WAVE SYSTEMS CORP, S-3, 1997-10-20

WAVE SYSTEMS CORP
S-3, 1997-10-20
COMPUTER PERIPHERAL EQUIPMENT, NEC

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As filed with the Securities and Exchange Commission on October 20, 1997
Registration No. 333-
================================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

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. [ ]

<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===============================================================================================================
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION FEE
SHARE(2) PRICE(2)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock, $.01 par value 5,858,340 Shares $1.14 $6,678,508 $2,204
===============================================================================================================
</TABLE>

(1) Includes (i) up to 5,669,590 shares issuable upon conversion of and as
dividends on outstanding Series F Convertible Preferred Stock, (ii) 168,750
shares issuable upon exercise of warrants issued in connection with the
placement of the Series F Convertible Preferred Stock, and (iii) 20,000 shares
held by one stockholder.

(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c), based on the average of the high and
low prices reported in the Nasdaq SmallCap Market on October 16, 1997.

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

===============================================================================

<PAGE> 2
SUBJECT TO COMPLETION, DATED OCTOBER 20, 1997

PROSPECTUS

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

5,858,340 SHARES

WAVE SYSTEMS CORP.

CLASS A COMMON STOCK

This Prospectus relates to 5,858,340 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 SmallCap Market tier of The
Nasdaq Stock Market under the Symbol: "WAVXC." The last reported sales price
of the Company's Class A Common Stock on The Nasdaq SmallCap Market on October
16, 1997 was $1.125 per share.

The shares of Class A Common Stock offered hereby by the Selling Security
Holders consist of (i) up to 5,669,590 shares issuable upon conversion of
112,500 shares of the Company's Series F Convertible Preferred Stock, par value
$.01 per share (the "Series F Preferred Stock") and as dividends on the Series
F Preferred Stock, (ii) 168,750 shares issuable upon the exercise of warrants
issued in connection with the placement of the Series F Preferred Stock (the
"Placement Warrants"), and (iii) 20,000 shares of Class A Common Stock issued
pursuant to a Software License Agreement entered into between the Company and
Galapagos Software, Inc., dated February 13, 1997 (the "GSI Agreement") in a
transaction exempt from the registration requirements of the Securities Act of
1933, as amended (the "Securities Act").

The Series F Preferred Stock was sold on October 9, 1997 for an aggregate
purchase price of $2,250,000 in a transaction exempt from the registration
requirements of 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
October 9, 1997 (the "Registration Agreement"), between the Company and the
purchaser of the Series F Preferred Stock. The Series F Preferred Stock is
convertible into shares of Class A Common Stock upon the earlier of (i)
December 8, 1997 and (ii) the effective date of the Registration Statement of
which this Prospectus is a part. The conversion price for the Series F
Preferred Stock is the lower of (a) $1.05 and (b) 80% of the average of the
five (5) lowest trading price of the Class A Common Stock during (x) a day on
which the Class A Common Stock is traded on The Nasdaq National Market or The
Nasdaq SmallCap Market or principal national securities exchange or market on
which the Class A Common Stock has been listed, or (y) if the Class A Common
Stock is not listed on The Nasdaq National Market or The Nasdaq SmallCap Market
or any stock exchange or market, a day on which the Class A Common Stock is
traded in the over-the-counter market, as reported by the OTC Bulletin Board,
or (z) if the Class A Common

<PAGE> 3
Stock is not quoted on the OTC Bulletin Board, a day on which the Class A
Common Stock is quoted in the over-the-counter market as reported by the
National Quotation Bureau Incorporated (or any similar organization or agency
succeeding its functions of reporting prices) ("Trading Days"), as reported by
Bloomberg Information Services, Inc. during the ten (10) Trading Days
immediately preceding the conversion date. Holders of the Series F 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 5,669,590 shares of
Class A Common Stock with respect to shares issuable upon conversion of the
Series F Preferred Stock and as dividends on the Series F Preferred Stock. The
number of shares of Class A Common Stock issuable in relation to the Series F
Preferred Stock will depend on the conversion price which, in turn, will depend
on the lowest trading price of the Class A Common Stock for five (5) Trading
Days during the ten (10) Trading Days prior to the date of conversion, as well
as the number of shares issuable as dividends on the Series F Preferred Stock.
Pursuant to the terms of the Series F Preferred Stock, the minimum number of
shares issuable upon conversion (without taking into account shares issuable as
dividends) would be 2,142,857 shares, assuming a conversion price of $1.05 per
share. The actual number of shares issuable upon conversion of the Series F
Preferred Stock and available for resale under this Prospectus could be
materially greater based upon the market price of the Class A Common Stock at
the time or times of conversion.

