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                      SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC 20549
 
                               ----------------
 
                                   FORM 10-K
 
   FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
 
  (MARK ONE)
 
  [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
     SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
 
                                      OR
 
  [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
     SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE TRANSITION PERIOD FROM      TO
 
                        COMMISSION FILE NUMBER 0-20789
 
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                                 ONEWAVE, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
                DELAWARE                             04-3249618
       (STATE OF INCORPORATION)         (I.R.S. EMPLOYER IDENTIFICATION NO.)
 
 
 ONE ARSENAL MARKETPLACE, WATERTOWN, MA                 02172
    (ADDRESS OF PRINCIPAL EXECUTIVE                  (ZIP CODE)
               OFFICES)
 
      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 923-6500
 
       SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE.
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
 
                    COMMON STOCK, PAR VALUE $.001 PER SHARE
                               (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  X  No
 
  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
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
 
  The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant on March 26, 1997 was $11,232,651.
 
  The number of shares of the registrant's Common Stock, par value $.001 per
share, outstanding on March 26, 1997 was 14,991,878.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  Portions of the Company's definitive proxy statement dated April 7, 1997 for
the Annual Meeting of Stockholders to be held on May 7, 1997 is incorporated
by reference into Part III of this Report on Form 10-K.
 
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  STATEMENTS MADE OR INCORPORATED INTO THIS FORM 10-K INCLUDE A NUMBER OF
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. FORWARD
LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS CONTAINING THE
WORDS "ANTICIPATES", "BELIEVES", "EXPECTS", "INTENDS", "FUTURE", AND WORDS OF
SIMILAR IMPORT WHICH EXPRESS MANAGEMENT'S BELIEFS, EXPECTIONS OR INTENTIONS
REGARDING THE COMPANY'S FUTURE PERFORMANCE. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS.
CERTAIN FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE ARE DISCUSSED IN THE
SECTION ENTITLED "CERTAIN FACTORS THAT MIGHT AFFECT RESULTS" ON PAGE 16 OF
THIS FORM 10-K.
 
                                    PART I
 
ITEM 1. BUSINESS.
 
  OneWave, Inc. ("OneWave" or the "Company"), a Delaware corporation, was
incorporated in January 1994. OneWave(TM) is an Internet software and services
company dedicated to unifying disparate information systems and building
integrated business solutions. OneWave technology serves as a common software
environment for accessing existing mainframes, databases and client/server
systems, and extending new business processes across the traditional
boundaries of the enterprise. OneWave utilizes and supports industry standards
and emerging technologies, and works closely with top consulting firms and
technology providers to ensure expertise in areas critical to a complete
solution.
 
  The Company's products are designed for high-volume and real-time
performance capabilities through the utilization of standard Internet
protocols; component-based, object-oriented technology; a scaleable, multi-
tier architecture and an intuitive point-and-click development environment.
The Company believes that its products and services can enable organizations
to achieve significant competitive advantages by increasing responsiveness to
changing business conditions, and exploiting the low cost, flexibility and
ease-of-use of Internet technologies.
 
  In light of OneWave's experience in the marketplace during the second half
of 1996, the Company has recently adjusted its sales and marketing approach,
offering to provide its customers with a combination of consulting services
and software necessary to deliver a comprehensive solution which addresses the
customers' business problems. The Company believes that, in the long term,
this change in approach will result in increased market penetration. However,
revenues will likely be reduced in the short term as the Company makes its
transition to the new sales and marketing approach.
 
BUSINESS BACKGROUND
 
 Business Reengineering and the Use of Information Technology
 
  In response to increased competitive pressures, businesses in recent years
have engaged in the extensive reengineering of critical business processes. To
date, these reengineering efforts have primarily focused on realizing
productivity and efficiency gains within internal business processes, such as
finance, order entry, manufacturing and resource planning. Businesses have
begun to shift the focus of their reengineering efforts from internal to
external business processes, such as supply chain and distribution channel
management. A key enabler of reengineering efforts has been the deployment and
effective use of IT systems to manage critical business processes and
information. Historically, most organizations addressed their IT requirements
through legacy systems, which are highly customized, proprietary mainframe or
mini-computer systems. The limitations of legacy systems, such as cost and
lack of flexibility, have led organizations to utilize powerful and relatively
inexpensive personal computers and networking technologies to deploy
departmental client/server IT systems for the next generation of IT solutions.
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  Organizations' ability to develop and deploy effective, enterprise-wide
business applications has been limited by the proliferation of disparate IT
systems. The lack of interoperability across different systems has introduced
inefficiencies by creating islands of information which are inaccessible from
certain systems within an organization. Such problems are dramatically
compounded when organizations attempt to extend business applications to
connect their IT systems with the disparate IT systems of their "extended
enterprise", including customers, suppliers, distributors and business
partners.
 
 The Emergence of the Internet and Intranets
 
  The recent emergence of the World Wide Web ("Web") and Internet technologies
offers businesses the opportunity to significantly improve collaboration and
communication both within the enterprise and with the extended enterprise.
Unlike current legacy and client/server IT solutions, Internet technologies
enable data exchange and collaboration based on cost-effective, easily
deployable and non-proprietary technology. The Company believes that
businesses will be able to realize substantial productivity and efficiency
gains by using the Internet to conduct business transactions with key
audiences of the extended enterprise. The Company also believes that
organizations will realize significant gains by deploying "Intranets", which
are internal networks that utilize the same Internet technologies and
protocols. Intranets exploit the openness, ease-of-use and cross-platform
functionality of Internet technologies to facilitate information
dissemination, communication and collaboration within the enterprise.
 
  The Company believes that demand exists for a solution which not only
integrates business applications with legacy systems, client/server systems
and databases, but also seamlessly extends those applications across the
enterprise to internal users via Intranets or to users in the extended
enterprise utilizing Internet technologies.
 
THE ONEWAVE SOLUTIONS
 
  The Company delivers solutions which leverage OneWave products and which
enable organizations to integrate their existing information systems and
develop and deploy business applications which take advantage of the low cost,
ease-of-use and flexibility of Internet technologies. The Company's products
and services allow organizations to reach beyond the enterprise and conduct
new, dynamic and interactive transactions with key audiences in the extended
enterprise.
 
  . Services: The Company now offers customers a phased, fixed-cost/fixed-
schedule approach to the delivery of a complete software solution to solve
their business problems. In the first phase, OneWave will work closely with
the customer on a limited "project scoping engagement" or "Internet Solution
Workshop", in which OneWave will become familiar with the customer's
challenges, and the customer will become educated on the OneWave architecture
and approach to solving business problems. The next phases in the solutions
delivery process are "design", "development" and "deployment". At each phase,
OneWave will make a firm, fixed schedule proposal for the next phase, and an
estimate of the likely costs for the next succeeding phase. The Company
expects that future software revenue will generally be recognized at the
deployment phase of solutions. This services-led approach to product sales is
expected to result in services revenue becoming the predominant component of
total revenue.
 
  . Technology: The Company's solutions are based on a distributed component
architecture employing a multi-tier client/server infrastructure, where
presentation, functionality and data access are developed and deployed as
independent layers. In this multi-tier architecture, each tier may be expanded
in a modular fashion by adding components which are reusable and shareable
across applications. Client-based components are processed by the OneWave
Client and the server-based components are run using the OneWave Application
Integration Server ("AIS") product (formerly named "Openscape Distributed Web
Engine"). Components can be partitioned, or split apart, placing the
appropriate application logic on the server or client. The Company has also
enhanced its products to support applets developed in Java.
 
  OneWave's distributed component architecture allows many disparate back-end
information systems to be "plugged-in" to the same application framework. For
example, OneWave products allow development of an
 
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application with seamless access to data from both an SAP R/3 system and a
mainframe database. Access to each system is provided through the AIS, which
regulates, manages and secures all traffic from the clients. The OneWave
Extensions ("Extensions") provide pre-configured connectivity to each back-end
system accessed by the AIS. The particular software required to integrate with
a target back-end IT system need only reside on the server with the Extension,
which simplifies licensing and management, ensures version control, and
eliminates the need for installation of such integration software on the
client machine. OneWave Extensions also may be used to support access to data
or applications which are compliant with connectivity standards such as
Microsoft's OLE (Object Linking and Embedding) and the Open Software
Foundation's DCE (Distributed Computing Environment). The Company intends to
develop and release additional Extensions to address its Customers' demand for
connectivity to additional systems, where the magnitude of such demand
justifies the resource expenditure required.
 
THE ONEWAVE STRATEGY
 
  OneWave's business strategy is based on the following key elements:
 
  Services-Led Approach to Sales. The Company's sales strategy has evolved
from a software-led model to a services-led model since the OneWave AIS was
released in June 1996. The AIS is an integration environment, and therefore
its capabilities may only be demonstrated in conjunction with application
software. As a result, the Company introduced "WaveApps", a set of limited
application programs. WaveApps were used by the Company as a product
demonstration vehicle, and were also offered to customers at no charge as
"starter kits" which could be customized and implemented by the customer.
OneWave also experienced demand for its services, and believes that the
delivery of services together with software can result in more successful
customer implementations of the Company's products. As a result, the Company
has introduced a "Proof of Concept" package, consisting of development
software and consulting services necessary to enable the customer to create a
small scale functioning solution, with the expectation that a limited but
successful experience would lead to future product sales. Management believes
that, over the long term, the Company could achieve greater success by
providing additional services along with its products. During the first
quarter of 1997, the Company adjusted its direct sales model by changing its
focus to delivering complete solutions, comprised of both products and
services. The Company believes that short term revenues will likely be reduced
while the Company makes its transition to a new sales approach and seeks to
develop its business under this new model.
 
  Release New Products to Integrate Emerging Technologies. The Company's
products may be used to access a wide variety of environments and
applications. Due to the modular nature of the Company's core technology, the
Company can rapidly develop Extensions, specific add-on products which enable
communication with proprietary environments, such as SAP R/3 and PeopleSoft,
as appropriate, and integrate new capabilities such as improved security
mechanisms and Java applets. The Company intends to release new products based
upon input from significant customers and alliance partners.
 
  Leverage Relationships with Technology Companies and Customers. The Company
believes that a key element to the success of delivering a complete Web-
enabled business solution is to leverage the use of its technologies through
the development of strategic relationships with leading technology companies
and large customers. To this end, the Company has developed relationships with
third-party systems integrators such as Hewlett-Packard Company's Professional
Services Organization and members of the "big six" accounting firms, ERP
software application vendors such as PeopleSoft, Inc., and other technology
providers such as NEC Corporation and Sterling Commerce, Inc. These strategic
relationships should provide the Company with the opportunity to market its
products to a large installed base of organizations in need of Web-enabling
and integration technology for their current IT infrastructure.
 
  Develop Multiple Channels of Distribution. To reach a broad potential
customer base, the Company believes that it must develop multiple distribution
channels. The Company anticipates that its direct sales force will focus on
the services-led model described above. The Company also intends to develop
relationships with technology companies that wish to integrate the OneWave
solution with their products. As an example of success
 
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in this area, Sterling Commerce, Inc., a supplier of EDI software, has
released "WebLink", an offering which features OneWave products integrated
with the Sterling GENTRAN product as a combined offering which enables EDI
trading partners to engage in EDI transactions over the Web. In addition, the
Company and NEC Corporation have integrated NEC's workflow product with the
AIS. The combined offering allows multiple applications and IT environments to
participate in integrated workflow processes over the Internet. Over time, the
Company plans to extend the depth and breadth of its market penetration by
augmenting its direct selling efforts and strategic relationships with
additional indirect distribution channels, including Value-Added Resellers
("VARs") and application vendors.
 
ONEWAVE PRODUCTS AND SERVICES
 
  Deployment Products. The Company's deployment architecture enables reusable
components to be managed, stored and accessed across an enterprise; provides
organizations with the flexibility to create applications on demand through a
Web server; and encrypts application data for transmission over an Intranet or
the Internet. All of the products described below are currently available.
 
  Application Integration Server. The OneWave AIS(TM) is a server-based
product that provides an environment for application integration. The AIS
manages all network communications in OneWave applications and facilitates the
appropriate levels of security for applications on the Internet. Because all
OneWave runtime clients access information via the AIS, third-party networking
or client software is only necessary on the application server, and not on
Internet client machines. Other key features of the AIS include: multi-
threaded operation for high-performance and scaleability; the ability to
facilitate communications encrypted using RSA Data Security, Inc. technology;
and the ability to support single log-on for systems which integrate multiple
enterprise applications and databases. The Company has also integrated NEC's
workflow product that plugs into the AIS; this integrated solution allows
multiple applications, platforms and organizations to participate in
integrated workflow processes over the Internet.
 
  Client. The OneWave runtime Client (the "Client") is a freely distributable
runtime library that allows Intranet or Internet users to execute OneWave user
interfaces within leading Web browsers. The Client also allows OneWave visual
components to run in other desktop applications, such as Visual Basic and
Lotus Notes. In addition, the Client facilitates secure communications over
the Internet to and from OneWave visual components. Other key features of the
Client include: 16-bit and 32-bit platform support; the exposure of visual
components such as Netscape plug-ins, ActiveX Internet controls or Desktop OLE
objects; the ability of individual users to restrict downloaded applications
from performing unwanted actions (such as local file access); and facilitation
of secure, encrypted Internet connections with the AIS. OneWave's AIS also
supports Java applets.
 
 Development Products
 
  The Company's development products are designed to facilitate the rapid
development of multi-tiered enterprise, Intranet and Internet applications
from a single platform. Except as otherwise noted, all of the products
described below are currently available.
 
  OneWave Enterprise. OneWave Enterprise(TM) provides a single environment for
building all tiers of a distributed enterprise, Intranet or Internet business
application. OneWave Enterprise includes the Workbench, the Visual Component
Builder, the Extension for OLE Automation and the Extension for Open Database
Connectivity ("ODBC"). The Workbench stores and manages multiple applications
while providing the ability to share and reuse components between
applications. The Visual Component Builder provides a point-and-click
development environment for the creation of reusable graphical user interface
screens. The Visual Component Builder's integrated development environment,
with application programming and debugging features, provides the ability to
write application code in a language which is compatible with Microsoft's
Visual Basic. Application components built with the Visual Component Builder
can also incorporate off-the-shelf user interface controls, such as
Microsoft's ActiveX controls, and can integrate with off-the-shelf
productivity applications, such as Microsoft Excel and Lotus Notes. The
Extension for OLE Automation automatically imports function and interface
information from existing OLE Automation servers. The Extension for ODBC
provides graphical
 
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database browsing and query-building capabilities for quickly exposing ODBC-
compliant data sources as logical components.
 
