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Table Of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission File Number 0-24752

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

413-243-1600
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:

Class A Common Stock, $.01 par value
(Title of Class)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o    No ý

        The aggregate market value of the shares of Common Stock of the registrant held by non-affiliates as of March 1, 2004 was $101,386,411 (For purposes of this calculation, the market value of a share of Class B Common Stock was assumed to be the same as a share of Class A Common Stock, into which it is convertible.)

        As of March 1, 2004 there were 67,133,415 shares of the registrant's Class A Common Stock and 205,725 shares of the registrant's Class B Common Stock outstanding.

EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THIS FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE U.S. SECURITIES LITIGATION REFORM ACT OF 1995. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES THAT MAY CAUSE WAVE'S ACTUAL RESULTS OR OUTCOMES TO BE MATERIALLY DIFFERENT FROM THOSE ANTICIPATED AND DISCUSSED HEREIN. FURTHER, WAVE OPERATES IN AN INDUSTRY SECTOR WHERE SECURITIES VALUES MAY BE VOLATILE AND MAY BE INFLUENCED BY REGULATORY AND OTHER FACTORS BEYOND WAVE'S CONTROL. IMPORTANT FACTORS THAT WAVE BELIEVES MIGHT CAUSE SUCH DIFFERENCES ARE DISCUSSED IN THE CAUTIONARY STATEMENTS ACCOMPANYING THE FORWARD-LOOKING STATEMENTS AND IN THE RISK FACTORS DETAILED IN WAVE'S OTHER FILINGS WITH THE COMMISSION DURING THE PAST 12 MONTHS. IN ASSESSING FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, READERS ARE URGED TO READ CAREFULLY ALL RISK FACTORS AND CAUTIONARY STATEMENTS CONTAINED IN THIS FORM 10-K AND IN THOSE OTHER FILINGS WITH THE COMMISSION.

Table Of Contents

PART I

Item 1. Business

        Wave Systems Corp., a development stage company, develops, produces and markets products for hardware-based digital security including security applications and services that are complementary to and compliant with the specifications of the Trusted Computing Group ("TCG"). TCG is an industry standards body, comprised of computer and device manufacturers, software vendors and others whose purpose is to develop, define and promote open industry standard specifications for embedded hardware-enabled computing products including security technologies, across multiple platforms, peripherals and devices. The current TCG specification recommends a hardware-based trusted computing platform, which is a platform that uses a semiconductor device, known as a Trusted Platform Module ("TPM") that performs protected activities including protected storage, platform authentication, protected cryptographic processes and attestable state capabilities to provide the first level of trust for the computing platform (a "Trusted Platform"). The TPM is a hardware chip that is separate from the platform's main CPU(s) that enables secure protection of files and other digital secrets, and performs critical security functions such as generating, storing and protecting "cryptographic keys," which are secret codes used to decipher encrypted or coded data. Wave's operations to date have consisted primarily of product development; performance under contract to develop products and preliminary marketing. TCG based systems will require an evolving "eco-system" of new development tools, applications, services and infrastructures. In 2003, Wave began the market introduction of its first commercial products designed to support the emerging products that include TPM's in this marketplace. In addition, Wave is developing additional products supporting these TCG products, some of which are in the final stages of testing for market introduction in 2004.

        Prior to the formation of the TCG, Wave developed its pioneering EMBASSY (EMBedded Application Security SYstem) Trust System. The EMBASSY Trust System is a combination of client hardware consisting of the EMBASSY 2100 security chip (the "EMBASSY chip"); and software consisting of the Trust Assurance Network ("TAN"), a back-office infrastructure that manages its security functions. As the market for TPM-enabled products has developed with computing devices being shipped in volume by leaders in the PC industry, Wave has enabled the development work on the EMBASSY Trust System to support security hardware based on the TCG specifications, by repurposing these product assets. More recently, Wave has developed a set of applications known as the EMBASSY Trust Suite to work with various other chip manufacturers' TCG compliant TPMs that are now available. Wave's products are unique in the fact that they support cross platform interoperability for the currently available TPM chips from National Semiconductor, Atmel, and Infineon, and have been certified for usage on TPM platforms shipped by Intel, IBM, and HP.

