WAVE SYSTEMS CORP, S-3, 1999-12-15

WAVE SYSTEMS CORP
S-3, 1999-12-15
COMPUTER PERIPHERAL EQUIPMENT, NEC

Previous: CASTLE GROUP INC, 10QSB, 1999-12-15

Next: WAVE SYSTEMS CORP, POS AM, 1999-12-15

As filed with the Securities and Exchange Commission on December 15, 1999
Registration No. 333-
================================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

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

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

WAVE SYSTEMS CORP.
(Exact name of registrant as specified in its charter)

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

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:
NEIL W. TOWNSEND, ESQ.
BINGHAM DANA LLP
399 PARK AVENUE
NEW YORK, NEW YORK 10022-4689
(212) 318 7700

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 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, 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, 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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
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 the delivery of the prospectus is expected to be made pursuant to Rule
434 under the Securities Act, check the following box. [_]

<TABLE><CAPTION>
CALCULATION OF REGISTRATION FEE
=============================== ====================== =================== ==================== ====================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE (1) REGISTRATION FEE
- ------------------------------- ---------------------- ------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Class A Common Stock,
$.01 par value.............. 1,590,178 Shares $12.38 $19,686,403 $5,197
=============================== ====================== =================== ==================== ====================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c), based on the average of the high and low prices
reported on the Nasdaq National Market on December 7, 1999.

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

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>
-1-

SUBJECT TO COMPLETION, DATED DECEMBER 15, 1999

PROSPECTUS

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.

1,590,178 SHARES

WAVE SYSTEMS CORP.

CLASS A COMMON STOCK

This prospectus relates to 1,590,178 shares of Class A Common Stock,
par value $.01 per share, of Wave Systems Corp. We are registering these shares
on behalf of certain stockholders, to be offered and sold by them from time to
time. We are not selling any of these shares and will not receive any proceeds
from the sale of these shares. Our Class A common stock trades on the Nasdaq
National Market under the symbol "WAVX". The last reported sales price of our
Stock on December 14, 1999 was $13.81 per share.

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

INVESTING IN OUR CLASS A COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7

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

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS
ACCURATE OR COMPLETE. IT IS ILLEGAL FOR ANYONE TO TELL YOU OTHERWISE.

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

The date of this prospectus is December 15, 1999.
<PAGE>
-2-

YOU SHOULD RELY ONLY UPON THE INFORMATION CONTAINED IN THIS DOCUMENT OR
THAT TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU
WITH ADDITIONAL INFORMATION OR INFORMATION THAT IS DIFFERENT. THIS PROSPECTUS IS
NOT AN OFFER TO SELL OR AN INVITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO DO
SO. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE AS OF ITS DATE,
REGARDLESS OF THE TIME OF THE DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF THE
CLASS A COMMON STOCK; CHANGES MAY HAVE OCCURRED SINCE.

We own or have rights to trademarks or tradenames that we use in
conjunction with the sale of our products. Embassy(TM), WaveMeter(R),
WaveNet(R), Great Stuff Network(TM), Second Shift(TM) (the Wave juggler logo),
WaveCommerce(TM), Wave Interactive Network(TM), WINPublish(TM), WINPurchase(TM),
CablePC(TM), WaveDirect(TM), MyPublish(TM), CharityWave(TM) and N*Click (TM) are
trademarks or registered trademarks used by us. All other trademarks and
tradenames referred to in this prospectus are the property of their respective
owners.
<PAGE>
-3-

PROSPECTUS SUMMARY

THE FOLLOWING IS A SUMMARY, AND SHOULD BE READ AS SUCH. THIS SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE
DETAILED INFORMATION AND FINANCIAL INFORMATION AND STATEMENTS INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. YOU SHOULD CAREFULLY CONSIDER THE FACTORS SET
FORTH UNDER THE CAPTION "RISK FACTORS".

Our Business........Wave Systems Corp. offers powerful, next-generation
solutions for electronic commerce, making the process
easier, versatile, and more secure for consumers as well as
business-to-business applications. We are involved in the
research, development, and market testing of the Wave
System, which performs the buying transactions in a range of
consumer electronic devices, including computers, personal
digital assistants, and interactive televisions, for the use
of electronic content and services in a secure, trusted
environment. Electronic content and services refers to any
data, graphic, software, video or audio sequence that can be
digitally transmitted or stored, as well as access to
services such as broadcast or telecommunications services.
Examples include archived newspaper and magazine articles,
on-line books, music selections, clip-art, photographs and
video games. Under our model, electronic content and service
providers use the Wave System to allow consumers to purchase
one-time, multiple or permanent use of their content or
service, using a wide range of payment models including
rental, pay-for-use, or outright purchase, much like a phone
card or a pay-per-view cable system. We believe that the
Wave System can fundamentally change today's centralized
e-commerce model by creating a de-centralized distribution
and security system under which consumers will be able to
make individual purchases of images, text, music or video,
or make use of software, all from the consumer's computer or
other interactive device. This means that content and
services can be consumed with more efficient and flexible
pricing, broader distribution opportunities, greater
protection against unauthorized usage and with better
privacy protection of the consumer's sensitive information.

Our Market..........Our long-term strategy is to achieve broad market acceptance
of the Wave System as a standard platform for the secure
delivery of electronic content and services and to build a
network of services for this platform. The growth of
e-commerce is creating consumer demand for a powerful
merchandising interface at the point of purchase, whether in
the office or at home. The business world is creating new
customer and supplier value chains which require new
approaches to the protection of information and content
which flows over public, shared networks. Content providers
seek a system that will allow consumers to pay royalties
easily and quickly for usage while allowing both customized
and broad, inexpensive distribution. Consumers in turn seek
enhanced control of their individual privacy and secure
storage of sensitive information. Our creation of the
trusted client model allows important new approaches to
addressing issues regarding the authentication of
identities, the protection of content and services, and the
distribution of electronic commerce transactions. These
three capabilities are key to building a network of
end-users and conducting e-commerce transactions.

<PAGE>
-4-

Our Product.........The Wave System consists of an EMBedded Application Security
SYstem in consumer devices that provides a core hardware and
software foundation for consumers to purchase electronic
content and access services on a flexible purchase basis.
The EMBASSY platform is a programmable, low cost "system
within a system" that can perform independent transactions
such as meter pay-per-use of electronic content, store
sensitive information such as identities, credit information
and account balances, and run secure applications for
pay-per-use access to software. The EMBASSY platform is an
open model based on security hardware originally designed
for use with "smart cards" that can be integrated into
personal computers and peripherals, interactive televisions
or used as independent components. The WaveMeter application
running in the EMBASSY platform allows e-commerce
transactions to occur without the expense of a real-time
network connection for every transaction. We have started
production of a software version of the WaveMeter
application that offers many of the features of the hardware
version. The WaveMeter server enables electronic content
owners to securely sell usage of their intellectual property
from a Web site. This secure electronic content delivery
service, offered through the WaveMeter server, does not
require either the consumer or the publisher to install any
additional hardware or software. The EMBASSY securely stores
electronic funds and transaction information about the usage
of electronic content to be transmitted securely to a
WaveNet central transaction processing center periodically.
The WaveNet application manages electronic codes for
scrambling and unscrambling electronic content, processes
credit and usage charges, automatically obtains credit
authorization, calculates royalty distributions, and provide
user and usage data to electronic content owners. The Wave
System is designed to be compatible with existing content
delivery systems, such as CD-ROMs and the Internet. Using
these Wave-enabled distribution systems, electronic content
providers can distribute their products in a secure format
and offer them for sale through the EMBASSY platform, which
in turn allows consumers to purchase and access the
electronic content when desired.

Our Partners........We are pursuing strategic relationships to build new ways of
distributing electronic content and services with electronic
content providers, network companies, and hardware
manufacturers. We have attracted other companies to port
their applications and services to the Wave System and its
EMBASSY platform, which we believe will in turn increase the
value of the system to other potential partners. During 1998
and 1999, we established relationships with RSA Data
Security, NEC Technologies, Pollex Technology,
Hewlett-Packard's VerSecure division, Sun Microsystems,
SMSC, ITE, IGST, Sarnoff Corp., Hauppauge Computer Systems,
Compaq Computer, National Semiconductor, KiSS Nordic,
Cyber-COMM, Lego Media and WavePhore. In 1999 and 2000, we
hope to expand the number of commitments from hardware
manufacturers, including personal computer manufacturers,
peripheral companies and other companies involved in
e-commerce.

We are incorporated in Delaware, and we were known previously as Indata
Corp. and Cryptologics International, Inc. We changed our name to Wave Systems
Corp. in January 1993. Our principal executive offices are located at 480
Pleasant Street, Lee, Massachusetts 01238, and our telephone number is (413)
243-1600.
<PAGE>
-5-

THE OFFERING

Issuer........................................Wave Systems Corp.

Shares of Class A common stock
offered by the selling stockholders.........1,590,178

Class A common stock outstanding
as of November 18, 1999.....................38,309,089

Voting Rights.................................One vote per share

Use of Proceeds...............................Wave will not receive any proceeds
from sales made hereunder

Listing.......................................Nasdaq National Market

Trading Symbol................................WAVX
<PAGE>
-6-

SUMMARY CONSOLIDATED FINANCIAL INFORMATION

STATEMENT OF OPERATIONS DATA:
<TABLE><CAPTION>

Nine
Months
Ended
Sept. 30, Year ended December 31
------------ --------------------------------------------
1999 1998 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(unaudited)
------------
Revenues $ 70,229 $ 47,681 $ 23,659 $ 3,220

Cost of Sales 34,974 37,488 12,947 1,762
------------ ------------ ------------ ------------
Gross Margin 35,255 10,193 10,712 1,458
------------ ------------ ------------ ------------

Operating expenses: 19,861,738 18,192,378 18,931,418 10,304,874
License Fee 1,250,000 2,750,000 1,000,000 --
License Warrant Cost -- (1,100,000) -- --
Net loss (18,907,966) (16,586,027) (18,012,635) (10,126,546)
------------
Accrued dividends on
preferred stock (including
accretion of assured
incremental yield on preferred
stock of $0 in 1999, $750,000
in 1998, $1,673,000 in 1997
and $670,965 in 1996 and
$3,093,965 since inception) 13,239 858,863 2,482,982 870,579
Net loss to common stockholders (18,921,205) $(17,444,890) $(20,495,617) $(10,997,125)
============ ============ ============ ============
Weighted average number of
common shares outstanding
during the period 37,489,993 31,580,665 23,224,569 17,237,405
Loss per common share $ (.50) $ (.55) $ (.88) $ (.64)
============ ============ ============ ============

Operating expenses: 7,404,920 4,193,649 88,203,209
License Fee -- -- 5,000,000
License Warrant Cost -- -- (1,100,000)
------------
Net loss (6,832,866) (4,271,501) (84,122,567)
------------
Accrued dividends on
preferred stock (including
accretion of assured
incremental yield on preferred
stock of $0 in 1999, $750,000
in 1998, $1,673,000 in 1997
and $670,965 in 1996 and
$3,093,965 since inception) 40,600 39,484 4,350,597
Net loss to common stockholders $ (6,873,466) $ (4,310,985) $(88,473,164)
============ ============ ============
Weighted average number of
common shares outstanding
during the period 13,794,373 10,503,621 15,304,539
Loss per common share $ (.50) $ (.41) $ (5.78)
============ ============ ============

BALANCE SHEET DATA: September 30, 1999
------------------
(unaudited)
------------
Working Capital $ 10,447,469
Total Assets $ 16,910,351
Series A Cumulative Redeemable Preferred Stock $ 0
Deficit Accumulated During Development $(84,122,567)
Total Stockholders' Equity $ 12,620,007
============
</TABLE>

<PAGE>
-7-

RISK FACTORS

WE HAVE A HISTORY OF NET LOSSES AND EXPECT NET LOSSES TO CONTINUE. IF
WE CONTINUE TO LOSE MONEY, OUR OPERATIONS WILL NOT BE FINANCIALLY VIABLE.

We have experienced significant losses and negative cash flow from
operations since our inception. We have not realized a net operating profit in
any quarter since we began our operations. As of September 30, 1999, we had a
deficit accumulated during the development stage of approximately $84 million
and working capital of approximately $10 million. Our limited operating history
offers little information to serve as a basis for evaluating us and our
long-term prospects. You should consider our prospects in light of the risks,
expenses and difficulties that companies in their earlier stage of development
encounter, particularly companies in new and rapidly evolving markets, such as
online commerce.