  OneWave Extensions. OneWave Extensions(TM) communicate with targeted back-
end systems using each system's native protocols, while providing a single,
standard interface to the end-users of integrated OneWave business
applications. The following environments are currently accessible via
Extensions: Open Software Foundation's DCE, ODBC, OLE Automation, SAP R/3,
Borland's Entera and PeopleSoft systems.
 
 Application Products
 
  WaveApps. During the second half of 1996, the Company developed limited
application products used for demonstrating the capabilities of its
development tools and the AIS. These "WaveApps" are OneWave visual components
designed to meet the needs of customers who use the SAP or Peoplesoft ERP
systems. WaveApps provide customers with a "starter kit" of functionality
which may be further tailored to meet their needs. The Company offers the
WaveApps as part of the standard OneWave development product bundle.
 
 Product Support and Maintenance
 
  The Company offers a wide range of customer support options which can be
packaged to meet the specific needs of customers and business partners. The
Company provides technical support to customers, distributors and strategic
partners throughout the implementation cycle of a OneWave solution as well as
on an ongoing basis. Support service offerings include direct telephone
consulting support by experienced technical account representatives, toll-free
telephone customer support, 24-hour pager access, e-mail and fax support, and
Internet access to product information. The Company offers maintenance support
services for an annual fee based upon the Company's then-current list price
license fee of the licensed products. In addition, this maintenance fee
entitles customers to receive software enhancements to their licensed versions
of software.
 
 Consulting Services
 
  The Company's consulting services are designed to deliver, and to assist the
customer in creating complete, comprehensive, effective business solutions
which utilize the Company's products and technology. The Company offers its
services on a fixed-price/fixed-schedule basis. The range of services offered
includes Internet Solutions Workshops ("ISWs"), scoping, design, development,
and implementation of the Company's products and comprehensive solutions. An
important aspect of the Company's consulting service strategy is to leverage
the skills and market reach of the Company's alliance partners. OneWave
believes that its services can play a significant role in generating demand
for its products by demonstrating their capabilities and advantages in the
context of the delivery of business solutions.
 
STRATEGIC RELATIONSHIPS
 
  The Company is actively developing a network of strategic relationships to
accelerate the adoption of the Company's products and to assist the Company in
delivering complete business solutions to its customers. The Company believes
that these relationships will allow it to leverage the broad expertise of
third party integrators and to extend the Company's market reach. OneWave, in
turn, offers these systems integrators a focused expertise in the integration
of software application systems and the extension of those systems to the
customer's extended enterprise. For example, OneWave has worked with Hewlett-
Packard Company's Professional Services Organization to create a vertical
retail application for use by Nobody Beats The Wiz, Inc. using OneWave's
technology.
 
  The Company is actively seeking VAR or OEM relationships with software
application vendors. For instance, the Company has worked with Sterling
Commerce to develop and release a combined product offering that enables EDI
trading partners to effect EDI transactions over the Web, using OneWave's AIS
and Sterling's GENTRAN products. In addition, NEC and OneWave have integrated
OneWave's products with NEC's workflow product, and the resulting Web-enabled
Workflow product was released during 1996.
 
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<PAGE>
 
CUSTOMERS AND MARKETS
 
  The Company has sold software, consulting services and education services to
customers in a wide variety of industries. In 1996, one strategic alliance
partner (Hewlett-Packard Company) accounted for 24% of the Company's revenue,
as a result of a variety of transactions involving the utilization of OneWave
software products and services.
 
RESEARCH AND DEVELOPMENT
 
  The Company believes that its future growth will depend, in part, on its
ability to enhance its OneWave product line, develop new products, maintain
technological leadership, and satisfy continually changing customer
requirements for Web-based applications. The Company's Engineering group is
responsible for product architecture, development, functionality, quality
assurance, and for compliance with emerging industry standards, additional
third-party application packages and leading database management systems.
OneWave intends to work with its larger customers and alliance partners to
develop and release new products which address validated business needs, and
which have the potential to address broad markets.
 
  The Company has made substantial investments in product development and
technology integration. The OneWave product line has been developed primarily
by the Company's internal development staff. Certain technologies also have
been purchased and integrated into OneWave products. The Company's
expenditures for research and development during the 1994, 1995 and 1996
fiscal years were $894,000, $3,182,000 and $3,525,000, respectively.
 
  During the second half of 1996, the Company extended the functionality of
its products, by adding support for UNIX server platforms, building an
additional Extension for PeopleSoft applications, and enabling its products to
accommodate Japanese character sets and to work in conjunction with Java
applets. The Company also created several "WaveApps", application "starter
kits" that provide customers with components developed for SAP and Peoplesoft
environments which have limited functionality, and which may be tailored and
enhanced to meet the customers' needs. There can be no assurance that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of new products and
enhancements, or that its new products and enhancements will adequately meet
the requirements of the marketplace and achieve market acceptance.
 
COMPETITION
 
  The market for Internet-based technologies is new, intensely competitive and
subject to rapid technological change. The Company expects competition to
persist and intensify in the future. The Company has experienced and expects
to continue to experience increased competition from current and future
competitors, many of whom have significantly greater financial, technical,
marketing and other resources than the Company. The Company's current and
potential competitors include, among others: software companies which offer
proprietary all-in-one development tools, such as Dynasty Technologies, Inc.,
Forte Software, Inc., NeXT Software, Inc., BEA Systems, Inc. and Gradient
Technologies, Inc.; established client/server tools and database vendors who
may transfer their technology to take advantage of the Internet, such as
Borland International, Inc., ParcPlace-Digitalk, Inc., Oracle Corporation,
Informix Software, Inc., Centura Software Corporation and Sybase, Inc.;
companies which develop electronic commerce and automated service software
products and services, such as Edify Corporation, Connect Inc., Sterling
Commerce, Inc., Harbinger Corporation, Open Market, Inc. and Premenos
Technology Corporation; major systems vendors such as Digital Equipment
Corporation, International Business Machines Corporation and Sun Microsystems,
Inc.; packaged application developers such as The Baan Company, Peoplesoft,
Inc., SAP America, Inc., Marcam Corporation, J.D. Edwards & Company, Inc., and
vendors such as NetDynamics, Inc. and HAHT Software, Inc. who offer solutions
to Web-enable those packaged applications; software industry leaders such as
Microsoft Corporation and Netscape Communications Corporation;
solutions/services companies such as Sapient Corporation and Cambridge
Technology Partners; and emerging alliances between industry participants such
as the alliances between Microsoft and SAP; Digital, MCI and Microsoft; GE and
Netscape; and Netscape, Oracle, IBM and Sun Microsystems.
 
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  The Company's competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sale of their products than the
Company. Also, many current and potential competitors have greater financial
or management resources, name recognition, or more extensive customer bases
that could be leveraged, thereby potentially reducing the Company's market
share. The Company expects to face additional competition as other established
and emerging companies enter the market for Internet-based technologies and
solutions, and new products and technologies are introduced. Increased
competition could result in price reductions, fewer customer orders, reduced
gross margins and loss of market share, any of which could materially
adversely affect the Company's business, operating results and financial
condition. In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
third parties, thereby increasing the ability of their products to address the
needs of the Company's prospective customers. Current and potential
competitors may also be more successful than the Company in having their
products or technologies accepted as industry standards. Accordingly, it is
possible that new competitors or alliances among current and new competitors
may emerge and rapidly gain significant market share. Such competition could
materially adversely affect the Company's ability to obtain and retain support
for the Company's products and services. There can be no assurance that the
Company will be able to compete successfully against current and future
competitors, and the failure to do so could have a material adverse effect
upon the Company's business, operating results and financial condition.
 
  The principal factors affecting the market for the Company's products and
services are: ease of applications development, deployment, integration and
management; expertise in delivering solutions; functionality and features;
product architecture; product performance, reliability and scaleability;
product quality; expertise in functional areas and in systems implementation;
price; customer support; and product management. The Company's market is still
evolving and there can be no assurance that the Company will be able to
compete successfully against current and future competitors. The failure to
compete successfully could have a material adverse effect upon the Company's
business, operating results and financial condition.
 
PROPRIETARY TECHNOLOGY
 
  The Company relies on a combination of trademark, copyright and trade secret
laws, employee and third-party nondisclosure agreements and other means to
protect its proprietary rights in its products. All products are distributed
in object code form only, and all end-user license agreements prohibit the
reverse engineering or decompiling of the Company's software. The Company has
filed applications for registration of its various trademarks. There can be no
assurance that any trademark or patent applications will result in issued
patents or trademarks or that, if issued, such patents or trademarks would be
upheld if challenged.
 
  There can be no assurance that the Company's competitors will not
independently develop technologies that are substantially equivalent or
superior to the Company's technology, or that the measures taken by the
Company to protect its proprietary rights will be adequate to prevent
misappropriation of its technology or independent development by others of
similar technology. In addition, the laws of various countries in which the
Company's products may be sold may not protect the Company's intellectual
property rights to the same extent as the laws of the United States.
 
  There can be no assurance that third parties will not assert intellectual
property infringement claims against the Company or that any such claims will
not require the Company to enter into royalty arrangements or result in costly
litigation. The Company is not the subject of any legal action alleging the
infringement of any copyright or trademark rights of any person or of any
violation of trade secrets or other proprietary rights claimed by any third
party relating to the Company or the Company's products, nor is the Company
aware of any threatened litigation with regard thereto. However, the computer
software market is characterized by frequent and substantial intellectual
property litigation. Intellectual property litigation is complex and
expensive, and the outcome of such litigation is difficult to predict.
 
                                       7
<PAGE>
 
  The Company believes that, due to the rapid pace of technological innovation
for software products, its ability to establish and maintain a position of
technology leadership in the industry is dependent more upon the skills of its
development personnel than upon the legal protections afforded its existing
technology.
 
  Certain of the Company's products contain software that is licensed to
OneWave by third parties. There can be no assurance that these third-party
software licenses will continue to be available to the Company on commercially
reasonable terms. The loss of, or inability to maintain, any such software
could result in shipment delays or reductions until equivalent software could
be independently developed or licensed from a third party and integrated into
the Company's products, which could materially adversely affect its business,
operating results and financial condition.
 
EMPLOYEES
 
  As of March 26, 1997, OneWave had a total of 127 employees. The Company's
future success depends in significant part upon the continued service of its
key technical, consulting, and senior management personnel, and its continuing
ability to attract and retain highly qualified technical, services, and
managerial personnel. Competition for highly qualified personnel is intense,
and there can be no assurance that the Company will be able to retain its key
managerial, services and technical employees or that it will be able to
attract and retain additional and highly technical, services and managerial
personnel in the future. None of the Company's employees is represented by a
labor union. The Company has not experienced any work stoppages and considers
its relations with its employees to be good.
 
  In order for OneWave to fully exploit the market opportunity for its
products and services, an effective planning and management process is
required. The Company's growth and the industry's rapid rate of change has
placed, and is expected to continue to place a significant strain on
managerial, operational and financial resources. The senior members of the
Company's management team joined OneWave during 1996. In addition, many of the
Company's development and engineering staff were only recently hired and in
the second half of 1996 the Company experienced significant reduction in its
senior management staff. To manage its growth, OneWave must continue to
implement and improve its operational and financial systems and to expand,
train and manage its employee base. The Company's future operating results
also will depend on its ability to expand its product development capabilities
and sales and marketing organizations; implement and manage new distribution
channels to penetrate different and broader markets and expand its support
organization commensurate with the increasing base of its installed products.
If OneWave is unable to manage growth effectively, the Company's business,
operating results and financial condition could be materially adversely
affected.
 
ITEM 2. PROPERTIES.
 
  The Company leases approximately 26,000 square feet of office space in
Watertown, Massachusetts under a five-year lease agreement which commenced in
March 1996. Depending on its future growth, the Company may need to expand its
existing facilities or obtain additional space prior to the end of 1997.
Management believes that adequate facilities for expansion will be available,
if necessary, at competitive rates.
 
ITEM 3. LEGAL PROCEEDINGS.
 
  In the normal course of its operations, the Company is subject to
performance under contracts and has certain legal actions and contingencies
pending. However, in Management's opinion, any such outstanding matters would
not have a material, adverse effect on the Company's financial position,
results of operations or cash flows.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
  There were no matters submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders through solicitation of
proxies or otherwise.
 
                                       8
<PAGE>
 
                                    PART II
 
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
 
 Market Information
 
  The Company's Common Stock, $.001 par value ("Common Stock") has been traded
on the Nasdaq National Market ("Nasdaq") since the Company's initial public
offering on July 2, 1996 and currently trades under the symbol "OWAV." The
following table sets forth the high and low of the closing sales prices for
the Company's Common Stock as reported by Nasdaq for the periods indicated:
 
<TABLE>
<CAPTION>
                                                               MARKET PRICES (1)
                                                               -----------------
       1996 FISCAL QUARTERS                                      HIGH     LOW
       --------------------                                    -----------------
       <S>                                                     <C>      <C>
       Third (from July 2).................................... $  18.00 $  12.75
       Fourth................................................. $  17.25 $   7.00
</TABLE>
--------
(1) The prices listed reflect inter-dealer prices without retail mark-up,
    mark-down or commission and may not necessarily represent actual
    transactions.
 
 Holders
 
  The number of record holders of the Company's Common Stock as of March 26,
1997 was approximately 78.
 
 Dividends
 
  The Company did not pay cash dividends on its Common Stock during the years
ended December 31, 1996 and December 31, 1995. The Company does not intend to
pay cash dividends on its Common Stock in the foreseeable future.
 
                                       9
<PAGE>
 
ITEM 6. SELECTED FINANCIAL DATA
 
  The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements of the Company, including the Notes
thereto, included elsewhere in this Annual Report. The statement of operations
data set forth below for the period from inception (January 19, 1994) to
December 31, 1994, and for the fiscal years ended December 31, 1995 and 1996,
and the balance sheet data as of December 31, 1994, 1995 and 1996, are derived
from the Company's audited financial statements which have been audited by
Arthur Andersen LLP, independent public accountants, and which are included
elsewhere in this report. The historical results are not indicative of the
results of operations to be expected in the future.
 