        Wave has not realized any significant revenues since we began our operations in 1988. While Wave was successful in signing distribution contracts with both Intel and National Semiconductor in 2003, we do not expect to begin to realize material revenues until the latter part of 2004. Revenues have been nominal in relation to our expenditures due to the highly complex nature of the technology that we are developing and the early stage nature of the market for products that utilize this technology. As a result, we have experienced a slow pattern of corporate development. As of December 31, 2003, we had working capital of approximately $12.4 million. Considering our current cash balance and Wave's projected operating cash requirements, we anticipate that we will need a minimum of $3,000,000 million of additional cash to satisfy our current forecasted cash flow requirements for the year ending December 31, 2004. As discussed above, Wave has begun market introduction of its software products for Trusted Platforms and has signed its first distribution contracts for these applications. However, due to the early stage nature of its market category, Wave is unable to predict with a high enough level of certainty whether enough revenue will be generated in calendar 2004 to fund its cash flow requirements. Given the uncertainty with respect to Wave's revenue forecast for 2004, it is likely that Wave will be required to raise additional capital through either equity or debt

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financing in order to adequately fund its capital requirements for the year ending December 31, 2004. Furthermore, in the event that we are successful in executing our business plan for 2004, we will likely still be in a cash shortfall position and we will need to begin to generate sufficient sales to fund operations in future years, or we will be required to raise additional capital to continue beyond 2004. Due to our current cash position, our capital needs over the next year and beyond, the fact that we have not at this time secured additional financing and uncertainty as to whether we will achieve our sales forecast of our products and services, substantial doubt exists with respect to our ability to continue as a going concern.

Formation of the Trusted Computing Group and introduction of TCG Compliant Products

        In April, 2003 the TCG was formed. The Promoting Founders were AMD, HP, IBM, Intel, and Microsoft, and Wave Systems was invited to join the founding group as a Contributing Member. The TCG formally accepted the initial technical specifications developed by the Trusted Computing Platform Alliance ("TCPA") for Trusted Platform Modules V1.1. TCG formally superceded the TCPA organization. The TCG has significantly expanded the industry participation in security hardware standards with membership from industry leaders for important additional platforms including cell phones, PDAs and consumer electronics.

        During 2003, several manufacturers of semiconductors for the PC industry including National Semiconductor, Atmel and Infineon were offering products that have the capability to function as TPMs that meet the TCG TPM V1.1 standard for trusted computing. In addition, PC platforms which included TPMs were announced and/or available from IBM, Intel and HP.

        The offering of these products to the PC market is an important development in the creation of the market for hardware-based computer security. As a result of this development, Wave had begun executing a strategy to enable the work it has done in developing the EMBASSY Trust System towards becoming a leading developer of software, applications and services to this market. Wave formed business relationships with some of these companies as a developer of products that will be essential to the deployment and usage of these new products, thereby creating a new revenue opportunity for Wave. Wave is providing solutions in the market which work with all available TCG compliant products today.

Products and Services

The EMBASSY Trust Suite

        The current version of the EMBASSY Trust Suite is a set of applications, tools and services that are designed to bring functionality and user value to the TPM enabled products. The EMBASSY Trust Suite includes Document Manager Vault, Private Information Manager (PIM) and SmartSignature. Document Manager Vault provides document encryption, decryption and client side storage of documents. The vault, which integrates with Microsoft Office, secures documents against unauthorized users and hackers. PIM uses the TPM to securely store user information such as user names, passwords, credit card numbers and other personal information. It retrieves login information to efficiently fill in web forms and web login information. Data stored using the PIM utilizes the security of the TPM to protect against unauthorized access. SmartSignature is a digital signing application that utilizes the signing keys generated by the TPM. Wave has released two separate versions of the EMBASSY Trust Suite: Business Edition and Professional Edition. Wave has also produced a Beta version of the Suite which includes a client version of Key Transfer Manager ("KTM") (see below), which is scheduled to be released in the first half of 2004. Wave plans to continue to develop and enhance the current products being developed within this product group and will develop new applications and services as the trusted computing market continues to evolve. Current planned development costs for this product group are expected to be approximately $1,500,000 for 2004.

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EMBASSY Trust Server Applications

        The EMBASSY Trust Server applications include Key Transfer Manager and Attestation Credential Manager (ACM)—essential enablers for managing and determining authenticity of Trusted Platforms. The ACM works with any application to ensure that it is interacting with a Trusted Platform. This is a critical function for attestation and management of TPM equipped devices. The KTM is a server application capable of securely backing up, storing and/or migrating TCG-specific keys from one TPM enabled system to another according to various security policies defined on the server, in a centralized fashion. KTM is being designed to allow an IT manager to provide capabilities to individual TPM users such as recovery services in the event of system malfunctions or new product availability. Both products are planned to be released for availability sometime in 2004. Current planned development costs for this product group are expected to be approximately $4,000,000 for 2004.