The Placement Warrants have an exercise price of $1.26 per share, and
expire on October 9, 2002. 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 9.

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

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

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<PAGE> 5

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.

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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, and amendments thereto,
for the fiscal year ended December 31, 1996.

2. The Company's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1997 and June 30, 1997.

3. The Company's Current Reports on Form 8-K filed on January 8,
1997, June 3, 1997 and October 15, 1997.

4. 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 Steven Sprague, 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 anticipates that its existing capital resources, including
the net proceeds from the sale of the Series F Preferred Stock, will be
adequate to satisfy its capital requirements into December 1997. In order to
continue operations, the Company will need to raise additional funds through
public or private financings. The Company does not have any other current
commitment to obtain additional funds and is unable to state the amount or
potential source of such additional funds. 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.

Effective October 3, 1997 the Company was delisted from The Nasdaq
National Market and granted a listing on The Nasdaq SmallCap Market, subject to
certain contingencies described herein. In the event that the Company fails to
meet the contingencies set forth by a Nasdaq Listing Qualifications Panel, the
Company's Class A Common Stock will be immediately delisted from The Nasdaq
SmallCap 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.

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 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 Wave System consists of many individually 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 batched information about the usage of electronic content
to be securely transmitted to a central transaction processing center
("WaveNet"). WaveNet manages encryption and decryption keys, processes credit
and usage charges, automatically

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obtains credit authorization, calculates royalty distributions, and can provide
user and usage data to electronic content owners. The Wave System is
compatible with existing content delivery systems such as CD-ROM, the Internet
and Direct Broadcast Satellite.

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 manufacturers of
personal computers and companies involved in electronic content commerce. Wave
also 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.

Since the end of the second quarter of 1997, the Company furthered its
goal of achieving broad market acceptance of the Wave System by entering into
strategic relationships. The Company and Aladdin Knowledge Systems, Ltd.
("Aladdin") closed a licensing agreement whereby in return for an equity
position in Wave, Aladdin licensed its proprietary persistent encryption
technology. The Company believes that the incorporation of this technology
into the Wave System will facilitate the commerce in electronic content on a
pay-per-use basis. The Company also has set the groundwork for the acceptance
of the Wave System in Europe. In July, the Company entered into a joint
venture with Internet Technology Group, Plc. Pursuant to this agreement, Wave
licensed certain elements of the Wave System to a joint venture company, Wave
ITG Limited, to promote the use of the Wave System in Europe.

The Company intends to continue to pursue strategic relationships with
hardware manufacturers, including personal computer manufacturers, and
companies involved in the commerce of electronic content both in North America
and overseas. The development of WINPublish and WINPurchase services and the
Great Stuff Network site, provide innovative alternatives for the distribution
of electronic content on the Web.

Significant uncertainty currently exists with respect to the adequacy of
current funds to support the Company's activities. This uncertainty will
continue until a positive cash flow from operations can be achieved.
Additionally, the Company is uncertain as to the availability of financing from
other sources to fund any cash deficiencies. These uncertainties raise doubt
about the Company's ability to continue as a going concern.

In order to reduce these uncertainties, the Company is currently
evaluating additional financing options and may therefore elect to raise
capital, from time to time, through equity or debt financings in order to
capitalize on business opportunities and market conditions and insure the
continued development of the Company's technology, products and services.
However, there can be no assurance that the Company can raise additional
financing.