<TABLE>
<CAPTION>
                                    JANUARY 19, 1994   YEAR ENDED   YEAR ENDED
                                     (INCEPTION) TO   DECEMBER 31, DECEMBER 31,
                                    DECEMBER 31, 1994     1995         1996
                                    ----------------- ------------ ------------
                                       (IN THOUSANDS EXCEPT PER SHARE DATA)
<S>                                 <C>               <C>          <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
  Software license and
   maintenance.....................      $   --         $ 2,151      $  8,106
  Consulting and education
   services........................          --           3,919         5,098
                                         -------        -------      --------
    Total revenues.................          --           6,070        13,204
Cost of Revenues:
  Software license and
   maintenance.....................          --             717         1,517
  Consulting and education
   services........................          --           2,684         4,001
                                         -------        -------      --------
    Total cost of revenues.........          --           3,401         5,518
    Gross profit...................          --           2,669         7,686
Operating Expenses:
  Selling, general and
   administrative..................          286          2,108        10,565
  Research and development.........          894          3,182         3,529
  Compensation to executive
   officer.........................          --             --          6,794
                                         -------        -------      --------
    Total operating expenses.......        1,180          5,290        20,888
                                         -------        -------      --------
    Operating loss.................       (1,180)        (2,621)      (13,202)
Interest (Expense) Income, net.....          --             (77)          953
                                         -------        -------      --------
  Net loss before income taxes.....       (1,180)        (2,698)      (12,249)
Income Tax Expense.................          --             --             95
                                         -------        -------      --------
  Net loss.........................      $(1,180)       $(2,698)     $(12,344)
                                         =======        =======      ========
Pro Forma Net Loss per Common and
 Common Equivalent Share...........                     $  (.21)     $   (.88)
                                                        =======      ========
Pro Forma Weighted Average Number
 of Common and Common Equivalent
 Shares Outstanding................                      12,872        13,961
                                                        =======      ========
<CAPTION>
                                                   DECEMBER 31,
                                    -------------------------------------------
                                          1994            1995         1996
                                    ----------------- ------------ ------------
<S>                                 <C>               <C>          <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
 marketable securities.............      $   --         $   105      $ 40,050
Working capital (deficit)..........         (932)        (1,967)       36,471
Total assets.......................           63          2,626        46,151
Stockholders' equity (deficit).....         (868)        (2,804)       39,737
</TABLE>
 
                                      10
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
OVERVIEW:
 
  The Company was incorporated in Delaware in January 1994 (under the name
Object Power, Incorporated) and changed its name to Business@Web, Inc. in
February 1996 and to OneWave, Inc. in June 1996. In 1994, the Company focused
on research and development and did not generate revenues. In 1995, the
Company generated revenues primarily through the reselling of software
licenses of a related party, providing the associated maintenance, and
providing consulting and education services. These revenues contributed to the
funding of increased research and development and the creation of market
awareness for its OneWave product line (the Company previously sold its
product under the OpenScape name). The Company began shipping OpenScape
products in late December 1995. Total revenues from the sale of OpenScape
products in 1995 were $609,000, which included a sale to Hewlett-Packard
Company of $490,000, or 80% of total 1995 OpenScape revenues. For the year
ended December 31, 1996, the Company generated total revenues of $13,204,000,
of which $8,106,000, or 61%, were software license and maintenance revenues
and $5,098,000, or 39%, were consulting and education services revenues.
OneWave products accounted for 78% of total software license and maintenance
revenues for the year ended December 31, 1996. The balance of software license
and maintenance revenues for the year ended December 31, 1996 was generated
through reselling third-party software licenses and maintenance. In 1996, the
Company primarily sold its products through alliance partners and its direct
sales force. Alliance partners generated 47% of 1996 revenue, primarily
through a limited number of large software license sales. The direct sales
channel generated 51% of 1996 revenue. The direct sales model did not develop
into a predictable source of revenue during 1996. The remaining 2% of 1996
revenue was primarily generated from value added resellers.
 
  Included in revenues generated from alliance partners during 1996 were
$2,920,000 of software license and $514,000 of consulting services revenues
associated with the development of vertical applications in conjunction with
Internet Business Solutions, Inc. (IBS). IBS provided up to 100% of the
funding of the purchase of software licenses and consulting services in return
for certain rights in the developed applications. IBS is a related party. See
Note 6 (d) of Notes to the Consolidated Financial Statements.
 
  In January 1997, the Company changed its direct sales strategy to a
solutions based model. This model differs from the prior direct sales model in
that the Company now intends to provide customers with a turnkey software
solution to a business problem, rather than with a software architecture which
allows the customer to build the software solution. Management believes that
in the long term the solutions based model will be more effective than the
Company's prior sales strategy, there can be no assurance as to its success.
However, revenues will likely be reduced in the short term as the Company
changes its approach to sales, revises its methods for delivering services and
solutions, and delays the generation of revenue from software licenses until
the complete solutions are delivered to customers.
 
  The Company has a limited operating history upon which an evaluation of the
Company and its prospects can be based. The Company and its prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets and technologies. To address
these risks, the Company must, among other things, respond to competitive
developments, continue to attract, retain and motivate qualified management
and other employees, continue to upgrade its technologies, commercialize
products and services which incorporate such technologies, and achieve market
acceptance for its OneWave products. There can be no assurance that the
Company will be successful in addressing such risks. The Company has achieved
only limited revenues to date and its ability to generate significant revenues
is subject to substantial uncertainty. The limited operating history of the
Company makes the prediction of future results of operations difficult and
therefore, there can be no assurance that the Company will sustain revenue
growth or achieve profitability. The Company has incurred net losses since
inception and expects to continue to incur losses on a quarterly and annual
basis for the foreseeable future. Due to all of the foregoing factors, it is
possible that in some future quarter, the Company's operating results may be
below the expectations of public market analysts and investors. In such event,
the price of the Company's common stock may be materially adversely affected.
 
 
                                      11
<PAGE>
 
RESULTS OF OPERATIONS:
 
  The following table sets forth certain operational data as a percentage of
total revenues for the years ended December 31, 1995 and 1996. The table does
not set forth such operational data for the period from inception to December
31, 1994, as the Company did not generate revenues in such period and
therefore such information is not meaningful.
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED
                                                             DECEMBER 31,
                                                             ----------------
                                                              1995      1996
                                                             ------    ------
   <S>                                                       <C>       <C>
   Revenues:
     Software license and maintenance.......................     35 %      61 %
     Consulting and education services......................     65        39
                                                             ------    ------
       Total revenues.......................................    100       100
   Cost of Revenues:
     Software license and maintenance.......................     12        12
     Consulting and education services......................     44        30
                                                             ------    ------
       Total cost of revenues...............................     56        42
       Gross profit.........................................     44        58
   Operating Expenses:
     Selling, general and administrative....................     35        80
     Research and development...............................     52        26
     Compensation to executive officer......................     --        51
                                                             ------    ------
       Total operating expenses.............................     87       157
       Operating loss.......................................    (43)      (99)
   Interest (Expense)/Income, net...........................     (1)        7
                                                             ------    ------
     Net loss before income taxes...........................    (44)      (92)
   Income Tax Expense.......................................     --         1
                                                             ------    ------
     Net loss...............................................    (44)%     (93)%
                                                             ======    ======
</TABLE>
 
1996 COMPARED TO 1995
 
 Revenues:
 
  Total revenues increased $7,134,000 to $13,204,000 in 1996 from $6,070,000
in 1995. The increase was due primarily to the introduction and expansion of
the Company's product offerings, including the OneWave(TM) (formerly
OpenScape) product line, and increased revenue from consulting and education
services. For the fiscal year ended December 31, 1996, software license and
maintenance revenues represented 61% of total revenues with the remaining 39%
resulting from consulting and education services, compared with 35% and 65%,
respectively, for the comparable prior year. During 1996, the Company executed
its plan to develop relationships with strategic partners within the industry.
These relationships generated large non-recurring software license and
consulting service contracts during the year. Additionally, the Company
continued to resell third-party software licenses to its customers. The resale
of third-party software license and maintenance revenues increased $718,000 to
$1,760,000 in 1996 from $1,042,000 in 1995. The Company has achieved only
limited revenues from direct sales of OneWave products to end-users and there
can be no assurance that the Company will sustain revenue growth or market
acceptance for these or other products which it markets. With the inception of
the Company's new solutions based direct sales strategy in 1997, management
expects that consulting and education services revenues will represent a more
significant percentage of revenues in future years.
 
 Gross profit:
 
  Total gross profit increased $5,017,000 to $7,686,000 in 1996 from
$2,669,000 in 1995. Cost of software license and maintenance revenues consists
of the cost of software and maintenance purchased for resale from a
 
                                      12
<PAGE>
 
third-party vendor, distribution costs and product support costs. See Note
6(b) of the Notes to the Consolidated Financial Statements. The cost of
consulting and education services consists primarily of consulting and
education personnel salaries, related costs and fees to third-party service
providers. For the year ended December 31, 1996, total gross margin increased
to 58% of total revenue from 44% of total revenues for the comparable prior
year period. The gross margin for software license and maintenance revenues in
1996 was 81% and the gross margin for consulting and education services
revenues was 22%, compared with 67% and 32%, respectively, for the comparable
prior year. The increase in total gross margin from the comparable prior year
is primarily attributable to an increase in software revenue as a percentage
of total revenue, since software revenues have higher profit margins. The
increase in gross margin for software license and maintenance revenues
compared to prior year is attributable to a higher gross profit achieved on
revenues from OneWave(TM) products compared to prior year license and
maintenance revenues which were primarily generated by reselling related-party
licenses and maintenance. The decrease in gross margin for consulting and
education services from the comparable prior year, is attributable to the
continued use of third-party service providers, an increase in consulting and
education personnel and a decrease in the number of educational seminars
provided. Additionally, there were a number of new employees hired during the
second half of the 1996 whose costs were included in cost of revenue, but who
were substantially engaged in the Company's orientation and training process
for the first few months of their employment. Management expects that gross
margin will decline in 1997 as the Company generates a greater percentage of
its total revenues from consulting service contracts. Historically, consulting
services revenues have provided significantly lower gross margin than software
license and maintenance revenues.
 
 Selling, General and Administrative Expenses:
 
  Selling, general and administrative expenses consist primarily of payroll
costs related to executive management, finance, administration, sales and
marketing personnel, and costs for advertising, marketing and related
administrative support. Selling, general and administrative expenses increased
to $10,565,000 for the year ended December 31, 1996 from $2,108,000 for the
comparable prior year, representing 80% and 35% of total revenues,
respectively. The total dollar increase of $8,457,000 in 1996 versus 1995
reflects the Company's increased selling, general and administrative expenses
associated with the hiring of an experienced management team, creation of a
direct sales force, the building of an IS/IT infrastructure, the move to a new
leased facility and lead generation activities such as advertising and
tradeshows.
 
 Research and Development Expenses:
 
  Research and development expenses primarily consist of payroll-related
costs, fees to independent contractors and purchases of technology. To date,
the Company has expensed all internal software development costs as incurred.
During the year ended December 31,1996, the Company capitalized approximately
$321,000, or 8% of total annual R&D expenditures, pertaining to third-party
costs for the development of certain WaveApps products. Research and
development expenses increased to $3,529,000 for the year ended December 31,
1996 from $3,182,000 for the comparable prior year, representing 26% and 52%
of total revenues, respectively. The decrease in research and development
expenses as a percentage of total revenues is attributable to the decrease in
purchases of third-party developed technology and a significant increase in
total revenue. The Company believes that it will be necessary to make
continued significant expenditures on research and development to remain
competitive.
 
 Compensation to Executive Officer:
 
  During the year ended December 31, 1996, certain of the Company's
controlling stockholders sold 960,000 shares of common stock to the Chief
Executive Officer for an aggregate purchase price of $1,440,000, and agreed to
make certain payments to the Chief Executive Officer to secure his services as
the Company's Chief Executive Officer. In accordance with generally accepted
accounting principles, the Company recorded a non-cash expense of $6,794,000
related to these transactions. This non-cash expense consists of: (i)
$5,760,000, which represents the difference between the purchase price paid by
the Chief Executive Officer for the shares of common stock
 
                                      13
<PAGE>
 
that he purchased and the fair market value of those shares at that time; (ii)
$1,000,000, relating to a payment received by the Chief Executive Officer from
one of the Company's controlling stockholders; and (iii) $34,000, representing
the value of a payment guaranty that such stockholder agreed to make to the
Chief Executive Officer due to the decline in the value of certain stock
appreciation rights held by the Chief Executive Officer on capital stock of
his former employer. No future non-cash credits or charges will be recorded
related to these stock appreciation rights. See Note 9 of Notes to the
Consolidated Financial Statements.
 
 Interest Income (Expense), Net:
 
  For the year ended December 31, 1996, the Company recorded net interest
income of $953,000. The interest income is primarily derived from interest
earned on the net proceeds received by the Company from its initial public
offering in July 1996. For the year ended December 31, 1995, the Company
recorded net interest expense of $77,000. The expense was related to interest
on notes payable to stockholders which have been repaid in full as of December
31, 1996 by the Company.
 
FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE PERIOD FROM INCEPTION
(JANUARY 19, 1994) TO DECEMBER 31, 1994
 
 Revenues:
 
  In 1994, the Company focused on research and development and did not
generate revenue. In 1995, the Company began generating revenues through
reselling related-party software licenses and associated maintenance and
providing consulting and education services. These revenues contributed to the
funding of increased research and development and the creation of market
awareness for its OpenScape product line. The Company began shipping OpenScape
in late December 1995. Total revenues in 1995 were $6,070,000, of which 35%,
or $2,151,000, were software license and maintenance revenues and 65%, or
$3,919,000, were consulting and education services revenues. Software license
revenues include $500,000 from a non-recurring sale of source code for an
application unrelated to the OpenScape product line to a related party. See
Note 6(b) of Notes to the Consolidated Financial Statements. In 1995,
OpenScape software license and maintenance revenues were $609,000, which
represented 28% of total software license and maintenance revenues for the
year. Total 1995 OpenScape revenues included a sale to Hewlett-Packard Company
of $490,000, or 80% of total 1995 OpenScape revenues.
 
