WAVE SYSTEMS CORP, 424B1, 2000-04-11

WAVE SYSTEMS CORP
424B1, 2000-04-11
COMPUTER PERIPHERAL EQUIPMENT, NEC

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Filed Pursuant to Rule No. 424(b)(1)
Registration No. 333-33236

PROSPECTUS

3,600,800 SHARES

WAVE SYSTEMS CORP.

CLASS A COMMON STOCK

This prospectus relates to 3,600,800 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 March 30, 2000 was $38.00 per share.

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INVESTING IN OUR CLASS A COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 5

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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.

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The date of this prospectus is March 31, 2000.
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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-Registered Trademark-,
WaveNet-Registered Trademark-, 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>
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".

<TABLE>
<S> <C>
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
</TABLE>

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<TABLE>
<S> <C>
distribution of electronic commerce transactions. These
three capabilities are key to building a network of
end-users and conducting e-commerce transactions.

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,
</TABLE>

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<TABLE>
<S> <C>
KiSS Nordic, Cyber-COMM, Lego Media and WavePhore. In 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.
</TABLE>

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.

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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 December 31, 1999, we had a
deficit accumulated during the development stage of approximately $93.3 million
and working capital of approximately $4.8 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:

- 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;

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

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

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

- 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 end 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 services could drop if:

- 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;

- 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;

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

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- 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 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.

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.

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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.

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

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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.

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 patents 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
copyrights 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.

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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 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:

- quarterly variations in operating results;

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

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

- changes in financial estimates and recommendations by securities analysts;

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

- 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 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

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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.

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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.

SELLING SECURITY HOLDERS

An aggregate of 3,600,800 shares of Class A common stock are being
registered in this offering for the account of the selling stockholders. All of
these shares were originally issued in connection with our private placement
that was completed on March 8, 2000. 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 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 March 23, 2000, there were 43,924,851 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 warrants held by that person that
are currently exercisable or become exercisable within 60 days following
March 15, 2000 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.

12
<PAGE>

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED AFTER THE
SHARES BENEFICIALLY OFFERING
OWNED PRIOR SHARES BEING -------------------
SELLING SECURITY HOLDER TO THE OFFERING OFFERED NUMBER PERCENT
- ----------------------- ------------------- ------------ -------- --------
<S> <C> <C> <C> <C>
Gruber, Jon D.................................... 10,000 10,000 0 0%
Gryphon Offshore Fund............................ 18,240 18,240 0 0%
Hare Investment Fund............................. 20,800 20,800 0 0%
Hilspen Capital Partners......................... 8,800 8,800 0 0%
Hilspen Capital Partners II...................... 49,100 49,100 0 0%
Hollis Capital Partners.......................... 50,000 50,000 0 0%
Jackson Square Partners LP....................... 70,000 70,000 0 0%
Job & Co......................................... 8,160 8,160 0 0%
Kent Williams Investment Assoc. Employee
Pension Plan................................... 20,000 20,000 0 0%
Lagunitas Partners LP............................ 30,000 30,000 0 0%
Martin, Loy...................................... 7,000 7,000 0 0%
Medical Education & Consulting Inc. Money
Purchase Pen & Profit Shg...................... 20,000 20,000 0 0%
Porter Partners, LP.............................. 50,000 50,000 0 0%
Small Cap Fund................................... 13,500 13,500 0 0%
Tonga Patners, LP................................ 22,000 22,000 0 0%
Ultra Whitney Ltd................................ 8,100 8,100 0 0%
Whitney Partners, LP............................. 26,900 26,900 0 0%
Rosenbach, Gary.................................. 25,000 25,000 0 0%
Foxhound Fund LP................................. 75,000 75,000 0 0%
Marcuard Cook & CIE SA........................... 30,000 30,000 0 0%
Metzler Investment GmbH.......................... 350,000 350,000 0 0%
Resonance Limited................................ 88,000 88,000 0 0%
Veritas SG Investment Trust GMBH................. 125,000 125,000 0 0%
Kamin, Anthony................................... 10,000 10,000 0 0%
Ram Trading, Ltd................................. 150,000 150,000 0 0%
Covington Partners............................... 20,000 20,000 0 0%
Brookside Capital Partner Fund................... 1,000,000 1,000,000 0 0%
Essex Performance Fund Ltd....................... 56,468 56,468 0 0%
Farrell Distributing Corp. Pension Fund.......... 8,000 8,000 0 0%
Green Century Balanced Fund...................... 25,000 25,000 0 0%
Jessie Smith Noyes Foundation.................... 17,000 17,000 0 0%
New Discovery Fund Ltd........................... 23,532 23,532 0 0%
Balestra Capital Partners, L.P................... 20,000 20,000 0 0%
Island Asset Fund LP............................. 10,000 10,000 0 0%
Island Capital Offshore Fd Ltd................... 10,000 10,000 0 0%
Jeffrey Thorp IRA................................ 10,000 10,000 0 0%
Jeffrey Thorp IRA Rollover....................... 20,000 20,000 0 0%
Narragansett I LP................................ 19,980 19,980 0 0%
Narragansett Offshore Ltd........................ 7,020 7,020 0 0%
Nordlicht, Jules................................. 88,000 88,000 0 0%
Orbitex Growth Fund.............................. 15,000 15,000 0 0%
Singer, Rich H................................... 15,000 15,000 0 0%
Special Situations Cayman Fund LP................ 12,500 12,500 0 0%
Special Situations Fund III LP................... 37,500 37,500 0 0%
TCMP3 Partners................................... 25,000 25,000 0 0%
</TABLE>

13
<PAGE>

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 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.

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<PAGE>
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.

EXPERTS

The consolidated financial statements of Wave Systems Corp. and Subsidiaries
(a development stage corporation) as of December 31, 1999 and 1998, and for each
of the years in the three-year period ended December 31, 1999 and for the period
February 12, 1998 (inception) to December 31, 1999, have been incorporated
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.

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

15
<PAGE>
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.

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<PAGE>
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 1999 Annual Report on Form 10-K, 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.