As of October 19, 1997, the Company will be obligated to redeem for
approximately $465,000 all of the outstanding shares of the Series A Redeemable
Preferred Stock issued to a certain individual pursuant to the terms of the
Restated Certificate of Incorporation.

The Company presently has no material commitments for capital
expenditures. However, in order to bring the Wave System to market, the
Company anticipates spending additional amounts on inventory items such as
computer chips and boards, additional hardware, and related materials. Such
spending will vary based on the Company's performance.

Effective October 3, 1997 the Company was delisted from The Nasdaq
National Market and granted a listing on The Nasdaq SmallCap Market, subject to
certain contingencies

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described herein. Pursuant to a hearing before a Nasdaq Listing Qualifications
Panel (the "Panel"), a determination was made that the continued listing of the
Company was no longer warranted since the Company did not meet the requirements
of NASD Marketplace Rule 4450(a)(3), which requires that an issuer maintain
minimum net tangible assets of $4,000,000 if it has sustained losses from
continuing operations and/or net losses in three of its four most recent fiscal
years. The Panel determined to grant the Company a listing on The Nasdaq
SmallCap Market, subject to certain contingencies, pursuant to which the Panel
determined to grant a waiver to the initial $4.00 per share bid price
requirement and a temporary exception for the initial net tangible asset
requirement. The exception requires the Company to provide the Nasdaq Hearing
Department with an executed copy of a contract with a certain original
equipment manufacturer on or before October 15, 1997. As of October 15, 1997,
the Company has not provided the Nasdaq Hearing Department with such a
contract. On October 15, 1997, the Company submitted materials regarding the
status of its original equipment manufacturer discussions, capital raising
efforts, and other corporate initiatives to the Panel. The Panel will review
the materials and respond to Wave regarding Wave's listing status in the near
future. It is uncertain, and the Company makes no assurances regarding, what
the possible outcomes may be.

If the Nasdaq Hearing Department agrees to extend the exception, then
such exception will continue until November 15, 1997, by which time the Company
must make a public filing with the Commission and Nasdaq. The filing must
contain a September 30, 1997 balance sheet, with pro forma adjustments for any
significant transactions occurring on or before the filing date, and evidencing
net tangible assets of $5,500,000 as well as compliance with all initial
inclusion requirements for The Nasdaq SmallCap Market, other than the minimum
bid price requirement. In the event that the Company fails to meet any of the
terms of this exception, the Company's Class A Common Stock will be immediately
delisted from The Nasdaq SmallCap Market.

The Company has continued to incur losses, however, and there can be no
assurance that the Company will be able to meet the net tangible asset,
capital and surplus, or other listing requirements of The Nasdaq SmallCap
Market in the future. Should the Company fail to meet such listing standards,
it may be delisted from The Nasdaq SmallCap 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.

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 June 30, 1997, the Company had an
accumulated deficit of approximately $37 million. There can be no assurance
that the Company will be successful in achieving commercial acceptance of the
Wave System.

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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 June 30, 1997, the Company had an accumulated deficit of $36,591,332. 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 depends 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 to ensure
continued acceptance of the Wave System.

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.

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FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING

The Company anticipates that its existing capital resources, including
the net proceeds from the sale of the Series F Preferred Stock, will be
adequate to satisfy its capital requirements into December 1997. The Company's
long-term capital requirements 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 does not have any other current commitment to obtain additional funds
and is unable to state the amount or potential source of such additional funds.
If additional funds are raised through the issuance of equity securities, the
percentage ownership of then current stockholders of the Company will be
reduced and such equity securities may have rights, preferences or privileges
senior to those of the holders of the Company's Class A Common Stock. No
assurance can be given that additional financing will be available or that, if
available, it will be available on terms favorable to the Company or its
stockholders. If adequate funds are not available to satisfy either short-
or long-term capital requirements, the Company may be required to curtail its
operations significantly or to obtain funds through arrangements with strategic
partners or others that may require the Company to relinquish material rights
to certain of its technologies or potential markets.

