Wave Systems Corp. (fka WAVXQ)

[2bStealthy]

Wave Systems Corp. is offering certain purchasers (the "Purchasers") 5,484,790 shares of its Class A common stock pursuant to this prospectus supplement and the accompanying prospectus. The Class A common stock will be purchased at the negotiated price of $1.05 per share.

Our Class A common stock is traded on the Nasdaq National Market under the ticker symbol "WAVX." The last reported sales price of our Class A common stock on December 15, 2004, was $1.28 per share.

In connection with this offering, we will pay fees to JPC Capital Partners, Inc. (formerly known as Corpfin.com, Inc.) (the "placement agents"). See "Plan of Distribution" beginning on page S-6 of this prospectus supplement for more information regarding these arrangements.

Per Common Share Total Offering
Offering Price $ 1.05 $ 5,759,030
Placement Agent Fees $ 0.042 $ 230,361
Proceeds before expenses to us $ 1.008 $ 5,528,668

We estimate the total expenses of this offering, excluding the placement agents' fees will be approximately $65,000. The first delivery of the shares of Class A common stock being offered under this prospectus supplement was made to the Purchasers on December 17, 2004.


We may be unable to raise the $11.5 million of additional cash flow, which is necessary to continue as a going concern for the next twelve months.

Based upon our current expense forecast, we estimate that our current available capital, including the proceeds from the sale of 5,484,790 shares of common stock from this offering, is sufficient to fund Wave into April, 2005. In addition to our efforts to begin to generate revenue sufficient to fund our operations, or complete one or more commercial or strategic transactions, Wave is evaluating additional financing options to generate additional capital in order to continue as a going concern, to capitalize on business opportunities and market conditions and to insure the continued development of our technology, products and services. Furthermore, in May of 2003, we significantly reduced our cash burn rate, and although we have since had to increase expenditures to meet specific market demand, we may have to further reduce our cash burn rate if we are unable to generate sufficient cash flow to fund our current and forecasted operations. If we are unable to generate sufficient cash flow from revenue and other sources, we will likely pursue additional capital through equity or debt financings. 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 will be diluted, or the shares issued may have rights, preferences or privileges senior to those of our common stock. In addition, if we pursue debt financing, we may be required to pay interest costs. If we are not successful generating sufficient cash flow or obtaining additional funding, we will be unable to continue our operations, develop or enhance our products, take advantage of future opportunities, respond to competitive pressures and continue as a going concern.

THE OFFERING
Class A common stock offered 5,484,790 shares

Class A common stock to be outstanding after this offering

76,177,617 shares

Use of Proceeds

We intend to use the net proceeds from the sale of the securities offered by this prospectus supplement and the related accompanying prospectus to provide working capital for our business.

Nasdaq National Market symbol

WAVX

The information above is based on 70,692,287 shares of Class A common stock and 205,725 shares of Class B common stock outstanding as of October 31, 2004, and excludes:

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11,522,357 shares of Class A common stock reserved for issuance upon the exercise of employee and director options outstanding.

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6,715,596 shares of Class A common stock reserved for issuance under existing option plans.

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184,365 shares of Class A common stock reserved for the exercise of warrants issued to consultants.

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65,789 shares of Class A common stock reserved for the exercise of warrants issued to the holders of Wave's Series H Convertible Preferred Stock.

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931,309 shares of Class A common stock reserved for the exercise of warrants issued in November 2003.

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161,595 shares of Class A common stock reserved for the exercise of warrants issued to placement agents.

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4,411,765 shares of Class A common stock reserved for the exercise of warrants issued on July 30, 2004.

To the extent that any of outstanding options are exercised, new options are issued under our stock incentive plans or we issue additional shares of common stock in the future, there will be further dilution to new investors.

USE OF PROCEEDS

We estimate that the net proceeds we will receive from this offering will be approximately $5,528,603, after deducting the estimated offering expenses. We will retain broad discretion over the use of the net proceeds from the sale of our Class A common stock offered hereby. We currently anticipate using the net proceeds from the sale of our Class A common stock hereby primarily for working capital.

We may also use a portion of the net proceeds to acquire or invest in businesses complementary to Wave's business, products and technologies. Although we have no specific arrangements with respect to acquisitions, we evaluate acquisition opportunities and engage in related discussions from time to time.


PLAN OF DISTRIBUTION

We have entered into a securities purchase agreement dated as of December 15, 2004 with certain purchasers (the "Purchasers") pursuant to which, subject to certain conditions, we have sold to the Purchasers, and the Purchasers purchased from us, 5,484,790 shares of Class A common stock offered hereby at $1.05 per share.

JPC Capital Partners, Inc. (formerly known as Corpfin.com, Inc.), referred to as the placement agents, has entered into a placement agency agreement with us in which they have agreed to act as placement agent in connection with the offering. The placement agent is using its best efforts to introduce us to selected institutional investors who will purchase the shares. The placement agent has no obligation to buy any of the shares from us.

The placement agency will be entitled to a fee of 4% of the gross subscription proceeds of this offering. We may not sell the entire amount of our Class A common stock offered pursuant to this prospectus supplement.

