumstances where holders
of Class B Common Stock have five vote per share), and accordingly will have the
ability to elect all of the directors of the Company and to control all other
matters requiring the approval of the Company's stockholders.

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

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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 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 the development of commerce in
electronic content through the Web, 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

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for the broad acceptance of the Wave System. The Company views the acceptance by
entertainment and educational software developers, distributors and consumers 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 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. Electronic content owners distribute their products to
customers in segmented and encrypted ("Wave-enabled") form so it can be used by
the Wave System. Customers are then able to purchase and decrypt the electronic
content on an as-needed, per-use 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
customers will enjoy lower costs and access to more electronic content as a
result of the application of the Wave System.

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

The current WaveMeter would be installed into the customer's
stand-alone PC or into a server on the customer's LAN. It is based on a
semiconductor device that uses proprietary

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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 developed a production software version of the WaveMeter which has been
implemented as the WaveMeter server. The WaveMeter is currently used to
facilitate transactions on the Web through WINPublish and WinPurchase.

The Company believes that 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 tools 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. The two primary mechanisms of delivery of
electronic content to the end user are the Internet and CD-ROM. All data
transfer to the end user may be purchased using a WaveMeter installed in the
customer's PC. In addition, the Wave System works with point-to-multi-point data
broadcasting via satellite or FM sideband, magnetic media, 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 through the Web, and promotes the use of the Wave System by
electronic content owners, particularly among developers and distributors of
entertainment and educational software. The Company views the acceptance by
entertainment and educational software developers, distributors and consumers 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.

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 150 publishers.
WINPurchase permits consumers to purchase electronic content that has been
published through WINPublish. While the WaveMeter server does not require a
WaveMeter at the consumer's site, WINPublish and WINPurchase are fully
compatible with the use of a hardware WaveMeter by the consumer. 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 and offer them a standard platform
for commerce in electronic content that is designed for the Internet, CD-ROM and
eventually broadband.

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 executed a memorandum of
understanding to incorporate the WaveMeter into some of Creative's existing and
future product lines. The final agreement is expected to be concluded in the
first quarter of 1997 and the first hardware products are expected to be
available in the fall of 1997. This agreement provides Wave with the first
strategic partner who can build an installed base of millions of households over
the next 2-3 years. The compatibility of the Wave System with the Web has
provided the Company with a leading-edge product that

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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 an agreement 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. No
assurance can be given that any or all of the aforementioned companies will be
successful in developing or marketing products that apply the Wave System
technology or that are Wave-enabled.

Electronic content owners may use the Wave System to package, encrypt,
and price electronic content to distribute to end users. Because the Wave System
uses asynchronous communication, it is well suited to low-cost processing of
micro, rental and rent-to-own transactions. The end users will pay for the
content on a per-piece basis drawing against credit securely stored in the
WaveMeter. The Company believes that this functionality of the Wave System can
reduce a user's expenditures on electronic content. Through the use of Wave-
compatible search software, the Wave System allows customers to preview and test
a wide array of electronic content prior to making a purchase decision, which
the Company believes will expand the market for the electronic content.

Wave has focused on promoting the acceptance of the Wave System by
electronic content owners. The initial target market is entertainment and
educational software to be delivered on a rental or rent-to-own basis. Wave
believes that the unique ability of the Wave System to permit the consumer to
rent-to-own electronic content will provide the home consumer with a new way of
acquiring interactive content and can offer the publishers 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 over 40 of such companies have executed content provider
agreements and have expressed their intention to distribute titles using the
Wave System.

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. Because the Wave System is designed to
improve on existing information delivery systems, when implemented in an
application, the Wave System will compete 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 information 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. 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 or other
applications the Company intends to develop for its technology. 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 the Company's competitors and potential competitors will not
succeed in developing technologies and products that are more effective or more
affordable than those being developed by the Company.

The Wave System competes with both metering systems and non-metering
systems in the distribution of electronic content. The Wave System competes
with: (i) electronic content unlocking mechanisms; (ii) hardware-based
controllers such as dongles; (iii) conventional on-line services that connect
directly to PCs or through LANs, such as Lexis(R), Westlaw(R), and Dialog(R);
(iv) electronic content transmission via the Internet; and (v) data broadcast
systems.

The Company believes that the Wave System offers functionality which is
superior to non-metered information delivery systems. The ability to measure,
control, and record the use of electronic content provides benefits to both the
content owners and the end-user customer.