To achieve profitability we must, among other things:

o Convince personal computer manufacturers and distributors of movies,
games, financial information and other digital data and electronic
content over the Internet to modify their offerings to be used with our
products and services;

o Convince consumers to choose to order, purchase and accept products
using our products and services;

o Assemble and maintain the necessary resources, especially talented
software programmers;

o Develop partnerships to maximize acceptance of our products and
services; and

o Raise additional capital if necessary to support our operations.

If we do not succeed in these objectives, our business likely will be
materially and adversely affected. We may never achieve, or be able to sustain,
profitability.

WE MAY NOT BE ABLE TO FUND OUR OPERATIONS.

Since we began our operations, we have incurred net losses and
experienced significant negative cash flow from operations. Based on our current
operating plan, we believe we have adequate cash to fund our operations through
at least the first quarter of 2000. However, our actual cash requirements may
exceed what we have anticipated and we may run out of money. We do not know if
additional financing will be available or that, if available, it will be
available on favorable terms. If we issue additional shares of our stock, our
stockholders' ownership may be diluted, or the shares issued may have rights,
preferences or privileges senior to those of our common stock. If we do not have
enough money, we may be unable to continue our operations, develop or enhance
our products, take advantage of future opportunities or respond to competitive
pressures.

IF WE ARE UNABLE TO DEVELOP A MARKET FOR OUR PRODUCTS AND SERVICES, OUR
BUSINESS WILL SUFFER.

The market for our services is still immature and is evolving rapidly.
Our business will suffer if the market does not accept our products and
services. Demand for our products and serviced could drop if:
<PAGE>
-8-

o providers of products or information in electronic form over the
Internet or personal computer manufacturers refuse to modify their
offerings so that they may be used with our products and service;

o providers of products or information in electronic form over the
Internet refuse to change their business model to allow end-users to
use our technology;

o consumers don't choose to use our technology; or

o competitors develop superior products or services.

To be successful, we must, among other things, prove that our
technology works and complete its development, respond to any competitive
developments, continue to attract, retain and motivate qualified personnel, and
market our technology effectively. We have only recently begun introducing our
technology to the market.

Our technologies have not been accepted as standards. To be successful,
we must obtain widespread acceptance of our technologies, or modify our products
and services to meet whatever industry standards ultimately develop. If we fail
to do either, our business will suffer.

An increasing number of market entrants have introduced or are
developing competing products and services to for delivering and receiving
payment for products or information in electronic form over the Internet.
Critical issues concerning the Internet remain unresolved and may limit the
growth of this type of commerce. Delays in the deployment of improvements to the
infrastructure for Internet access, including higher speed modems and other
access devices, also could hinder the development of the Internet.

For all of these reasons, it remains uncertain whether commerce over
the Internet will continue to grow, our technologies will be generally accepted
as a standard model of this type of commerce, or a significant market for our
products and services will emerge.

OUR BUSINESS WILL NOT GROW IF WE DO NOT KEEP PACE WITH RAPIDLY CHANGING
TECHNOLOGIES.

Because the market in which we operate is characterized by rapidly
changing technology and frequent new product introductions, our success will
depend, among other things, upon our ability to improve our products, to develop
and introduce new products and services that keep pace with technological
developments, to respond to evolving customer requirements and to achieve market
acceptance. If we do not identify, develop, manufacture, market and support new
products and deploy new services successfully, our business will not grow and
our financial results will suffer.

OUR BUSINESS WILL SUFFER IF OUR TECHNOLOGIES ARE NOT COMPATIBLE WITH
POPULAR MODES OF DELIVERY OF PRODUCTS AND INFORMATION IN ELECTRONIC FORM.

We believe that our system is adaptable to most present modes for the
delivery of products and information in electronic form, such as on CD-ROMs,
over the Internet and through telecommunications devices. However, these modes
of delivery of products and information in electronic form may be replaced by
other distribution technologies that are not compatible with our technology.
<PAGE>
-9-

The Internet, and online commerce over the Internet, are at an early
stage of development and are rapidly evolving. While the Internet is expected to
experience substantial growth in the number of users and amount of traffic,
Internet infrastructure may not continue to support the increasing demands
placed on it by this growth. Break-downs and slow-downs in Internet traffic may
slow expansion of its use. Further, the costs of use of the Internet could
increase to a degree that reduces its attraction as a platform for electronic
commerce.

Adequate Internet infrastructure and increased online commerce are
necessary for us to succeed. If the Internet infrastructure and complementary
services are unable to support growth, our business will not grow.

PROBLEMS RELATING TO SECURITY, SYSTEM DISRUPTIONS AND COMPUTER
INFRASTRUCTURE COULD NEGATIVELY AFFECT OUR BUSINESS AND THE BUSINESS OF OUR
CUSTOMERS.

Although we have implemented in our products various security
mechanisms, our products and services may nevertheless be vulnerable to
break-ins, piracy and similar disruptive problems caused by Internet users. Any
of these disruptions would harm our business. Advances in computer capabilities,
new discoveries in the field of security, or other developments may result in a
compromise or breach of the technology we use to protect products and
information in electronic form. Computer break-ins and other disruptions would
jeopardize the security of information stored in and transmitted through the
computer systems of users of our products, which may result in significant
liability to us and may also deter potential customers.

The security, piracy and privacy concerns of existing and potential
customers and electronic content providers, as well as concerns related to
computer viruses, may inhibit the growth of the Internet marketplace generally,
and our customer base and revenues in particular. A party who is able to
circumvent our security measures could misappropriate proprietary electronic
content or cause interruptions in our operations and those of our strategic
partners. We may be required to expend significant capital and other resources
to protect against security breaches or to alleviate problems caused by
breaches. Our attempts to implement contracts which limit our liability to our
customers, including liability arising from a failure of security features
contained in our products and services, may not be enforceable. We currently do
not have product liability insurance to protect against these risks.

COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR BUSINESS.

Our competitors may be able to develop products and services that are
more attractive to customers than our products and services. Many of our
competitors and potential competitors have substantially greater financial and
technical resources, greater name recognition and more extensive customer bases
that could be used to gain market share or product acceptance.

The Wave System competes with conventional information delivery
systems, such as on-line services, subscription services on CD-ROM, and services
on the Internet. We are also aware of other metering systems which compete
directly with the Wave System, and other current and evolving technologies that
provide some of its functionality. The Wave System is subject to competition
from producers of hardware-based controllers. We compete with producers of
software unlocking systems such as Rainbow Technologies, Inc. and Portland
Software. In addition to small companies dedicated to specific solutions, many
large information industry players are forming alliances and attempting to take
advantage of the information delivery options offered by the Internet. The Wave
System also competes with electronic commerce payment technologies developed and
offered by IBM infoMarket Service, Broadvision Inc., Connect, Inc., CyberCash,
Inc., DigiCash and Open Market, Inc.
<PAGE>
-10-

Other companies have developed or are developing technologies that are,
or may become, the basis for competitive products in the field of electronic
content distribution. Some of those technologies may have an approach or means
of processing that is entirely different from ours. Existing or new competitors
may develop products that are superior to ours or that otherwise achieve greater
market acceptance than ours.

IF WE DO NOT SUCCESSFULLY DEVELOP AND MAINTAIN OUR RELATIONSHIPS WITH
STRATEGIC PARTNERS, OUR REVENUES COULD GROW MORE SLOWLY THAN EXPECTED.

We depend upon strategic partners in our efforts to establish an
installed base of WaveMeters sufficient to convince content providers to use the
Wave System for delivery of their content. We are dependent upon semiconductor
companies to manufacture functioning WaveMeters in sufficient numbers and at a
low enough cost to enable us to convince manufacturers of personal computers to
incorporate WaveMeters. We are dependent upon electronic content owners to
modify their products to be used with the WaveMeters. These partners may choose
not to use our technology and could develop or market products or technologies
that compete directly with us. We cannot predict whether these third parties
will commit the resources necessary to achieve broad-based commercial acceptance
of our technology. Any delay in the use of our technology by these partners
could have a material adverse impact on the commercial acceptance of our
systems. We have no binding commitments from many of our strategic partners, and
there can be no assurance that we will enter into definitive agreements or that
the terms of such agreements will be satisfactory.

PRODUCT DEFECTS, DEVELOPMENT OR MANUFACTURING DELAYS MAY HARM OUR
BUSINESS.

We may experience delays in the development of our products or the
software, hardware and computing systems underlying our services. In addition,
despite testing by us and potential customers, it is possible that our products
may nevertheless contain errors. These development delays or errors could have a
material adverse effect on our business. Also, manufacturing delays or our
ability to procure products on a timely basis may limit our ability to sell
products.

IF WE LOSE OUR KEY PERSONNEL, OR FAIL TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, OUR BUSINESS AND GROWTH MAY SUFFER.

We believe that our future success depends upon the continued service
of our key technical and management personnel and on our ability to attract and
retain highly skilled technical, management, sales and marketing personnel. We
are particularly dependent on the skills and contributions of several key
individuals, including Peter J. Sprague and Steven Sprague, each of whom may
voluntarily terminate their employment with Wave at any time and whose departure
would have a material adverse effect on our business. We do not have "key
person" life insurance policies on any of our employees. Our industry is
characterized by a high level of employee mobility and aggressive recruiting of
skilled personnel. There can be no assurance that our current employees will
continue to work for us or that we will be able to hire any additional personnel
necessary for our growth. Our future success also depends on our continuing
ability to identify, hire, train and retain other highly qualified technical and
managerial personnel. Competition for these employees is intense and increasing.
We may not be able to attract, assimilate or retain qualified technical and
managerial personnel in the future, and the failure of us to do so would have a
material adverse effect on our business.

WE HAVE A LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS
AND OTHERS COULD INFRINGE ON OR MISAPPROPRIATE OUR PROPRIETARY RIGHTS.
<PAGE>
-11-

Our success depends, in part, on our ability to enjoy or obtain
protection for our products and technologies under United States and foreign
patent laws, copyright laws and other intellectual property laws and to preserve
our trade secrets. We cannot assure you that issued patent owned or licensed by
us will provide us with adequate protection or will not be challenged,
invalidated, infringed or circumvented.

We rely on trade secrets and proprietary know-how, which we protect, in
part, by confidentiality agreements with our employees and contract partners.
However, our confidentiality agreements may be breached and we may not have
adequate remedies for these breaches. Our trade secrets may also otherwise
become known or be independently discovered by competitors. We also rely on
copyright to prevent the unauthorized duplication of our software and hardware
products. While we have and will continue to protect our software and our
copyright interests, copyright laws may not adequately protect our technology.
We have submitted three trademark registrations and intend to apply for
additional name and logo marks in the United States and foreign jurisdictions,
as appropriate, but we cannot assure you that federal registration of any of
these trademarks will be granted.

CLAIMS THAT OUR TECHNOLOGY MAY INFRINGE PROPRIETARY RIGHTS OF THIRD
PARTIES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.

We are aware of four United States patents, each of which has some
claim that is similar to some of the claims we have licensed under the patent
discussed above. Based upon what we currently know, some of the claims of each
of these patents cover certain material aspects of our technology. Therefore,
the commercialization of our technology is subject to the rights of the holder
of these patents unless we are able to invalidate or license such claims. Also,
the holder of these patents or its licensees could seek to invalidate the claims
of the patent which we have licensed and therefore be able to commercialize a
technology similar to our technology. We can give no assurance that we would be
successful in invalidating such claims or, in turn, avoid having our claims
invalidated. Any proceeding involving the validity of these patents would be
protracted and costly. If these other four patents are not invalid insofar as
their claims relate to our technology, then we would require a license from the
holder of these patents to commercialize our technology. Due to the uncertainty
as to whether these other patents could be proved to be invalid, we have engaged
in preliminary negotiations with the patents holder to obtain a license
thereunder. The negotiations have so far not produced any agreement and we
cannot assure you that we will be able to obtain a license on acceptable terms,
if at all. Our inability to obtain a license, if needed, on commercially
reasonable terms or to invalidate the claims would have a material adverse
effect on our business and our future operations.