Digital Signature and Electronic Document Management

        On October 4, 2001 Wave acquired digital signature and electronic document management technology, SmartSignature and SmartSAFE from SignOnLine, Inc. ("SignOnLine"), a California-based company. This group or products now makes up our eSign Transaction Management Suite, also known as eTMS, which now consists of four core products: SmartIdentity, SmartSignature, SmartSAFE and SmartConnect. SmartSignature Version 3.0 is a digital signature application that connects signers and institutions—banks, insurance companies, enterprises etc.—through a legally binding digital signature. Wave's SmartSignature is currently enabled for the support of TPMs for added security associated with user identity and signing credentials. SmartSAFE Version 3.0 is a web-based document management application where signed documents are archived and tracked. SmartSAFE provides an easy to use environment where a client institution can view, manage, store and transfer sensitive signed and unsigned documents. SmartSAFE also supports archival and management of unsigned documents in virtually any format. These products allow a document to be executed, verified, accepted and filed in minutes at a lower cost compared to traditional documentation methods. SmartSignature Version 3.0 and SmartSAFE Version 3.0 have been completed and Wave commercially released these products in the first quarter of 2003. SmartIdentity, an optional service to verify a signer's identity through strong authentication methods, including issuing encrypted digital certificates based on public key infrastructure technology, was completed and released in January of 2003. No further development activities are planned for this product group other than routine updates. Future development will be based on specific customer opportunities. Wave will continue to allocate resources towards marketing and sales to promote these products.

The EMBASSY Trust System

        The EMBASSY Trust System is Wave's proprietary co-processor cryptographic subsystem and supporting infrastructure; a separate chip with its own processor designed to provide security functions such as hidden processing of software applications, protected storage of cryptographic keys and encrypted data, that works with client and server software applications that provide and/or manage various security functions. Products that make up the EMBASSY Trust System include hardware and software. The hardware products that make up this product group are the EMBASSY 2100 security chip (referred to above) and secure user input devices such as EMBASSY Smart Card Readers and EMBASSY Smart Card Reader Keyboards that use EMBASSY 2100 chips. These devices are being marketed to government, military and financial services markets. The software products included in this product group are the Trust Assurance Network, which is the back office security infrastructure of the EMBASSY Trust System; Assistant, a client interface that allows the user to securely enter and store, their personal and financial data, personal identification numbers, passwords, digital certificates and other information that requires security, the Cyber-Comm applet; a secure French banking application that runs on an EMBASSY chip and FINREAD; a JAVA interface for online transactions. No further

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development activities are planned for this product group. The primary assets of this product group have served as the basis for the development of the TCG compliant products in the EMBASSY Trust Suite and EMBASSY Trust Server applications.

Broadband Media Distribution

        Wave offers its data broadband content distribution products through Wavexpress, Inc. ("Wavexpress"), a joint venture between Wave and Sarnoff Corporation. The joint venture was established on October 15, 1999. Under the joint venture agreement, Sarnoff and its affiliates received a 40% equity stake in Wavexpress. Wave received a 53% equity interest; and its affiliates, who purchased founders stock in April 1999 for a nominal amount, owned the remaining 7% of the outstanding capital stock. The affiliates of Wave include Peter Sprague; former Chairman of Wave and Steven Sprague; Chief Executive Officer of Wave, certain members of the Board of Directors of Wave and certain Wave employees.

        Wavexpress has developed a vertically integrated suite of products designed to enable the optimum broadband distribution of digital programming. Suitable media for delivery include an extensive range of file types, including video, movies and games. Wavexpress delivers files presented and assembled as rich media channels. These products are designed to provide a rich consumer experience, allow content partners to participate in the market for broadband distribution and allow enterprise customers to deliver rich content to selected users within the enterprise network. Wave believes the benefits of these products to content owners, network operators and enterprises include incremental revenue streams from content subscriptions and sales, increased consumer acquisition and retention when used as a marketing tool and cost savings over traditional distribution methods. The product has been deployed, and revenue generating enterprise and content customers have been signed.

        Planned future development expenditures are expected to approximate $2,000,000 for the year ending December 31, 2004. As of December 31, 2003, Wave owned 69% of Wavexpress and Sarnoff owned 26%.