We negotiated the price for the Class A common stock offered in this offering with the Purchasers. The factors considered in determining the price included the recent market price of our Class A common stock, the general condition of the securities market at the time of this offering, the history of, and the prospects, for the industry in which we compete, our past and present operations, and our prospects for future revenues.

The placement agent may be deemed to be an underwriter within the meaning of Section 2(a)(11) of the Securities Act of 1933, as amended, or the Securities Act, and any fees or commissions received by it and any profit realized on the resale of the securities sold by it while acting as principal might be deemed to be underwriting discounts or commissions under the Securities Act. As underwriter, the placement agent would be required to comply with the requirements of the Securities Act and the Securities Exchange Act of 1934, as amended, or the Exchange Act, including, without limitation, Rule 415(a)(4) under the Securities Act and Rule 10b-5 and Regulation M under the Exchange Act. These rules and regulations may limit the timing of purchases and sales of shares of Class A common stock by the placement agent. Under these rules and regulations, the placement agent:

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may not engage in any stabilization activity in connection with our securities; and

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may not bid for or purchase any of our securities or attempt to induce any person to purchase any of our securities, other than as permitted under the Exchange Act, until it has completed its participation in the distribution.

The placement agency agreement with JPC Capital Partners, Inc. was included as an exhibit to our Current Report on Form 8-K that was filed with the Securities and Exchange Commission on August 2, 2004.

The transfer agent for our Class A common stock is American Stock Transfer Corporation.


We may be unable to raise the $8.5 million of additional cash flow, which is necessary to continue as a going concern for the next twelve months.

Based upon our current expense forecast, we estimate that our current available capital is sufficient to fund Wave into July, 2004. In addition to our efforts to begin to generate revenue sufficient to fund our operations, sell some or all of our marketable securities valued at $6.3 million as of December 31, 2003, or complete one or more commercial or strategic transactions, Wave is evaluating additional financing options to generate additional capital in order to continue as a going concern, to capitalize on business opportunities and market conditions and to insure the continued development of our technology, products and services. Furthermore, in May of 2003, we significantly reduced our cash burn rate, and although we have since had to increase expenditures to meet specific market demand, we may have to further reduce our cash burn rate, if we are unable to generate sufficient cash flow to fund our current and forecasted operations. If we are unable to generate sufficient cash flow from revenue and other sources, we will likely pursue additional capital through equity or debt financings. 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 will be diluted, or the shares issued may have rights, preferences or privileges senior to those of our common stock. In addition, if we pursue debt financing we may be required to pay interest costs. If we are not successful generating sufficient cash flow or obtaining additional funding, we will be unable to continue our operations, develop or enhance our products, take advantage of future opportunities, respond to competitive pressures and continue as a going concern.

USE OF PROCEEDS

Except as may be otherwise set forth in the prospectus supplement accompanying this prospectus, we will use the net proceeds we receive from sales of the securities offered hereby for general corporate purposes, including the development and support of our sales and marketing organization, support for our continuing research and development efforts and the funding of acquired related businesses and technologies.


DESCRIPTION OF CAPITAL STOCK

Following is a summary of the material terms of our capital stock, including our Class A common stock. The summary is not complete and should be read in conjunction with our Restated Certificate of Incorporation, filed as Exhibit 3.1 to our Registration Statement on Form S-1 (SEC File No. 33-75286).

Authorized and Outstanding Shares

Our authorized capital stock consists of 120,000,000 shares of Class A common stock, $.01 par value per share; 13,000,000 shares of Class B common stock, $.01 par value per share; and 2,000,000 shares of preferred stock, $.01 par value.

As of March 1, 2004, a total of 67,133,415 shares of our Class A common stock and 205,725 shares of our Class B common stock were issued and outstanding.

Common Stock

Wave's Class A common stock and Class B common stock are equal in all respects except for voting rights, conversion rights and restrictions on transferability, as discussed more fully below.

Voting Rights

The voting powers, preferences and relative rights of the Class A common stock and the Class B common stock are identical in all respects, subject to the following provisions. Holders of Class A common stock have one vote per share on all matters submitted to a vote of the stockholders of Wave. Holders of Class B common stock have one vote per share on all matters submitted to a vote of the stockholders, except that holders of Class B common stock will have five votes per share on the following matters: (i) any election of directors where one or more directors has been nominated by any person or persons other than Wave's Board of Directors or in the event of an "Election Contest" (as described in Rule 14a-11 promulgated under the Securities Exchange Act of 1934, as amended) or other solicitation of proxies or consents by or on behalf of any person or persons other than Wave's Board of Directors for the purpose of electing directors; and (ii) any vote on a merger, consolidation

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or reorganization of Wave or similar business combination or transaction, or any sale, lease, exchange or other disposition of all or substantially all of the assets of Wave to or with any other person, if the particular business combination or other transaction has not been recommended by Wave's Board of Directors. In addition, holders of Class B common stock will have five votes per share on all matters submitted to a vote of the stockholders of Wave in the event that any person or group (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) acquires beneficial ownership of 20% or more of the outstanding voting securities of Wave (provided that this provision will not apply to any person who beneficially owns 3% or more of the outstanding voting securities at the time of the closing of this offering or any group including any such person). No class of outstanding common stock alone is entitled to elect any directors. There is no cumulative voting with respect to the election of directors.

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