In January 1996, we received notice from a third party that claimed
that our technology infringes upon U.S. and foreign patents it owned. These
patents are also currently being litigated by third parties. We are not involved
in these proceedings. This company offered to license its patents to us. We are
currently obtaining information needed to investigate the merits of this claim.
While we believe that there is a viable argument for non-infringement, if we are
not able to show non-infringement, then we would require a license from this
company to commercialize our technology. We cannot assure you that we would be
able to obtain a license on acceptable terms, if at all. Our inability to obtain
a license, if needed, on commercially reasonable terms would have a material
adverse effect on our business and our future operations.

REGULATION OF INTERNATIONAL TRANSACTIONS MAY ADVERSELY AFFECT OUR
BUSINESS OVERSEAS.

A variety of U.S. export control laws apply to our technology. We will require
export licenses to export certain of our technology outside North America. We
cannot assure you that we will be able to obtain
<PAGE>
-12-

licenses for our products. In addition, the regulation of electronic monitoring,
transmitting payment instructions or audited usage and financial information
varies from country to country. We may be subject to different statutory or
regulatory controls in different foreign jurisdictions. Our technology may not
be permitted in foreign jurisdictions. Violations of foreign regulations or
regulation of international transactions could hurt our business.

OUR STOCK PRICE IS VOLATILE.

The price of our Class A common stock has been and likely will continue
to be subject to wide fluctuations in response to a number of events and
factors, such as:

o quarterly variations in operating results;

o variances of our quarterly results of operations from securities
analyst estimates;

o announcements of technological innovations, new products, acquisitions,
capital commitments or strategic alliances by us or our competitors;

o changes in financial estimates and recommendations by securities
analysts;

o the operating and stock price performance of other companies that
investors may deem comparable to us; and

o news reports relating to trends in our markets.

In addition, the stock market in general, and the market prices for
Internet-related companies in particular, have experienced significant price and
volume fluctuations that often have been unrelated to the operating performance
of the companies affected by these fluctuations. These broad market fluctuations
may adversely affect the market price of our Class A common stock, regardless of
our operating performance. Securities class action litigation has often been
instituted against companies that have experienced periods of volatility in the
market price for their securities. If we were to become the target of this kind
of litigation, the cost in dollars and management attention could be
substantial, and the diversion of management's attention and resources could
have a material adverse affect on our business.

WE MAY BE SUBJECT TO CONFLICTS OF INTEREST.

Our Board of Directors has included, and is likely to include in the
future, representatives of our strategic partners. It is possible that those
corporations may be competing against us or each other, directly or indirectly.
A director who also represents another company may voluntarily abstain from
voting on matters where there could be conflicts of interest. Even if such a
director does abstain, his presence on the Board could affect the process or the
results of the Board's deliberations. We have adopted no policies or procedures
to reduce or avoid such conflicts. If such conflicts of interest arise, they may
have a materially adverse effect on our business.

DISPROPORTIONATE VOTING RIGHTS MAY AFFECT OUR STOCK PRICE.

Our common stock is divided into two classes, Class A common stock and
Class B common stock. Each class has different voting rights. Voting rights of
Class B common stock permit the holders of Class B common stock to block mergers
or similar transactions that are not approved by our
<PAGE>
-13-

Board of Directors and other transactions submitted to stockholders if any
person has acquired more than 20% of our outstanding Series A common stock. The
disproportionate voting power enjoyed by the Class B common stock holders when
voting on questions of control may dissuade a potential merger partner or
acquirer, even if the majority of the Class A common stock holders wanted the
merger or acquisition to occur, and could depress the market price of the Common
Stock.

GOVERNMENTAL REGULATION MAY SLOW OUR GROWTH AND DECREASE OUR
PROFITABILITY.

There are currently few laws or regulations that apply directly to the
Internet. Because our business is dependent in significant respect on the
Internet the adoption of new local, state, national or international laws or
regulations may decrease the growth of Internet usage or the acceptance of
Internet commerce which could, in turn, decrease the demand for our products and
services and increase our costs or otherwise have a material adverse effect on
our business.

Tax authorities in a number of states are currently reviewing the
appropriate tax treatment of companies engaged in Internet commerce. New state
tax regulations may subject us to additional state sales, use and income taxes.

OUR ANTI-TAKEOVER PROVISIONS MAY DISCOURAGE FUTURE ACQUISITIONS AND
DEPRESS OUR STOCK PRICE.

In addition to the anti-takeover effect of the voting rights granted to
the holders of Class B common stock, a change of control may be delayed,
deferred or prevented by certain provisions of our charter documents, as well as
the Board's ability to issue shares of preferred stock without further vote or
action by the stockholders. In addition, Delaware law restricts certain business
combinations with any "interested stockholder", as defined. This statute may
delay, defer, or prevent a change in control of our company. These provisions
are intended to encourage any person interested in acquiring us to negotiate
with and obtain the approval of our Board of Directors. Certain of these
provisions may discourage a future acquisition not approved by our Board in
which you might receive an attractive value for your shares or that a
substantial number or even a majority of our stockholders might believe to be in
their best interest. As a result, stockholders who desire to participate in such
a transaction may not have the opportunity to do so. All of these factors may
depress the market price of our Class A common stock.

OUR DIVIDEND POLICIES MAY DEPRESS OUR STOCK PRICE.

We have never declared or paid any cash dividends on our common stock.
We currently anticipate retaining all future cash earnings, if any, to fund the
development and growth of our business and we do not anticipate paying dividends
on our common stock for the foreseeable future.

YEAR 2000 PROBLEMS MAY DISRUPT OUR BUSINESS.

The Year 2000 issue results from computer programs written using two
digits rather than four to define the applicable year. Any of our computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. Any failure of our products or systems to
operate properly due to Year 2000 problems could require us to incur
unanticipated expenses to address associated problems, which could have a
material adverse effect on our business.
<PAGE>
-14-

We have no plan to ascertain whether the internal systems and products
of our potential future customers are Year 2000 compliant. We may in the future
be subject to claims based on Year 2000 problems in others' products or issues
arising from the integration of multiple products within an overall system. We
cannot assure you that we will not in the future be required to defend our
products or services or to negotiate resolutions of claims based on Year 2000
issues. The costs of defending and resolving Year 2000-related disputes, and any
of our liabilities for Year 2000-related damages, including consequential
damages, could have a material adverse effect on our business, operating results
and financial condition.

We do not have any specific contingency plans if any Year 2000 problems
develop with respect to our embedded systems or systems acquired from vendors.
We will develop contingency plans if we identify instances of noncompliance, and
we expect such noncompliance to have a material adverse impact on our
operations. The cost of developing and implementing such plans may itself be
material.

Year 2000 issues may affect the purchasing patterns of customers and
potential customers in a variety of ways. Many companies are expending
significant resources to replace or remedy their current hardware and software
systems for Year 2000 compliance. These expenditures may result in reduced funds
available to purchase products such as those offered by us. We do not believe
that there is any practical way to ascertain the extent of, and have no plan to
address problems associated with such a reduction in purchasing resources of its
customers. Any such reduction could, however, result in a material adverse
effect on our business, operating results and financial condition. The Year 2000
problem is pervasive and complex, as virtually every computer operation will be
affected in some way. Consequently, no assurance can be given that Year 2000
compliance can be achieved without significant additional costs.
<PAGE>
-15-

PRICE RANGE OF COMMON STOCK

The Class A common stock trades on the Nasdaq National Market under the
symbol "WAVX". The following table sets forth, for the periods indicated, the
high and low closing sales prices per share for the Class A common stock. There
is no established trading market for our Class B common stock.

HIGH LOW
---- ----
Year Ended December 31, 1997
First Quarter $3.00 1.56
Second Quarter 1.81 1.25
Third Quarter 2.00 0.94
Fourth Quarter 2.00 0.63

Year Ended December 31, 1998
First Quarter $1.68 $0.97
Second Quarter 4.75 1.56
Third Quarter 4.56 2.25
Fourth Quarter 5.63 2.44

Year Ending December 31, 1999
First Quarter $27.50 $3.72
Second Quarter $24.13 $15.63
Third Quarter $20.00 $8.25
Fourth Quarter (through December 14, 1999) $16.88 $9.00

As of December 14, 1999, there were approximately 555 holders of our
Class A common stock. As of such date, there were 34 holders of our Class B
common stock.

On December 14, 1999, the last sale price reported on the Nasdaq
National Market for the Class A common stock was $13.81.

We have never declared or paid any cash dividends on our capital stock.
We currently anticipate that we will retain all future earnings, if any, to fund
the development and growth of our business and do not anticipate paying any cash
dividends on our capital stock in the foreseeable future.

USE OF PROCEEDS

The selling stockholders will receive all of the net proceeds from
sales of the Class A common stock sold pursuant to this prospectus.

SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth our selected consolidated financial data
for the Nine Months ended September 30,1999, and for each of the years in the
five-year period ended December 31, 1998, and for the period from February 12,
1988 (inception) through September 30, 1999. The selected consolidated financial
data as of December 31, 1998 and 1997 and for each of the years in the
three-year period ended December 31, 1998 have been derived from and should be
read in conjunction with our consolidated financial statements, which have been
audited by KPMG LLP, independent certified public accountants, whose report is
incorporated herein by reference. The
<PAGE>
-16-

N*Able Technologies transaction was accounted for under the pooling-of-interests
method of accounting and all financial data has been restated accordingly.
<PAGE>
-17-

STATEMENT OF OPERATIONS DATA

Nine Months
Ended
Sept. 30, Year ended December 31
------------ --------------------------------------------
1999 1998 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(unaudited)
------------
Revenues $ 70,229 $ 47,681 $ 23,659 $ 3,220

Cost of Sales 34,974 37,488 12,947 1,762
------------ ------------ ------------ ------------
Gross Margin 35,255 10,193 10,712 1,458
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and
administrative 12,580,650 11,945,273 9,557,198 6,553,003
Write-off of Goodwill -- -- 769,886 --
Aladdin Technology
License Expense -- -- 3,889,000 --
Research and
development 7,281,088 6,247,105 4,715,334 3,751,871
------------ ------------ ------------ ------------
19,861,738 18,192,378 18,931,418 10,304,874
------------ ------------ ------------ ------------
Other income (expense):
License Fee 1,250,000 2,750,000 1,000,000 --
License Warrant Cost -- (1,100,000) -- --
Net interest and other
income (expense) (331,483) (53,842) (91,929) 176,870
------------ ------------ ------------ ------------
Net loss (18,907,966) (16,586,027) (18,012,635) (10,126,546)
Accrued dividends on
preferred stock 13,239 108,863 809,982 199,614
------------ ------------ ------------ ------------

Assured incremental yield -- 750,000 1,673,000 670,965
------------ ------------ ------------ ------------

Net loss to common stockholders $(18,921,205) $(17,444,890) $(20,495,617) $(10,997,125)
============ ============ ============ ============
Weighted average
number of common shares
outstanding during the period 37,489,993 31,580,665 23,224,569 17,237,405
Loss per common share $ (.50) $ (.55) $ (.88) $ (.64)
============ ============ ============ ============

Period from
February 12,
1988 (inception)
through
September 30,
Year ended December 31 1999
---------------------------- ------------
1995 1994 1999
------------ ------------ ------------
(unaudited)
------------
Revenues $ -- $ -- $ 144,789
------------ ------------
Cost of Sales -- -- 87,171
------------ ------------ ------------
Gross Margin -- -- 57,618
------------ ------------ ------------
Operating expenses:
Selling, general and
administrative 4,080,185 2,432,283 53,557,425
Write-off of Goodwill -- -- 769,886
Aladdin Technology
License Expense -- -- 3,889,000
Research and
development 3,324,735 1,761,366 29,986,898
------------ ------------ ------------
7,404,920 4,193,649 88,203,209
------------ ------------ ------------
Other income (expense):
License Fee -- -- 5,000,000
License Warrant Cost -- -- (1,100,000)
Net interest and other
income (expense) 572,054 (77,852) 123,024
------------ ------------ ------------
Net loss (6,832,866) (4,271,501) (84,122,567)
Accrued dividends on
preferred stock 40,600 39,484 1,256,632
------------ ------------ ------------
Assured incremental yield -- -- 3,093,965
------------ ------------ ------------
Net loss to common stockholders $ (6,873,466) $ (4,310,985) $(88,473,164)
============ ============ ============