 Gross profit:
 
  The Company did not generate revenues in 1994 and therefore did not incur
cost of revenues in this period. Gross margin was 44% in 1995. Gross margin
for software license and maintenance costs and consulting and education
services were 67% and 32%, respectively, in 1995.
 
 Selling, General and Administrative Expenses:
 
  Selling, general and administrative expenses increased to $2,108,000 in 1995
from $286,000 for the prior year. Such expenses represented 35% of total
revenues in 1995. The total dollar increase in selling, general and
administrative expenses reflected the Company's increased sales, marketing and
distribution efforts required to grow from a development stage entity to a
business generating direct sales through operations.
 
 Research and Development Expenses:
 
  Research and development expenses increased to $3,182,000 in 1995 from
$894,000 for the prior year. Research and development expenses represented 52%
of total revenues in 1995. Through December 31, 1995, the Company expensed all
software development costs incurred. Research and development expenses in 1994
included $350,000 relating to the purchase of technology rights and $373,000
for independent contractors. The total dollar increase is attributable to
increased headcount and related costs which reflect the Company's efforts to
enhance the functionality of products. During 1995, the Company recorded non-
recurring expenses of
 
                                      14
<PAGE>
 
$2,550,000 for purchases of technology rights to incorporate in its OpenScape
products. See Note 6(b) of Notes to the Consolidated Financial Statements.
 
 Interest Expense, Net:
 
  For the year ended December 31, 1995, the Company recorded net interest
expense of $77,000. This expense arose from the Company's $1,000,000 debt to
stockholders. The Company did not have any outstanding debt for the period
from inception to December 31, 1994.
 
 Liquidity and Capital Resources:
 
  In July 1996, the Company completed its initial public offering of 3,750,000
shares of its Common Stock of which 3,000,000 shares were sold by the Company
and 750,000 shares were sold by certain of the Company's stockholders. The
public offering price was $16.00 per share and the net proceeds to the Company
were approximately $43,256,000, net of underwriting discounts, commissions and
other offering costs. Upon consummation of the IPO, all outstanding shares of
the Company's preferred stock were automatically converted into Common Stock.
The Company used a portion of the proceeds for the repayment of a $2,000,000
note payable to a bank.
 
  In February 1996, the Company entered into a financing agreement with a
bank. The agreement provides for a revolving line of credit of up to
$2,500,000, subject to certain limitations, and an equipment line of credit up
to $500,000 for purchases of new equipment. As of December 31, 1996, the
Company had no outstanding balances under the revolving line of credit or the
equipment line of credit.
 
  The Company's operating activities utilized cash and cash equivalents of
approximately $5,892,000 for the year ended December 31, 1996.
 
  The Company's investing activities, which consisted of capitalized software
development costs, purchases of property and equipment and investments in
short-term marketable securities, utilized cash and cash equivalents of
approximately $30,954,000 for the year ended December 31, 1996. The purchases
of property and equipment were primarily related to increases in headcount and
the move to a new facility in March 1996.
 
  The Company's financing activities provided cash and cash equivalents of
approximately $49,610,000 for the year ended December 31, 1996, primarily from
public and private issuance of equity securities and borrowings under its
notes payable with a bank. The proceeds generated from the issuance of
convertible preferred stock were used to retire Common Stock. The borrowings
under its note payable with a bank were repaid in full in July 1996.
 
  The Company has agreed to loan an executive officer up to $2,560,000 for
payment of his anticipated income tax liability resulting from his purchase of
960,000 shares of the Company's Common Stock from a significant stockholder
for a purchase price less than its then fair market value. The Company
believes that it will fund the amounts under the loan agreement in the first
half of 1997. The Company has no other significant commitments other than
obligations under its operating leases.
 
  The Company currently anticipates that the existing cash, cash equivalents
and marketable securities balances will be sufficient to meet its anticipated
working capital and capital expenditure requirements through December 31,
1997. Thereafter, the Company may need to raise additional funds. The Company
may in the future seek to expand its business through possible acquisitions.
The Company, however, has no commitments or agreements with respect to any
future acquisition and no assurances can be given with respect to the
likelihood or financial or business effect, of any future acquisition. Future
acquisitions could be financed by internally generated funds, bank borrowings,
public offerings or private placements of equity or debt securities, or a
combination of the foregoing. There can be no assurance that additional
financing will be available when needed on terms favorable to the Company or
at all.
 
 
                                      15
<PAGE>
 
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
 
  Statements made or incorporated into this Form 10-K include a number of
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward
looking statements include, without limitation, statements containing the
words "anticipates", "believes", "expects", "intends", "future", and words of
similar import which express Management's beliefs, expectations or intentions
regarding the Company's future performance. The Company's actual results could
differ materially from its historical results and from those set in the
forward-looking statements and may fluctuate between operating periods.
Factors that might cause such differences and fluctuations include the
following: ability to implement and achieve market acceptance of the Company's
solutions based approach to sales, risks related to the management of growth,
the Company's ability to attract, train and retain qualified personnel,
product development risks, new product announcements and introductions,
development and promotional expenses related to the introduction of new
products, changes in technology and industry standards, dependence on certain
strategic partnerships, limited operating history, recent introduction of
OneWave products, delays in development or product releases, changes in the
market for the Company's products and services, the rate of acceptance of the
Company's products and services, dependence of the Company's business on the
Internet, increased competition, changing of pricing policies by the Company
or its competitors, the timing of receipt of orders from major customers,
development of competing products, development of Internet and Intranet
products or enhancements by vendors of existing client/server or legacy
software systems, risk of software defects, disproportionate reliance on
strategic relationships, difficulties in management of growth, dependence on
key personnel, evolving distribution strategy, proprietary technology and the
inherent difficulties in protecting intellectual property, dependence on
third-party technology, and exposure for product and professional services
liability. The market price of the Company's Common Stock has been, and in the
future will likely be, subject to significant fluctuations in response to
variations in quarterly operating results and other factors, such as
announcements of technological innovations or new products by the Company or
its competitors, or other events.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
  The Consolidated Financial Statements and Supplementary Data of the Company
are listed under Part IV, Item 14, of this Annual Report.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
 
  None.
 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
 
  The information appearing under the captions "Information Regarding
Directors" and "Executive Officers" in the registrant's definitive proxy
statement dated April 7, 1997 relating to the Annual Meeting of Stockholders
to be held on May 7, 1997 is incorporated herein by reference.
 
  The Company's directors and executive officers and their principal
occupations are set forth below:
 
<TABLE>
<CAPTION>
  NAME                                        PRINCIPAL OCCUPATION
  ----                                        --------------------
<S>                      <C>
Albert Carnesale........ Provost, Harvard University
Manuel Diaz............. Vice-President of Sales and Marketing, Hewlett-Packard Company
Stephen R. Levy......... Private Investor and Consultant
Ofer Nemirovsky......... Managing Director, HVP Partners, LLC
Sundar Subramaniam...... President, Cambridge Technology Enterprises, Inc.
Klaus P. Besier......... Chairman and Chief Executive Officer, OneWave, Inc.
John S. Coviello........ Vice President of Engineering, OneWave, Inc.
Mark J. Gallagher....... Chief Financial Officer & Treasurer, OneWave, Inc.
Craig Newfield.......... General Counsel and Secretary, OneWave, Inc.
</TABLE>
 
 
                                      16
<PAGE>
 
ITEM 11. EXECUTIVE COMPENSATION.
 
  The information appearing under the caption "Executive Compensation" in the
registrant's definitive proxy statement dated April 7, 1997 relating to the
Annual Meeting of Stockholders to be held on May 7, 1997 is incorporated
herein by reference.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
 
  The information appearing under the caption "Principal and Management
Stockholders" in the registrant's definitive proxy statement dated April 7,
1997 relating to the Annual Meeting of Stockholders to be held on May 7, 1997
is incorporated herein by reference.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
  The information appearing under the caption "Certain Relationships and
Related Transactions" in the registrant's definitive proxy statement dated
April 7, 1997 relating to the Annual Meeting of Stockholders to be held on May
7, 1997 is incorporated herein by reference.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
  (a)(1) Financial Statements. The response to this portion of Item 14 is
submitted as a separate section of this Annual Report beginning on page F-1.
 
  (a)(2) Schedules. The response to this portion of Item 14 is submitted as a
separate section of this Annual Report beginning on page F-1.
 
  (a)(3) Exhibits. Exhibits 10.1 through 10.3 constitute all of the management
contracts and compensation plans and arrangements of the Company required to
be filed as exhibits to this Annual Report. The following is a complete list
of Exhibits filed or incorporated by reference as part of this Annual Report.
 
<TABLE>
<CAPTION>
 EXHIBIT
   NO.                                 DESCRIPTION
 -------                               -----------
 <C>     <S>
   3.1   Third Amended and Restated Certificate of Incorporation(1)
   3.2   Amended and Restated By-laws(2)
   4.1   Specimen Common Stock Certificate(2)
  10.1   1995 Stock Plan, as amended(1)
 *10.1A  Form of Incentive Stock Option Agreement under the 1995 Stock Plan
 *10.1B  Form of Non-Qualified Stock Option Agreement under the 1995 Stock Plan
  10.2   1996 Stock Plan, as amended(2)
 *10.2A  Form of Incentive Stock Option Agreement under the 1996 Stock Plan
 *10.2B  Form of Non-Qualified Stock Option Agreement under the 1996 Stock Plan
  10.3   Employee Stock Purchase Plan(1)
  10.4   Lease for One Arsenal Marketplace, Watertown, Massachusetts(1)
  10.5   Source Code License Agreement dated as of August 8, 1995 between the
         Company and InterGroup Technologies, Inc.(1)
  10.6   Software License Agreement dated as of August 8, 1995 between the
         Company and InterGroup Technologies, Inc.(1)
</TABLE>
 
                                      17
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT
   NO.                                 DESCRIPTION
 -------                               -----------
 <C>     <S>
  10.6A  Agreements dated as of May 21, 1996 and May 22, 1996 amending the
         Source Code License Agreement and Software License Agreement between
         the Company and InterGroup Technologies, Inc(1)
  10.7   Source Code License Agreement dated as of February 8, 1996 between the
         Company and Mentor Communications Limited(1)
  10.8   Software License Agreement dated as of August 10, 1995 between the
         Company and Mystic River Software, Inc.(1)
  10.9   Software, Education, Services Distribution Agreement dated June 21,
         1995 between the Company and Open Environment Corporation(2)
  10.10  "SAP Customization Software" Agreement dated October 1, 1995 between
         the Company and Open Environment Corporation(2)
  10.11  OEM Source License Agreement dated as of December 29, 1995 between the
         Company and Open Environment Corporation(2)
  10.12  Joint Marketing Agreement effective as of February 27, 1996 between
         the Company and Hewlett-Packard Company(2)
  10.13  Loan Agreement dated February 16, 1996 between the Company and State
         Street Bank and Trust Company, together with Guaranty (unlimited) of
         J&S Limited Partnership(1)
  10.14  Warrant Purchase Agreement dated as of February 16, 1996 between the
         Company and SSB Investments, Inc.(1)
  10.15  Common Stock Purchase Warrant dated as of February 16, 1996 issued to
         SSB Investments, Inc.(1)
  10.16  Series B Convertible Preferred Stock Purchase Agreement dated February
         27, 1996 between the Company and Hewlett-Packard Company(1)
  10.17  Amendment to Series B Convertible Preferred Stock Purchase Agreement
         dated as of March 6, 1996 between the Company and Hewlett-Packard
         Company(1)
  10.17A Amendment No. 1 to Series B Convertible Preferred Stock Purchase
         Agreement dated as of June 7, 1996 between the Company and Hewlett-
         Packard Company(2)
  10.18  Series B Convertible Preferred Stock Purchase Agreement dated March 6,
         1996 among the Company and the purchasers named therein(1)
  10.19  Registration Rights Agreement dated March 6, 1996 among the Company
         and the investors named therein(1)
  10.20  Co-Sale Rights Agreement dated as of March 6, 1996 among the investors
         and holders of shares of the Company's Common Stock named therein(1)
  10.21  Voting Agreement dated March 6, 1996 among the investors and holders
         of shares of the Company's Common Stock named therein(1)
  10.22  Series C Convertible Preferred Stock Purchase Agreement dated as of
         March 29, 1996 among the Company and the purchasers named therein(1)
  10.23  Registration Rights Agreement dated as of March 29, 1996 among the
         Company and the investors named therein(1)
  10.24  Stock Purchase Agreement dated as of February 1996 between John J.
         Donovan and Len Hafetz(1)
  10.25  Assignment and Assumption Agreement dated as of March 15, 1996 between
         John J. Donovan and the Company(1)
  10.26  Stock Repurchase Agreement dated as of April 4, 1996 between the
         Company and James Nondorf(1)
 
</TABLE>
 
                                       18
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT
   NO.                                 DESCRIPTION
 -------                               -----------
 <C>     <S>
  10.27  Stock Repurchase Agreement dated as of April 15, 1996 between the
         Company and J&S Limited Partnership(1)
  10.28  Stock Repurchase Agreement dated as of April 15, 1996 between the
         Company and Harrington Trust Limited as Trustee of The Appleby
         Trust(1)
  10.29  Five-Year 9% Subordinated Note dated December 29, 1995 issued to
         Harrington Trust Limited as Trustee of The Appleby Trust in the
         principal amount of $750,000(1)
  10.30  Five-Year 6% Convertible Subordinated Note dated May 3, 1995 issued to
         Harrington Trust Limited as Trustee of The Appleby Trust in the
         principal amount of $750,000(1)
  10.31  Five-Year 6% Convertible Subordinated Note dated May 3, 1995 issued to
         J&S Limited Partnership in the principal amount of $250,000(1)
  10.32  Loan Agreement dated as of March 31, 1996 between Klaus P. Besier and
         the Company(1)
 *11     Statement of Computation of Per Share Earnings
 *21     List of Subsidiaries
 *23.1   Consent of Arthur Andersen LLP
 *27     Financial Data Schedule
</TABLE>
--------
(1) Filed as an exhibit to Amendment No. 1 to the Company's Registration
    Statement on Form S-1 filed with the Securities and Exchange Commission on
    June 13, 1996 (File No. 333-04235) and incorporated herein by reference
    thereto.
 
