WAVE SYSTEMS CORP, S-3/A, 1997-03-24

WAVE SYSTEMS CORP
S-3/A, 1997-03-24
COMPUTER PERIPHERAL EQUIPMENT, NEC

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As filed with the Securities and Exchange Commission on March 21, 1997

Registration No. 333-20017
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

AMENDMENT NO. 2

TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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Wave Systems Corp.
(Exact name of registrant as specified in its charter)

Delaware 13-3477246
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

480 Pleasant Street
Lee, Massachusetts 01238
(413) 243-1600
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)

Steven Sprague
President and Chief Operating Officer
Wave Systems Corp.
480 Pleasant Street
Lee, Massachusetts 01238
(413) 243-1600
(Name, address, including zip code, and telephone
number, including area code, of agent for service)

Copy to:
Jeffrey N. Ostrager, Esq.
Curtis, Mallet-Prevost, Colt & Mosle
101 Park Avenue
New York, New York 10178-0061
(212) 696-6000
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Approximate date of commencement of proposed sale to public: At such time
or times after the Registration Statement becomes effective as the Selling
Holders may determine.

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

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

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

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

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

The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PROSPECTUS

3,115,577 Shares

Wave Systems Corp.

Class A Common Stock

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

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

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

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

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

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

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

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

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

The date of this Prospectus is March 21, 1997.

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AVAILABLE INFORMATION

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

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

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

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

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

1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.

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

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

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

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

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

No person is authorized in connection with any offering made hereby to
give any information or to make any representation other than as contained in
this Prospectus, and, if given or made, such information or representation must
not be relied upon as having been authorized by the Company, any Selling
Security Holder or any underwriter. This Prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any of the securities offered
hereby to any person in any jurisdiction in which it is unlawful to make any
such offer or solicitation. Neither the delivery of this Prospectus nor any sale
made hereunder shall under any circumstance imply that there has been no change
in the affairs of the Company since the date hereof.

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PROSPECTUS SUMMARY

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

The Company

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

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

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

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

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

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

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

The Company is a development stage company and has realized minimal
operating revenues since its inception. At December 31, 1996, the Company had an
accumulated deficit of approximately $31.4 million. There can be no assurance
that the Company will be successful in achieving commercial acceptance of the
Wave System.

RECENT DEVELOPMENTS

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

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RISK FACTORS

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

Minimal Revenues; Going Concern Reports

The Company has only recognized minimal revenues to date, has incurred
significant losses and has substantial negative cash flow since its inception.
At December 31, 1996, the Company had an accumulated deficit of $31,426,669. The
Company's independent auditors have included an explanatory paragraph in their
report on the Company's consolidated financial statements as of December 31,
1996 and 1995, and for each of the years in the three year period ended December
31, 1996, and for the period from February 12, 1988 (inception) to December 31,
1996 which paragraph expresses substantial doubt about the Company's ability to
continue as a going concern.

Development Stage Company; Need for Acceptance of the Company's Technology

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

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

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

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

Future Capital Needs; Uncertainty of Additional Funding

The Company anticipates that its existing capital resources will be
adequate to satisfy its capital requirements through the second quarter. The
Company's long-term capital requirements beyond the second quarter will depend
on many factors, including, but not limited to, the rate at which the Company's
strategic partners incorporate the Wave System into their products, the market
acceptance of such products, the levels of promotion and advertising required to
launch such products and attain a competitive position in the marketplace, the
extent to which the Company invests in technology, and the response of
competitors to the products based on the Company's technology. In order to
continue operations, the Company will need to raise additional funds through
public or private financings. The Company has no current commitment

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

Risk of Losing Nasdaq National Market Listing

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

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

Rapid Technological Change; New Product Introductions

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

Dependence on CD-ROM, Internet and Broadband Markets

Although the Company believes that its system is adaptable to all
significant present modes for the delivery of electronic content, the Company
believes that its technology is particularly well-suited for the CD-ROM,
Internet and broadband markets and that growth in the CD-ROM, Internet and
broadband markets will facilitate and enhance the acceptance of the Company's
technology. There can be no assurance that the CD-ROM, Internet and broadband
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 Company operates in a highly competitive and fragmented environment
that is characterized by rapidly evolving technology. Many of the Company's
competitors and potential competitors have substantially greater financial and
technical resources than the Company. Also, many current and potential
competitors have greater name recognition and more extensive customer bases that
could be leveraged, thereby gaining market share or product acceptance to the
Company's detriment. The Wave System competes with conventional information
delivery systems, such as on-line services, subscription services on CD-ROM, and
services on the Internet. However, the Company believes that its metering
capability is competitive with other electronic content delivery systems in a
number of applications due to its superior protection against unauthorized
usage, accurate and detailed information on content usage, and transparent
operation. Further, provided that the Company is successful in incorporating the
rental and rent-to-own functionality into the Wave System, the Company believes
that it will be competitive with existing distribution systems, including
traditional retail outlets for entertainment and educational software, due to
its ability to offer these innovative merchandising mechanisms.