Weighted average
number of common shares
outstanding during the period 13,794,373 10,503,621 15,304,539
Loss per common share $ (.50) $ (.41) $ (5.78)
============ ============ ============
</TABLE>
<PAGE>
-18-

BALANCE SHEET DATA
<TABLE><CAPTION>
Sept. 30 December 31
--------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
(unaudited)
------------
Working capital (deficiency) $ 10,447,469 $ (770,959) $ 4,250,749 $ 2,481,309 $ 5,458,512 $ 12,463,502

Total assets 16,910,351 6,023,991 7,965,827 6,501,686 7,754,042 13,766,864

Current liabilities 4,290,344 5,289,634 2,342,526 1,785,807 1,210,778 867,145

Long-term liabilities -- -- -- 465,500 -- --

Series A Cumulative
Redeemable Preferred
Stock 493,201 471,601 432,334 390,534 349,934

Series B Cumulative
Convertible Preferred
Stock -- -- -- 195,520 -- --

Series C Cumulative
Convertible Preferred
Stock -- -- -- 2,647,742 -- --

Deficit accumulated during
the development stage (84,122,567) (65,214,601) (50,882,035) (32,869,400) (22,742,854) (15,909,988)

Total stockholders' equity $ 12,620,007 $ 241,156 $ 5,151,700 $ 1,440,283 $ 6,152,730 $ 12,549,785
</TABLE>
<PAGE>
-19-

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Wave is creating a new electronic commerce model for digital
information and services based on client-side security, transactions and trust.
Since our inception in February of 1988, we have devoted substantially all of
our efforts and resources to research, feasibility studies, design, development,
and market testing of a distributed trust system that enables client based
transactions, including the metered usage of electronic content and services
(the "Wave System"). Electronic content and services refers to any data, graphic
software, video or audio sequence that can be digitally transmitted and/or
stored. As our research and development activities matured, we were able to
devote increased resources to the creation of content distribution services,
market development and the application of the Wave System to end-user services.
During 1998 and 1999 we established relationships with RSA Data Security, NEC
Technologies, Pollex Technology, Hewlett-Packard's VerSecure division, Sun
Microsystems, SMSC, ITE, IGST, Sarnoff, Hauppauge Computer Systems, Compaq
Computer, National Semiconductor, KiSS Nordic, Cyber-COMM, Lego Media and
WavePhore. We received payments of $1 million and $4 million pursuant to a joint
venture agreement with Internet Technology Group, PLC ("ITG"), a United Kingdom
company, and have recognized $5 million to date as license fees. We also
recorded a net cost of $1.1 million for an exchange of warrants between us and
ITG for 1,000,000 shares of common stock in each of the companies, which is to
occur upon attainment of the final milestones and payment of the final
installment of the license fee. From inception through September 30, 1999, we
have realized only minimal operating revenues, and do not anticipate significant
revenues in the near future. There are numerous risks that could adversely
affect our efforts to achieve profitability.

On July 27, 1999, we completed the acquisition of N*ABLE Technologies,
Inc., a security solutions company that produces hardware-based security
solutions for the protection of sensitive user data within network client
systems, including a hardware-based security co-processor that manages the
secure transfer of payment or sensitive personal information to and from desktop
computers.. We paid the shareholders of N*ABLE the total consideration of
2,781,263 shares of our Class A common stock (subject to certain post-closing
adjustments) for their shares. The closing price per share as of the closing
date was $10.38. Founded in 1996, N*ABLE is located in Danvers, Massachusetts,
with offices in Cupertino, California and Bouguenais, France. The transaction
was accounted for under the pooling-of-interests method of accounting and the
following financial data has been restated accordingly.

RESULTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998

For the nine months ended September 30, 1999 and September 30, 1998, we
had minimal revenues of $70,229 and 47,763 respectively.

Research and development expenses for the nine months ended September
30, 1999 were $7,281,088, as compared to $4,588,917 for the comparable period of
1998. This 59% increase in research and development expenses was primarily
attributable to an increase in headcount and consultant costs associated with
the design and development of our proprietary integrated circuit technology and
software.
<PAGE>
-20-

Selling, general and administrative expenses, net of acquisition costs,
for the nine months ended September 30, 1999 were $11,086,650 as compared to
$7,632,781 for the comparable period of 1998. The 45% increase in selling,
general and administrative expenses was primarily attributable to an increase in
personnel, consultants and professional fees, trade shows, equipment and other
related costs associated with the development and marketing of new applications
and new markets for our technology. . Acquisition costs related to the N*Able
acquisition amounted to $1,494,000.

Interest income for the nine months ended September 30, 1999 was
$501,146, as compared to $121,629 for the comparable period of 1998. The
increase in interest income is primarily attributable to an increase in
interest-bearing assets, which were a direct result of the private placement of
Class A common stock for an aggregate purchase price of $23,000,494.

Interest expense for the nine months ended September 30, 1999 was
$832,629, as compared to interest expense of $39,240 for the comparable period
of 1998. This increase in interest expense is primarily attributable to a
non-cash expense of approximately $666,000 for the value of warrants to acquire
275,000 shares of Class A common stock issued as part of the bridge loan
financing, and a non-cash interest charge of approximately $151,000 on a note to
Southeast Interactive Technologies Fund I. On October 18, 1998, we amended the
Southeast Interactive Technologies note so that it was convertible at any time
from April 1, 1999 to April 18, 1999, reducing the conversion price to $0.95 per
share. Additional warrants for 75,000 shares were issued as part of this
amendment, and the fair value of these warrants was $106,000. Additionally, the
fair value of the reduced conversion price was $274,000. We amortized such
amounts as additional interest expense from the date that the note was amended
and the warrant issued through the earliest conversion date of April 1, 1999.

Due to the reasons set forth above, our net loss for the nine months
ended September 30, 1999 was $18,907,966 as compared to $9,998,728 for the
comparable period of 1998. The net loss for the nine months ended September 30,
1998 to common stockholders was $18,921,205, as compared to $10,862,325 for the
comparable period of 1998.

YEARS ENDED DECEMBER 31, 1998 AND 1997

For the years ended December 31, 1998 and December 31, 1997 we had only
minimal operating revenues.

Selling, general and administrative expenses for the year ended
December 31, 1998 were $11,945,273, as compared with $9,557,198 for 1997. The
increase in selling, general and administrative expenses was primarily
attributable to increased headcount, as well as trade-show related expenses.

In the third quarter of 1997 we wrote off approximately $770,000 of
Goodwill recorded for the Win acquisition because we were uncertain as to
whether the anticipated future operations of the business would be sufficient to
justify the carrying value.

Research and development expenses for the year ended December 31, 1998
were $6,247,105, as compared with $4,715,334 for 1997. The increase in research
and development expenses is attributable to increased headcount and
consulting-related expenses.

License fee income for the year ended December 31, 1998 was $2,750,000,
as compared with $1,000,000 for 1997. The $2,750,000 for the year ended December
31, 1998 is before a charge of $1.1 million related to our net cost of a warrant
we are obligated to issue to ITG as part of the
<PAGE>
-21-

technology licensing agreement. The $1.1 million charge is net of the estimated
fair value of the ITG warrant that we will receive as part of the warrant
exchange. The license fee for both 1998 and 1997 were portions of a $5 million
fee paid by ITG to us as part of a joint venture agreement under which ITG
receives the right to market the Wave technology in European and Middle Eastern
markets.

Interest expense for the year ended December 31, 1998 was $285,662, as
compared with interest expense of $177,868 for 1997. An increase in interest
expense for the year ended December 31, 1998 was primarily attributable to the
restated and amended note for Southeast Interactive Technologies Fund I, offset
by an increase in interest-bearing assets. Interest income of $231,820 for the
year ended December 31, 1998 as compared with interest income for the year ended
December 31, 1997 of $85,939 was attributable to the interest earned on cash and
marketable securities. We held no marketable securities at December 31, 1998

Due to the reasons set forth above, our net loss was $16,586,027 for
the year ended December 31, 1998, as compared with $18,012,635 for 1997.

YEARS ENDED DECEMBER 31, 1997 AND 1996

For the years ended December 31, 1997 and December 31, 1996 we had only
minimal operating revenues.

Selling, general and administrative expenses for the year ended
December 31, 1997 were $9,557,198, as compared with $6,553,003 for 1996. The
increase in selling, general and administrative expenses was primarily
attributable to development and marketing of new applications of our technology
as well as accrued expenses related to the ITG Joint Venture Agreement, and
bonuses and salary increases.

Research and development expenses for the year ended December 31, 1997
were $4,715,334, as compared with $3,751,871 for 1996. Separately additional
expenses were attributable in part to a license agreement with Aladdin Knowledge
System, whereby we licensed Aladdin's Hasp technology for a share in content
revenues as well as cash and warrants totaling $3,889,600. More generally, the
change in research and development is attributable to the shift in our focus
from research and development to commercialization and marketing and personnel
adjustments consequent thereto.

In July of 1997, we entered into a joint-venture with Internet
Technology Group, PLC (ITG), a United Kingdom Internet service provider.
Pursuant to the joint venture agreement, we will receive a license fee of up to
$5 million in exchange for the joint venture's right to market our technology in
European and Middle Eastern markets. During the third quarter of 1997, we
received $1.0 million from the joint-venture representing partial payment of the
license fee, with the remaining payment to be made upon our attaining certain
milestones related to the number of Wave Meters distributed. The amount received
was recorded as deferred license fee income in the third quarter as it was
uncertain whether we had met the contractual requirements required in order to
have earned the first payment. During the fourth quarter of 1997, we met these
requirements and recorded the $1 million as a license fee. Also, we accrued
$490,000 in the fourth quarter for expenses related to our obligation to assist
the joint-venture in setting up the Wave system in the designated markets. These
costs are included in selling, general and administrative expense. Additionally,
upon attainment of the final milestones and
<PAGE>
-22-

final cash payment by ITG, we and ITG will exchange warrants for 1 million
shares of the other company.

Net interest expense for the year ended December 31, 1997 was $91,929,
as compared with net interest income of $176,870 for 1996. Interest income of
$85,939 for the year ended December 31, 1997 was attributable to the interest
earned on proceeds from the issuance of our convertible preferred stock in May
of 1996. Interest income of $194,766 for the year ended December 31, 1996 was
attributable to the interest earned on proceeds from the issuance of our
convertible preferred stock in May of 1996. We held no marketable securities at
December 31, 1997.

Due to the reasons set forth above, our net loss was $18,012,635 for
the year ended December 31, 1997, as compared with $10,126,546 for 1996.

LIQUIDITY AND CAPITAL RESOURCES

We have experienced net losses and negative cash flow from operations
since our inception, and, as of September 30, 1999, had a $84,122,567 deficit
accumulated during the development stage, and stockholders' equity of
$12,620,007. We have financed our operations through September 30, 1999
principally through:

o the private placement of Class A and B Common Stock for an aggregate
amount of $31,201,931 before expenses;

o the issuance of $2,873,250 in aggregate principal amount of our 10%
Convertible Notes and 15% Notes (of which $2,098,250 was converted into
Class B Common Stock);

o the sale of 3,728,200 shares of our Class A Common Stock in an initial
public offering raising approximately $15,711,000 after expenses;

o the private placement of 800,000 shares of Class A Common Stock raising
$800,000 before expenses; and

o the private placements of convertible preferred stock for an aggregate
amount of $13,350,000 before expenses; and

o the sale by N*Able of $11,532,411 in private placements of Common and
Preferred Stock.

At September 30, 1999, we had $13,123,125 in cash and cash equivalents.
At December 31, 1998, we had $4,451,175 in cash and cash equivalents. We did not
hold any marketable securities at September 30, 1999 or December 31, 1998. The
increase in cash and cash equivalents is primarily attributable to cash proceeds
from private placements during the first quarter of 1999. In January 1999, we
issued a $2 million convertible promissory note, which was subsequently
converted into Class A common stock in March 1999. We also completed a $23
million private placement with institutional, strategic and accredited investors
in March 1999. On March 6, 1998, we sold 150,000 shares of newly created Series
G Convertible Preferred Stock to one accredited investor at a price of $20 per
share, for an aggregate purchase price of $3,000,000, which was converted into
2,771,596 shares of Class A common stock. We also issued warrants to purchase a
total of 225,000 shares of Class A Common stock at an exercise price of $1.38
per share, exercisable until October 9, 2002. Until August, 1999, we had issued
and outstanding 360 shares of preferred stock designated as Series A Cumulative
Redeemable Preferred Stock, par value $.01 per share, all of which was held by
one person. This
<PAGE>
-23-

stock was redeemable, in whole or in part, at any time at our option, at a price
of $1,000 per share and was subject to mandatory redemption five years from the
date of issuance. The holder of these shares made demand for redemption as of
April 28, 1999. We redeemed these shares on August 11, 1999. The total
redemption price was $465,000.