        Wave was 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.

        Wave, as well as Wavexpress, is a development stage company and has realized minimal operating revenues since our inception. For the years ended December 31, 2003, 2002, and 2001 Wave incurred losses to common shareholders of approximately $25,292,000, $43,467,000, and $48,701,000, respectively. At December 31, 2003 we had an accumulated deficit of approximately $252,686,000. There can be no assurance that we will ever be successful in achieving commercial acceptance of our products and services.

Markets and Business Strategy

        Software has traditionally secured critical information on networks and PCs and allowed for user access to various applications. However, virus attacks and breaches of security have proven that software, on its own, is not capable of completely securing a network or platform. Because of these persistent security concerns, there is now a recognized need in the computer industry for the development and deployment of a more robust and reliable security infrastructure including new security hardware in devices to guard against these persistent security risks. The TCG was formed to develop, define and promote open industry standard specifications for embedded hardware-enabled trusted computing and security technologies, including secure hardware and software interfaces across multiple platforms, peripherals and devices. The underlying premise of the creation of a Trusted Platform that meets the TCG specification is that only when a platform is secured by hardware, in

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effect creating an authenticatable security environment within the computer itself, will the information stored on the platform be adequately secure. Wave is seeking to become a software, applications, and services leader in hardware-based digital security and e-commerce products markets. Because Wave has been a pioneer in developing hardware-based computer security systems, it is distinctively positioned to take advantage of this unique knowledge, significant technology assets, and trusted computing intellectual properties. Because hardware-based trusted computing involves a new approach to conducting business and exchanging information using computer systems, as it will require that traditional software-based security be augmented with next generation hardware-based security and an enhanced support infrastructure, intensive marketing and sales efforts have been and will continue to be necessary in order to generate demand for products using Wave's technology, and to ensure that Wave's solution is accepted in this emerging market. Our objective is to make our EMBASSY products and services the preferred applications and infrastructure for Trusted Platforms. Key components in achieving this goal include:

Capitalizing on Information Security Industry Trends

        For 2003 and 2004 security remains one of the top industry priorities across multiple segments of the user and product value chains. This top priority is supported by increased spending budgets and high product adoption rates of new security offerings. Virtually all segments within the security markets are seeing increased focus.

        Wave believes that a key differentiator of its EMBASSY Trust Suite is that it supports cross platform interoperability, ease of use, and a robust set of development tools for TCG products. Key industry initiatives and security specifications that will require the addition of trusted hardware are moving forward in a number of platforms including Microsoft's Next Generation Secure Computing Base (NGSCB), Intel's LaGrande secure computing program, and AMD's Secure Execution Mode (SEM). Similar programs are under consideration in mobile devices such as PDAs and cell phones and consumer electronics devices.

        Wave has designed its products with features and functionality that it believes uniquely positions them to capitalize on information security industry issues and trends. Wave sees these issues and trends as follows:

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Requirements to authenticate the identity of both platforms and users for access to protected resources and information



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User managed security features



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Major privacy concerns



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Rapid development of new e-commerce business and distribution models



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Lack of adequate security for e-commerce and vulnerability to attacks



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Convergence of consumer electronics and PC's



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Legal status of digital identities and digital signatures, including development of next generation web services which require digital signature solutions.



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Increased focus on security and privacy by government entities



•

Rampant piracy of digital goods including music, video, software, and the need for digital goods providers to securely distribute their content and prevent theft

        Wave will continue to pursue strategic relationships with hardware manufacturers, independent software vendors, systems integrators and companies involved in the development of commerce in

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electronic content and services to achieve broad market acceptance of its products as a platform for security solutions and commerce performed in user devices.

Pursue Strategic Marketing and Distribution Alliances

        We intend to expand Wave's strategic alliances with key partners that could distribute our products in enterprise, government and eventually in consumer markets, and to build upon our alliances with such industry leaders as Intel, HP, IBM and others in the PC industry. In addition, we are engaged in strategic activities with semi-conductor manufacturers National Semiconductor, Atmel and Infineon Technologies to support and/or deploy EMBASSY applications with their TCG compliant TPMs. TCG has expanded its scope to include trusted peripherals, cell phones, PDAs, and consumer elctronics devices. Wave believes its trusted computing offerings can provide significant value in these new markets and platforms, and thus, Wave is working to establish relationships with key partners in each of these markets.