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

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

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

The Company believes that the interoperability of the Wave System with
currently available and developing distribution media makes the Wave System
attractive to both distributors and consumers of electronic content. A consumer
with an installed WaveMeter will be able to purchase Wave-enabled content from
sources on CD-ROM and/or the Internet, as well as from sources distributing
electronic content on other developing media such as broadband. In addition,
with the incorporation of the rental and rent-to-own functionality, the Wave
System will offer greater merchandising flexibility than is possible using
currently available

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electronic commerce solutions. There can be no assurance that the Wave System
will achieve the broad-based acceptance necessary to make the system a viable
competitor with currently existing and developing electronic commerce solutions.

Dependence on Strategic Partners

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

Dependence on Key Personnel

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

Proprietary Rights and Licenses and Intellectual Property

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

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

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

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

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

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

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whole provide it with exclusive rights under the Wave Patents. There can be no
assurance that the Company will enjoy exclusive rights to the Wave Patents under
such agreements.

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

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

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

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

Conflicts of Interest

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

Voting Rights; Control by Existing Stockholders

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

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of 20% or more of the outstanding voting securities of the Company. Both classes
vote together as a single class on all matters, except where class voting is
required by the Delaware General Corporation Law ("DGCL"), which would apply,
among other situations, to a vote on any proposal to modify the voting rights of
the Class B Common Stock. Upon conversion of the Series C Preferred Stock and
upon the exercise of the warrants, the Company's executive officers and
directors and entities affiliated with them will have approximately 18% of the
combined voting power of the outstanding capital stock (42% in those
circumstances where holders of Class B Common Stock have five votes per share).

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

Anti-takeover Provisions

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

Volatility of Stock Price

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

Absence of Dividends

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

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BUSINESS

Introduction

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The Wave System

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

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Company believes that greater flexibility in electronic distribution and pricing
makes the Wave System particularly attractive to developers, distributors and
consumers of entertainment and educational software.

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

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

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

The Company believes that the hardware version of the WaveMeter is the
most secure form of metering technology available today. Tampering with the
WaveMeter is easily detected by both the WaveMeter and WaveNet. The 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 low since the keys
have no system-wide use.

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

Markets and Business Strategy

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

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installed base of WaveMeters and acceptance of the Wave System. The Company
believes that once there is a broad installed base of WaveMeters, electronic
content owners from other market segments are likely to be attracted to the Wave
System.

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

Wave has also focused on pursuing strategic relationships with companies
seeking to distribute electronic content via the Internet. The compatibility of
the Wave System with the Web has provided the Company with a product that has
already attracted the attention of leaders in the development of electronic
commerce solutions and particularly commerce in electronic content. Wave has
executed a letter of intent with EarthLink Network, Inc. to jointly promote the
Wave System. Wave has also entered into a letter of intent with IBM to work on
the interoperability between 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.

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

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

Competition

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against unauthorized usage, accurate and detailed information on content usage,
and transparent operation. Further, provided that the Company is successful in
incorporating the rental and rent-to-own functionality into the Wave System, the
Company believes that it will be competitive with existing distribution systems,
including traditional retail outlets for entertainment and educational software,
due to its ability to offer these innovative merchandising mechanisms.

International Market

The Company's technologies are controlled under various United States
export control laws and regulations and will require export licenses for certain
exports outside of the United States and Canada. The Company has received export
licenses from the U.S. Department of Commerce for the sale and export of the
Company's decrypt-only products. The Company is currently preparing to file for
additional licenses under the provisions of the 1996 Executive

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Order allowing export of encryption systems providing key escrow capability.
There can be no assurance that such export license will be obtained. There can
be no assurance that the Company will have patent protection or that it will not
infringe patents of third parties in foreign jurisdictions. Because electronic
monitoring and the transmission of audited usage and financial information on
end users or payment instructions may be subject to varying statutory or
regulatory controls in foreign jurisdictions, there can be no assurance that the
use of all portions of the Wave System will be permitted in any particular
foreign jurisdiction.

Proprietary Rights and Licenses and Intellectual Property

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 that meter this information. In addition, the License
Agreement is subject to the rights of the joint owner of the Licensed Patent,
who has the right to exploit, or to license to third parties, the Licensed
Patent, including in a manner competitive with the Company. There can be no
assurance that the joint owner of the Licensed Patent will not compete with the
Company or license the Licensed Patent to a competitor of the Company, or that
the Company's business will not exceed the scope of the License Agreement.
Pursuant to the License Agreement, the Company is obligated to pay certain
royalties to Titan. Pursuant to the License Agreement, the Company has granted
to Titan the exclusive right to use the Company's patents for products
distributed to government entities. On February 28, 1997 the Company and Titan
executed an addendum to the License Agreement whereby the Company received a
sole license to the Licensed Patent to develop and distribute products to the
in-home consumer microcomputer market segment. Under this addendum to the
License Agreement, Titan waived any and all defaults by Wave under the License
Agreement occurring prior to February 28, 1997.