RISK OF LOSING NASDAQ SMALLCAP MARKET LISTING

Effective October 3, 1997 the Company was delisted from The Nasdaq
National Market and granted a listing on The Nasdaq SmallCap Market, subject to
certain contingencies described herein. Pursuant to a hearing before a Nasdaq
Listing Qualifications Panel (the "Panel"), a determination was made that the
continued listing of the Company was no longer warranted since the Company did
not meet the requirements of NASD Marketplace Rule 4450(a)(3), which requires
that an issuer maintain minimum net tangible assets of $4,000,000 if it has
sustained losses from continuing operations and/or net losses in three of its
four most recent fiscal years. The Panel determined to grant the Company a
listing on The Nasdaq SmallCap Market, subject to certain contingencies,
pursuant to which the Panel determined to grant a waiver to the initial $4.00
per share bid price requirement and a temporary exception for the initial net
tangible asset requirement. The exception requires the Company to provide the
Nasdaq Hearing Department with an executed copy of a contract with a certain
original equipment manufacturer on or before October 15, 1997. As of October
15, 1997, the Company has not provided the Nasdaq Hearing Department with such
a contract. On October 15, 1997, the Company submitted materials regarding the
status of its original equipment manufacturer discussions, capital raising
efforts, and other corporate initiatives to the Panel. The Panel will review
the materials and respond to Wave regarding Wave's listing status in the near
future. It is uncertain, and the Company makes no assurances regarding, what
the possible outcomes may be.

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exception, the Company's Class A Common Stock will be immediately delisted from
The Nasdaq SmallCap Market.

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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.

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.

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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 Cryptolopes(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 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

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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 potential 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.

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

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<PAGE> 16
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, and WaveTrac.

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.

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VOTING RIGHTS; CONTROL BY EXISTING STOCKHOLDERS

The Company's Common Stock is divided into two classes with different
voting rights, which allows for the maintenance of control of the Company by
the holders of the Class B Common Stock. Holders of Class A Common Stock are
entitled to one vote per share on all matters submitted to a vote of the
stockholders of the Company. Holders of Class B Common Stock are entitled to
one vote per share on all matters submitted to a vote of the stockholders,
except that holders of Class B Common Stock will have five votes per share in
cases where one or more directors are nominated for election by persons other
than the Company's Board of Directors and where there is a vote on any merger,
consolidation or other similar transaction which is not recommended by the
Company's Board of Directors. In addition, holders of the Class B Common Stock
will have five votes per share on all matters submitted to a vote of the
stockholders in the event that any person or group of persons acquires
beneficial ownership of 20% or more of the outstanding voting securities of the
Company. Both classes vote together as a single class on all matters, except
where class voting is required by the Delaware General Corporation Law
("DGCL"), which would apply, among other situations, to a vote on any proposal
to modify the voting rights of the Class B Common Stock. Upon conversion of
the Series F Preferred Stock and upon the exercise of the warrants, the
Company's executive officers and directors and entities affiliated with them
will have approximately 15% of the combined voting power of the outstanding
capital stock (36% 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.

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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

In 1996 the Company developed a production software version of the
WaveMeter that offers a subset of the feature 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.

Since the end of the second quarter of 1997, the Company furthered its
goal of achieving broad market acceptance of the Wave System by entering into
strategic relationships. The Company

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and Aladdin Knowledge Systems, Ltd. ("Aladdin") closed a licensing agreement
whereby in return for an equity position in Wave, Aladdin licensed its
proprietary persistent encryption technology. The Company believes that the
incorporation of this technology into the Wave System will facilitate the
commerce in electronic content on a pay-per-use basis. The Company also has
set the groundwork for the acceptance of the Wave System in Europe. In July,
the Company entered into a joint venture with Internet Technology Group, Plc.
Pursuant to this agreement, Wave licensed certain elements of the Wave System
to a joint venture company, Wave ITG Limited, to promote the use of the Wave
System in Europe.

In order to reduce these uncertainties, the Company is currently evaluating
additional financing options and may therefore elect to raise capital, from
time to time, through equity or debt financings in order to capitalize on
business opportunities and market conditions and insure the continued
development of the Company's technology, products and services. However, there
can be no assurance that the Company can raise additional financing.