Enhancing our Current Product Offerings and Products in Development

        We intend to continue to develop and extend our existing product offerings to include features and functionality to meet customer requirements and market demand. Planned development efforts that enhance or utilize existing technologies include building upon and enhancing our EMBASSY Trust Suite and Wavexpress broadband media distribution software applications.

        Client and server solutions supporting both the operations and life cycle management of Trusted Platforms is a major focus area for Wave. New products that Wave is planning on developing over the ensuing period will consist primarily of new TCG client and server software services and enabling tools that will expand upon its portfolio of TCG trusted computing applications and services in the following areas:

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Cross platform interoperability: There is TCG hardware coming from multiple suppliers, as well as supporting software from multiple vendors. In order for applications from independent software vendors to work with any of these multiple combinations of products, Wave is developing TCG toolkits which provide this interoperability across platforms. Wave will continue to expand the functions available to ISVs within these enabling toolkits to make it easier to bring new applications to Trusted Platforms.



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Client applications: Wave's EMBASSY Trust Suite provides important applications for the end user which run on their PCs such as Document Manager, Private Information Manager, and SmartSignature. Wave will continue to add new client applications and enhance the current applications with advanced functions to exploit the strong security of the TCG platforms.



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Server applications: Trusted devices require a number of life cycle management products to address the set up, registration, operations, and systems management requirements of the platforms. Wave's current offerings include the Key Transfer Manager-Enterprise Server, and Attestation Credential Manager. The server family of products will be expanded and enhanced with future versions.

        These development efforts will likely be significant, and Wave intends to expend a substantial portion of its research and development resources towards these enhancements as well as significant marketing and corporate development funds to introduce the products and build market demand. As a result, although Wave reduced its research and development expenditures in 2003, the continued research and development efforts will require substantial capital resources, which will likely necessitate the need for further funding so that Wave may ultimately be able to capitalize on the emerging market opportunities for its products and services. Wave announced major products, primarily for TPM applications in 2003, and is developing significant new client and server based products which we plan

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to announce early in 2004. It is expected that continued product enhancements, new releases and new product development activities will continue through 2004.

Marketing, Sales and Customers

        Because Wave's technology involves a new approach to conducting business and exchanging information using computer systems, as it will require that traditional software-based security be enhanced and/or replaced with next generation hardware-based security, intensive marketing and sales efforts have been and will continue to be necessary in order to increase recognition of and generate demand for products using Wave's technology, and to ensure that Wave's solution is accepted in this emerging market. The current primary focus is on closing business with chip OEMs, PC OEMs, enterprise customers, and systems integrators. Wave has also undertaken steps to develop and establish a reseller channel for our products.

        Wave's business model targets revenues from various sources including: licensing of our technology including EMBASSY Trust Suite client applications, tools and enabling software and client/server based trusted software solutions for the lifecycle management of keys and authentication of Trusted Platforms.

        Wave has identified four key markets where we believe our products provide unique benefits:

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PCs—TCG's standards based specifications for trusted hardware is leading the industry towards increased deployment of TPM hardware by a growing number of PC OEMs. The current focus for both TCG and Wave is for enterprise PC platforms, but will be extending into consumer PCs over time. Wave anticipates providing enabling tools to ISV's in order to take advantage of the new trusted computing features of these platforms.



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Banking and Finance—in addition to our European initiatives to be a leader in delivering solutions for European standards, which can provide strong authentication to services, we are aggressively cultivating interest and support from financial institutions for utilizing TCG compliant platforms.



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Broadband Media—through our Wavexpress joint venture, we have developed a broadband architecture for persistent protection of content from the content owner to the hard disk at home.



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Government and Enterprise—the market for electronic security systems in governmental units and large business enterprises is growing and Wave believes this market represents a key opportunity for both our eSIGN Transaction Management Suite as well as Wave's TCG offerings.

        Directly and through our partners, Wave is aggressively targeting opportunities in these markets, as we believe our products provide a wide range of security and trust capabilities not offered in any other single solution.

        Wave's sales for the year ended December 31, 2003 consisted of development contracts for NRE projects, licensing of its products and other services. Of the total revenue realized for the year ended December 31, 2003, 43% was derived from Wavexpress' broadband media distribution segment and the remaining 57% was derived from activities related to Wave's computer security products and services. None of the customers from which Wave derived revenue in 2003 in excess of 10%, would have a material adverse effect on Wave's business if Wave were to lose such customers, because the level of sales during the year overall was not significant to Wave's level of expenditures. However, Wave's business plan on a forward-looking basis, will depend heavily on a small number of OEM customers, partners and prospective customers, the loss of, or lack of substantial future revenues from, any one of which may have a material adverse effect on our business plan going forward. Theses include National Semiconductor, Intel, IBM, Hewlett Packard and others.