As of December 31, 1998, we had available net operating loss
carryforwards for Federal income tax purposes of approximately $50.6 million.
Because of the "change in ownership" provisions of the Tax Reform Act of 1986,
our net operating loss carryforwards may be subject to an annual limitation on
the utilization of these carryforwards against taxable income in future periods
if a cumulative change in ownership of more than 50 percent of Wave occurs
within any three-year period. We have made no determination concerning whether
there has been such a cumulative change in ownership. However, we believe that
it is likely that such a change in ownership occurred prior to or following the
completion of our initial public offering in September 1994.

At September 30, 1999, we had working capital of $10,447,469. We expect
we may incur substantial additional expenses resulting in significant losses at
least through the period ending December 31, 1999, due to minimal revenues and
increased sales and marketing expenses associated with initial market entry, and
continued research and development costs.

We anticipate that our existing capital resources will be adequate,
however, to satisfy our capital requirements into the first quarter of 2000. In
order to continue operations beyond the first quarter of 2000, we will need to
raise additional funds through public or private financings. We have no current
commitment to obtain additional funds, nor can we state the amount or source of
such additional funds.

RECENT ACCOUNTING PRONOUNCEMENTS

In November 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 100, "Restructuring and Impairment Charges."
In December 1999, the SEC issued SAB No.101, "Revenue Recognition in Financial
Statements." SAB No. 100 expresses the views of the SEC staff regarding the
accounting for and disclosure of certain expenses not commonly reported in
connection with exit activities and business combinations. This includes the
accrual of exit and employee termination costs and the recognition of impairment
charges. SAB No. 101 expresses the views of the SEC staff in applying generally
accepted accounting principles to certain revenue recognition issues. Although
we are still in the process of analyzing the impact of SAB No. 100 and SAB No.
101, if any, on our consolidated financial statements and related disclosures,
we expect that there will be no material impact on our financial position or our
results of operations.

IMPACT OF YEAR 2000 ISSUE

We have made an assessment with regard to whether our own internal
information systems are Year 2000 compliant. Since January 1998, in addition to
updating employee computers and workstations, we have upgraded various
accounting, telecommunications, customer care systems and transaction systems at
an aggregate cost of approximately $620,000, with systems that are warranted
<PAGE>
-24-

by the vendors to be Year 2000 compliant. To the extent we purchase additional
systems, we require that such systems are warranted by the vendors to be Year
2000 compliant. We continue to seek assurances from our existing vendors whose
systems are not warranted to be Year 2000 compliant that such systems will be
Year 2000 compliant. We employ a manager of management information systems,
whose responsibilities include oversight of Year 2000 compliance. We do not
separately track the internal costs incurred for Year 2000 projects, which are
principally the related payroll costs for our information systems personnel.
Although we do not believe that any additional Year 2000 compliance-related
costs will be significant, we cannot assure you that costs incurred to address
unanticipated issues would not have a material adverse effect on our business,
operating results and financial conditions. Any failure of third-party equipment
or software comprising any part of our systems to operate properly with regard
to Year 2000 and thereafter could require us to incur unanticipated expenses to
address associated problems, which could have a material adverse effect on our
business, operating results and financial condition.

We believe, based on an internal assessment, that the current versions
of our software products are Year 2000 compliant. We have no plan to ascertain
whether the internal systems and products of our potential future customers are
Year 2000 compliant. We may in the future be subject to claims based on Year
2000 problems in others' products or issues arising from the integration of
multiple products within an overall system. Although we have not been involved
in any litigation or proceeding to date involving our products or services
related to Year 2000 issues, we cannot assure you that we will not in the future
be required to defend our products or services or to negotiate resolutions of
claims based on Year 2000 issues. The costs of defending and resolving Year
2000-related disputes, and any of our liabilities for Year 2000-related damages,
including consequential damages, could have a material adverse effect on our
business, operating results and financial condition.

We do not have any specific contingency plans if any Year 2000 problems
develop with respect to our embedded systems or systems acquired from vendors.
Contingency plans will be developed if we identify instances of noncompliance,
and such noncompliance is expected to have a material adverse impact on our
operations. The cost of developing and implementing such plans may itself be
material.

Year 2000 issues may affect the purchasing patterns of customers and
potential customers in a variety of ways. Many companies are expending
significant resources to replace or remedy their current hardware and software
systems for Year 2000 compliance. These expenditures may result in reduced funds
available to purchase products such as those offered by us. We do not believe
that there is any practical way to ascertain the extent of, and have no plan to
address problems associated with such a reduction in purchasing resources of our
customers. Any such reduction could, however, result in a material adverse
effect on our business, operating results and financial condition. The Year 2000
problem is pervasive and complex, as virtually every computer operation will be
affected in some way. Consequently, you should understand that Year 2000
compliance may not be achieved without significant additional costs to us.
<PAGE>
-25-

BUSINESS

Wave Systems Corp. offers powerful, next-generation solutions for
electronic commerce, making the process easier, versatile, and more secure for
consumers as well as business-to-business applications. We are involved in the
research, development, and market testing of the Wave System, which performs the
buying transactions in a range of consumer electronic devices, including
computers, personal digital assistants, and interactive televisions, for the use
of electronic content and services. Electronic content and services refers to
any data, graphic, software, video or audio sequence that can be digitally
transmitted or stored, as well as access to services such as broadcast or
telecommunications services. Examples include archived newspaper and magazine
articles, on-line books, music selections, clip-art, photographs and video
games. Under our model, electronic content and service providers use the Wave
System to allow consumers to purchase one-time, multiple or permanent use of
their content or service, using a wide range of payment models including rental,
pay-for-use, or outright purchase, much like a phone card or a pay-per-view
cable system. We believe that the Wave System can fundamentally change today's
centralized e-commerce model by creating a de-centralized distribution and
security system under which consumers will be able to make individual purchases
of images, text, music or video, or make use of software, all from the
consumer's computer or other interactive device. This means that content and
services can be consumed with more efficient and flexible pricing, broader
distribution opportunities, greater protection against unauthorized usage and
with better privacy protection of the consumer's sensitive information.

We believe that the Wave System can fundamentally change today's
centralized e-commerce model by creating a distributed trust and security
system, where transactions are executed and recorded in the consumer's devices,
at the consumer's location. This means that electronic content and services can
be consumed with more efficient and flexible pricing, broader distribution
opportunities, greater protection against unauthorized usage and secure,
low-cost, and accurate data on the usage of the products and services.

The Wave System consists of an EMBedded Application Security SYstem in
consumer devices that provides a core hardware and software foundation for
consumers to purchase electronic content and access services on a flexible
purchase basis. The EMBASSY platform is a programmable, low cost "system within
a system" that can perform independent transactions such as meter pay-per-use of
electronic content, store sensitive information such as identities, credit
information and account balances, and run secure applications for pay-per-use
access to software. The EMBASSY platform is an open model based on security
hardware originally designed for use with "smart cards" that can be integrated
into personal computers and peripherals, interactive televisions or used as
independent components. The WaveMeter application running in the EMBASSY
platform allows e-commerce transactions to occur without the expense of a
real-time network connection for every transaction.

The EMBASSY securely stores electronic funds and transaction
information about the usage of electronic content to be transmitted securely to
a WaveNet central transaction processing center periodically. The WaveNet
application manages electronic codes for scrambling and unscrambling electronic
content, processes credit and usage charges, automatically obtains credit
authorization, calculates royalty distributions, and provide user and usage data
to electronic content owners. The Wave System is designed to be compatible with
existing content delivery system, such as CD-ROMs and the Internet. Using these
Wave-enabled distribution systems, electronic content providers can distribute
their products in a secure format and offered them for sale through the EMBASSY
platform, which in turn allows consumers to purchase and access the electronic
content on an as-desired basis.

In order to achieve broad market acceptance of the Wave System, we
pursue strategic relationships with major computer manufacturers and technology
suppliers, and promote the use of the
<PAGE>
-26-

EMBASSY platform to electronic content owners, particularly developers and
distributors of entertainment, audio, broadcast and educational software. We
believe that the EMBASSY platform can manage subscribers and usage of electronic
content independent of the type of content or network on which it is delivered.
This means that electronic content can be delivered on CD-ROM, high-speed wired
and wireless broadcasting, and other forms of transmission.

We believe that the Wave System provides a powerful merchandising
interface for electronic content and services at the point of purchase. This is
an enticement to consumers to sample electronic content that they are
considering purchasing. The Wave System provides the consumer with enhanced
control of their individual privacy and secure storage of sensitive information.
The Wave System facilitates the payment of royalties to content providers and
service partners while allowing both customized and broad, inexpensive
distribution to customers.

We recently enhanced the Wave System to make it acceptable as an open
industry standard for a broad range of security and e-commerce functions in end
user-devices. We have been successful in attracting other companies to port
their applications and services to the Wave System and our EMBASSY platform,
which we believe will increase the value of the system to potential deployment
partners. These strategic relationships have generated what we believe to be
significant joint marketing benefits in our efforts to promote the Wave System
to manufacturers of computers and electronic consumer goods and the electronic
content industry.

During 1998 and 1999, we established relationships with RSA Data
Security, NEC Technologies, Pollex Technology, Hewlett-Packard's VerSecure
division, Sun Microsystems, SMSC, ITE, IGST, Sarnoff, Hauppauge Computer
Systems, Compaq Computer, National Semiconductor, KiSS Nordic, Cyber-COMM, Lego
Media and WavePhore. We also received payments of $1 and $4 million pursuant to
a joint venture agreement with Internet Technology Group, PLC ("ITG"), a United
Kingdom company.

Additionally, we have also developed the WaveMeter server, a production
software version of the WaveMeter application that offers some of the features
of the hardware version and has been implemented as part of our Internet
commerce server. The WaveMeter server enables content owners to secure and sell
their intellectual property from a web site. The e-commerce services offered
through the WaveMeter server do not require the consumer or publisher to install
any additional hardware or software.

We were incorporated in Delaware under the name Indata Corp. on August
12, 1988. We changed our name to Cryptologics International, Inc. on December 4,
1989. We changed our name again to Wave Systems Corp. on January 22, 1993. Our
principal executive offices are located at 480 Pleasant Street, Lee,
Massachusetts 01238 and our telephone number is (413) 243-1600.

We are a development stage company and have realized minimal operating
revenues since our inception. At December 31, 1998 we had an accumulated deficit
of approximately $65.2 million. There can be no assurance that we 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
the encrypted Wave-enabled form so it can be offered for sale through the
EMBASSY E-
<PAGE>
-27-

Commerce System. Customers are then able to purchase and access the electronic
content on an as-desired basis. We believe 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. We believe that greater flexibility in
electronic distribution and pricing makes the Wave System particularly
attractive to developers, distributors and consumers of entertainment and
educational software. 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,
broadcast TV, FM radio, floppy disc, DVD and cable modem and similar high-speed
networking.

In addition, the programmable EMBASSY platform is capable of supporting
multiple secure applications from a range of service providers, applications
vendors, and security companies. We believe that our expansion of the EMBASSY
platform has provided a source of increased interest in Wave's technology as a
general-purpose solution for adoption by a wide range of companies in their
platforms and as a mechanism for the secure delivery of electronic content.