The Company presently has no material commitments for capital expenditures.
However, in order to bring the Wave System to market, the Company anticipates
spending additional amounts on inventory items such as computer chips and
boards, additional hardware, and related materials. Such spending will vary
based on the Company's performance.

Effective October 3, 1997 the Company was delisted from The Nasdaq National
Market and granted a listing on The Nasdaq SmallCap Market, subject to certain
contingencies described herein. Pursuant to a hearing before a Nasdaq Listing
Qualifications Panel (the "Panel"), a determination was made that the continued
listing of the Company was no longer warranted since the Company did not meet
the requirements of NASD Marketplace Rule 4450(a)(3), which requires that an
issuer maintain minimum net tangible assets of $4,000,000 if it has sustained
losses from continuing operations and/or net losses in three of its four most
recent fiscal years. The Panel determined to grant the Company a listing on
The Nasdaq SmallCap Market, subject to certain contingencies, pursuant to which
the Panel determined to grant a waiver to the initial $4.00 per share bid price
requirement and a temporary exception for the initial net tangible asset
requirement. The exception requires the Company to provide the Nasdaq Hearing
Department with an executed copy of a contract with a certain original
equipment manufacturer on or before October 15, 1997. As of October 15, 1997,
the Company has not provided the Nasdaq Hearing Department with such a
contract. On October 15, 1997, the Company submitted materials regarding the
status of its original equipment manufacturer discussions, capital raising
efforts, and other corporate initiatives to the Panel. The Panel will review
the materials and respond to Wave regarding Wave's listing status in the near
future. It is uncertain, and the Company makes no assurances regarding, what
the possible outcomes may be.

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filing date, and evidencing net tangible assets of $5,500,000 as well as
compliance with all initial inclusion requirements for The Nasdaq SmallCap
Market, other than the minimum bid price requirement. In the event that the
Company fails to meet any of the terms of this exception, the Company's Class A
Common Stock will be immediately delisted from The Nasdaq SmallCap Market.

The Company is a development stage company and has realized minimal
operating revenues since its inception. At June 30 1997, the Company had an
accumulated deficit of approximately $37 million. There can be no assurance
that the Company will be successful in achieving commercial acceptance of the
Wave System.

THE WAVE SYSTEM

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

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

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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 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

22
<PAGE> 24
in electronic content. Wave is currently in discussion with major original
equipment manufacturers regarding the incorporation of the WaveMeter into their
products.

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 Cryptolopes(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

23
<PAGE> 25
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.

24
<PAGE> 26
will achieve the broad-based acceptance necessary to make the system a viable
competitor with currently existing and developing electronic commerce
solutions.

INTERNATIONAL MARKET

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

PROPRIETARY RIGHTS AND LICENSES AND INTELLECTUAL PROPERTY

25
<PAGE> 27
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.

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

26
<PAGE> 28
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.

27
<PAGE> 29
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 June 30, 1997, the Company employed 48 full-time employees, 23 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
current monthly rent of $6,769. The lease is scheduled to expire in June 1999.
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.

28
<PAGE> 30
LEGAL PROCEEDINGS

On June 27, 1997 a complaint alleging breach of contract, among other
related claims, was filed against the Company by Carl A. Artopoeus and
Artopoeus Capital Management (collectively, "Artopeous") with the Sacramento
Superior Court in Sacramento, California in connection with the engagement of
Artopeous by the Company to arrange financing. A hearing has been set for
October 20, 1997.

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) Combination Inc. ("Combination"), the
purchaser of the Series F Preferred Stock and 112,500 Placement Warrants (which
are exercisable at $1.26 per share) in connection with the placement of the
Series F Preferred Stock, (ii) Wharton Capital Partners, Ltd., who received
56,250 Placement Warrants in connection with the placement of the Series F
Preferred Stock, and (iii) Galapagos Software, Inc., who received 20,000 shares
of unregistered Class A Common Stock in connection with the GSI Agreement.
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 F Preferred Stock, the number of shares of Class A Common Stock
calculated to be issuable upon conversion is based on a conversion price of
$1.05 per share (without taking into account shares issuable as dividends).
The conversion price for the Series F Preferred Stock is the lower of (a) $1.05
and (b) 80% of the average of the five (5) lowest trading price of the Class A
Common Stock during (x) a day on which the Class A Common Stock is traded on
The Nasdaq National Market or The Nasdaq SmallCap Market or principal national
securities exchange or market on which the Class A Common Stock has been
listed, or (y) if the Class A Common Stock is not listed on The Nasdaq National
Market or The Nasdaq