(2) Filed as an exhibit to Amendment No. 2 to the Company's Registration
    Statement on Form S-1 filed with the Securities and Exchange Commission on
    June 25, 1996 (File No. 333-04235) and incorporated herein by reference
    thereto.
 
 * Filed herewith.
 
  A COPY OF ANY EXHIBIT TO THIS ANNUAL REPORT MAY BE OBTAINED WITHOUT CHARGE BY
WRITTEN REQUEST TO CRAIG NEWFIELD, ONEWAVE INC., ONE ARSENAL MARKETPLACE,
WATERTOWN, MA 02172.
 
  (b) Reports on Form 8-K. The Registrant did not file any reports on Form 8-K
during the last quarter of the period covered by this Annual Report.
 
  (c) Exhibits. The response to this portion of Item 14 is submitted as a
separate section of this Annual Report beginning on page 17.
 
  (d) Financial Statement Schedules. The response to this portion of Item 14 is
submitted as a separate section of this Annual Report beginning on page F-1.
 
                                       19
<PAGE>
 
                                  SIGNATURES
 
  PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
 
                                          OneWave, Inc.
 
                                                    
                                          By:       /s/ Klaus P. Besier
                                             ---------------------------------
                                                      KLAUS P. BESIER
                                             CHAIRMAN OF THE BOARD, PRESIDENT
                                                            AND
                                                  CHIEF EXECUTIVE OFFICER
 
Dated: March 28, 1997
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
 
              SIGNATURE                        TITLE                 DATE
 
         /s/ Klaus P. Besier           Chairman, President      March 28, 1997
-------------------------------------   and Chief Executive
           KLAUS P. BESIER              Officer (Principal
                                        Executive Officer &
                                        Director)
 
        /s/ Mark J. Gallagher          Chief Financial          March 28, 1997
-------------------------------------   Officer &
          MARK J. GALLAGHER             Treasurer(Principal
                                        Financial and
                                        Accounting Officer)
 
        /s/ Albert Carnesale           Director                 March 28, 1997
-------------------------------------
          ALBERT CARNESALE
 
           /s/ Manuel Diaz             Director                 March 28, 1997
-------------------------------------
             MANUEL DIAZ
 
         /s/ Stephen R. Levy           Director                 March 28, 1997
-------------------------------------
           STEPHEN R. LEVY
 
         /s/ Ofer Nemirovsky           Director                 March 28, 1997
-------------------------------------
           OFER NEMIROVSKY
 
       /s/ Sundar Subramaniam          Director                 March 28, 1997
-------------------------------------
         SUNDAR SUBRAMANIAM
 
                                      20
<PAGE>
 
                                 ONEWAVE, INC.
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Report of Independent Public Accountants..................................  F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996..............  F-3
Consolidated Statements of Operations for the Period from Inception
 (January 19, 1994) to December 31, 1994 and for the Years Ended December
 31, 1995 and 1996........................................................  F-4
Consolidated Statements of Redeemable Convertible Preferred Stock and
 Stockholders' Equity (Deficit) for the Period from Inception (January 19,
 1994) to December 31, 1994 and for the Years Ended December 31, 1995 and
 1996.....................................................................  F-5
Consolidated Statements of Cash Flows for the Period from Inception
 (January 19, 1994) to December 31, 1994 and for the Years Ended December
 31, 1995 and 1996........................................................  F-6
Notes to Consolidated Financial Statements................................  F-7
Report of Independent Public Accountants on Schedule......................  S-1
Schedule II--Valuation of Qualifying Accounts.............................  S-2
</TABLE>
 
                                      F-1
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To OneWave, Inc.:
 
  We have audited the accompanying consolidated balance sheets of OneWave,
Inc. (a Delaware corporation, formerly Business@Web, Inc.) as of December 31,
1995 and 1996, and the related consolidated statements of operations,
redeemable convertible preferred stock and stockholders' equity (deficit) and
cash flows for the period from inception (January 19, 1994) to December 31,
1994 and for the years ended December 31, 1995 and 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of OneWave,
Inc. as of December 31, 1995 and 1996, and the results of its operations and
its cash flows for the period from inception (January 19, 1994) to December
31, 1994 and for the years ended December 31, 1995 and 1996, in conformity
with generally accepted accounting principles.
 
                                          Arthur Andersen LLP
 
Boston, Massachusetts
January 23, 1997
 
                                      F-2
<PAGE>
 
                                 ONEWAVE, INC.
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                          DECEMBER 31,
                                                   ----------------------------
                                                      1995        1996
                                                   ----------  -----------
<S>                                                <C>         <C>        
                      ASSETS
Current Assets:
  Cash and cash equivalents (Note 1).............. $  104,622  $12,868,496
  Marketable securities (Note 1)..................        --    27,181,222
  Accounts receivable, less reserve of $100,000
   and $283,000 at December 31, 1995 and 1996,
   respectively...................................  1,908,541    1,783,741
  Inventories (Note 1)............................    292,000      303,900
  Prepaid expenses and other current assets.......    157,333      691,735
  Due from affiliates (Note 6)....................        --        55,402
                                                   ----------  -----------
    Total current assets..........................  2,462,496   42,884,496
                                                   ----------  -----------
Property and Equipment, at cost (Note 1):
  Computer and office equipment...................    226,550    3,155,384
  Furniture and fixtures..........................        --       462,944
  Leasehold improvements..........................        --        59,964
                                                   ----------  -----------
                                                      226,550    3,678,292
  Less--Accumulated depreciation and
   amortization...................................     63,118      669,118
                                                   ----------  -----------
    Net property and equipment....................    163,432    3,009,174
                                                   ----------  -----------
Other Assets (Note 1).............................        --       256,865
                                                   ----------  -----------
    Total assets.................................. $2,625,928  $46,150,535
                                                   ==========  ===========
  LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
  Accounts payable................................ $  575,575  $ 1,454,440
  Due to affiliates (Note 6)......................  2,938,086          --
  Accrued expenses (Note 9).......................    637,613    4,410,615
  Deferred revenues (Note 1)......................    278,572      548,330
                                                   ----------  -----------
    Total current liabilities.....................  4,429,846    6,413,385
                                                   ----------  -----------
Long-Term Debt to Stockholders (Note 3)...........  1,000,000          --
Commitments (Note 8)
Stockholders' Equity (Deficit) (Note 4):
  Preferred stock, $1.00 par value--
   Authorized--5,000,000 shares
   Issued and outstanding--no shares..............        --           --
  Common stock, $.001 par value--
   Authorized--50,000,000 shares
   Issued and outstanding--10,803,030 and
   14,907,696 at December 31, 1995 and 1996,
   respectively...................................     10,803       14,908
  Additional paid-in capital......................  1,230,597   58,504,913
  Note receivable from executive officer (Note
   9).............................................        --    (2,560,000)
  Deferred compensation...........................   (166,594)         --
  Accumulated deficit............................. (3,878,724) (16,222,671)
                                                   ----------  -----------
    Total stockholders' equity (deficit).......... (2,803,918)  39,737,150
                                                   ----------  -----------
    Total liabilities and stockholders' equity
     (deficit).................................... $2,625,928  $46,150,535
                                                   ==========  ===========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-3
<PAGE>
 
                                 ONEWAVE, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                      PERIOD FROM
                                       INCEPTION
                                   (JANUARY 19, 1994)
                                           TO          YEAR ENDED    YEAR ENDED
                                      DECEMBER 31,    DECEMBER 31,  DECEMBER 31,
                                          1994            1995          1996
                                   ------------------ ------------  ------------
<S>                                <C>                <C>           <C>
Revenues (Note 1):
  Software license and
   maintenance...................     $       --      $ 2,150,735   $  8,106,049
  Consulting and education
   services......................             --        3,918,927      5,098,402
                                      -----------     -----------   ------------
    Total revenues...............             --        6,069,662     13,204,451
                                      -----------     -----------   ------------
Cost of Revenues (Note 1):
  Software license and
   maintenance...................             --          716,392      1,517,532
  Consulting and education
   services......................             --        2,684,216      4,001,376
                                      -----------     -----------   ------------
    Total cost of revenues.......             --        3,400,608      5,518,908
                                      -----------     -----------   ------------
    Gross profit.................             --        2,669,054      7,685,543
                                      -----------     -----------   ------------
Operating Expenses:
  Selling, general and
   administrative................         285,962       2,107,956     10,564,948
  Research and development (Note
   1)............................         894,314       3,181,972      3,528,799
  Compensation to executive
   officer (Note 9)..............             --              --       6,793,696
                                      -----------     -----------   ------------
    Total operating expenses.....       1,180,276       5,289,928     20,887,443
                                      -----------     -----------   ------------
    Operating loss...............      (1,180,276)     (2,620,874)   (13,201,900)
Interest (Expense)/Income, net...             --          (77,574)       953,284
                                      -----------     -----------   ------------
    Net loss before provision for
     income taxes................      (1,180,276)     (2,698,448)   (12,248,616)
Provision for Income taxes.......             --              --          95,331
                                      -----------     -----------   ------------
    Net loss.....................     $(1,180,276)    $(2,698,448)  $(12,343,947)
                                      ===========     ===========   ============
Pro Forma Net Loss per Common and
 Common Equivalent Share.........                     $      (.21)  $       (.88)
                                                      ===========   ============
Pro Forma Weighted Average Number
 of Common and Common Equivalent
 Shares Outstanding..............                      12,871,554     13,961,337
                                                      ===========   ============
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-4
<PAGE>
 
                                 ONEWAVE, INC.
 
              STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
                       AND STOCKHOLDERS' EQUITY (DEFICIT)
 
<TABLE>
<CAPTION>
                        REDEEMABLE
                        CONVERTIBLE
                      PREFERRED STOCK
                   ----------------------
                     NUMBER
                       OF       CARRYING
                     SHARES      VALUE
                   ----------  ----------
<S>                <C>         <C>
Initial issuance
 of stock at
 inception at
 $.0015 per
 share...........         --   $      --
 Contribution
  from
  stockholders
  for purchase of
  Series A
  preferred
  stock..........         --          --
 Net loss........         --          --
                   ----------  ----------
Balance, December
 31, 1994........         --          --
 Issuance of
  common stock at
  $.0015 per
  share..........         --          --
 Issuance of
  Series A
  preferred stock
  at $1.20 per
  share..........         --          --
 Conversion of
  Series A
  preferred stock
  into common
  stock..........         --          --
 Conversion of
  long-term debt
  to stockholders
  into common
  stock at $.66
  per share......         --          --
 Deferred
  compensation
  related to
  grant of stock
  options........         --          --
 Compensation
  expense related
  to stock
  options........         --          --
 Net loss........         --          --
                   ----------  ----------
Balance, December
 31, 1995........         --          --
 Issuance of
  Series B
  redeemable
  convertible
  preferred stock
  at $5.54 per
  share, net of
  issuance costs
  of $600,000....   1,332,127   7,379,984
 Compensation
  expense to
  executive
  officer........         --          --
 Issuance of note
  receivable from
  executive
  officer........         --          --
 Issuance of
  Series C
  convertible
  preferred stock
  at $5.00 per
  share, net of
  issuance costs
  of $30,000.....         --          --
 Repurchase and
  retirement of
  common stock
  $7.50 per
  share..........         --          --
 Issuance of
  common stock at
  $16.00 per
  share related
  to initial
  public
  offering, net
  of issuance
  costs of
  $4,744,000.....         --          --
 Conversion of
  redeemable
  convertible
  preferred stock
  and convertible
  preferred stock
  into common
  stock..........  (1,332,127) (7,379,984)
 Compensation
  expense related
  to stock
  options........         --          --
 Issuance of
  common stock
  from stock
  option
  exercises......         --          --
 Deferred
  compensation
  adjustment
  related to
  termination of
  stock options..         --          --
 Net loss........         --          --
                   ----------  ----------
Balance, December
 31, 1996........         --   $      --
                   ==========  ==========
<CAPTION>
                                                         STOCKHOLDERS' EQUITY (DEFICIT)
                   ----------------------------------------------------------------------------------------------------------------
                        CONVERTIBLE
                      PREFERRED STOCK          COMMON STOCK                      NOTE
                   ----------------------- ---------------------              RECEIVABLE                                  TOTAL
                     NUMBER                  NUMBER              ADDITIONAL      FROM                                 STOCKHOLDERS'
                       OF        $1.00         OF        $.001     PAID-IN     EXECUTIVE     DEFERRED   ACCUMULATED      EQUITY
                     SHARES    PAR VALUE     SHARES    PAR VALUE   CAPITAL      OFFICER    COMPENSATION   DEFICIT       (DEFICIT)
                   ----------- ----------- ----------- --------- ------------ ------------ ------------ ------------- -------------
<S>                <C>         <C>         <C>         <C>       <C>          <C>          <C>          <C>           <C>
Initial issuance
 of stock at
 inception at
 $.0015 per
 share...........         --   $      --    7,933,333   $ 7,933  $     3,967  $       --     $    --    $        --    $    11,900
 Contribution
  from
  stockholders
  for purchase of
  Series A
  preferred
  stock..........         --          --          --        --       300,000          --          --             --        300,000
 Net loss........         --          --          --        --           --           --          --      (1,180,276)   (1,180,276)
                   ----------- ----------- ----------- --------- ------------ ------------ ------------ ------------- -------------
Balance, December
 31, 1994........         --          --    7,933,333     7,933      303,967          --          --      (1,180,276)     (868,376)
 Issuance of
  common stock at
  $.0015 per
  share..........         --          --       66,667        67           33          --          --             --            100
 Issuance of
  Series A
  preferred stock
  at $1.20 per
  share..........     250,000     250,000         --        --      (250,000)         --          --             --            --
 Conversion of
  Series A
  preferred stock
  into common
  stock..........    (250,000)   (250,000)  1,666,667     1,667      248,333          --          --             --            --
 Conversion of
  long-term debt
  to stockholders
  into common
  stock at $.66
  per share......         --          --    1,136,363     1,136      748,864          --          --             --        750,000
 Deferred
  compensation
  related to
  grant of stock
  options........         --          --          --        --       179,400          --     (179,400)           --            --
 Compensation
  expense related
  to stock
  options........         --          --          --        --           --           --       12,806            --         12,806
 Net loss........         --          --          --        --           --           --          --      (2,698,448)   (2,698,448)
                   ----------- ----------- ----------- --------- ------------ ------------ ------------ ------------- -------------
Balance, December
 31, 1995........         --          --   10,803,030    10,803    1,230,597          --     (166,594)    (3,878,724)   (2,803,918)
 Issuance of
  Series B
  redeemable
  convertible
  preferred stock
  at $5.54 per
  share, net of
  issuance costs
  of $600,000....         --          --          --        --      (600,000)         --          --             --       (600,000)
 Compensation
  expense to
  executive
  officer........         --          --          --        --     6,793,696          --          --             --      6,793,696
 Issuance of note
  receivable from
  executive
  officer........         --          --          --        --           --    (2,560,000)        --             --     (2,560,000)
 Issuance of
  Series C
  convertible
  preferred stock
  at $5.00 per
  share, net of
  issuance costs
  of $30,000.....   1,200,000   1,200,000         --        --     4,770,000          --          --             --      5,970,000
 Repurchase and
  retirement of
  common stock
  $7.50 per
  share..........         --          --     (800,000)     (800)  (5,999,200)         --          --             --     (6,000,000)
 Issuance of
  common stock at
  $16.00 per
  share related
  to initial
  public
  offering, net
  of issuance
  costs of
  $4,744,000.....         --          --    3,000,000     3,000   43,253,000          --          --             --     43,256,000
 Conversion of
  redeemable
  convertible
  preferred stock
  and convertible
  preferred stock
  into common
  stock..........  (1,200,000) (1,200,000)  1,688,074     1,688    8,578,296          --          --             --      7,379,984
 Compensation
  expense related
  to stock
  options........         --          --          --        --           --           --       41,169            --         41,169
 Issuance of
  common stock
  from stock
  option
  exercises......         --          --      216,592       217      603,949          --          --             --        604,166
 Deferred
  compensation
  adjustment
  related to
  termination of
  stock options..         --          --          --        --      (125,425)         --      125,425            --            --
 Net loss........         --          --          --        --           --           --          --     (12,343,947)  (12,343,947)
                   ----------- ----------- ----------- --------- ------------ ------------ ------------ ------------- -------------
Balance, December
 31, 1996........         --   $      --   14,907,696   $14,908  $58,504,913  $(2,560,000)   $    --    $(16,222,671)  $39,737,150
                   =========== =========== =========== ========= ============ ============ ============ ============= =============
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-5
<PAGE>
 