The Wave System consists of the EMBASSY E-Commerce System, the
WaveMeter application, a subsystem that records and communicates the usage of
electronic content, and WaveNet, a central transaction processing network. The
EMBASSY platform controls the simultaneous loading and execution of multiple
applications, all on a secure basis. The WaveMeter controls and monitors the
customer's access to encrypted electronic information and software. The Wave
System is well suited to low-cost processing of very-low-priced, rental and
rent-to-own electronic content transactions. We have completed a prototype
incorporating the rental and rent-to-own functionality into the Wave System
using Wave's current chip technology. This is currently being integrated into a
WinTV tuner card from Hauppauge Computer Systems. This product was introduced to
the market in May, 1999. With this version of the WaveMeter, application
transactions are executed within the electronic device itself, against a source
of funds stored in the WaveMeter secure memory. The WaveMeter retains this
pricing and licensing 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 uploading and reporting to WaveNet. The
WaveMeters and WaveNet communicate using Wave's secure communications protocol.

WaveNet consists of the WaveNet Transaction Processing System ("TXP")
and the WaveNet Information Clearing House ("ICH"). TXP acts as the principal
interface with the EMBASSY. Every EMBASSY-equipped device will contact TXP on a
periodic basis. During this secure communication, all stored event information,
such as purchase logs, are uploaded to TXP, additional credit may be requested,
pending events are delivered to the device, and a routine audit check is
performed. There may be a number of TXP systems to distribute access around the
globe. TXP routes all event logs to ICH where they are processed against Wave's
royalty contracts. ICH calculates royalties due to each partner and handles the
billing and reporting services, ensuring that all Wave partners are properly
compensated. WaveNet is presently in operation.

The Wave System is installed into the customer's computer or integrated
into an attached peripheral device. It is based on a semiconductor device that
uses secure certified integrated circuit technology to unscramble data and to
store credit and usage data. At present, the WaveMeter, based on our own silicon
chip, is packaged on an accessory board to be installed in a personal computer.
In 1999, we plan to deliver a new version of the EMBASSY hardware with a USB
interface, which should easily integrate into a broad range of products,
including separate attachments for portable interactive devices. We also offer a
production software version of the WaveMeter application, which is compatible
with the use of the hardware version.
<PAGE>
-28-

We believe that the hardware version of the Wave System with EMBASSY is
the most secure form of content licensing management and metering technology
available today. The EMBASSY hardware and software contain a wide range of
security features. Tampering results in the device automatically locking out
users, and is readily detected. The codes used to unscramble data are loaded at
the time we manufacture the EMBASSY device, and are unique and specific to each
device. Every piece of electronic content is protected using a unique code key.
Services are controlled by secure applications running in the EMBASSY platform.
We believe we have designed a security architecture where the value of breaking
into an individual computer system to ascertain the code keys is low, since
there are no common keys that allow the use of such code keys on other systems.

MARKETS AND BUSINESS STRATEGY

Our long-term strategy is to achieve broad market acceptance of the
Wave System as a distributed trust platform for commerce performed in user
devices. To achieve this goal, we pursue strategic relationships with hardware
manufacturers and companies involved in the development of commerce in
electronic content and services. In addition, we believe that, since the Wave
System permits greater flexibility in pricing and distribution of electronic
content, it is particularly well-suited for merchandising consumer content,
entertainment and educational software. Therefore we are vigorously targeting
this market segment as a means of rapidly achieving the broad installed base of
the Wave System. We believe that once there is a broad installed base of the
Wave System and EMBASSY, electronic content owners from other market segments
are likely to be attracted to the Wave System. However, we cannot assure you
that the Wave System will achieve any significant market acceptance.

We have focused on forming agreements with strategic partners that will
help us promote the broad-based acceptance of the Wave System as a platform for
commerce in electronic content. We are currently in discussion with original
equipment manufacturers regarding the incorporation of the Wave System and
EMBASSY into their products. We have 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 us with
a product that has already attracted the attention of leaders in the development
of electronic commerce solutions and particularly commerce in electronic
content. We will continue to focus on developing other strategic relationships
to seek to achieve the broad acceptance of the Wave System as a platform for
electronic commerce.

We have 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. We believe 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. We have invested
heavily in developing relationships with entertainment and educational software
providers. Today, we have over 50 titles functional for demonstration and are
actively preparing others to be launched in 2000.

COMPETITION

We operate in a highly competitive and fragmented environment that is
characterized by rapidly evolving technology. Many of our competitors and
potential competitors have substantially greater financial and technical
resources than us. 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 our detriment. The Wave
System competes with conventional information delivery systems, such as on-line
services like AOL, subscription services on CD-ROM, and services on the
Internet. However, we believe that its metering capability is competitive with
other
<PAGE>
-29-
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, we believe
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.

We are aware of other metering systems that compete directly with the
Wave System, 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 us. We cannot assure you that either existing or new competitors
will not develop products that are superior to or that otherwise achieve greater
market acceptance than our products.

The Wave System is subject to competition from producers of
hardware-based controllers such as hardware-based key systems and software
unlocking systems. We will compete with well-established producers of
hardware-based unlocking systems such as Rainbow Technologies, Inc. We also
compete with developers of software unlocking systems such as Portland Software.
We also provide basic security services that competes with companies such as
QPass and PrivaSeek in providing electronic wallets and certain e-commerce
capabilities. We believe that the Wave System is superior to existing
hardware-based and software unlocking systems in several ways. These systems
primarily operate as "on/off switches" to control the use of electronic content
and services, but are very limited in their ability to measure and record usage
information. We believe 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. Our products also provides a superior solution
for the broadcasting and multicasting of data. 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 Micropayment Service, Broadvision, Connect, CyberCash, and Open Market.
However, we believe 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. We are also
aware of other companies, such as TestDrive, Release Software and InterTrust
that provide electronic content encryption and license management functionality
for transmission of electronic content over the Internet. We believe that the
Wave System is superior to currently available electronic content encryption
technologies due to the high level of persistent security and usage reporting
capabilities of the WaveMeter.

We believe 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 EMBASSY platform will be able to purchase Wave-enabled electronic
content from sources on CD-ROM and/or the Internet, as well as from sources
distributing electronic content via other developing media. 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. We caution you, however, that the Wave
System may never achieve the broad-based acceptance necessary to make it a
viable competitor with existing
<PAGE>
-30-
and developing electronic commerce solutions.

INTERNATIONAL MARKET

Our 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. We have received full export
license from the U.S. Department of Commerce for the sale and export of our
single-key DES products. We have also received an export license for our
triple-key data encryption standard products under the provisions of a License
Exception KMI, granted by the Bureau of Export Administration of the U.S.
Department of Commerce. We cannot assure you that that we 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,
the use of all portions of the Wave System may not be permitted in any
particular foreign jurisdiction.

Wave Systems formed a strategic alliance in 1998 with HP VerSecure in
the development of the underlying architecture of the EMBASSY platform. HP
VerSecure provides a security management framework for EMBASSY that controls
security functions in the device. The primary function of the VerSecure system
is to provide a management system that enables the EMBASSY hardware to have
strong security features that can be selectively enabled or disabled in order to
comply with the regulations of various countries. This capability is intended to
allow computer manufacturers to build a single, consistent product which can be
shipped worldwide, regardless of local restrictions.

PROPRIETARY RIGHTS AND LICENSES AND INTELLECTUAL PROPERTY

Our success depends, in part, on our ability to enjoy or obtain
protection for our products and technologies under United States and foreign
patent laws, copyright laws and other intellectual property laws, to preserve
our trade secrets and to operate without infringing the proprietary rights of
third parties. Any issued patent owned or licensed by us may not, however,
afford adequate protection to us and may be challenged, invalidated, infringed
or circumvented. Furthermore, you should understand that our activities may
infringe patents owned by others.

In addition, we may be required to obtain licenses to patents or other
proprietary rights of third parties. Licenses required under any such patents or
proprietary rights may not be made available on terms acceptable to us, if at
all. If we are required to and do not obtain such licenses, we would be
prevented from, or encounter delays in the development and marketing of, our
products and technologies while we attempted to design around such patents or
other rights. Such attempts may not be successful. Failure to obtain such
licenses or to design around such patents or other rights would have a material
adverse effect on us.

We hold non-exclusive patent rights relating to the metered use of
encrypted data in local memory under a limited license from Titan Corporation to
a patent jointly held by Titan and a third party. This license agreement
restricts us from metering information produced and used solely by a government
entity or producing products that meter this information. In addition, this
license agreement is subject to the rights of the joint owner of this patent,
who has the right to exploit, or to license to third parties, this patent,
including in a manner competitive with us. The joint owner of this patent may
compete with us or license this patent to a competitor of ours, and our business
may exceed the scope of this license agreement. Pursuant to this license
agreement, we are obligated to pay certain royalties to Titan. Pursuant to this
license agreement, we have granted to Titan the exclusive right to use our
patents for products distributed to government entities. On February 28, 1997 we
and Titan executed an addendum to this license agreement whereby we received a
sole
<PAGE>
-31-

license to this patent to develop and distribute products to the in-home
consumer microcomputer market segment. Under this addendum to this license
agreement, Titan waived any and all defaults by us under this license agreement
occurring prior to February 28, 1997.

We are 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 us, some of the claims of both
the Licensed Patent and the Third Party Patents cover certain material aspects
of our technology. Therefore, the commercialization of our technology would be
subject to the rights of the holder of the Third Party Patents unless we are
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 our 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. We cannot
assure you that we 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 the claims of the
Licensed Patent. Furthermore, we cannot assure you 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 our technology, then we would require a license from the holder of the
Third Party Patents to commercialize our technology and make, use, or sell
products or practice methods, or license others to sell products or use methods,
utilizing this technology in the United States. Due to the uncertainty as to
whether the Third Party Patents could be proved to be invalid, we have 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 a license may not 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 our business and our
future operations.

We have been issued three United States patents relating to encryption
and to our proprietary WaveMeter and WaveNet technology. We also have one patent
pending before the United States Patent Office and three corresponding foreign
patent applications pending before the European Patent Office. Our patents are
material to protecting some of our technology. Our patent rights derive from a
license from Mr. Peter J. Sprague, our Chairman and Chief Executive Officer, of
his rights in these patents, and several agreements with former officers
regarding their rights in these patents. The license agreement with Mr. Sprague
requires us to make royalty payments to him and Dr. John R. Michener, a former
officer, in a total amount equal to two percent of gross revenues less certain
adjustments. This royalty payment is apportioned 75 percent to Mr. Sprague and
25 percent to Dr. Michener. The payment of royalties is secured by a security
interest in and to our patents. We believe that these agreements as a whole
provide us with exclusive rights under our patents. We cannot assure you,
however, that we will enjoy exclusive rights to these patents under such
agreements.

On January 26, 1996, we received notice from E-Data Corporation
(formerly Interactive Gift Express, Inc.), claiming that our practice of our
technology infringes U.S. and foreign patents owned by E-Data Corporation, and
offering to license such patents to us. We are currently obtaining information
needed to investigate the merits of this claim. We believe that there is a
viable argument for non-infringement. The patents owned by E-Data Corporation
are currently being litigated by third parties. We are not involved in these
proceedings.
<PAGE>
-32-

We rely on trade secrets and proprietary know-how, which we protect, in
part, by confidentiality agreements with our employees and contract partners.
However, we caution you that our confidentiality agreements may be breached and
we may not have adequate remedies is such a breach occurs. Furthermore, we
cannot assure you that our trade secrets will not otherwise become known or be
independently discovered by competitors.

We also rely on copyright to prevent the unauthorized duplication of
our software and hardware products. We have and will continue to protect our
software and our copyright interest therein through agreements with our
consultants. We cannot assure you that copyright laws will adequately protect
our technology.

We have registered trademark and service mark registrations with the
United States Patent and Trademark Office for the marks WaveMeter and WaveNet,
Great Stuff Network, Second Shift (the Wave juggler logo), WaveCommerce, Wave
Interactive Network, WaveDirect, WINPublish, WINPurchase and CablePC. We have
submitted trademark registrations for EMBASSY, EMBASSY System and EMBASSY
E-Commerce System and intend 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. We have abandoned our prior applications for DataWave,
InfoWave, and WaveTrac.

RESEARCH AND DEVELOPMENT

The Wave System incorporates semiconductor, encryption/decryption,
software transaction processing and other technologies in which we have made a
substantial investment in research and development. We expect that we will be
required to continue to make substantial investments in the design of the Wave
System, including EMBASSY, the WaveMeter, WaveNet and software interfaces. For
the Nine Months ended September 30, 1999 and the years ended December 31, 1998,
1997, and 1996, we expended approximately $7.3 million, $6.2 million, $4.7
million and $3.8 million respectively, on research and development activities
(which amounts include the value of stock issued). In addition to our ongoing
research and development activities, in July 1997 we licensed technology and
in-process research and development from Aladdin Knowledge Systems for cash and
warrants valued at $3.9 million. From our inception in February 1988 through
September 1999, we expended approximately $30 million on research and
development activities.