29
<PAGE> 31
SmallCap Market or any stock exchange or market, a day on which the Class A
Common Stock is traded in the over-the-counter market, as reported by the OTC
Bulletin Board, or (z) if the Class A Common Stock is not quoted on the OTC
Bulletin Board, a day on which the Class A Common Stock is quoted in the
over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions of
reporting prices) ("Trading Days"), as reported by Bloomberg Information
Services, Inc. during the ten (10) Trading Days immediately preceding the
conversion date. Holders of the Series F 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 F 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 F 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 F Preferred
Stock, pursuant to the terms of the Registration Agreement.

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

NUMBER OF SHARES
OF CLASS A NUMBER OF SHARES
COMMON STOCK OF CLASS A
BENEFICIALLY OWNED COMMON STOCK
SELLING SECURITY HOLDER PRIOR TO THE OFFERING BEING OFFERED
- ------------------------- --------------------- -----------------
<S> <C> <C>
Combination Inc. 2,864,726(1) 5,782,090(4)(5)
Wharton Capital Partners, Ltd......... 118,750(2) 56,250
Galapagos Software, Inc................ 20,000(3) 20,000
--------- ---------
TOTAL............................ 3,003,476 5,858,340
- ---------------- ========= =========
</TABLE>
(1) Represents shares issuable upon a hypothetical conversion of 112,500
shares of Series F Preferred Stock, with a stated value of $2,250,000 acquired
on October 9, 1997 and 112,500 shares issuable upon exercise of Purchase
Warrants.

(2) Represents shares issuable upon exercise of warrants. 37,500 shares of
Class A Common Stock issuable upon the exercise of a warrant issued to Wharton
Capital Partners, Ltd. in connection with the placement of the Series C
Preferred Stock, par value $.01, which were registered pursuant to a
registration statement filed with the Commission on January 17, 1997, which was
amended on March 7, 1997 and March 21, 1997. 25,000 shares of Class A Common
Stock issuable upon the exercise of a warrant issued to Wharton Capital
Partners, Ltd. in connection with the placement of the Series D Preferred
Stock, par value $.01, which were registered pursuant to a registration
statement filed with the Commission on June 9, 1997, which was amended on June
16, 1997.

(3) Represents shares issued pursuant to a Software Development Agreement
between the Company and Galapagos Software, Inc., dated February 13, 1997 (the
"GSI Agreement"), whereby the Company issued 20,000 shares of unregistered
Class A Common Stock to Galapagos Software, Inc., which shares were entitled to
certain piggyback registration rights.

30
<PAGE> 32
(4) 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 Combination. Because the number of shares of Class A
Common Stock that will ultimately be issued to Combination upon conversion of
the Series F 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.

(5) Combination has contractually agreed not to use its conversion rights
with respect to the Series F Preferred Stock to obtain in excess of 4.9% of the
total outstanding shares of Class A Common Stock.

31
<PAGE> 33
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, including 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 Regulation M, 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

32
<PAGE> 34
any. The Selling Security Holders will be indemnified by the Company against
certain civil liabilities, including certain liabilities under the Securities
Act, or will be entitled to contribution in connection therewith. The Company
will be indemnified by the Selling Security Holders against certain civil
liabilities, including certain liabilities under the Securities Act, or will be
entitled to contribution in connection therewith.

LEGAL MATTERS

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

EXPERTS

The consolidated financial statements and schedule of Wave Systems Corp.
and Subsidiaries as of December 31, 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 and schedule do not include any
adjustments that might result from the outcome of that uncertainty.