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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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the United States will be granted. The Company has abandoned its prior
applications for DataWave, InfoWave, WaveTrac, and CreditChip.

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, 1996, 1995 and 1994, the Company expended $3,309,022, $3,324,735
and $1,761,366, respectively, on research and development activities (which
amounts include the value of stock issued). From its inception in February 1988
through December 1996, the Company expended $12,599,686.

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

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

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

Employees

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

Properties

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

Legal Proceedings

On November 25, 1994, the Company commenced an action in the Supreme Court
of the State of New York, New York County, captioned Wave Systems Corp. v.
Infosafe Systems, Inc., Thomas H. Lipscomb and RAS Securities Corp. In this
action, the Company alleges that

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

USE OF PROCEEDS

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

SELLING SECURITY HOLDERS

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

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

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

22
<PAGE> 24

<TABLE>
<CAPTION>
Number of Shares of Class A Number of Shares of
Common Stock Beneficially Class A Common Stock
Selling Security Holder Owned Prior to the Offering Being Offered
----------------------- --------------------------- --------------------
<S> <C> <C>
JNC Opportunity Fund Ltd.................. 1,298,701(1) 3,000,000 (3)
William C. Leigh.......................... 15,000 15,000
Strategic Executives...................... 3,077 3,077
Charles Brofman........................... 7,500 7,500
James D. Burchetta........................ 7,500 7,500
Royalty Capital Partners, L.P............. 45,000 45,000
Wharton Capital Partners, Ltd............. 37,500 (2) 37,500
--------- ---------
TOTAL................................ 1,373,778 3,115,577
========= =========
</TABLE>

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

(2) Represents shares issuable upon exercise of warrants.

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

23
<PAGE> 25

PLAN OF DISTRIBUTION

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

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

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

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

24
<PAGE> 26

LEGAL MATTERS

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

EXPERTS

The consolidated financial statements of Wave Systems Corp. and
Subsidiaries as of December 31, 1996 and 1995, and for each of the years in
the three-year period ended December 31, 1996, and for the period from February
12, 1988 (inception) to December 31, 1996 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, 1996
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 do not include any adjustments
that might result from the outcome of that uncertainty.

25
<PAGE> 27

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

Item 14. Other Expenses of Issuance and Distribution.

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

Commission registration fee.......................... $ 2,878
Nasdaq additional listing fee........................ 17,500
Legal fees and expenses.............................. 30,000
Accounting fees and expenses......................... 10,000
Printing and engraving expenses...................... 10,000
Miscellaneous expenses............................... 4,622
----------
Total............................................. $ 75,000
==========

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> 28

directors' liability insurance which insures against liabilities that officers
and directors of the Company may incur in such capacities.

Item 16. Exhibits.

Exhibit No. Description of Exhibit
- ----------- ----------------------

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

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

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

4.4 Certificate of Designation of Series C Convertible 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

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

* Previously Filed

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 of the estimated maximum offering range
may be reflected in the form of a prospectus

II-2
<PAGE> 29

filed with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;

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

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

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

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

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

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

II-3
<PAGE> 30

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on the 17th day of March
1997.

Wave Systems Corp.

By: /s/ Peter J. Sprague
-------------------------------------
Name: Peter J. Sprague
Title: Chairman and Chief Executive
Officer

SIGNATURES

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

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>

/s/ Peter J. Sprague Chairman and Chief Executive March 17, 1997
- ----------------------------------- Officer (Chief Executive Officer
Peter J. Sprague and Principal Financial Officer)

/s/ Steven Sprague President and Chief Operating Officer March 17, 1997
- -----------------------------------
Steven Sprague

/s/ Gail S. Titus Controller March 17, 1997
- -----------------------------------
Gail S. Titus

/s/ John E. Bagalay, Jr. Director March 17, 1997
- -----------------------------------
John E. Bagalay, Jr.

/s/ Philippe Bertin Director March 17, 1997
- -----------------------------------
Philippe Bertin

/s/ George Gilder Director March 17, 1997
- -----------------------------------
George Gilder

/s/ John E. McConnaughy, Jr. Director March 17, 1997
- -----------------------------------
John E. McConnaughy, Jr.

/s/ Gene W. Ray Director March 17, 1997
- -----------------------------------
Gene W. Ray
</TABLE>

<PAGE> 31

EXHIBIT INDEX

Exhibit No. Description of Exhibit
- ----------- ----------------------

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

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

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

*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

- -----------------
*Previously Filed

<PAGE> 1

Exhibit 23.2

Consent of Independent Auditors

The Board of Directors
Wave Systems Corp.

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

Our report dated March 14, 1997, 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 do not include any adjustments that might
result from the outcome of that uncertainty.

/s/ KPMG Peat Marwick LLP

New York, New York
March 20, 1997