                                 ONEWAVE, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                               PERIOD FROM INCEPTION  YEAR ENDED    YEAR ENDED
                               (JANUARY 19, 1994) TO DECEMBER 31,  DECEMBER 31,
                                 DECEMBER 31, 1994       1995          1996
                               --------------------- ------------  ------------
<S>                            <C>                   <C>           <C>
Cash Flows from Operating
 Activities:
  Net loss...................       $(1,180,276)     $(2,698,448)  $(12,343,947)
  Adjustments to reconcile
   net loss to net cash
   provided by (used in)
   operating activities--
    Depreciation and
     amortization............            12,680           50,438        670,200
    Compensation expense to
     executive officer.......               --               --       6,793,696
    Compensation expense
     related to stock
     options.................               --            12,806         41,169
    Changes in operating
     assets and liabilities--
      Accounts receivable....               --        (1,908,541)       124,800
      Inventories............               --          (292,000)       (11,900)
      Prepaid expenses and
       other current assets..               --          (157,333)      (534,402)
      Due from affiliates....               --               --         (55,402)
      Accounts payable.......           275,000          300,575        878,865
      Due to affiliates......           656,844        2,281,242     (2,938,086)
      Accrued expenses.......               --           637,613      1,213,002
      Deferred revenues......               --           278,572        269,758
                                    -----------      -----------   ------------
        Net cash used in
         operating
         activities..........          (235,752)      (1,495,076)    (5,892,247)
                                    -----------      -----------   ------------
Cash Flows from Investing
 Activities:
  Purchases of marketable
   securities, net...........               --               --     (27,181,222)
  Purchases of property and
   equipment.................           (76,078)        (150,472)    (3,451,742)
  Increase in other assets...               --               --        (321,065)
                                    -----------      -----------   ------------
        Net cash used in
         investing
         activities..........           (76,078)        (150,472)   (30,954,029)
                                    -----------      -----------   ------------
Cash Flows from Financing
 Activities:
  Proceeds from (payments on)
   long-term debt to
   stockholders..............               --         1,750,000     (1,000,000)
  Proceeds from secured note
   payable to a bank.........               --               --       2,000,000
  Payments on secured note
   payable to a bank.........               --               --      (2,000,000)
  Net proceeds from issuance
   of common stock...........            11,900              100     43,256,000
  Payment for the repurchase
   of common stock...........               --               --      (6,000,000)
  Net proceeds from issuance
   of preferred stock........           300,000              --      12,749,984
  Proceeds from the exercise
   of stock options..........               --               --         604,166
                                    -----------      -----------   ------------
        Net cash provided by
         financing
         activities..........           311,900        1,750,100     49,610,150
                                    -----------      -----------   ------------
Net Increase in Cash and Cash
 Equivalents.................                70          104,552     12,763,874
Cash and Cash Equivalents,
 beginning of period.........               --                70        104,622
                                    -----------      -----------   ------------
Cash and Cash Equivalents,
 end of period...............       $        70      $   104,622   $ 12,868,496
                                    ===========      ===========   ============
Supplemental Disclosure of
 Cash Flow Information:
  Cash paid during the period
   for interest..............       $       --       $    25,843   $     79,191
                                    ===========      ===========   ============
  Cash paid for income
   taxes.....................       $       --       $       --    $     70,125
                                    ===========      ===========   ============
Supplemental Disclosure of
 Noncash Financing
 Activities:
  Conversion of long-term
   debt to stockholders into
   common stock..............       $       --       $   750,000   $        --
                                    ===========      ===========   ============
  Conversion of preferred
   stock into common stock...       $       --       $   250,000   $  8,579,984
                                    ===========      ===========   ============
  Issuance of note receivable
   from executive officer....       $       --       $       --    $  2,560,000
                                    ===========      ===========   ============
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-6
<PAGE>
 
                                 ONEWAVE, INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
 
 (a) Organization
 
  OneWave, Inc. (the Company) was incorporated in Delaware (under the name
Object Power, Incorporated) and commenced operations on January 19, 1994 and
changed its name to Business@Web, Inc. in February 1996 and to OneWave, Inc.
in June 1996. The Company is an Internet software and services company
dedicated to unifying disparate information systems and building integrated
business solutions. OneWave technology serves as a common software environment
for accessing existing mainframes, databases and client/server systems, and
extending new business processes across the traditional boundaries of the
enterprise. OneWave utilizes and supports industry standards and emerging
technologies, and works closely with top consulting firms and technology
providers to ensure expertise in areas critical to a complete solution. For
fiscal year 1996, the Company's principal market for its products was North
America.
 
 (b) Principles of Consolidation
 
  The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, OneWave Securities Corporation. Inter-company
accounts and transactions are eliminated in consolidation.
 
 (c) Revenue Recognition
 
  The Company recognizes revenue in accordance with the provisions of
Statement of Position No. 91-1 (SOP 91-1), Software Revenue Recognition. The
Company generates software and maintenance revenues from licensing the rights
to use its software products and the resale of software products licensed from
a related party (see Note 6(b)). The Company also generates service revenues
from the sale of consulting and education services.
 
  Revenues from software license fees are recognized upon delivery, net of
estimated returns, provided there are no significant post-delivery
obligations, and payment is due within one year and is probable of collection.
If acceptance is required, software license revenues are recognized upon
customer acceptance. Fees for consulting and education services are recognized
upon customer acceptance or over the period in which services are provided if
customer acceptance is not required and the revenues are fixed and
determinable. Maintenance revenues are deferred at the time of billing and are
recognized ratably over the term of the support period, which is typically one
year.
 
  Deferred revenues primarily relate to prepaid maintenance and consulting
services fees.
 
  Cost of software license and maintenance revenues consists of the cost of
software and maintenance purchased for resale from a related party;
distribution costs; and support personnel costs. Cost of consulting and
education services consists primarily of consulting and support personnel
salaries and related costs and fees to third party service providers.
 
 (d) Cash and Cash Equivalents
 
  The Company classifies all short-term, highly liquid investments with
original maturities at purchase of three months or less as cash equivalents.
The Company held the following cash and cash equivalents at December 31:
 
<TABLE>
<CAPTION>
                                                             1995      1996
                                                           -------- -----------
       <S>                                                 <C>      <C>
       Corporate Debt Instruments......................... $    --  $ 9,053,091
       Cash and Money Market Accounts.....................  104,622   3,815,405
                                                           -------- -----------
                                                           $104,622 $12,868,496
                                                           ======== ===========
</TABLE>
 
                                      F-7
<PAGE>
 
                                 ONEWAVE, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 (e) Marketable Securities
 
  Marketable securities consist of marketable financial instruments with
original maturities greater than 90 days. The Company has established
guidelines relative to concentration, maturities, and credit ratings that
maintain safety and liquidity.
 
  In accordance with Statement of Financial Accounting Standard No. 115
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No.
115"), the Company has classified its investments in marketable securities as
"Held-to-Maturity" Securities. Accordingly, marketable securities as of
December 31, 1996 are recorded at amortized cost, which approximates market.
 
  The Company held the following marketable securities at December 31, 1996:
 
<TABLE>
       <S>                                                        <C>
       U.S. Government and Government Agency Securities
        (average maturity of 252 days)........................... $20,545,759
       Commercial Paper (average maturity of 73 days)............   6,635,463
                                                                  -----------
                                                                  $27,181,222
                                                                  ===========
</TABLE>
 
 (f) Property and Equipment
 
  Property and equipment are stated at cost. Depreciation and amortization
expense is computed using the straight-line method over the estimated useful
lives of the assets (three to five years).
 
 (g) Research and Development and Software Development Costs
 
  In accordance with SFAS No. 86, Accounting for the Costs of Software To Be
Sold, Leased or Otherwise Marketed, the Company has evaluated the
establishment of technological feasibility of its various products during the
development phase. Due to the dynamic changes in the market, the Company has
concluded that it cannot determine technological feasibility until a fully
functional working model is complete. The time period during which costs could
be capitalized from the point of reaching technological feasibility until the
time of general product release is very short, and consequently, the amounts
that could be capitalized are generally not material to the Company's
financial position or result of operations. Therefore, the Company has charged
all internally generated research and development expenses to operations in
the period incurred.
 
  Since inception, the Company has incurred various charges associated with
the purchase of third party developed technology. During 1996 the Company
contracted with a third party to develop applications to be integrated with
the Company's existing product. The Company capitalized $321,065 of cost
associated with the development of this product. The Company has elected to
amortize the cost of this product over its expected useful life of fifteen
months. At December 31, 1996, approximately $64,000 had been amortized.
Included in research and development expenses for the period from inception
(January 19, 1994) to December 31, 1994 and the years ended December 31, 1995
and 1996, is $350,000, $2,550,000 and $450,000, respectively, relating to
purchase of technology, of which $2,200,000 was purchased from a related party
in 1995 (see Note 6(b)).
 
 (h) Inventories
 
  Inventories are stated at the lower of cost or market and consist of
purchased software products from third party vendors held for resale.
 
                                      F-8
<PAGE>
 
                                 ONEWAVE, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 (i) Post-retirement Benefits
 
  The Company has no obligations for post-retirement benefits.
 
 (j) Concentration of Credit Risk
 
  SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. Financial instruments that potentially subject the Company to
concentrations of credit risk are accounts receivable, cash equivalents and
marketable securities. Concentration of credit risk with respect to accounts
receivable is limited to two customers that accounted for 21% and 10%,
respectively, of total revenues in the year ended December 31, 1995. These
customers represented 35% and 15%, respectively, of the accounts receivable
balance as of December 31, 1995. For the year ended December 31, 1996 these
customers accounted for approximately 24% and 6%, respectively, of total
revenues for the year ended December 31, 1996. These customers represented 19%
and 0%, respectively, of the December 31, 1996 accounts receivable balance.
 
  In the years ended December 31, 1995 and 1996, sales outside the United
States accounted for approximately 17% and 10% of total revenues,
respectively. To reduce accounts receivable credit risk, the Company routinely
assesses the financial strength of its customers and, as a consequence,
believes that its accounts receivable credit risk exposure is limited. The
Company maintains an allowance for potential credit losses but has not
experienced any significant losses related to individual customers or groups
of customers in any particular industry or geographic area. To reduce cash
equivalent and marketable securities credit risk, the Company invests in
highly liquid U.S. Government and commercial paper obligations with maturities
of less than one year. The Company limits the amount of holdings with any one
particular financial institution or government agency.
 
 (k) Pro Forma Net Loss per Common and Common Equivalent Share
 
  For the years ended December 31, 1995 and 1996, pro forma net loss per
common and common equivalent share is computed by dividing the net loss by the
pro forma weighted average number of common and common equivalent shares
outstanding during the period, including the number of shares of common stock
issuable upon conversion of all outstanding shares of Series B redeemable
convertible preferred stock and Series C convertible preferred stock. Stock
options granted after March 31, 1995 and prior to July 2, 1996, the effective
date of the Company's initial public offering, have been included in the
calculation of the weighted average number of shares outstanding, as required
by the Securities and Exchange Commission, for periods prior to July 2, 1996.
Common stock equivalents issued in earlier periods have not been included as
their effect would be antidilutive. Historical net loss per share data have
not been presented, as such information is not considered to be relevant or
meaningful.
 
 (l) Use of Estimates in the Preparation of the Financial Statements
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
 (m) Financial Instruments
 
  The estimated fair value of the Company's financial instruments, which
include cash equivalents, marketable securities and accounts receivable and
accounts payable, approximates their carrying value.
 