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Competition

Wave EMBASSY Digital Security Products

        We operate in the information security market, a highly competitive and fragmented environment that is characterized by rapidly evolving technology. Many of our competitors and potential competitors have substantially greater financial, technical and marketing 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. In addition, the rate of market acceptance of trusted computing solutions is still in the formative, early stages. The markets for our products are developing and while the TCG specifications have provided the basis for the industry to move forward, there remains significant standards work efforts in order for the eco-system supporting trusted computing to move forward. Wave's potential competitors include security solutions providers such as RSA Security, Inc., Symantec, Computer Associates, Verisign, Inc., Entrust, Inc., Ultimaco, Safenet, and major systems integrators such as IBM, HP and EDS. The competitive factors defining these evolving markets include product performance, compatibility, standards compliance, quality and reliability, ease of use, client services and support, distribution and price. Wave believes its products meet the requirements to be successful viable products in these markets. Wave's features that should allow its products to compete favorably include product differentiation of a cross platform, interoperable solutions, easy use of features, and leading edge trusted client/server infrastructure solutions. In addition, Wave continues to have leading solutions with its digital signature products especially combined with trusted computing platforms and features.

        One of the market challenges facing Wave is the establishment of a newly defined market category for trusted computing software and services that includes a more complex business model for adoption. While Wave has developed a very complex cryptographic system that required significant skills and resources, the market for security solutions that are as complex as those developed by Wave is in a formative stage of development. As a result, commercialization of these technologies has been slow to develop. It is also possible for other competitors to develop similar offerings to compete with our products, or new technologies may emerge that could replace existing technology that our products rely on, thereby making our products non-competitive or obsolete. We can offer no assurances that Wave's products will become industry standards or become widely accepted by the marketplace.

Wavexpress Broadband Media Distribution

        Wavexpress competes in a market dominated by traditional content delivery methods. Wavexpress prospects are often relying on Federal Express and UPS to deliver physical media, which Wavexpress technology replaces. In the network operator arena, Wavexpress competes against Video-on-demand companies such as SkyStream Networks. Several companies compete for the digital delivery of content over broadband, including CDNs (content delivery networks) such as Akamai and startup caching companies such as Maven Networks.

International Market

        Most of our software products and many components of the EMBASSY Trust System are controlled under various United States export control laws and regulations and may require export licenses for certain exports of the products and components outside of the United States and Canada. We have received export licenses from the U.S. Department of Commerce's Bureau of Export Administration (the "BXA") for the sale and export of our EMBASSY chip and related products and technology to any end-user in any country throughout the world with the exception of Cuba, Iran, Iraq, Libya, North Korea, Sudan and Syria, subject to certain restrictions and in some cases, certain reporting requirements. With respect to our EMBASSY Trust Suite software applications, we have applied for and received export classifications that allow us to export our products, without a license

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and with no restrictions, to any country throughout the world with the exception of Cuba, Iran, Iraq, Libya, North Korea, Sudan and Syria.

        We believe the export classifications that we have received for our software products allow us to sell our products internationally in an effective, competitively advantageous manner. Enhancements to existing products may, and new products, including the EMBASSY Trust Server applications will be subject to reviews by the BXA to determine what export classification they will receive. Some of our partners demand that our products be allowed to be exported without restrictions and/or reporting requirements. Current export regulations have, in part, allowed us to receive the desired classification without undue cost or effort. However, the export regulations may be modified at any time. Modifications to the export regulations could prevent us from exporting our existing and future products in an unrestricted manner, without a license as we are currently allowed for the products that we've received classification, or make it more difficult to receive the desired classification. If export regulations were to be modified in such a way, we may be put at a competitive disadvantage with respect to selling our products internationally.

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 upon or circumvented. Furthermore, you should understand that our activities may infringe upon patents owned by others.

        Wave has been issued eleven (11) United States patents relating to encryption and to our proprietary EMBASSY and Wave Commerce technology. We also have six (6) patents pending before the United States Patent Office. In addition, we have filed foreign patent applications for seven patents. Our patents are material to protecting some of our technology.

        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 if such a breach occurs. Furthermore, we can provide no assurance that our trade secrets will not otherwise become known or be independently discovered by competitors.