The success of the Wave System depends to a large extent on our 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. Incorporation of Aladdin's Hasp technology furthered
these efforts and illustrates the adaptive capabilities of the Wave System. We
believe that a significant portion of our future research and development
expenditures will be used to adapt the Wave System accordingly.

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

We are now focusing increased resources on developing our operational
infrastructure. We are placing greater emphasis on developing internal
production and fulfillment systems and marketing infrastructure to distribute
the Wave System. We will also increase the resources available to WaveNet to
adapt to changing market requirements. We plan to expand WaveNet to handle more
end
<PAGE>
-33-

users, to implement more sophisticated pricing methodologies and to add greater
financial system flexibility.

RECENT DEVELOPMENTS

In April 1999, we joined with Sarnoff Corporation to announce the
formation of a new joint venture, WaveXpress. WaveXpress aims to provide secure
data broadcast architecture, infrastructure and content services to broadcasters
and content providers. WaveXpress is developing technology and services that
will allow content providers to send electronic content to properly equipped PCs
by utilizing unused bandwidth in the Digital Television (DTV) spectrum.
Consumers will be able to purchase this electronic content directly through a
secure network connection, thus enabling a significant new revenue stream for
broadcasters.

We also announced, in April 1999, the first fee-free internet commerce
service for digital content distribution. MyPublish will allow individuals and
small businesses to harness the Internet to publish, promote, and sell various
types of electronic content, such as newsletters, subscriptions, images, audio,
video, and software. MyPublish is a complete, simple-to-use community commerce
solution that can be easily integrated into any Web service.

On July 27, 1999, we completed the acquisition of N*ABLE Technologies,
Inc., a security solutions company that produces hardware-based security
solutions for the protection of sensitive user data within network client
systems, including a hardware-based security co-processor that manages the
secure transfer of payment or sensitive personal information to and from desktop
computers.. We paid the shareholders of N*ABLE the aggregate consideration of
2,781,263 shares of Class A Common stock (subject to certain post-closing
adjustments) for their shares. The closing price per share as of the closing
date was $10.38. Founded in 1996, N*ABLE is located in Danvers, Massachusetts,
with offices in Cupertino, California and Bouguenais, France. The transaction
was accounted for under the pooling-of-interests method of accounting.

In September 1999, we entered into an agreement with Cyber-COMM, a
banking consortium led by France's largest banks, to license our EMBASSY
technology for the development of a European network of enhanced smart card
readers, to be used for conducting various types of e-commerce.

In November 1999, we launched CharityWave, a free online charitable
contribution service that guarantees participating non-profit organizations 100
percent of all monies donated. Through CharityWave, visitors to the Web sites of
participating charities can make instant secure donations electronically, at any
hour. CharityWave is initially providing this service to thirty prominent
charities, including United Way International, National Wildlife Federation,
National Conference for Community and Justice, National Center for Missing and
Exploited Children, and World Monuments Fund.

EMPLOYEES

As of November 16, 1999, we employed 140 full-time employees, 74 of
whom were involved in sales, marketing and administration and 66 of whom were
involved in research and development. As of November 16, 1999, we employed 36
full-time consultants, who are reflected in the foregoing figures. We believe
our employee relations are satisfactory.

PROPERTIES

We lease a 10,748 square foot facility for our executive offices and to
house the WaveNet installation, administration, and customer support operations
in Lee, Massachusetts at a monthly rent
<PAGE>
-34-

of $5,598, with a monthly charge of $2,123 for common costs. The Lee,
Massachusetts lease will expire during February 2001. We lease offices in New
York, New York, at a monthly rent of $12,000, which is scheduled to expire in
May 2001. We lease offices in Danvers, Massachusetts at a base rent of $4,826
with a monthly payment for utilities and taxes of $357 and is scheduled to
expire in September 2002. We lease a 21,637 square foot facility in Princeton,
New Jersey at a monthly base rent of $39,758 with a monthly payment for
utilities which is approximately $2,308 per month. This lease is scheduled to
expire during December 2002. In Cupertino, California we lease a 12,329 square
foot facility at a monthly base of $40,710 and is scheduled to expire in October
2002. Our principal research and development activities are conducted at the
Princeton and Cupertino facilities. We lease a 2,728 square foot facility in San
Jose, California for $6,138 per month, which is scheduled to expire in December
2001.

LEGAL PROCEEDINGS

From time to time, we are party to litigation arising in the ordinary
course of business. We believe that no pending legal proceeding will have a
material adverse effect on our business, financial condition or results of
operations.
<PAGE>
-35-

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

NOTE RECEIVABLE FROM DIRECTOR/OFFICER

On November 16, 1992, we made a personal loan to Mr. Peter J. Sprague,
our Chairman and Chief Executive Officer, as evidenced by a note for $150,000,
which sum was due and payable to us on January 16, 1993 and which bore interest
at the rate of ten percent per annum. On the due date, the note was canceled and
the total amount owed was "rolled-over" into a new note, dated May 12, 1993 for
$150,000, plus accrued interest. The note is due on demand by us and accrues
interest at the rate of ten percent per annum. On April 22, 1993, we made an
additional loan to Mr. Peter Sprague for $23,175 as evidenced by a promissory
note, which is due on demand by us and which bears interest at a rate of ten
percent per annum. All of these loans were made to Mr. Sprague for personal
reasons. As part of Mr. Sprague's $150,000 bonus for 1998, $75,000 was applied
against his indebtedness to us. As of September 30, 1999, Mr. Sprague's
aggregate indebtedness (including accrued interest) to us under the notes
totaled $152,955.25. No demand for payment has been made as of the date hereof.
The notes are secured by a pledge of 67,000 shares of Class B common stock.

COMPENSATION TO STEVEN SPRAGUE

Steven Sprague received aggregate compensation of $327,500, $267,500
and $131,666 for services rendered to us in 1998, 1997 and 1996, respectively.
Steven Sprague is the son of Mr. Peter J. Sprague, our Chairman and Chief
Executive Officer.

COMPENSATION TO MICHAEL SPRAGUE

Michael Sprague received aggregate compensation of $112,500 and $27,500
for services rendered to us in 1998 and 1997, respectively. Michael Sprague is
the son of Mr. Peter J. Sprague, our Chairman and Chief Executive Officer.

AMENDED AND RESTATED LICENSE AGREEMENT AND ASSIGNMENT

Pursuant to an Amended and Restated License Agreement, dated February
14, 1994, and related Patent Assignment and Security Agreement, Mr. Peter J.
Sprague assigned his interest in a patent for the metering and usage of serial
data information to us in exchange for a non-terminable royalty interest. We
have agreed to pay royalties to Mr. Sprague in an amount equal to 2% of the
gross revenues (less actual amounts paid to information, database and content
providers, hardware manufacturers and suppliers, search and retrieval software
suppliers, consolidators of information and network providers) derived from our
technology based on the patent. The royalty payments are allocated 75% to Mr.
Sprague and 25% to one of our former officers, and are secured by a security
interest in the patent.
<PAGE>
-36-

SELLING SECURITY HOLDERS

An aggregate of 1,590,178 shares of Class A common stock are being
registered in this offering for the account of the selling stockholders. Of
these shares, 1,520,552 shares were originally issued in connection with the
acquisition of N*ABLE Technologies, Inc. We granted registration rights with
respect to these shares. We agreed to bear expenses, other than fees and
expenses of counsel to the selling stockholders, in connection with the
registration and sale of these shares. See "Plan of Distribution." The remaining
69,626 shares were issued to Hewlett-Packard Company, in connection with HP's
undertaking to us to cooperate in identifying opportunities to use our Embassy
platform technology with an array of HP products. We also received paid-up
licenses for use of HP's VerSecure technology in devices using the Embassy
platform. The aggregate market value of these shares is equal to approximately
$1,000,000, calculated using a trailing average of closing prices for the last
five trading days prior to December 14, 1999. In addition, should the value of
our stock have either increased or decreased by 10% or more as of the date of
effectiveness of the registration statement of which this prospectus forms a
part, a cash adjustment shall be made by HP or us, respectively.

The following table sets forth the names of the selling stockholders,
the number of shares of Class A common stock each of the selling stockholders
beneficially owns, the number of shares which may be offered for resale pursuant
to this prospectus, and the number of shares that will be owned by each selling
stockholders after the completion of this offering.

As of November 18, 1999, there were 38,309,089 shares of Class A common
stock outstanding. The shares offered by this prospectus may be offered from
time to time, in whole or in part, by the selling stockholders or their
transferees. No selling stockholders has held any position nor had any material
relationship with us or our affiliates during the past three years, except where
noted.

The information included below is based upon information provided by
the selling stockholders. Because the selling stockholders may offer all, some
or none of their shares, we cannot provide a definitive estimate as to the
number of shares that the selling stockholders will hold after the offering.

Beneficial ownership is calculated in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person, and the percentage ownership of that person,
shares of common stock subject to options or warrant held by that person that
are currently exercisable or become exercisable within 60 days following
November 30, 1999 are deemed outstanding ("Currently Exercisable Option/Warrant
Shares"). However, these shares are not deemed outstanding for the purpose of
computing the percentage ownership of any other person. Unless otherwise
indicated, the persons and entities named in the table have sole voting and
investment power with respect to all shares beneficially owned, subject to
community property laws where applicable.

<TABLE><CAPTION>
Shares Shares Beneficially
Beneficially Owned After the
Owned Prior Offering
to the Shares Being -----------------
Selling Security Holder Offering Offered Number Percent
============================================== ========== ============= ====== =======
<S> <C> <C> <C> <C>
Chase Venture Capital Associates, LP 987,981 658,654 - -
Mitsui Comtek Corp. 144,807 96,538 - -
Sobrato 1979 Revocable Trust 23,180 15,453 - -
Tricia Joerger 512 341 - -
Donna Bumgarner 1,023 682 - -
</TABLE>
<PAGE>
-37-
<TABLE><CAPTION>
<S> <C> <C> <C> <C>
Gordon Campbell 14,476 9,651 - -
Gordon Campbell 100,231 66,821 - -
Kurt Keilhacker 32,738 21,825 - -
James Lee Whims 16,369 10,913 - -
Koji Morihiro 8,185 5,457 - -
Laura Onopchenko 2,873 1,915 - -
Eleanor M. Wierenga 226 151 - -
Techfund Capital Management LLC 23,370 15,580 - -
Techfund Capital L.P. 231,982 154,655 - -
Cushman Living Trust dated September 28, 1993 1,534 1,023 - -
Cambridge Samsung Partners, LLC 367,719 223,798 - -
Eiji Kawamura 14,482 9,655 - -
Leonard S. Veil (1) 61,806 34 61,772 *
Jeffrey H. Grammer (2) 131,166 7 131,159 *
Patrick Chiumiento (3) 61,322 7 61,315 *
William Junkermier (4) 29,685 7 29,678 *
Donald Stephenson 1,044 696 - -
NQUIT, Inc. 1,023 682 - -
Richard Weiss (5) 5,637 2,729 2,908 *
Eric Murray (6) 8,755 2,251 6,504 *
Gary P. Golding 274 183 - -
CEO Venture Fund II 158,753 105,835 - -
Corporate Venture Partners, L.P. 85,314 56,876 - -
Poly Ventures II, L.P. 71,442 47,628 - -
Jay Wessel 426 284 - -
James Colker 1,369 913 - -
ACO c/o National City Bank 1,369 913 - -
Eugene R. Yost 1,369 913 - -
Timothy Parks 274 183 - -
Databook Inc. 10,948 7,299 - -
Hewlett-Packard Company ...................... 69,626 69,626 - -

TOTAL.................................... 2,850,889 1,590,178 293,336 *
</TABLE>
- --------------
* less than 1%

(1) Includes 61,755 shares issuable under Currently Exercisable
Option/Warrant Shares.
(2) Includes 131,156 shares issuable under Currently Exercisable
Option/Warrant Shares.
(3) Includes 61,312 shares issuable under Currently Exercisable
Option/Warrant Shares.
(4) Includes 29,675 shares issuable under Currently Exercisable
Option/Warrant Shares.
(5) Includes 1,544 shares issuable under Currently Exercisable
Option/Warrant Shares.
(6) Includes 5,379 shares issuable under Currently Exercisable
Option/Warrant Shares.