                                      F-9
<PAGE>
 
                                 ONEWAVE, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
2. BANK AGREEMENT
 
  In February 1996, the Company entered into a financing agreement with a
bank. The agreement provides for a revolving line of credit, an equipment line
of credit and a secured term note. Borrowings under the revolving line of
credit are limited to the lesser of $2,500,000 or 80% of qualified accounts
receivable and bear interest at either the bank's prime rate plus 1%, or
LIBOR. Borrowings under the equipment line are limited to $500,000 for the
purchase of new equipment. Advances under the equipment line of credit will be
repaid over a three-year period. Borrowings under the equipment line bear
interest at either the bank's cost of funds plus 3.5% or the bank's prime rate
plus 1.5%. The $2,000,000 borrowed on the secured term note during the year
was repaid prior to December 31, 1996. The revolving line of credit and
equipment line of credit expire on June 30, 1997. The agreement is
collateralized by all assets of the Company. The financing agreement contains
certain restrictive covenants, including among other items, minimum levels of
tangible net worth and net income (loss). At December 31, 1996 the Company was
not in compliance with certain covenants under the facility. No funds were
available or outstanding under the credit lines at December 31, 1996.
 
3. LONG-TERM DEBT TO STOCKHOLDERS
 
  In May 1995, the Company issued a $250,000 subordinated note payable to a
stockholder. The note bore interest at 6% per annum and was payable on April
30, 2000.
 
  In December 1995, the Company issued a $750,000 subordinated note payable to
a stockholder. The note bore interest at 9% per annum and was payable on
December 31, 2000.
 
  Both notes were outstanding as of December 31, 1995 and were repaid in full
in March 1996.
 
4. STOCKHOLDERS' EQUITY (DEFICIT)
 
 (a) Authorized Capital Stock
 
  As of December 31, 1996, the Company's authorized capital stock consisted of
50,000,000 shares of common stock, $.001 par value per share, and 5,000,000
shares of preferred stock, $1.00 par value per share.
 
 (b) Common Stock
 
  In May 1995, the Company issued a convertible note payable to a stockholder
for $750,000. In accordance with the provisions of the note payable agreement,
the outstanding principal of the note was converted into 1,136,362 shares of
common stock in November 1995.
 
  In April 1996, the Company repurchased and retired 800,000 shares of common
stock for $6,000,000.
 
  In July 1996, the Company completed an initial public offering of its common
stock. The Company issued 3,000,000 shares at $16.00 per share for net
proceeds of $43,256,000.
 
 (c) Conversion of Series A Convertible Preferred Stock
 
  In December 1994, certain stockholders contributed $300,000 to the Company
for the purchase of 250,000 shares of Series A convertible preferred stock.
The shares of Series A convertible preferred stock were issued to the
stockholders in February 1995 and were subsequently converted to 1,666,667
shares of common stock in November 1995.
 
 (d) Conversion of Series B Redeemable Convertible Preferred Stock
 
  In March 1996, the Company issued 1,332,127 shares of Series B redeemable
convertible preferred stock at $5.54 per share, less offering costs of
$600,000 for net proceeds of $6,779,984. Upon consummation of the
 
                                     F-10
<PAGE>
 
                                 ONEWAVE, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
Company's initial public offering, all outstanding shares of redeemable
convertible preferred stock were converted into 888,080 shares of common
stock.
 
 (e) Conversion of Series C Convertible Preferred Stock
 
  In April 1996, the Company issued 1,200,000 shares of Series C convertible
preferred stock at a price of $5.00 per share, less offering costs of $30,000,
for net proceeds of $5,970,000. Upon consummation of the Company's initial
public offering, all outstanding shares of Series C preferred stock were
converted into 799,994 shares of common stock.
 
 (f) Stock Split
 
  In February 1995, the Company effected a 10-for-1 stock split of the common
stock in the form of a stock dividend. On May 20, 1996, the Company effected a
2-for-3 reverse stock split. The accompanying financial statements have been
affected for the stock splits.
 
 (g) Stock Options
 
  1995 Stock Plan
 
    The Company has a stock plan (the 1995 Plan) that provides for the
  issuance of incentive stock options (ISOs), non-qualified stock options and
  shares of common stock. Under the terms of the 1995 Plan, non-qualified
  options may be granted at a price not less than the lesser of (i) the book
  value per share of common stock as of the end of the fiscal year of the
  Company immediately preceding the date of such grant, or (ii) 50% of the
  fair market value per share of common stock on the date of such grant and,
  in the case of ISOs, not less than the fair market value per share at the
  date of grant. Options generally vest over a four-year period, commencing
  one year after the date of the grant. In 1995, the Company granted an
  option to purchase 40,000 shares of common stock to an employee at an
  exercise price of $.015 per share. The difference between the estimated
  fair market value of the common stock and the aggregate exercise price of
  $179,400 was recorded as deferred compensation at the date of grant. During
  1995 and 1996, the Company recorded compensation expense related to these
  options in the amount of $12,806 and $41,169, respectively. The remaining
  balance of deferred compensation was reversed upon the cancellation of all
  unvested stock options during 1996. All other options have been granted at
  exercise prices that represent the estimated fair market value of the
  common stock as determined by the Company's Board of Directors at the time
  of the grant and accordingly the Company has not recorded any compensation
  on these option grants.
 
  1996 Stock Plan
 
    On May 17, 1996, the Board of Directors and stockholders approved the
  Company's 1996 Stock Plan (the 1996 Plan). Each non-employee director will
  receive an initial option grant to purchase 7,000 shares of common stock,
  at the then fair market value, when such director was first appointed to
  the Board of Directors. In addition, each non-employee director will
  receive an option grant to purchase 1,700 shares of common stock, at the
  then fair market value, on each January 1 that such director is a member of
  the Board of Directors.
 
  The Company has reserved 4,150,000 shares of common stock for issuance under
the 1995 Plan and the 1996 Plan. As of December 31, 1996, there were
approximately 1,323,000 shares available for grant. Generally, the options
granted under both Plans vest equally over four years and expire after ten
years.
 
                                     F-11
<PAGE>
 
                                 ONEWAVE, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The following table summarizes incentive and non-qualified stock option
activity under the 1995 and 1996 Stock Plans:
 
<TABLE>
<CAPTION>
                                                                     WEIGHTED
                                            NUMBER OF   PRICE PER  AVERAGE PRICE
                                             SHARES       SHARE      PER SHARE
                                            ---------  ----------- -------------
   <S>                                      <C>        <C>         <C>
   Outstanding, December 31, 1994..........       --   $       --     $   --
   Options granted......................... 1,219,533    .015-4.50       3.90
                                            ---------  -----------    -------
   Outstanding, December 31, 1995.......... 1,219,533    .015-4.50       3.90
   Options granted......................... 2,457,648   7.50-16.00      10.53
   Options exercised.......................  (216,592)  .015-13.13       4.25
   Options canceled........................  (850,245)  1.50-16.00       8.01
                                            ---------  -----------    -------
   Outstanding, December 31, 1996.......... 2,610,344  $1.50-16.00    $ 10.42
                                            =========  ===========    =======
   Exercisable, December 31, 1996..........   782,563  $1.50-13.75    $  8.21
                                            =========  ===========    =======
</TABLE>
 
  In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 requires the
measurement of the fair value of stock options, including stock purchase
plans, or warrants granted to be included in the statement of operations or
disclosed in the notes to financial statements. The Company has determined
that it will continue to account for stock-based compensation for employees
under Accounting Principles Board Opinion No. 25 and elect the disclosure-only
alternative under SFAS No. 123. The Company has computed the pro forma
disclosures required under SFAS No. 123 for options granted in 1995 and 1996
using the Black-Scholes option pricing model prescribed by SFAS No. 123. The
weighted average assumptions used for 1995 and 1996 are as follows:
 
<TABLE>
<CAPTION>
                                                            1995        1996
                                                         ----------- -----------
<S>                                                      <C>         <C>
 Risk-free interest rate................................ 5.86%-7.05% 5.97%-6.69%
 Expected dividend yield................................         --          --
 Expected life..........................................     5 years     5 years
 Expected volatility....................................         70%         70%
</TABLE>
 
  The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions including expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
 
  The total fair value of the options granted during 1995 and 1996 was
computed as approximately $2,463,000 and $14,030,000, respectively. Of these
amounts approximately $865,000 and $4,941,000 would be charged to operations
for the years ended December 31, 1995 and 1996, respectively. The remaining
amount, approximately $10,687,000, would be amortized over the remaining
vesting periods. The resulting pro forma compensation expense may not be
representative of the amount to be expected in future years as pro forma
compensation expense may vary based upon the number of options granted.
 
  The pro forma net loss and pro forma net loss per common share presented
below have been computed assuming no tax benefit. The effect of a tax benefit
has not been considered since a substantial portion of the stock options
granted are incentive stock options and the Company does not anticipate a
future deduction associated with the exercise of these stock options.
 
                                     F-12
<PAGE>
 
                                 ONEWAVE, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The pro forma effect of SFAS No. 123 for the years ended December 31, 1995
and 1996 is as follows:
 
<TABLE>
<CAPTION>
                                     1995                       1996
                            ------------------------  --------------------------
                            AS REPORTED   PRO FORMA   AS REPORTED    PRO FORMA
                            -----------  -----------  ------------  ------------
   <S>                      <C>          <C>          <C>           <C>
   Net loss................ $(2,698,448) $(3,563,448) $(12,343,947) $(17,284,947)
   Pro forma net loss per
    common and common
    equivalent share....... $      (.21) $      (.28) $       (.88) $      (1.24)
</TABLE>
 
 (h) Warrants
 
  In February 1996, the Company issued a warrant to purchase 23,333 shares of
common stock at a price of $8.31 per share in connection with the Company's
financing agreement as discussed in Note 2. The warrant is exercisable in
whole or in part, at any time on or before February 15, 2003.
 
 (i) Employee Stock Purchase Plan
 
  On May 17, 1996, the stockholders approved the Company's Employee Stock
Purchase Plan (ESPP). The Company has reserved 150,000 shares for issuance
under the ESPP. The ESPP permits eligible employees of the Company to purchase
common stock through payroll deductions of up to 10% of their total
compensation. The price of common stock purchased under the ESPP will be 85%
of the lower of the fair market value of the common stock on the first or last
day of each six-month purchase period. The Company had not issued shares under
the ESPP as of December 31, 1996. In January 1997, the Company issued 13,839
shares of common stock under the ESPP.
 
5. INCOME TAXES
 
  The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under SFAS No. 109, a deferred tax asset or
liability is measured by the enacted tax rates expected to be in effect when
the differences between the financial statement and tax bases of assets and
liabilities reverse.
 
  As of December 31, 1996, the Company had available net operating loss
carryforwards of approximately $13,120,000 to reduce future federal and state
income taxes, if any. These carryforwards expire through 2011 and are subject
to review and possible adjustment by the Internal Revenue Service. The Tax
Reform Act of 1986 contains provisions that may limit the amount of net
operating loss carryforwards that the Company may utilize in any one year in
the event of certain cumulative changes in ownership over a three year period
in excess of 50%, as defined.
 
  The approximate income tax effect of each type of temporary difference and
carryforward is as follows:
 
<TABLE>
<CAPTION>
                                                          1995         1996
                                                       -----------  -----------
   <S>                                                 <C>          <C>
   Net operating loss carryforwards................... $ 1,208,000  $ 5,248,000
   Other temporary differences........................     275,000    1,202,000
                                                       -----------  -----------
                                                         1,483,000    6,450,000
   Valuation allowance................................  (1,483,000)  (6,450,000)
                                                       -----------  -----------
   Net deferred tax asset............................. $       --   $       --
                                                       ===========  ===========
</TABLE>
 
  It is the Company's objective to become a profitable enterprise and to
realize the benefits of its deferred tax assets. However, in evaluating the
realizability of these deferred tax assets, management has considered the
Company's short operating history, the volatility of the market in which it
competes, and the operating losses
 
                                     F-13
<PAGE>
 
                                 ONEWAVE, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
incurred to date, and believes that, given the significance of this evidence,
a full valuation reserve against its deferred tax asset is required as of
December 31, 1995 and 1996, respectively.
 
6. RELATED-PARTY TRANSACTIONS
 
 (a) Cambridge Technology Group, Inc.
 
  During 1995 and the first two months of 1996, the Company shared office
space with Cambridge Technology Group, Inc. (CTGroup), a company under the
control of a significant stockholder of the Company. CTGroup charged the
Company for a portion of certain common costs incurred in addition to any
specific items paid by CTGroup on the Company's behalf. These costs were
allocated based on head count or actual cost incurred. During the period from
inception (January 19, 1994) to December 31, 1994 and for the years ended
December 31, 1995 and 1996, CTGroup charged the Company $956,844, $1,013,142
and $117,442, respectively, for these costs.
 
  During 1995 and 1996, the Company sold software and services to CTGroup
amounting to $104,993 and $100,000, respectively. In addition, during 1995 and
1996, CTGroup assigned its rights under certain contracts, to the Company. The
Company recorded revenue of $2,403,235 and $100,000, respectively, for the
performance of education and consulting services and the delivery of software
licenses and maintenance services under these contracts.
 
  In July 1995, the Company gave an unlimited guarantee of all of CTGroup's
obligations under its credit facility. The Company's obligations under the
unlimited guaranty were terminated in February 1996.
 
  In March 1996, the Company purchased computer equipment from CTGroup for
$125,000.
 
  In September 1996, the Company obtained third party software licenses from
CTGroup in exchange for certain source code rights previously purchased from
Open Environment Corporation (Note 6(b)). The source code rights were
originally purchased with the intent of embedding the technology into certain
of the Company's future products. The software licenses received and the
source code rights given were deemed to be of equal value. In 1996, the
Company recorded software license revenue of approximately $412,000 from the
subsequent resale of software licenses acquired in this exchange.
 
  Amounts due (to) from CTGroup for these transactions were $(169,939) and
$55,402 at December 31, 1995 and 1996, respectively.
 
  The Company believes that the transactions described above were at terms no
less favorable than the Company would have obtained from unaffiliated third
parties.
 
 (b) Open Environment Corporation
 
  In 1995, the Company entered into a reseller agreement with Open Environment
Corporation (OEC) to license software developed by OEC, an entity that was
founded by significant stockholders of the Company. During the years ended
December 31, 1995 and 1996, the Company generated software license and
maintenance revenues of $1,111,992 and $1,759,639, respectively, from the
resale of OEC products and services. Total expenses relating to purchases of
OEC software and OEC software bundled with the Company's product and related
maintenance contracts totaled $716,392 and $837,675, in the years ended
December 31, 1995 and 1996, respectively. In addition, the Company
subcontracted consulting services from OEC totaling $398,271 and $153,622 in
1995 and 1996, respectively.
 