        We also rely on copyright law 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 can provide no assurance that copyright laws will adequately protect our technology.

Research and Development

        Wave's products incorporate encryption/decryption, client and server software applications and other technologies in which we have made a substantial investment in research and development. We will likely be required to continue to make substantial investments in the design of information security applications and services, including the EMBASSY Trust Suite, EMBASSY Server applications, eTMS products, and broadband media distribution products. For the years ended December 31, 2003, 2002, and 2001 we spent approximately $7.4 million, $12.0 million, and $17.7 million, respectively, on research and development activities. Planned development expenditures for the year ended December 31, 2004 are expected to be approximately $7.5 million.

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Employees

        As of December 31, 2003, we employed eighty-three (83) full-time employees, forty-two (42) of whom were involved in sales, marketing and administration and forty-one (41) of whom were involved in research and development (including twenty-one (21) employed by Wavexpress, nine (9) of whom were in sales, marketing and administration and twelve (12) of whom were involved in research and development.) As of December 31, 2003 we retained the services of six (6) full-time consultants, three (3) of whom were retained by Wavexpress. We believe our employee relations are satisfactory.

Item 2. Properties

        Summarized below is a listing of properties leased by Wave. Our principal research and development activities are conducted at the Princeton and Cupertino facilities.

Item 3. Legal Proceedings

Securities and Exchange Commission Investigation

        On December 17, 2003 Wave received an Order by the Securities and Exchange Commission (the "Commission") regarding a formal investigation. The focus of this investigation is on certain public statements made by Wave during and around August 2003, as well as certain trading in Wave's securities during such time. The Commission has not concluded that there has been any wrongdoing and Wave is cooperating fully with the Commission on this matter. Wave cannot predict the potential effect on Wave as a result of this investigation at this time.

Purported Class Actions

        Several (9 known) similar purported class action complaints have been filed between January 23, 2004 and February 23, 2004 most in the United States District Court for the District of Massachusetts, seven (7) of which name Wave, its Chief Executive Officer and its Chief Financial Officer and two (2) of which also name Wave's Chairman, as defendants. The purported class action complaints have been filed by alleged purchasers of Wave's Class A Common Stock during the purported class period July 31, 2003 through February 2, 2004. The complaints claim that Wave and the named individuals violated the federal securities laws by publicly disseminating materially false and misleading statements regarding Wave, relating to Intel and IBM agreements, resulting in the artificial inflation of Wave's Class A Common Stock price during the purported class periods. The complaints do not specify the amount of alleged damages plaintiffs seek to recover.

        Wave intends to defend the actions vigorously. At this time, Wave is unable to predict the outcome of these actions.

Derivative Actions

        Wave has learned of three (3) other complaints filed in the United States District Court for the District of Massachusetts. Wave believes that the complaints name all of its directors as defendants and allege claims for breach of fiduciary duties and other claims. The allegations are very similar to the allegations made in the purported securities class actions because the allegations concern the very same

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alleged statements alleged in the purported class actions. Wave is also named as a nominal defendant, although the actions are derivative in nature and purportedly asserted on behalf of Wave. Wave is in the process of evaluating these claims.

        Other than the matters described above, Wave was not involved in any material litigation, nor, to management's knowledge is any material litigation threatened against them or their properties other than routine litigation arising in the ordinary course of business.

Item 4. Submission of Matters to a Vote of Security Holders

        On November 21, 2003, Wave held a special meeting of shareholders (the "Special Meeting"). At the Special Meeting, the shareholders voted on the following matters:

1.

To consider and act upon a proposal to ratify the appointment of KPMG LLP as the Company's independent auditors for the year ending December 31, 2004. The proposal was adopted with the following results: 56,337,541 votes for, 334,336 votes against and 232,803 abstentions.

2.

To ratify the action of the Board of Directors in amending the 1994 Employee Stock Option Plan to increase the number of shares of Class A Common Stock authorized for issuance thereunder from 13,000,000 to 15,500,000. The proposal was adopted with the following results: 8,744,408 votes for, 2,385,919 votes against and 240,715 abstentions.

3.

To ratify the action of the Board of Directors in amending the 1994 Employee Stock Option Plan to extend the termination date thereof from January 1, 2004 to January 1, 2009. The proposal was adopted with the following results: 8,956,274 votes for, 2,143,224 votes against and 273,436 abstentions.