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The content owner receives rich, accurate information on usage in a relatively
low-cost way, and the end user can pay per use and have access to many more
information sources than is possible with subscription services.

The Company believes that the Wave System is superior to software
metering/encryption systems in several ways. Wave offers superior protection
from unauthorized usage, low operating costs (because it does not require
constant communication with and authorization from a centralized processor), and
the fast operation of the Wave System which is convenient and essentially
transparent to the end user. Both software unlocking systems and hardware
controllers offer only part of the functionality of the Wave System. These
systems control the use of information but are very limited in their ability to
measure and record usage information. The Company expects other electronic
information delivery and metering systems to be developed. Many large
information industry players are forming alliances and attempting to capitalize
on the information delivery options offered by the Internet.

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. To prepare for an eventual
entry into international markets, the Company has filed for, but not yet
obtained the necessary export licenses, and there can be no assurance that such
export licenses 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

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. The License Agreement is terminable by Titan if the Company
fails to satisfy certain minimum royalty payments and production levels.
Pursuant to the License Agreement, the Company has granted to Titan the
exclusive right to use the Company's patents in government entities from which

<PAGE> 20
Wave is restricted. The Company is currently in default of its obligation to
pay royalties under the terms of the License Agreement. The Company is in
negotiations with Titan and Titan has waived its right to terminate the License
Agreement until January 24, 1997.

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

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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.

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 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.

20
<PAGE> 22
PROPERTIES

The Company leases its executive 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 9,433 square foot facility 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 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 the 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.

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. and The
Shemano Group, Inc., who received the Placement Warrants (which are exercisable
at $2.54 per share) in connection with the placement of the Series C Preferred
Stock, (iii) Dickinson & Co. and its designees and their transferees, who
received the IPO Warrants (which are exercisable at $6.50 per share) in
connection with the Company's initial public offering, and (iv) two stockholders
of the Company. Dickinson & Co. acted as underwriter for the Company's initial
public offering in 1994. 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

21
<PAGE> 23
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.

<TABLE>
<CAPTION>
NUMBER OF SHARES
OF CLASS A COMMON NUMBER OF SHARES
STOCK 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
Dickinson & Co. [360,000](2) 360,000
Wharton Capital Partners, Ltd. 37,500(2) 37,500
The Shemano Group, Inc. 37,500(2) 37,500
--------- ---------
TOTALS 1,751,778 3,453,077
</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.

(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.

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

22
<PAGE> 24
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 or 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.

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.

23
<PAGE> 25

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.

<TABLE>
<S> <C>
Commission registration fee.................................. $ 2,878
Nasdaq additional listing fee................................ 17,500
Legal fees and expenses...................................... 20,000
Accounting fees and expenses................................. 10,000
Printing and engraving expenses.............................. 10,000
Miscellaneous expenses....................................... 4,622
-------

Total..................................................... $65,000
=======
</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 the fullest extent permitted by the DGCL. In
addition, the Company maintains officers' and

II-1
<PAGE> 26
directors' liability insurance which insures against liabilities that officers
and directors of the Company may incur in such capacities.

ITEM 16. EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------

<S> <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>

- ----------------
* To be filed by amendment.

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 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

II-2
<PAGE> 27
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> 28
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 15th day of
January, 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.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----

<S> <C> <C>
/s/ Peter J. Sprague Chairman and Chief Executive January 15, 1997
- -----------------------------------
Peter J. Sprague Officer (Chief Executive Officer
and Principal Financial Officer)
/s/ Steven Sprague President and Chief Operating Officer January 15, 1997
- -----------------------------------
Steven Sprague

/s/ Gail S. Titus Controller January 15, 1997
- -----------------------------------
Gail Titus

/s/ John E. Bagalay, Jr. Director January 15, 1997
- -----------------------------------
John E. Bagalay, Jr.

/s/ Philippe Bertin Director January 15, 1997
- -----------------------------------
Philippe Bertin

/s/ George Gilder Director January 15, 1997
- -----------------------------------
George Gilder

/s/ John E. McConnaughy, Jr. Director January 15, 1997
- -----------------------------------
John E. McConnaughy, Jr.

/s/ Gene W. Ray Director January 15, 1997
- -----------------------------------
Gene W. Ray
</TABLE>
<PAGE> 29
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
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>

- -------------
* To be filed by amendment.

<PAGE> 1
-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.

KPMG Peat Marwick LLP

New York, New York
January 14, 1997