                                     F-14
<PAGE>
 
                                 ONEWAVE, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  On December 29, 1995, the Company and OEC entered into a $2,200,000 OEM
source code license agreement which provided the Company with a certain source
code developed by OEC. At the time of the license agreement, the Company
intended to embed this source code into certain of the Company's future
software products which were then currently under development. In accordance
with SFAS No. 86, the Company charged the cost of this source code to research
and development expenses in the year ended December 31, 1995.
 
  On October 31, 1995, the Company sold to OEC the source code for certain
software technology relating to the customization and enhancement of SAP
software products. OEC paid the Company an initial software license fee of
$500,000 under the agreement by which the source code was transferred, and
agreed to pay the Company a royalty in an amount equal to 20% of the first
$1,000,000 of sales revenue recognized by OEC related to products
incorporating components of the transferred source code and 10% of such sales
revenues in excess of $1,000,000. OEC's royalty obligations expire on the
earlier of October 1, 1997 or the date on which OEC's aggregate sales revenues
related to products incorporating components of the transferred source code
exceed $3,000,000. The initial software license fee was included in 1995
software license revenues. To date the Company has not received any royalties
under this arrangement.
 
  In November 1996, OEC was acquired by Borland International, Inc. To the
best of the Company's knowledge as a result of the acquisition, no stockholder
of the Company holds a significant ownership interest in the combined entity.
Accordingly, effective November 1996, OEC is not a related party.
 
  The total accounts payable to OEC at December 31, 1995 was $2,490,133.
 
  The Company believes that the transactions described above were at terms no
less favorable than the Company would have obtained from unaffiliated third
parties.
 
 (c) International Integration, Incorporated
 
  The Company subcontracted consulting services from International
Integration, Incorporated, a company controlled by a significant stockholder
of the Company. During 1995 and 1996, these consulting services totaled
$662,000 and $32,000, respectively, and were included in cost of revenues. At
December 31, 1995, the Company had outstanding accounts payable to this entity
of $274,444.
 
  The Company believes that the transactions described above were at terms no
less favorable than the Company would have obtained from unaffiliated third
parties.
 
 (d) Internet Business Solutions, Incorporated.
 
  During 1996, the Company generated revenues from unrelated entities of
$2,920,000 for software licenses and $514,450 for consulting services to
develop vertical applications in conjunction with Internet Business Solutions,
Inc. (IBS). IBS provided up to 100% of the funding of the purchase of software
licenses and consulting services in return for certain rights in the developed
applications. IBS is wholly-owned by certain of the Company's significant
stockholders. As of December 31, 1996 the balance included in accounts
receivable related to these transactions was $184,500.
 
7. EMPLOYEE BENEFIT PLAN
 
  The Company's employees participate in an employee benefit plan under
Section 401(k) of the Internal Revenue Code. The plan is available to
substantially all employees. The plan allows for employees to make
contributions up to a specified percentage of their compensation. For all
participants with greater than one year of continuous service, the Company
contributes 25% of the first 6% of employees' pay contributed to the plan.
 
                                     F-15
<PAGE>
 
                                 ONEWAVE, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
Previously, the Company's employees were eligible to participate in a plan
sponsored by CTGroup. The Company contributed approximately $2,000 and $53,500
under these plans during the years ended December 31, 1995 and 1996,
respectively.
 
8. LEASE COMMITMENTS
 
  The Company leases its office facilities and certain office equipment under
operating leases expiring at various dates through 2001. Rental expense
amounted to approximately $69,000, $83,000 and $389,000 for the period of
inception (January 19, 1994) to December 31, 1994, and the years ended
December 31, 1995, and 1996, respectively. At December 31, 1996, future rental
commitments are approximately as follows:
 
<TABLE>
       <S>                                                            <C>
       1997.......................................................... $  558,000
       1998..........................................................    485,000
       1999..........................................................    476,000
       2000..........................................................    463,000
       2001..........................................................     77,000
                                                                      ----------
         Total....................................................... $2,059,000
                                                                      ==========
</TABLE>
 
9. COMPENSATION TO EXECUTIVE OFFICER
 
  In January 1996, a significant stockholder of the Company entered into an
agreement with the Company's Chief Executive Officer (CEO) under which the CEO
purchased 960,000 shares of the Company's common stock held by the stockholder
at a price of $1.50 per share. To fund the purchase, the CEO entered into a
$1,440,000 note payable agreement with the stockholder. The note payable
accrues interest at 6.56% per annum and provides for full recourse against the
CEO. At the time of this sale transaction, the fair market value of the
Company's common stock was $7.50 per share. The Company has recorded the
aggregate difference between the fair market value of the common stock and the
price paid by the CEO, $5,760,000, in compensation to executive officer in the
accompanying statement of operations for the year ended December 31, 1996. In
connection with this purchase, the Company agreed to loan the CEO up to
$2,560,000 which represents the CEO's estimated tax liability resulting from
the compensation on the purchase of shares at less than fair market value. The
Company has recorded this commitment as an accrued expense and a corresponding
note receivable from executive officer in the accompanying balance sheet as of
December 31, 1996. The Company expects to fund this commitment in the first
half of 1997. Borrowings under the loan will be secured by shares of common
stock purchased, will accrue interest at 6.21% per annum and will be due and
payable no later than December 31, 2001.
 
  In connection with the employment of the CEO in January 1996, the CEO
received a nonrefundable $1,000,000 cash payment from a significant
stockholder. The Company believes the nature of this payment to be a sign-on
bonus. Accordingly, the Company has recorded a $1,000,000 charge to
compensation to executive officer in the accompanying statement of operations
for the year ended December 31, 1996 with a corresponding contribution to
additional paid-in capital.
 
  Also in connection with the employment of the CEO, the same significant
stockholder agreed to reimburse the CEO for any potential decline in value
(from January 1996 to the date of exercise) for certain stock appreciation
rights held by the CEO in an unrelated company. At the time this agreement was
entered into, the unrealized appreciation on the stock appreciation rights was
approximately $4,400,000. The stock appreciation rights were exercised by the
CEO in September 1996. The value of the stock of the unrelated company had
declined to the extent that the stockholder is required to reimburse the CEO
approximately $34,000. The Company has recorded this charge to compensation to
executive officer in the accompanying statement of operations for the year
ended December 31, 1996, with a corresponding contribution to additional paid-
in capital.
 
                                     F-16
<PAGE>
 
             REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
 
To OneWave, Inc.:
 
  We have audited, in accordance with generally accepted auditing standards,
the consolidated balance sheets of OneWave, Inc. (formerly Business@Web, Inc.)
as of December 1995 and 1996 and the related consolidated statements of
operations, redeemable convertible preferred stock and stockholders' equity
(deficit) and cash flows for the period from inception (January 19, 1994) to
December 31, 1994 and the years ended December 31, 1995 and 1996, included in
this Annual Report, and have issued our report thereon dated January 23, 1997.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed on page S-2 is the
responsibility of the Company's management and is presented for the purposes
of complying with the Securities and Exchange Commission's rules and is not
part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in our audits of the basic financial
statements and, in our opinion, fairly states in all material respects, the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
 
                                          Arthur Andersen LLP
 
Boston, Massachusetts
January 23, 1997
 
                                      S-1
<PAGE>
 
                                                                     SCHEDULE II
 
                                 ONEWAVE, INC.
 
                        VALUATION OF QUALIFYING ACCOUNTS
 
<TABLE>
<CAPTION>
                                    BALANCE AT    BAD DEBT  WRITE-    BALANCE AT
ALLOWANCE FOR DOUBTFUL ACCOUNTS  BEGINNING PERIOD EXPENSE    OFFS    END OF PERIOD
-------------------------------  ---------------- -------- --------  -------------
<S>                              <C>              <C>      <C>       <C>
Period from inception
 (January 19, 1994)
 to December 31, 1994........        $    --      $    --  $    --     $    --
Year ended December 31,
 1995........................             --       143,000  (43,000)    100,000
Year ended December 31,
 1996........................         100,000      260,000  (77,000)    283,000
</TABLE>
 
                                      S-2
<PAGE>
 
                                 EXHIBIT INDEX
 
  Listed and indexed below are all Exhibits filed as part of this Report.
Certain Exhibits are incorporated by reference to documents previously filed
by the Company with the Securities and Exchange Commission pursuant to Rule
12b-32 under the Securities Exchange Act of 1934, as amended.
 
<TABLE>
<CAPTION>
 EXHIBIT NO. DESCRIPTION
 ----------- -----------
 <C>         <S>
   3.1       Third Amended and Restated Certificate of Incorporation(1)
   3.2       Amended and Restated By-laws(2)
   4.1       Specimen Common Stock Certificate(2)
  10.1       1995 Stock Plan, as amended(1)
 *10.1A      Form of Incentive Stock Option Agreement under the 1995 Stock Plan
 *10.1B      Form of Non-Qualified Stock Option Agreement under the 1995 Stock
             Plan
  10.2       1996 Stock Plan, as amended(2)
 *10.2A      Form of Incentive Stock Option Agreement under the 1996 Stock Plan
 *10.2B      Form of Non-Qualified Stock Option Agreement under the 1996 Stock
             Plan
  10.3       Employee Stock Purchase Plan(1)
  10.4       Lease for One Arsenal Marketplace, Watertown, Massachusetts(1)
  10.5       Source Code License Agreement dated as of August 8, 1995 between
             the Company and InterGroup Technologies, Inc.(1)
  10.6       Software License Agreement dated as of August 8, 1995 between the
             Company and InterGroup Technologies, Inc.(1)
  10.6A      Agreements dated as of May 21, 1996 and May 22, 1996 amending the
             Source Code License Agreement and Software License Agreement
             between the Company and InterGroup Technologies, Inc(1)
  10.7       Source Code License Agreement dated as of February 8, 1996 between
             the Company and Mentor Communications Limited(1)
  10.8       Software License Agreement dated as of August 10, 1995 between the
             Company and Mystic River Software, Inc.(1)
  10.9       Software, Education, Services Distribution Agreement dated June
             21, 1995 between the Company and Open Environment Corporation(2)
  10.10      "SAP Customization Software" Agreement dated October 1, 1995
             between the Company and Open Environment Corporation(2)
  10.11      OEM Source License Agreement dated as of December 29, 1995 between
             the Company and Open Environment Corporation(2)
  10.12      Joint Marketing Agreement effective as of February 27, 1996
             between the Company and Hewlett-Packard Company(2)
  10.13      Loan Agreement dated February 16, 1996 between the Company and
             State Street Bank and Trust Company, together with Guaranty
             (unlimited) of J&S Limited Partnership(1)
  10.14      Warrant Purchase Agreement dated as of February 16, 1996 between
             the Company and SSB Investments, Inc.(1)
  10.15      Common Stock Purchase Warrant dated as of February 16, 1996 issued
             to SSB Investments, Inc.(1)
  10.16      Series B Convertible Preferred Stock Purchase Agreement dated
             February 27, 1996 between the Company and Hewlett-Packard
             Company(1)
</TABLE>
 
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT NO. DESCRIPTION
 ----------- -----------
 <C>         <S>
  10.17      Amendment to Series B Convertible Preferred Stock Purchase
             Agreement dated as of March 6, 1996 between the Company and
             Hewlett-Packard Company(1)
  10.17A     Amendment No. 1 to Series B Convertible Preferred Stock Purchase
             Agreement dated as of June 7, 1996 between the Company and
             Hewlett-Packard Company(2)
  10.18      Series B Convertible Preferred Stock Purchase Agreement dated
             March 6, 1996 among the Company and the purchasers named therein
             (1)
  10.19      Registration Rights Agreement dated March 6, 1996 among the
             Company and the investors named therein(1)
  10.20      Co-Sale Rights Agreement dated as of March 6, 1996 among the
             investors and holders of shares of the Company's Common Stock
             named therein(1)
  10.21      Voting Agreement dated March 6, 1996 among the investors and
             holders of shares of the Company's Common Stock named therein(1)
  10.22      Series C Convertible Preferred Stock Purchase Agreement dated as
             of March 29,1996 among the Company and the purchasers named
             therein(1)
  10.23      Registration Rights Agreement dated as of March 29, 1996 among the
             Company and the investors named therein(1)
  10.24      Stock Purchase Agreement dated as of February 1996 between John J.
             Donovan and Len Hafetz(1)
  10.25      Assignment and Assumption Agreement dated as of March 15, 1996
             between John J. Donovan and the Company(1)
  10.26      Stock Repurchase Agreement dated as of April 4, 1996 between the
             Company and James Nondorf(1)
  10.27      Stock Repurchase Agreement dated as of April 15, 1996 between the
             Company and J&S Limited Partnership(1)
  10.28      Stock Repurchase Agreement dated as of April 15, 1996 between the
             Company and Harrington Trust Limited as Trustee of The Appleby
             Trust(1)
  10.29      Five-Year 9% Subordinated Note dated December 29, 1995 issued to
             Harrington Trust Limited as Trustee of The Appleby Trust in the
             principal amount of $750,000(1)
  10.30      Five-Year 6% Convertible Subordinated Note dated May 3, 1995
             issued to Harrington Trust Limited as Trustee of The Appleby Trust
             in the principal amount of $750,000(1)
  10.31      Five-Year 6% Convertible Subordinated Note dated May 3, 1995
             issued to J&S Limited Partnership in the principal amount of
             $250,000(1)
  10.32      Loan Agreement dated as of March 31, 1996 between Klaus P. Besier
             and the Company(1)
 *11         Statement of Computation of Per Share Earnings
 *21         List of Subsidiaries
 *23.1       Consent of Arthur Andersen LLP
 *27         Financial Data Schedule
</TABLE>
--------
(1) Filed as an exhibit to Amendment No. 1 to the Company's Registration
    Statement on Form S-1 filed with the Securities and Exchange Commission on
    June 13, 1996 (File No. 333-04235) and incorporated herein by reference
    thereto.
(2) Filed as an exhibit to Amendment No. 2 to the Company's Registration
    Statement on Form S-1 filed with the Securities and Exchange Commission on
    June 25, 1996 (File No. 333-04235) and incorporated herein by reference
    thereto.
*  Filed herewith.