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PART II

Item 5.    Market for Registrant's Common Equity and Related Stockholder Matters

Market Information & Dividends

        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 sales prices per share for the Class A Common Stock. There is no established trading market for our Class B Common Stock.

        As of February 15, 2004, there were approximately 39,000 holders of our Class A Common Stock. As of such date, there were 16 holders of our Class B Common Stock.

        On March 1, 2004, the last sale price reported on the Nasdaq National Market for the Class A Common Stock was $1.52.

        We have never declared nor 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.

Securities Authorized for Issuance Under Equity Compensation Plans

        Wave Equity compensation plans not approved by security holders are comprised of the following:

        In connection with a software development agreement that Wave entered into with Archon Technologies, Inc. ("Archon"), Wave issued to Archon a warrant to purchase 50,000 shares of Class A Common Stock at $3.48 per share, pursuant to an individual compensation plan with Archon (the

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"Archon Plan"). The warrant became exercisable on November 9, 2002, and expires on November 9, 2007. No additional warrants are required to be granted pursuant to the Archon Plan.

        A director of Wavexpress, Inc. ("Wavexpress"), a joint venture between Wave and Sarnoff Corporation, was granted a warrant to purchase 10,000 shares of Class A Common Stock at $10.00 per share, pursuant to an individual compensation plan with the director, upon acceptance of an offer to serve on Wavexpress' board. This warrant is currently exercisable and expires on August 24, 2004. No additional warrants are required to be granted pursuant to this individual compensation plan.

        As a result of the successful placement of 350 shares of Series B preferred stock, a consultant from Digital Media Group, Inc. ("Digital Media") was issued warrants by Wave to purchase 15,000 shares of Class A Common Stock at a price of $3.09 per share, pursuant to an individual compensation plan with Digital Media (the "Digital Media Plan"). No additional warrants are required to be granted pursuant to the Digital Media Plan. These warrants are currently exercisable and expire on March 1, 2006.

        In connection with a consulting agreement that Wave entered into with the William Morris Agency, Inc. ("William Morris"), Wave issued William Morris a warrant to purchase 10,000 shares of Class A Common Stock at $14.73 per share, pursuant to an individual compensation plan with William Morris (the "William Morris Plan"). No additional warrants are required to be granted pursuant to the William Morris Plan. This warrant is currently exercisable and expires on March 31, 2004.

        In connection with an agreement that Wave entered into with an outside sales representative, Wave issued warrants to purchase 44,365 shares of Class A Common Stock at prices ranging from $0.95 to $1.45 per share, pursuant to an individual compensation plan with the sales representative. No additional warrants are required to be granted pursuant to the individual compensation plan for the sales representative. These warrants are currently exercisable and expire January 1, 2013 through April 30, 2013.

Recent Sales of Unregistered Securities

        On November 18, 2003, Wave issued 3,725,263 shares of its Class A Common Stock at a price of $1.90 per share and granted warrants to purchase 931,309 shares of Class A Common Stock at an exercise price of $2.62 per share in a private placement to a group of accredited investors for proceeds of approximately $6,562,000, net of issuance costs of approximately $516,000. The warrants have a three (3) year term. In addition, in connection with the transaction, Wave incurred commissions of $218,000 for the fair market value of warrants granted to placement agents to purchase 161,595 shares of Wave's Class A Common Stock. The warrants granted to the placement agents are also exercisable at a price of $2.62 per share and have a 3 year life as well. If exercised in full, the warrants granted in connection with this financing will generate up to an additional $2,863,000, at the exercise price. Proceeds from this issuance of common stock have been and will be used to fund Wave's ongoing operations, specifically its sales and marketing efforts, as well as its engineering, development and customer support teams and its general corporate overhead.

        In completing the sale of the unregistered Class A Common Stock referred to above, we relied upon Section 4(2) of the Securities Act of 1933 for exemption from registration of these securities. The common stock issued in the private placement was not registered under the Securities Act of 1933, as amended, at the time of issuance, and could not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. Pursuant to a registration rights agreement entered into with the accredited investors for the sales of these shares, Wave agreed to file a registration statement with the Securities and Exchange Commission covering the resale of the Class A Common Shares sold and those underlying the warrants. Wave filed a registration statement on Form S-3 covering the resale of the shares on January 20, 2004. On February 12, 2004 the registration statement was declared effective by the Commission.

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Item 6.    Selected Financial Data

Statement of Operations Data

See Notes to Financial Statements

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Balance Sheet Data