33
<PAGE> 35
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

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

<TABLE>
<S> <C>
Commission registration fee . . . . . . . . . . . . . . . . . . . . . . . . $ 2,204
Nasdaq additional listing fee . . . . . . . . . . . . . . . . . . . . . . . 7,500
Legal fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Accounting fees and expenses . . . . . . . . . . . . . . . . . . . . . . . 10,000
Printing and engraving expenses . . . . . . . . . . . . . . . . . . . . . . 2,000
Miscellaneous expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 96
-------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $41,800
=======
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTOR AND OFFICERS.

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

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

Section 145 of the DGCL provides that a corporation may indemnify any
person, including officers and directors, who are, or are threatened to be
made, parties to any threatened, pending or completed legal action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of such corporation), by reason of the fact
that such person was an officer, director, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation. The indemnity may
include expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection
with such action, suit or proceeding, provided such officer, director, employee
or agent acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests and, for criminal proceedings,
had no reasonable cause to believe that his conduct was unlawful. A Delaware
corporation may indemnify officers and directors in an action by or in the
right of the corporation under the same

II-1
<PAGE> 36
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 directors' liability insurance
which insures against liabilities that officers and directors of the Company
may incur in such capacities.

ITEM 16. EXHIBITS.

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

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

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

4.4 Certificate of Designation of Series F Convertible Preferred Stock of Wave Systems Corp. as filed with the
Delaware Secretary of State on October 9, 1997 (incorporated by reference to Exhibit 3.1 of the
Registrant's Current Report on Form 8-K filed on October 15, 1997, File No. 0-24752)

4.5 Purchase Agreement between Wave Systems Corp. and Combination Inc., dated as of October 9, 1997
(incorporated by reference to Exhibit 4.1 of the Registrant's Current Report on Form 8-K filed on October
15, 1997, File No. 0-24752)

4.6 Registration Rights Agreement between Wave Systems Corp. and Combination Inc., dated as of October 9, 1997
(incorporated by reference to Exhibit 4.2 of the Registrant's Current Report on Form 8-K filed on October
15, 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

24.1 Power of Attorney (included on signature pages)
- ----------------
</TABLE>
* To be filed as an amendment.

II-2
<PAGE> 37
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 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

II-3
<PAGE> 38
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-4
<PAGE> 39
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on the 15th day of
October, 1997.

Wave Systems Corp.

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

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Peter J. Sprague and Steven Sprague and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him or her and in his or her name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as full to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his or her substitute
or substitutes, may lawfully do or cause to be done by virtue hereof. 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 October 15, 1997
- --------------------------- Officer (Chief Executive Officer,
Peter J. Sprague Principal Financial Officer and
Principal Accounting Officer)

/s/ STEVEN SPRAGUE President and Chief Operating Officer October 15, 1997
- ---------------------------
Steven Sprague

/s/ JOHN E. BAGALAY, JR. Director October 15, 1997
- ----------------------------
John E. Bagalay, Jr.

</TABLE>

--------------------------- Director October 15, 1997
Philippe Bertin

/S/ GEORGE GILDER Director October 15, 1997
---------------------------
George Gilder

/s/ JOHN E. MCCONNAUGH, JR. Director October 15, 1997
---------------------------
John E. McConnaughy, Jr.

/s/ GENE W. RAY Director October 15, 1997
--------------------------
Gene W. Ray
</TABLE>

<PAGE> 41
INDEX TO EXHIBITS

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

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

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

4.4 Certificate of Designation of Series F Convertible Preferred Stock of Wave Systems Corp. as
filed with the Delaware Secretary of State on October 9, 1997 (incorporated by reference to
Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed on October 15, 1997, File No.
0-24752)

4.6 Registration Rights Agreement between Wave Systems Corp. and Combination Inc., dated as of
October 9, 1997 (incorporated by reference to Exhibit 4.2 of the Registrant's Current Report on
Form 8-K filed on October 15, 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

24.1 Power of Attorney (included on signature pages)
- ----------------
</TABLE>
* To be filed as an amendment.

<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

Boston, Massachusetts
October 17, 1997