PLAN OF DISTRIBUTION

We are registering the shares of Class A common stock offered in this
prospectus on behalf of the selling stockholders. As used in this prospectus,
the term selling stockholder includes pledgees, donees, transferees or other
successors-in-interest selling shares received from a selling stockholder as a
gift, partnership or liquidating distribution or other non-sale related transfer
after the date of this prospectus. We will pay all expenses of registration of
the shares offered, except for taxes or underwriting fees, discounts, selling
commissions and legal fees of selling stockholders. Each selling stockholder
will pay any brokerage commissions and similar selling expenses attributable to
the sale of
<PAGE>
-38-

the shares. We will not receive any of the proceeds from the sale of the shares
by the selling stockholder.

The selling stockholders may sell the shares from time to time in one
or more types of transactions, including block transactions, on one or more
exchanges, in the over-the-counter market, in negotiated transactions, through
put or call options transactions relating to the shares, through short sales of
the shares, or a combination of these methods of sale. The selling stockholders
may sell their shares at market prices prevailing at the time of sale, or at
negotiated prices.

The selling stockholders may use brokers or dealers to sell their
shares. As of the date of this prospectus, we have not been advised by any
selling stockholders that he, she or it has made any arrangements as to the
distribution of shares covered by this prospectus.

The selling stockholders may sell their shares directly to purchasers
or to or through broker-dealers, which may act as agents or principals. These
broker- dealers may receive compensation in the form of discounts, concessions
or commissions from the selling stockholders and/or the purchasers of shares for
whom broker-dealers may act as agents or to whom they sell as principal, or
both. Compensation as to a particular broker-dealer might be in excess of
customary commissions.

The selling stockholders and any broker-dealers that act in connection
with the sale of the shares might be deemed to be "underwriters" as the term is
defined in Section 2(11) of the Securities Act of 1933. Consequently, any
commissions received by these broker-dealers and any profit on the resale of the
shares sold by them while acting as principals might be deemed to be
underwriting discounts or commissions under the Securities Act of 1933.

Because the selling stockholders may be deemed to be "underwriters" as
defined in Section 2(11) of the Securities Act of 1933, the selling stockholders
will be subject to the prospectus delivery requirements of the Securities Act of
1933, as amended.

A selling stockholders also may resell all or a portion of the shares
in open market transactions in reliance upon Rule 144 under the Securities Act
of 1933, provided that he, she or it meets the criteria and conforms to the
requirements of that Rule.

Upon being notified by a selling stockholder that he, she or it has
entered into any material arrangement with a broker-dealer for the sale of the
shares through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker or dealer, we will file a
supplement to this prospectus, if required, pursuant to Rule 424(b) under the
Securities Act of 1933, regarding the plan of distribution.

We have agreed to indemnify certain of the selling stockholders against
certain liabilities, including liabilities arising under the Securities Act of
1933, or to contribute to payments which these selling stockholders may be
required to make in respect hereof. These selling stockholders have agreed to
indemnify us against certain liabilities, including liabilities arising under
the Securities Act of 1933, as amended.

LEGAL MATTERS

The validity of the securities offered hereby will be passed upon for
Wave Systems by Bingham Dana LLP, New York, New York.
<PAGE>
-39-

EXPERTS

The consolidated financial statements of Wave Systems Corp. and
Subsidiaries (a development stage corporation) as of December 31, 1998 and 1997,
and for each of the years in the three-year period ended December 31, 1998 have
been included herein by reference and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants, upon the
authority of said firm as experts in accounting and auditing.
<PAGE>
-40-

WHERE YOU CAN FIND MORE INFORMATION

We are subject to the periodic filing requirements of the Securities
Exchange Act of 1934. Further to our obligations under the Exchange Act, we file
reports, proxy and information statements and other information with the
Securities and Exchange Commission. These reports, proxy and information
statements and other information may be inspected and copied at the public
reference facilities of the Securities and Exchange Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Regional Offices of the Securities and Exchange Commission 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 these materials also can
be obtained from the Public Reference Section of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of
prescribed fees. The Securities and Exchange Commission also maintains a site on
the World Wide Web that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Securities and Exchange Commission (including Wave systems). The address of this
site is http://www.sec.gov.

We have filed a registration statement on Form S-3 with the Securities
and Exchange Commission to register under the Securities Act of 1933 the
securities that this prospectus offers. In accordance with the rules and
regulations of the Securities and Exchange Commission, portions of the
registration statement have been omitted from this prospectus. Therefore, this
prospectus contains only some of the information in the registration statement.
If you would like more information about Wave Systems and the securities this
prospectus offers, please refer to the registration statement, which is on file
at the offices of the Commission. You may obtain copies of these documents upon
payment of the fee, or you may examine them without charge at the offices or via
the Web site. When we discuss other documents in this prospectus, we may not
provide all of the information about or contained in those other documents. You
should not rely upon this prospectus to provide a complete discussion of the
contents of other documents. You should refer to those other documents yourself.
Whenever we discuss the contents of other documents, we qualify our statements
in all respects by reference to the applicable documents on file with the
Commission.

In addition to historical information, this prospectus and the
registration statement contain forward-looking statements within the meaning of
the Securities Litigation Reform Act of 1995. These statements and projections
about the future involve risks and uncertainties. As a result, we may not be
able to accurately predict the future and our actual results may turn out to be
materially different from what we anticipate and discuss in this prospectus. In
addition, we operate in an industry segment where securities prices may
fluctuate dramatically and may be influenced by regulatory and other factors
beyond our control. We discuss some of the factors which we believe to be
important in the cautionary statements that accompany the forward-looking
statements and in the risk factors section of this prospectus, as well as in the
risk factors detailed in the other filings we have made with the Securities and
Exchange Commission during the past 12 months. Whenever you assess a
forward-looking statement in this prospectus, we urge you to read carefully all
of the risk factors and cautionary statements in this prospectus, as well as
those in our other filings with the Securities and Exchange Commission.
<PAGE>
-41-

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The SEC allows us to incorporate into this prospectus information we
file with the SEC in other documents. The information incorporated by reference
is considered to be part of this prospectus and information we later file with
the SEC will automatically update and supersede this information. We incorporate
by reference the documents listed below and any future filings made with the SEC
under Sections 13(a), 13(c), 14 and 15(d) of the Securities Exchange Act of 1934
until all of the shares of common stock that are part of this offering have been
sold. The documents we have incorporated by reference are:

our Annual Report on Form 10-K for the year ended December 31, 1998;

our Quarterly Reports on Form 10-Q for the quarters ended March 31,
1999, June 30, 1999 and September 30, 1999;

our Current Report on Form 8-K filed with the SEC on August 12, 1999,
as amended on October 13, 1999;

our Proxy Statement, filed with the SEC on October 26, 1999; and

the description of our common stock contained in our Registration
Statement on Form 8-A.

You may request a copy of these filings at no cost by writing or
telephoning Wave Systems Corp., 480 Pleasant Street, Lee, Massachusetts 01238,
(413) 243-1600.
<PAGE>

ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS AND SCHEDULES

EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------

5 -- Opinion of Bingham Dana LLP with respect to the
legality of the shares being offered

23.1 -- Consent of Bingham Dana LLP (included as part
of Exhibit 5 hereto)

23.2 -- Consent of KPMG LLP, Independent Certified
Public Accountants, with respect to Wave
Systems Corp.

23.3 -- Consent of KPMG LLP, Independent Certified
Public Accountants, with respect to N*Able
Technologies Inc.

24 -- Power of Attorney (included on the signature
page hereto)

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

(b) Financial Statement Schedules:

All schedules have been omitted since they are either not required or
not applicable.

II-1

<PAGE>

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; and (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.

(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.

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 registrant has
been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and therefore is unenforceable.
In the event that a claim for indemnification against such liabilities, other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant 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.

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.

II-2
<PAGE>

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 Town of Lee, Commonwealth of Massachusetts, on the 15th day
of December, 1999.

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.

SIGNATURE TITLE DATE
<S> <C> <C>

/s/ Peter J. Sprague Chairman and Chief Executive December 15, 1999
- ----------------------------------- Officer
Peter J. Sprague

/s/ Steven Sprague President, Chief Operating Officer December 15, 1999
- ----------------------------------- and Director
Steven Sprague

/s/ John E. Bagalay, Jr. Director December 15, 1999
- -----------------------------------
John E. Bagalay, Jr.

/s/ Philippe Bertin Director December 15, 1999
- -----------------------------------
Philippe Bertin

/s/ George Gilder Director December 15, 1999
- -----------------------------------
George Gilder

/s/ John E. McConnaughy, Jr. Director December 15, 1999
- -----------------------------------
John E. McConnaughy, Jr.

/s/ Gerard T. Feeney Senior Vice President, Finance December 15, 1999
- ----------------------------------- and Administration, Chief Financial
Gerard T. Feeney Officer and Secretary (Principal
Accounting Officer)
</TABLE>

II-3

BINGHAM DANA LLP
150 Federal Street
Boston, Massachusetts 02110

December 15, 1999

Wave Systems Corp.
480 Pleasant Street
Lee, Massachusetts 01238

Re: Registration Statement on Form S-3 Relating
to 1,590,178 Shares of Common Stock
-------------------------------------------

Ladies and Gentlemen:

We have acted as counsel for Wave Systems Corp., a Delaware corporation
(the "Company"), in connection with the registration under the Securities Act of
1933, as amended (the "Act"), of 1,590,178 shares of the Company's Common Stock,
$0.01 par value per share, all of which shares are issued and outstanding (the
"Shares") and are to be sold by certain selling shareholders, pursuant to a
Registration Statement on Form S-3 (as amended, the "Registration Statement"),
initially filed with the Securities and Exchange Commission on December 15,
1999.

We have reviewed the corporate proceedings of the Company with respect
to the authorization of the issuance of the Shares. We have also examined and
relied upon originals or copies of such corporate records, instruments,
agreements or other documents of the Company, and certificates of officers of
the Company as to certain factual matters, and have made such investigation of
law and have discussed with officers and representatives of the Company such
questions of fact, as we have deemed necessary or appropriate as a basis for the
opinions hereinafter expressed. In connection with the issuance of the Shares,
we have examined and relied upon a certificate of the Treasurer of the Company.
In our examinations, we have assumed the genuineness of all signatures, the
conformity to the originals of all documents reviewed by us as copies, the
authenticity and completeness of all original documents reviewed by us in
original or copy form and the legal competence of each individual executing any
document.

We have further assumed that the registration requirements of the Act
and all applicable requirements of state laws regulating the sale of securities
will have been duly satisfied.

This opinion is limited solely to the Delaware General Corporation Law
as applied by courts located in Delaware.

Based upon and subject to the foregoing, we are of the opinion that the
Shares were duly authorized, are validly issued and are fully-paid and
non-assessable.

We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,

/s/ Bingham Dana LLP

EXHIBIT 23.2
------------

INDEPENDENT AUDITORS' CONSENT

The Board of Directors
Wave Systems Corp.:

We consent to the use of our report included herein and to the references to our
firm under the headings "Selected Consolidated Financial Data" and "Experts" in
the prospectus.

/s/ KPMG LLP

KPMG LLP

Boston, Massachusetts
December 14, 1999

EXHIBIT 23.3
------------

INDEPENDENT AUDITORS' CONSENT

The Board of Directors
Wave Systems Corp.:

We consent to the incorporation by reference on Form S-3 of Wave Systems Corp.
and Subsidiaries, of our report dated July 9, 1999, except as to note 9, which
is as of July 27, 1999, with respect to the balance sheets of N*ABLE
Technologies, Inc. as of June 30, 1999 and 1998, and the related statements of
operations, stockholders' equity, and cash flows for the two years ended June
30, 1999 and the period from October 31, 1996 (inception) to June 30, 1999,
which report appears in the Form 8-K of Wave Systems Corp. and Subsidiaries
dated October 12, 1999.

/s/ KPMG LLP

KPMG LLP

Boston, Massachusetts
December 14, 1999